May 1, 2001
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Dear Mr. Katz:
The Philadelphia Stock Exchange, Inc. ("Phlx" or "Exchange") submits this comment letter in response to Securities Exchange Act Release No. 44106, Notice of Filing of Amendment to the Options Intermarket Linkage Plan ("Plan") to Conform the Options Intermarket Linkage Plan to the Requirements of Securities Exchange Act Rule 11Ac1-7 (the "Release").1 The amendment to the Plan ("Amendment") was submitted by Phlx and the other Plan participants ("Participants") in order to conform the Plan to the requirements of the recently adopted Securities Exchange Act Rule 11Ac1-7 (the "Trade-Through Disclosure Rule"). While the Exchange supports the Amendment, as it was submitted to the Securities and Exchange Commission ("Commission") by the Participants, the Exchange is submitting this letter to express concern with the Commission's statement in the Release indicating that the Amendment may not fully satisfy the requirements of the Trade-Through Disclosure Rule.2
The adopting release for the Trade-Through Disclosure Rule states that, among other things, to conform to the regulations of the Trade-Through Disclosure Rule, a linkage plan, such as the Plan, would need to (1) limit participants from trading through both quotes of other linkage plan participants and also quotes of exchanges that are not participants in an approved linkage plan and (2) require plan participants to actively conduct surveillance of their markets for trades executed at prices inferior to those publicly quoted on other exchanges.3 In addition, this release states, in a footnote, that exchanges would have to adopt rules to allow the exchange to sanction specialists or market makers that trade through better prices of other exchanges.4
The Exchange anticipated the Amendment, in its current form, would conform the Plan to the regulations of the Trade-Through Disclosure Rule, which would exempt broker-dealers who execute orders on Participant exchanges from disclosing trade-throughs on their customers' confirmations. The Exchange believes that the Amendment, as submitted, achieves the goals of the Trade-Through Disclosure Rule. The Amendment commits Participants to establish procedures for conducting surveillance for trade-throughs with respect to trade throughs of quotes from linked and unlinked markets.5 However, the Exchange believes that the review process and sanctions for such behavior are necessarily different depending whether the market traded-though was linked or unlinked.
The Amendment commits the Participants to sanction their members, with enumerated exceptions, for not making use of the mechanism for preventing trade-throughs, the linkage itself. However, when markets are not linked, access to quotes from, and information about, an away market may not be available or may be inaccurate or incomplete. While the Exchanges agrees with the Trade-Through Disclosure Rule's admonition that exchanges should limit members from trading through unlinked markets, the exchanges must, in creating those limitations, take into account the potentially limited access to those unlinked markets.
The Exchange anticipates that if an investigation of a member who trades-through an unlinked market reveals that such market was inaccessible to the member, or information concerning the validity of that market was unreliable (problems which should not generally exist with linked markets), it would be unjust for the Exchange to sanction its member. However, the Exchange believes that members who trade-through quotes from unlinked markets without justification or without due diligence on their part should be subject to investigation and possible sanctions under existing guidelines. Therefore, the Exchange believes that Participants' members should not be sanctioned for trade-throughs based on their good faith reliance on information from a non-linked exchange.
In summary, the Exchange believes that the Amendment, as submitted, conforms to the regulations of the Trade-Through Disclosure Rule. Specifically, the Amendment would require the Participants to limit trade-throughs of both linked and unlinked markets. As described above, the Exchange believes that it could limit unlinked market trade-throughs using the surveillance it committed to in the Amendment with existing rules that enforce the policies of the Exchange without unduly penalizing members who might be required to rely on incomplete or inaccurate information from an unlinked options market. The Exchange notes that its Board of Governors did not consider the Amendment, which it approved for filing with the Commission, to require the Exchange to sanction a member trading through an unlinked market. Should the Commission consider the Amendment to require such a sanction, the Board of Governors of the Exchange may need to reconsider its approval of the Amendment.
The Exchange welcomes the opportunity to discuss these comments with individual members of the Commission and its staff. Any questions regarding this letter may be directed to myself at (215) 496-1615.
Executive Vice President
cc: The Honorable Laura S. Unger, Acting Chairman
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Paul R. Carey, Commissioner
Annette Nazareth, Director, Division of Market Regulation
Robert L.D. Colby, Deputy Director, Division of Market Regulation
Belinda Blaine, Associate Director, Division of Market Regulation
Elizabeth K. King, Associate Director, Division of Market Regulation
|1||Securities Exchange Act Release No. 44106 (March 27, 2001), 66 FR 17977 (April 4, 2001).|
|2||See Id. at footnote 5.|
|3||Securities Exchange Act Release No. 43591 (November 17, 2000), 65 FR 75439 (December 1, 2000).|
|4||See Id. at footnote 62.|
|5||Securities Exchange Act Release No. 44106 (March 27, 2001), 66 FR 17977 (April 4, 2001).|