[Federal Register Volume 59, Number 4 (Thursday, January 6, 1994)]
[Notices]
[Pages 790-792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-239]


[[Page Unknown]]

[Federal Register: January 6, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33405; File No. SR-Phlx-93-57]

 

Self-Regulatory Organizations; Filing and Order Granting 
Accelerated Approval of a Proposed Rule Change by the Philadelphia 
Stock Exchange, Inc., Relating To Extending the AUTOM Pilot Program

December 30, 1993.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
1, 1993, the Philadelphia Stock Exchange (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx is requesting Commission approval to extend the Exchange's 
Automated Options Market (``AUTOM'') system, a pilot program, until 
December 31, 1994. AUTOM is an electronic delivery system of small 
options orders to the Phlx trading floor, with an automatic execution 
feature.\1\
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    \1\The original proposal included a request for permanent 
approval of AUTOM. Because the Phlx is in the process of modifying 
and upgrading the computer system on which the AUTOM system 
operates, the Phlx submitted a letter, dated December 17, 1993, 
withdrawing that request from the proposal (``Amendment No. 1''). 
The Phlx states that it will resubmit its request for permanent 
approval after the Phlx and the Commission have had the opportunity 
to evaluate the operation of the system in light of the current 
modifications and upgrades. See letter from J. Keith Kessel, Staff 
Counsel, Phlx, to Richard L. Zack, Branch Chief, Division of Market 
Regulation, Commission, dated December 17, 1993.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included states concerning the purpose of and basis for the proposed 
rule change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The self-regulatory organization has 
prepared summaries, set forth in Sections (A), (B), and (C) below, of 
the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On March 31, 1988, the Commission approved the establishment of 
AUTOM as a pilot program.\2\ The Exchange currently is proposing to 
extend the AUTOM pilot program until December 31, 1994. The Exchange 
represents that, from the date of the last Commission order extending 
the AUTOM pilot program, AUTOM has operated efficiently and without any 
material problems being reported by Phlx members or AUTOM users.
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    \2\The Commission approved AUTOM on a pilot basis for market 
orders of up to five contracts for all exercise prices in the near 
month covering twelve Phlx equity options. See Securities Exchange 
Act Release No. 25540 (March 31, 1988), 53 FR 11390 (April 6, 1988). 
Since then, the order routing feature of AUTOM has been expanded to 
include all orders in all exercise prices and months in all Phlx 
equity options. In addition, day orders, good until cancelled 
orders, and cabinet orders (accommodation transactions) have become 
eligible for delivery through the system, and the eligible order 
size for the order routing feature of AUTOM has been increased from 
five to one hundred contracts. See Securities Exchange Act Release 
No. 28643 (November 26, 1990), 55 FR 49960 (December 3, 1990) at 
notes 2-6 for citations to Commission orders approving these 
expansions of the AUTOM pilot. See also Securities Exchange Act 
Release No. 28978 (March 15, 1991), 56 FR 12050 (March 21, 1991).
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    The AUTOM system is an online system that allows electronic 
delivery of options orders from member firms directly to the 
appropriate specialist on the Phlx options trading floor, with 
electronic confirmation of order executions. Specifically, once AUTOM 
orders are entered into the system and routed to the specialists' post, 
they are executed manually by the specialist who, upon execution of the 
order, enters the relevant trade information into the system. An 
execution report is then automatically transmitted to the firm that 
placed the order.
    The AUTOM system also has an automatic execution feature called 
``Auto-X.'' Currently, Auto-X is available to public customer market 
and marketable limit orders of up to 20 contracts. Orders eligible for 
automatic execution through AUTOM are: (1) Printed in hard copy form at 
the floor representative booth of the delivering member organization; 
(2) displayed on the trading crowd screen with buy/sell information 
omitted; and (3) printed in hard copy form at the specialist post. The 
order is priced and executed automatically at the best displayed bid or 
offer, and the execution is reported automatically to the Options Price 
Reporting Authority (``OPRA''). A report of the execution also is 
electronically sent to the delivering member organization. Under Auto-
X, the specialist is the contra-side of all trades. However, the 
specialist is required to ensure participation of bids and offers on 
the limit order book and in the trading crowd that are entitled to 
execution pursuant to the Phlx's rules of priority, parity, and 
precedence.
    The Phlx represents that, as a general matter, the AUTOM system has 
functioned well, servicing member firms options orders. The Phlx states 
that two major groups of figures best reflect the performance of AUTOM: 
(1) The capacity figures; and (2) the order flow figures.\3\ First, the 
Phlx believes that information regarding AUTOM's system capacity shows 
that AUTOM continues to have the ability to service the volume of 
incoming orders. Specifically, the Phlx represented, in February 1993, 
that it would make enhancements to systems capacity (i.e., the ability 
of the system's hardware to properly route orders and service potential 
order volume) if order volume during peak time exceeded 80% of CPU 
capacity. The Exchange represents that since making these 
representations with respect to AUTOM's capacity, this 80% level has 
not been attained.
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    \3\See letter from J. Keith Kessel, Staff Counsel, Phlx, to 
Monica C. Michelizzi, Staff Attorney, Division of Market Regulation, 
Commission, dated November 19, 1993.
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    Second, the Phlx also believes that an analysis of current customer 
order flow demonstrates that the system capacity is adequate to handle 
the current and potential number of orders transmitted through the 
system. Specifically, the Phlx represents that only about two-thirds of 
all orders placed on AUTOM are executed because the other one-third of 
the orders are too far away from the market to receive execution. The 
orders routed through AUTOM that receive execution are either 
automatically executed through Auto-X or are manually executed by the 
receiving Phlx specialist.
    Accordingly, the Phlx believes that AUTOM continues to facilitate 
smooth and liquid markets on the equity options floor, and otherwise 
represents a favorable development for all concerned parties. The Phlx 
further believes that AUTOM has performed well, servicing member firms' 
options orders.
    The Phlx, therefore, believes that it is consistent with the Act 
and the rules and regulations promulgated thereunder for the Commission 
to permanently approve the AUTOM system. Specifically, the Phlx 
believes that the current proposal is consistent with section 6(b)(5) 
of the Act because it is designed to promote just and equitable 
principles of trade and to protect investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx believes that the proposed rule change will not impose a 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has requested that the proposed rule change be given 
accelerated effectiveness pursuant to section 19(b)(2) of the Act.
    The Commission finds that the proposed rule change, including 
Amendment No. 1 to the proposed rule change, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in particular, the 
requirements of Sections 6 and 11A.\4\ Specifically, the Commission 
continues to believe that the development and implementation of the 
AUTOM system provides for more efficient handling and reporting of 
orders in Phlx equity options through the use of new data processing 
and communications techniques, thereby improving order processing and 
turnaround time. The Commission also believes that the extension of the 
pilot program until December 31, 1994, will provide the Exchange with a 
better opportunity to study its operation and effectiveness prior to 
permanent approval of the program.\5\
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    \4\15 U.S.C. 78f and 78k-1 (1988).
    \5\The Commission notes that the Phlx is in the process of 
modifying and upgrading the computer system on which AUTOM operates. 
Before granting permanent approval or any further extension of the 
pilot, the Commission expects the Phlx to submit a full report, by 
November 1, 1994, describing the effect these modifications have had 
on the operation of AUTOM and updating the information, submitted to 
the Commission on November 24, 1993, which set forth the benefits 
provided by AUTOM, the degree of AUTOM usage, including the number 
and size of the orders routed through AUTOM and the number and size 
of the orders automatically executed through the Auto-X system, and 
the system capacity of AUTOM and Auto-X and any problems that have 
been encountered with the routing and execution features. The 
Commission also requests that the Phlx submit its request for an 
extension of the pilot or permanent approval by November 1, 1994.
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    The Commission further notes that the Exchange has represented that 
from January 1, 1993 until present, AUTOM has not suffered any 
operational failures and the Phlx has not received any formal 
complaints with respect to the system's operation.\6\ Finally, since 
the pilot program is being extended without expansion of the scope of 
the pilot, the Commission does not believe that the capacity of the 
Exchange's automated systems will be adversely effected by this 
extension.\7\
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    \6\See letter dated December 17, 1993, supra note 3.
    \7\The Commission recognizes that additional options classes 
added onto the system can have an effect on the systems operations. 
In this context, the Commission expects that the Phlx will notify 
the Commission if the expansion of options multiple trading, 
pursuant to Rule 19c-5 under the Act, has any material effect on the 
capacity of the Phlx's automated systems.
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    The Commission finds good cause for approving the proposed rule 
change, including Amendment No. 1 to the proposed rule change, prior to 
the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register in order to permit the Phlx to continue 
the AUTOM pilot program on an uninterrupted basis. Specifically, the 
Commission believes that the Phlx's proposal to extend the AUTOM pilot 
program does not raise any new issues since it merely extends the pilot 
program as it is currently operating. Further, the Commission believes 
that the pilot is beneficial in maintaining the quality and efficiency 
of the Phlx's market.
    The Commission also notes that there have been no adverse comments 
concerning the pilot program since its implementation. Accordingly, the 
Commission believes that granting accelerated approval of the proposed 
rule change is appropriate and consistent with Sections 6 and 11A of 
the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the proposed rule change, including Amendment No. 
1 to the proposed rule change. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by January 27, 
1994.
    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-Phlx-93-57) is 
approved through December 31, 1994.

    \8\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\17 CFR 200.30-3(a)(12) (1993).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-239 Filed 1-5-94; 8:45 am]
BILLING CODE 8010-01-M