[Federal Register Volume 59, Number 234 (Wednesday, December 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30031]


[[Page Unknown]]

[Federal Register: December 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35033; File No. SR-PHLX-94-32]

 

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendments No. 1 and No. 2 to Proposed 
Rule Change To Implement a ``Wheel'' for the Registered Options Trader 
Contra-Side Participation to AUTO-X Trades

November 30, 1994.
    On July 18, 1994, pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ the Philadelphia Stock Exchange, 
Inc. (``PHLX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change that implements a 
new procedure for assigning contra-side participants to AUTO-X orders. 
On August 10, 1994, the Commission published notice of the proposed 
rule change in the Federal Register to solicit comment from interested 
persons.\2\ No comments were received. On October 28, 1994, PHLX filed 
with the Commission Amendment No. 1 in order to clarify certain 
operations of the Wheel and to amend certain provisions of Floor 
Procedure Advice F-24.\3\ On November 15, 1994, PHLX filed with the 
Commission Amendment No. 2 which clarifies the interaction between the 
Wheel and the trading crowd.\4\ This order approves the proposal, 
including Amendments No. 1 and No. 2 on an accelerated basis.
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 34481 (August 3, 1994), 
59 FR 40943.
    \3\Specifically, Amendment No. 1 will require that an ROT be 
present in its Wheel assignment area to participate in Wheel 
executions; that an ROT be actively making a market in options in 
order to participate in the Wheel; and to permit the Options 
Committee to conduct the six month review of the Wheel, instead of 
the Allocation, Evaluation and Securities Committee. Letter from 
Gerald D. O'Connell, First Vice President, Market Regulation and 
Trading Operations, PHLX, to Michael Walinskas, Branch Chief, Office 
of Market Supervision, Division of Market Regulation, Commission 
(October 24, 1994).
    \4\Letter from Gerald D. O'Connell, First Vice President, Market 
Regulation and Trading Operations, PHLX, to Christine Sibille, 
Office of Market Supervision, Division of Market Regulation, 
Commission (November 15, 1994).
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I. Description

    The proposed rule change adopts Floor Procedure Advice F-24, AUTO-X 
Contra-Party Participation (The Wheel), which establishes an automated 
mechanism for assigning floor traders (i.e., specialists and Registered 
Option Traders (``ROTs'')), on a rotating basis, as contra-side 
participants to AUTO-X orders.
    The AUTO-X system is the automatic execution feature of the 
Exchange's Automated Options Market (``AUTOM'') system.\5\ AUTO-X 
provides customers with automatic executions of eligible option orders 
at displayed markets.\6\ Currently, floor trader contraside 
participation defaults to the account of the specialist, and the 
addition of ROTs or orders from the trading crowd or the specialist's 
limit order book as contra-side participants to AUTO-X orders requires 
manual keypunch entries.\7\ The Wheel automatically includes eligible 
ROTs in AUTO-X executions and specifies how such trades will be split 
among the specialist and ROTs. Customer orders, both on the limit order 
book and in the trading crowd, will continue to receive priority in 
accordance with PHLX rules. An ROT, whether on the Wheel or not, also 
may have priority.\8\ If priority is established for the limit order 
book, a member of the trading crowd, or an ROT, the specialist will 
stop the Wheel's operation and manually assign the trade to the contra-
party with priority.
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    \5\AUTOM is an on-line 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. On March 31, 1988, the Commission 
first approved the Phlx's operation of the AUTOM system on a pilot 
basis. Securities Exchange Act Release No. 25540 (March 31, 1988), 
53 FR 11390.
    \6\Public customer orders up to 25 contracts are eligible for 
AUTO-X. Securities Exchange Act Release No. 32906 (September 15, 
1993), 58 FR 49345. Orders eligible for automatic execution 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.
    \7\Under the previous method, ROTs were eligible for 
participation when they had established priority or parity at the 
execution price. Under the proposal, an ROT at parity may only be 
assigned trades through the Wheel.
    \8\An ROT may have price priority (if the best bid or offer is 
the ROT's alone) or time priority (the ROT's bid or offer was 
clearly established first at that price).
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    The specialist and any signed on ROTs will be listed on the 
Wheel.\9\ ROTs must sign on to the Wheel in person on the trading floor 
from terminals designated by the Exchange. ROTs may sign on before 9:30 
a.m. for the entire trading day or before 12:30 p.m. for trading after 
12:30 p.m. An ROT may not sign on after 12:30 p.m. for the first time 
that trading day.
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    \9\Specialists must participate on the Wheel. ROTs may 
participate on the Wheel in assigned issues. ROTs are limited to 
participating in one Wheel assignment area (two contiguous quarter 
turrets) at any given time. ROTs must be present in the Wheel 
assignment area to participate in Wheel executions, although brief, 
reasonable absences will be permitted. ROTs must be actively making 
markets in assigned options. ROTs may sign on in individual options. 
No two associated or dually affiliated ROTs may be on the Wheel for 
the same option at the same time.
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    Contra-side participation of AUTO-X orders are assigned to Wheel 
participants in circular rotation. The specialist receives the first 
assignment of trades for the day in each respective option. Thereafter, 
the Wheel assigns trades to ROTs in an order standardized for that day 
on a random basis.\10\ If there are five or more ROTs signed onto the 
Wheel, the specialist participates in the first trade of the day and 
every fifth assignment thereafter. Each ten lot or order (whichever is 
smaller) constitutes an assignment. For AUTO-X orders greater than ten 
contracts, each ten lot or remaining portion of the order constitutes 
an assignment. The procedure for rotating trades among participants 
will be reviewed by the Exchange's Option Committee after six months.
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    \10\The first ROT is selected randomly from all ROTs that sign 
on prior to 9:30 a.m. All other ROTs are prioritized for receipt of 
orders based on the badge numbers following sequentially the first 
ROT's badge number. If other ROTs sign on for the 12:30 p.m. 
session, the priority list is re-randomized for that session.
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    An ROT may sign off the Wheel at any time during the trading day, 
which becomes effective for all listed options. An ROT may sign off 
twice each trading day and still be eligible to sign on again that day; 
after the third sign off, that ROT is no longer eligible for the Wheel 
that day. ROTs who sign on for the half-day session beginning at 12:30 
p.m. may only sign off once and still be eligible to sign on again that 
day. A floor official may modify the sign on/sign off procedures in 
extraordinary circumstances.

II. Discussion

    The Commission finds that 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 Section 6 and the rules and regulations 
thereunder. Section 6(b)(5) of the Act provides that the rules of the 
exchange must promote just and equitable principles of trade and remove 
impediments to and perfect the mechanism of a free and open market, and 
in general to protect investors and the public interest.\11\
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    \11\15 U.S.C. Sec. 78f(b)(5) (1988).
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    The proposal will help the PHLX to provide an orderly market and to 
encourage small investor participation in the options markets by 
facilitating the use of AUTO-X. AUTO-X enhances the Exchange's ability 
to execute small public customer orders in a timely, accurate, and 
efficient manner. The manual assignment of contra-participation 
increases the time needed to execute each trade through AUTO-X. During 
periods of heavy trading volume, this manual operation may severely 
restrict AUTO-X's utility. Therefore, the automation of assignments of 
contra-parties for AUTO-X trades should improve order processing and 
turnaround time. By not manually entering contra-participant 
information for each trade, the Wheel should reduce opportunities for 
keypunching errors. In addition, the Wheel should generally reduce the 
number of contra-participants for each trade.\12\ The reduction in the 
number of contra-parties to each contract may increase the efficiency 
of order processing. By enhancing AUTO-X's utility, the proposal should 
assist in providing a free and open market.
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    \12\Currently, the specialist and all ROTs with parity or 
priority at the execution price would be contra-participants to an 
AUTO-X trade. Under the Wheel, the maximum number of contra-
participants would be three. (The maximum permissible size for AUTO-
X orders is twenty-five contracts, which would be split into two 
ten-contract assignments and one five-contract assignment.)
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    Finally, the Commission finds good cause for approving Amendments 
No. 1 and No. 2 prior to the thirtieth day after the date of 
publication of notice of filing thereof. Amendment No. 1 provides minor 
amendments to the procedure consistent with the original proposal. 
Amendment No. 2 merely clarifies the interaction between the Wheel and 
the trading crowd and limit order book. The Commission did not receive 
any comments on the original proposal, which was noticed for the full 
statutory period.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 1 and No. 2 to the proposed rule 
change. Persons making written submissions should file six copies 
thereof with the Secretary, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, D.C. 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 Amendments No. 1 and No. 2 between 
the Commission and any persons, other than those that may be withheld 
from the public in accordance with the provisions of 5 U.S.C. Sec. 522, 
will be available for inspection and copying in the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of such filing also will be available at the principal office of 
PHLX. All submissions should refer to file No. SR-PHLX-94-32 and should 
be submitted by December 28, 1994.

III. Conclusion

    For the reasons stated above, the Commission finds that the 
proposed file change is consistent with Section 6(b)(5) of the Act.

    It is therefore ordered, Pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-PHLX-94-32) be, and 
hereby is, approved.
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    \13\15 U.S.C. Sec. 78s(b)(2) (1988).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\17 CFR Sec. 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30031 Filed 12-6-94; 8:45 am]
BILLING CODE 8010-01-M