[Federal Register Volume 60, Number 5 (Monday, January 9, 1995)]
[Notices]
[Pages 2420-2422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-384]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35183; File No. SR-Phlx-94-41]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 to the Proposed Rule Change by the Philadelphia Stock Exchange, 
Inc., Relating to an Extension of the Automated Options Market 
(``AUTOM'') Pilot Program

December 30, 1994.
    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 November 
21, 1994, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which items have been prepared by the Exchange. 
The Exchange subsequently filed Amendment No. 1 to the proposal on 
December 1, 1994.\1\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

    \1\In Amendment No. 1, the Exchange requested accelerated 
approval of the proposed rule change. See Letter from Edith 
Hallahan, Special Counsel, Phlx, to Michael Walinskas, Branch Chief, 
Office of Market Supervision (``OMS''), Division of Market 
Regulation (``Division''), Commission, dated December 1, 1994 
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to extend the Exchange's Automated Options Market 
(``AUTOM'') pilot program until December 31, 1995. The text of the 
proposal is available at the Office of the Secretary, the Phlx, and the 
Commission. [[Page 2421]] 

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 Phlx included statements 
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 Phlx 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

    AUTOM is the Exchange's electronic order routing, delivery, 
execution, and reporting system for equity and index options. AUTOM is 
an on-line system that allows electronic delivery of options orders 
from member firms directly to the appropriate specialists on the Phlx 
options trading floor, with electronic confirmation of order 
executions. Certain orders are eligible for AUTOM's automatic execution 
feature, AUTO-X. AUTO-X orders are executed automatically at the 
disseminated quotation price on the Exchange and reported to the 
Options Price Reporting Authority (``OPRA'') and to the originating 
firm. Generally, the specialist is the contra-side to AUTO-X trades.\2\ 
Those orders not eligible for AUTO-X are executed manually by the 
specialist, and, upon execution of the order, are entered into the 
Exchange's systems for reporting to OPRA and to the firm that placed 
the order.

    \2\See Securities Exchange Act Release No. 35033 (November 30, 
1994), 59 FR 63152 (December 7, 1994) (order approving a ``wheel'' 
execution system to automatically assign the specialist and 
participating Registered Options traders, on a rotating basis, as 
the contra-side to AUTO-X trades).
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    The AUTOM system has operated on a pilot basis since 1988, when it 
was first approved by the Commission for market orders of up to five 
contracts for all exercise prices in the near-month covering 12 Phlx-
traded equity options.\3\ Since that time, AUTOM has been extended and 
amended several times.\4\

    \3\See Securities Exchange Act Release No. 25540 (March 31, 
1988), 53 FR 11390 (April 6, 1988).
    \4\See Securities Exchange Act Release Nos.: 25868 (June 30, 
1988), 53 FR 25563 (July 7, 1988) (order extending the pilot program 
to include 25 additional equity options and extending the pilot 
through December 31, 1988); 26354 (December 13, 1988), 53 FR 51185 
(December 20, 1988) (order extending pilot program through June 30, 
1989); 26522 (February 3, 1989), 54 FR 6465 (February 10, 1989) 
(order extending pilot through December 31, 1989); 27599 (January 9, 
1990), 55 FR 1751 (January 18, 1990) (order extending pilot through 
June 30, 1990); 28265 (July 26, 1990), 55 FR 31274 (August 1, 1990) 
(order extending pilot through December 31, 1990); 28978 (March 15, 
1991), 56 FR 12050 (March 21, 1991) (order extending pilot through 
December 31, 1991 and approving the use of AUTO-X as part of the 
AUTOM pilot program); 29662 (September 9, 1991), 56 FR 46816 
(September 16, 1991) (order permitting AUTO-X orders up to 20 
contracts in Duracell operations only); 29782 (October 3, 1991), 56 
FR 51247 (October 10, 1991) (order permitting AUTO-X for all strike 
prices and expiration months); 29837 (October 18, 1991), 56 FR 55146 
(October 24, 1991) (order extending pilot through December 31, 
1993); 32000 (March 15, 1993), 58 FR 15168 (March 19, 1993) (order 
approving the delivery of orders for up to 100 contracts through 
AUTOM and execution of orders for up to 25 contracts through AUTO-
X); 32906 (September 15, 1993), 58 FR 49345) (September 22, 1993) 
(order permitting AUTO-X orders up to 25 contracts in all equity 
options); 33405 (December 30, 1993), 59 FR 790 (January 6, 1994) 
(order extending pilot through December 31, 1994) (``Exchange Act 
Release No. 33405''); and 34920 (October 31, 1994), 59 FR 55510 
(November 7, 1994) (order approving use of AUTOM and AUTO-X for 
index option orders).
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    The purpose of the proposed rule change is to extend the AUTOM 
pilot program until December 31, 1995. The Phlx believes that this 
extension of the pilot program should provide the Exchange, as well as 
the Commission, with additional time to study the effectiveness of 
AUTOM prior to either a further extension or permanent approval of the 
pilot program. During this extension, the Exchange intends to monitor 
the implementation of certain enhancements to AUTOm as well as to 
codify the entire pilot program as an Exchange rule.\5\

    \5\Separately, the Exchange is proposing to limit the 
eligibility of National Over-the-Counter Index options for execution 
through AUTO-X. See File No. SR-Phlx-94-60. Additionally, the 
Exchange is proposing to codify the types of orders eligible for 
AUTOM and AUTO-X. See File No. SR-Phlx-94-62. See also, supra note 
2.
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    Generally, the Exchange believes that since the last extension of 
the pilot program,\6\ AUTOM has functioned properly and efficiently, 
without any material problems reported by Phlx members of AUTOM users, 
and without significant malfunctions or operational failures.

    \6\See Exchange Act Release No. 33405, Supra note 4.
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    The Exchange believes that AUTOM provides small customer option 
orders with the benefits of electronic delivery and reporting, while 
AUTO-X provides automatic executions as well. Accordingly, the Exchange 
believes that AUTOM increases the speed and efficiency of order 
delivery, execution and reporting. This, the Exchange believes, 
promotes both liquidity and fair and orderly markets. For these 
reasons, the Phlx believes that extending the AUTOM pilot program until 
December 31, 1995, is consistent with Section 6 of the Act, in general, 
and, Section 6(b)(5), the particular, in that the proposal is designed 
to promote just and equitable principles of trade, and to protect 
investors and the public interest. In addition, the Exchange believes 
that the proposed rule change is consistent with Section 11A(a)(1)(B) 
of the Act in the that AUTOM is intended to improve, through the use of 
new data processing and communications techniques, the efficiency with 
which transactions in Phlx equity and index options are executive. 
Further, the Exchange believes that AUTOM fosters competition among 
options exchanges, which have similar systems in place.

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

    The Phlx does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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

    No written comments were either solicited or received by the 
Exchange.
    No written comments were either solicited or received by the 
Exchange.

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.\7\

    \7\See Amendment No. 1, supra note 1.
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    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 Sections 6 and 11A.\8\ 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 options through the use of new data 
processing and communications techniques, thereby improving order 
processing and turnaround time.\9\ The Commission also 
[[Page 2422]] believes that the extension of the pilot program until 
December 31, 1995, will provide the Exchange with a better opportunity 
to further study the operation and effectiveness of the pilot program, 
and the proposed modifications to be implemented during the 
extension,\10\ prior to either a further extension or permanent 
approval of the pilot program.\11\

    \8\15 U.S.C. Sec. Sec. 78f and 78k-1 (1988).
    \9\The Commission notes that in the last extension of the pilot 
program, the Commission stated that prior to granting permanent 
approval or any further extension of the pilot, the Phlx would be 
required to submit a full report: (1) describing certain system 
modifications then in progress by the Exchange and describing the 
effect those modifications have subsequently had on AUTOM; and (2) 
updating a report submitted by the Phlx dated November 24, 1993; in 
connection with the last extension of the pilot program. See 
Exchange Act Release No. 33405, supra note 4. The Phlx has filed the 
required reports in connection with the current request for an 
extension of the pilot program. See Letter from Gerald O'Connell, 
First Vice President, Market Regulation and Trading Operations, 
Phlx, to Michael Walinskas, Branch Chief, OMS, Division, Commission, 
dated December 14, 1994, and letter from Jack McCarthy, Vice 
President, Equity Options Trading Systems, Phlx, to Michael 
Walinskas, Branch Chief, OMS, Division, Commission, dated December 
21, 1994 (``December 21 Letter'').
    \10\See supra note 5.
    \11\Before granting permanent approval of the pilot program, the 
Commission expects the Phlx to submit a full report, on or before 
November 1, 1995, describing the operation of AUTOM during this 
extension and the effect of any modifications made to AUTOM system 
implemented during the extension. Additionally, the Phlx's AUTOM 
pilot report should include: (1) a description of the benefits 
provided by AUTOM; (2) the degree of AUTOM usage, including the 
number and size of the orders routed through AUTOM and the number 
and size of the orders executed automatically through the AUTO-X 
system; (3) the system capacity of AUTOM and AUTO-X; and (4) any 
problems the Exchange has encountered with the routing and execution 
features. The Commission also requests that the Phlx submit its 
request for either an extension or permanent approval of the pilot 
program on or before November 1, 1995.
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    The Commission further notes that the Exchange has represented that 
since the last extension of the pilot program,\12\ AUTOM has functioned 
properly and efficiently, that no material problems have been reported 
by Phlx members or AUTOM users, and that AUTOM has not had significant 
malfunctions or operational failures.\13\ Finally, because 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.\14\

    \12\See Exchange Act Release No. 33405, supra note 4.
    \13\Telephone conversation between Edith Hallahan, Special 
Counsel, Phlx, and Brad Ritter, Senior Counsel, OMS, Division, 
Commission, on December 29, 1994.
    \14\The Commission expects the Phlx to immediately notify the 
Commission of any and all developments during this extension of the 
pilot program having a material effect on the capacity of the Phlx's 
automated systems. See also, December 21 Letter, supra note 9.
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    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 thereto 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 because it merely extends the pilot program as it is 
currently operating. Further, the Commission continues to believe that 
the pilot program is beneficial to maintaining the quality and 
efficiency of the Phlx's market. Finally, the Commission 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 foregoing. 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 at 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 Phlx. All 
submissions should refer to File No. SR-Phlx-94-41 and should be 
submitted by January 30, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-Phlx-94-41), as amended, is 
approved through December 31, 1995.

    \15\15 U.S.C. Sec. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-384 Filed 1-6-95; 8:45 am]
BILLING CODE 8010-01-M