[Federal Register Volume 60, Number 186 (Tuesday, September 26, 1995)]
[Notices]
[Pages 49653-49654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23759]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36248; File No. SR-PHLX-95-39]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to Increasing
the Maximum Size of Options Orders Eligible for Automatic Execution
September 19, 1995.
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 August
21, 1995, 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, II and III 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
Generally, public customer market and marketable limit orders for
up to 25 option contracts are eligible for execution through the
automatic execution (``AUTO-X'') feature of the PHLX's Automated
Options Market (``AUTOM'') system.\1\ The PHLX proposed to increase the
maximum AUTO-X order size eligibility for public customer market and
marketable limit orders for all equity and index options from 25
contracts to 50 contracts.
\1\ For USTOP 100 Index (``TPX'') options, public customer
market and marketable limit orders for up to 50 contracts are
eligible for AUTO-X. See Securities Exchange Act Release No. 35781
(May 30, 1995), 60 FR 30131 (June 7, 1995) (File No. SR-PHLX-95-29).
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The text of the proposed rule change is available at the Office of
the Secretary, PHLX, and at the Commission.
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 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 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
The purpose of the proposal is to increase the maximum order size
eligibility for AUTO-X from 25 to 50 contracts. The PHLX notes that
this number represents the maximum size of a permissible AUTO-X order,
which is determined by the specialist in that option. Under the 10-up
rule,\2\ the minimum size of the Exchange's AUTO-X guarantee is 10
contracts.
\2\ See PHLX Rule 1033(a), ``Size of Bid/Offer and 10-up
Guarantee.''
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AUTOM, which has operated on a pilot basis since 1988 and was most
recently extended through December 31, 1995,\3\ is the PHLX's electric
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 specialist on the Exchange's trading floor.
\3\ See Securities Exchange Act Release No. 35183 (December 30,
1994), 60 FR 2420 (January 9, 1995) (order approving File No. SR-
PHLX-94-41). See also Securities Exchange Act Release Nos. 25540
(March 31, 1988), 53 FR 11390 (order approving AUTOM on a pilot
basis); 25868 (June 30, 1933), 53 FR 35563 (order approving File No.
SR-PHLX-88-22, extending pilot through December 31, 1988); 26354
(December 13, 1988), 53 FR 51185 (order approving File No. SR-PHLX-
88-33, extending pilot program through June 30, 1989); 26522
(February 3, 1989), 54 FR 6465 (order approving File No. SR-PHLX-89-
1, extending pilot through December 31, 1989); 27599 (January 9,
1990), 55 FR 1751 (order approving File No. SR-PHLX-89-03, extending
pilot through June 30, 1990); 28625 (July 26, 1990), 55 FR 31274
(order approving File No. SR-PHLX-90-16, extending pilot through
December 31, 1990); 28978 (March 15, 1991), 56 FR 12050 (order
approving File No. SR-PHLX-90-34, extending pilot through December
31, 1991); 29662 (September 9, 1991), 56 FR 46816 (order approving
File No. SR-PHLX-91-31, permitting AUTO-X orders up to 20 contracts
in Duracell options only); 29837 (October 18, 1991), 56 FR 36496
(order approving File No. SR-PHLX-91-33, increasing size of AUTO-X
orders from 10 contracts to 20 contracts); 32906 (September 15,
1993), 58 FR 15168 (order approving File No. SR-PHLX-92-38,
permitting AUTO-X orders up to 25 contracts in all options); and
33405 (December 30, 1993), 59 FR 790 (order approving File No. SR-
PHLX-93-57, extending pilot through December 31, 1994).
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Certain orders are eligible for AUTOM's automatic execution
feature, AUTO-X.\4\ AUTO-X orders are executed automatically at the
disseminated quotation price on the Exchange and reported to the
originating firm. Orders that are not eligible for AUTO-X are handled
manually by the specialist.
\4\ Orders for up to 500 contracts are eligible for AUTOM and
public customer orders for up to 25 contracts, in general, are
eligible for AUTO-X. See Secuirities Exchange Act Release Nos. 35782
(May 30, 1995), 60 FR 30136 (June 7, 1995) (order approving File No.
SR-PHLX-95-30); and 32000 (March 15, 1993), 58 FR 15168 (March 19,
1994) (order approving File No. SR-PHLX-92-38). As noted above,
public customer orders for up to 50 contracts in TPX options are
eligible for AUTO-X. See Securities Exchange Act Release No. 35781,
supra note 1.
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The Commission approved the use of AUTO-X as part of the AUTOM
pilot program in 1990.\5\ In 1991, the Commission approved a PHLX
proposal to extend AUTO-X to all equity options.\6\ As noted earlier,
orders for up to 500 contracts are eligible for AUTOM and orders for up
to 25 contracts, in general, are eligible for AUTO-X.
\5\ See Securities Exchange Act Release No. 27599 (January 9,
1990), 55 FR 1751 (January 18, 1990) (order approving File No. SR-
PHLX-89-03).
\6\ See Securities Exchange Act Release No. 28978 (March 15,
1991), 56 FR 12050 (March 21, 1991) (order approving File No. SR-
PHLX-90-34).
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The PHLX believes that the proposed expanded AUTO-X parameter
should improve the AUTOM system by offering the benefits of AUTO-X,
including prompt and efficient automatic executions at the displayed
price, to additional customer orders. The Exchange states that the
proposed AUTO-X increase from a maximum of 25 to 50 contracts is in
line with prior changes. For example, the PHLX notes that the
Commission previously has approved other PHLX proposals to increase the
maximum AUTO-X contract size limit.\7\
\7\ See Securities Exchange Act Release No. 29837, supra note 3.
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Further, the Exchange believes that it is appropriate to permit
automatic executions of option orders up to 50 contracts for several
reasons. First, the PHLX states that AUTO-X affords each order the
opportunity for price improvement, such that the price discovery
mechanism is not impaired. Specifically, AUTO-X orders, although
immediately reported with the best bid/offer as the execution price,
may be subject to price improvement by the specialist, if a better bid/
offer is
[[Page 49654]]
available. For example, a superior Registered Options Trader (``ROT'')
bid/offer established immediately prior to the receipt of an AUTO-X
order may not be disseminated in time to be matched with such order
electronically, but the superior bid/offer is matched with the AUTO-X
order through the trade adjustment function of the system. In view of
this opportunity for price improvement by manual specialist
intervention, the Exchange believes that permitting the automatic
execution of 26 to 50 lots does not raise pricing concerns.
Second, according to the PHLX, there are many safeguards
incorporated into Exchange rules and policies to ensure the appropriate
handling of AUTO-X orders. Although AUTO-X orders are by definition
executed automatically at the disseminated quotation, there are
procedures in place in the event that the quotes are not accurate. The
PHLX states that these safeguards protect customer orders in the event
quotations are not up-to-date, not disseminating, or otherwise
malfunctioning. At the same time, specialists and (ROTs) are also
protected from incorrect executions. For example, in extraordinary
(fast) market conditions, quotations are disseminated with an ``F''
once the 10-up guarantee on screen markets is suspended pursuant to
Option Floor Procedure Advise (``Advice'') F-10, ``Extraordinary Market
Conditions (Fast Markets).'' \8\ In addition, Advice A-113, ``Auto
Execution Engagement/Disengagement Responsibility,'' allows a
specialist to disengage AUTO-X in extraordinary circumstances, upon
approval by two floor officials. PHLX believes that these provisions
serve to protect the integrity of AUTO-X by preventing inaccurate
executions.
\8\ Under Advice F-10, when a fast market is in effect,
displayed options quotes are not firm and the 10-up guarantee is not
applicable, although specialists and trading crowds are required to
use best efforts to update quotes and fill incoming orders in
accordance with the 10-up rule.
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Third, the Exchange notes that specialists have the flexibility to
establish the AUTO-X guarantee size for each option up to the maximum
permissible size. In addition, the Exchange's ``Wheel'' for
electronically assigning AUTO-X participation (although not yet
operational) is voluntary for ROTS and will provide executions in 10-
lot increments.\9\ Thus, the PHLX believes that increasing the maximum
AUTO-X order size up to 50 contracts does not raise financial viability
concerns because ROTs can choose whether to participate on the Wheel
and because the Wheel assigns order in 10-lot increments. With respect
to the financial integrity of PHLX specialists and ROTs, the Exchange
notes that it monitors compliance with PHLX Rules 703, ``Financial
Responsibility and Reporting,'' and 722, ``Margin Accounts,'' on a
regular basis.
\9\ The Wheel is an automated mechanism for assigning
specialists and ROTs, on a rotating basis, as contra-side
participants for AUTO-X orders. Specialists must participate on the
Wheel and ROTs may participate on the Wheel in assigned issues. On
the Wheel, 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. Each 10 lot or order (whichever is smaller) constitutes an
assignment. See Securities Exchange Act Release No. 35033 (November
30, 1994), 59 FR 63152 (December 7, 1994) (order approving File No.
SR-PHLX-94-32).
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The Exchange states that the proposed expansion of the AUTO-X
maximum order size should not impose significant burdens on the
operation and capacity of the AUTOM system. Instead, the PHLX believes
that the proposal may enhance AUTOM's effectiveness by increasing the
number of orders eligible for automatic execution, thereby reducing
manual processing.
The PHLX believes that the proposal is consistent with Section 6(b)
of the Act, in general, and, in particular, with Section 6(b)(5), in
that it is designed to promote just and equitable principles of trade
and to prevent fraudulent and manipulative acts and practices, as well
as to protect investors and the public interest, by extending the
benefits of AUTO-X to a larger number of customer orders.
(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 on Comments on the
Proposed Rule Change Received from Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(a) by order approve such proposed rule change, or
(b) institute proceedings to determine whether the proposed rule
change should be disapproved.
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 above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by October 17,
1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
\10\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23759 Filed 9-25-95; 8:45 am]
BILLING CODE 8010-01-M