[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