[Federal Register Volume 61, Number 232 (Monday, December 2, 1996)]
[Notices]
[Pages 63889-63892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30611]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37977; File No. SR-PHLX-96-49]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Incorporated, Relating to Amending Floor Procedure Advice F-
24, The Wheel

November 25, 1996.
    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 
11, 1996,\1\ the Philadelphia Stock Exchange Incorporated (``PHLX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 Exchange has designated the proposed rule change as 
constituting a ``non-controversial'' rule change under paragraph (e)(6) 
of Rule 19b-4 under the Act which renders the proposal effective upon 
receipt of this filing by the Commission.\2\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ On November 20, 1996, the PHLX filed Amendment No. 1 with 
the Commission. Amendment No. 1 constitutes a substantive change in 
the proposal in that it redesignates the proposal as a 
``noncontroversial'' rule filing under Rule 19b-4(e)(6) rather a 
19b-4(e)(5). The amendment also states that the Exchange intends to 
monitor the operation of the Wheel for excessive sign-on and sign-
off practices by ROTs, and that Wheel participation is mandatory for 
specialists. See Letter from Philip H. Becker, Senior Vice 
President, Chief Regulatory Officer, PHLX, to Michael Walinskas, 
Senior Special Counsel, Division of Market Regulation, Commission, 
dated November 19, 1996.
    \2\ The Exchange has requested that this proposal be implemented 
on December 13, 1996. The Exchange has represented that this 
proposed rule change: (i) will not significantly affect the 
protection of investors or the public interest; (ii) will not impose 
any significant burden on competition; and (iii) will not become 
operative for 30 days after the date of the filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Floor Procedure Advice (``Advice'') 
F-24, AUTO-X Contra-Party Participation (``The Wheel''), to: (1) 
eliminate most of the sign-on and sign-off provisions; (2) rotate the 
Wheel in two, five and ten lot increments, depending on the size of the 
trading crowd's AUTO-X guarantee, as opposed to ten lot increments, as 
is currently stated in Advice F-24; (3) permit two Floor Officials to 
require all assigned ROTs to participate on the Wheel; and (4) update 
the text with minor revisions. The Wheel is an automated mechanism for 
assigning floor traders (Specialists and Registered Option Traders 
(``ROTs'')) on a rotating basis, as contra-side participants to AUTO-X 
orders. AUTO-X is the automatic execution feature of the Exchange's 
Automated Options Market (``AUTOM'') system,\3\ which provides 
customers with automatic executions of

[[Page 63890]]

eligible option orders at displayed markets.
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    \3\ AUTOM is an electronic order routing system for options 
orders.
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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 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

1. Purpose
    The Exchange's Wheel provisions were approved by the Commission in 
1994 as Advice F-24.\4\ These provisions do not currently appear in any 
other Exchange rules.\5\ The purpose of the Wheel is to increase the 
efficiency and liquidity of order execution through AUTO-X by including 
all floor traders in the automated assignment of contra-parties to 
incoming AUTO-X orders. The Wheel is intended to make AUTO-X more 
efficient, as contra-side participation will be assigned automatically, 
and no longer be entered manually. The Wheel is also intended to 
promote liquidity by including ROTs, as opposed to solely specialists, 
as a contra-side to AUTO-X orders.
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    \4\ Securities Exchange Act Release No. 35033 (November 30, 
1994), 59 FR 63152 (December 7, 1994).
    \5\ Separately, the Exchange intends to incorporate the Wheel 
provisions, as amended, into an AUTOM Rule.
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    The Exchange does not believe that the proposed amendments will 
impair the price or time of the AUTO-X executions or the quality of 
markets for PHLX-listed options. The Wheel affects only who the contra-
side participant may be, not the process, price or time of the actual 
execution. The Exchange does not believe that the market making and 
AUTO-X burden of the specialists will be increased by Wheel 
implementation, even if a particular Wheel only consists of specialist 
participation. For example, the Exchange does not believe that a 
specialist, alone on the Wheel, would disseminate wider markets, 
because the specialist would only be impairing his own business and 
reputation as a specialist. Also, AUTO-X volume represents a small 
percentage of Exchange options volume. In addition, the Exchange notes 
that quote spread parameters help ensure that markets remain within 
certain limits. In fact, with the Wheel in effect, specialists will be 
freed of the manual process of inserting ROTs at parity as contra-side 
participants, which may better enable specialists to monitor and 
perhaps improve markets.
    Due to technical delays associated with balancing various option 
automation projects, the Wheel has not yet been implemented, but is 
currently scheduled for implementation by the end of 1996. The Exchange 
continues to believe that the Wheel offers important benefits to AUTO-X 
participants, as stated above.
    Currently, respecting AUTO-X orders, as stated in the proposal to 
adopt the Wheel, floor trader contra-side participation defaults to the 
account of the specialist if no step is taken to manually add the 
participation of an ROT. The specialist is the party who manually 
enters ROT participation. ROTs are eligible for participation when they 
have established priority or parity at the execution price. 
Consequently, before contra-side information can be added, the trading 
crowd has to resolve among itself which floor trader(s) had priority or 
parity at the execution price. Quite often, several floor traders are 
on parity, thus requiring keypunch entries for each such trader. The 
more contra-side participants that must be added to a trade, the more 
of a delay there is in processing the participant information to the 
trade and the more the process becomes prone to keypunch errors and 
additional manual paperwork. The implementation of the proposed rule 
change to the Wheel will automatically include eligible ROTs in AUTO-X 
executions according to a specific rotation procedure, thus reducing 
the manual inclusion of ROTs as contra-side participants. An additional 
result of the change will be that ROTs on parity who are not signed-on 
the Wheel will not participate in AUTO-X trades. The Exchange believes 
that the inability of ROTs at parity to participate in AUTO-X trades 
absent Wheel participation will be a strong incentive for Wheel sign-
on.
    Several changes to the Wheel are proposed at this time, as listed 
above. First, certain sign-on and sign-off provisions are being deleted 
in order to encourage maximum participation on the Wheel. Currently, in 
order to be placed on the Wheel for an entire trade day, PHLX 
requirements state that the respective ROT must sign-on, in person on 
the trading floor for that listed option by no later than 9:30 AM on 
that day. If not signed on by 9:30 A.M., an ROT may be added to the 
Wheel for all or any portion of the half-day session, commencing at 
12:30 P.M., by signing-on in person at any time during that morning 
session. An ROT may sign-off the Wheel at any time during the trade 
day. An ROT signed-on for an entire day may sign-off up to twice during 
that day and still be eligible to sign-on again on that day, but a 
third sign-off in the same day will cause that ROT to become ineligible 
for the Wheel for the remainder of that trade day. An ROT who has 
signed-on for the half-day session may sign-off once during that 
session and still be eligible to sign-on again for that session, but a 
second sign-off during that half-day session will cause that ROT to be 
ineligible for the Wheel for the remainder of that session.
    The limitations on the number of sign-ons and sign-offs per day as 
well as the requirement that an ROT sign-on by 9:30 A.M. are being 
deleted. The Exchange does not want to limit Wheel participation by 
imposing stringent sign-on/sign-off requirements. However, the Exchange 
realizes that if experience gained through operation of the Wheel 
demonstrates that such requirements are needed, the Options Committee 
will consider such changes. Certain provisions concerning sign-on and 
sign-off will remain in effect. ROTs will continue to be subject to 
certain log-on requirements, including that an ROT sign-on in person on 
the trading floor in individual listed options. Sign-offs are effective 
immediately for all options for which the ROT is on the Wheel, and a 
sign-off shall be effective immediately upon being processed for 
deletion in the system. Also, no two associated or dually affiliated 
ROTs may be on the Wheel for the same option at the same time. In 
addition, to address the concern expressed by the Commission that ROTs 
fulfill their market making obligations, the Exchange will monitor the 
operation of the Wheel for indications of excessive sign-on and sign-
off practices by ROTs, through terminal access to sign-on and sign-off 
information for each ROT and the next-day reports.
    The Exchange emphasizes that the specialist's obligations 
respecting AUTO-X and the Wheel are obligatory and central to the 
specialist function. Floor Procedure Advice (``Advice'') A-13 requires 
specialists to engage AUTO-X within three minutes of completing an 
opening or reopening rotation. This means that AUTO-X participation is 
required for specialists. Advice F-24 concerning the Wheel also 
specifically states that specialists on the options floor are required 
to participate on the

[[Page 63891]]

Wheel in assigned issues. Also, the mandatory nature of the Wheel for 
specialists was stated in the original proposed rule change to adopt 
the Wheel and in the Commission's approval order.\6\
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    \6\ See Securities Exchange Act Release No. 35033 (November 30, 
1994), 59 FR 63152 (December 7, 1994) at n.9.
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    Second, the purpose of amending the Wheel rotation and assignment 
process is to expand the number of automatic participants to each AUTO-
X trade. Currently, paragraph (e) details the rotation of trades among 
Wheel participants. Specifically, the specialist receives the first 
execution of the day in each respective listed option. Thereafter, the 
Wheel would have rotated among participants in ten-lot increments. For 
those AUTO-X orders greater than ten contracts, each additional ten-lot 
or remaining portion thereof would have been assigned to the next 
individual Wheel participant. Under the proposal, the Wheel will rotate 
in increments depending upon the size of the crowd's AUTO-X guarantee, 
as follows:


1-10 contracts.............................  Every 2                    
                                             contracts.                 
11-25 contracts............................  Every 5                    
                                             contracts.                 
26 and more................................  Every 10                   
                                             contracts.                 
                                                                        

    For customer orders, Phlx Rule 1033(a) requires that markets be 
firm for ten contracts, which serves as the minimum AUTO-X guarantee. 
The fact that the Wheel will begin its rotation in a random place each 
day after the specialist's first execution of the day is being added 
into the provision. The maximum size of an AUTO-X guarantee is 50 
contracts.\7\ The remainder of the provision remains unchanged, such 
that if there are five or more ROTs signed onto the Wheel, the 
specialist will receive every fifth execution, in addition to being 
assigned to the first AUTO-X order in the option.
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    \7\ Securities Exchange Act Release No. 36601 (December 18, 
1995), 60 FR 66817 (December 18, 1996).
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    The Options Committee has determined that this rotation process 
should encourage Wheel participation and allot trades more fairly by 
dividing each trade among more participants, such that each participant 
will participate in a greater number and variety of AUTO-X executions. 
As an example of the proposed rotation process, in AQL, for which the 
guarantee is ten contracts, a ten lot AUTO-X order would be split 
evenly among five Wheel participants, or where there are only two 
participants, the split would be six contracts and four contracts, 
respectively. A 50 lot AUTO-X order received in FNM options would also 
be split among five participants, due to its 50-up guarantee. The 
Exchange notes that the size of the AUTO-X guarantee is displayed in 
the trading crowd along with the markets for the option as well as 
published periodically as an Exchange memorandum to the options 
membership.
    Thirdly, paragraph (d) currently permits a Floor Official to modify 
the aforementioned sign-on/sign-off procedures in extraordinary 
circumstances. The Exchange is proposing to add the ability of two 
Floor Officials to require Wheel participation in extraordinary 
circumstances. This ability is limited to ROTs assigned in that option 
and situations where liquidity is required. Stating that two Floor 
Officials may require all assigned ROTs to sign-on the Wheel is 
intended to prevent unfairly singling out certain ROTs; where liquidity 
is needed, all assigned ROTs should be obligated to participate on the 
Wheel. This new requirement is consistent with the affirmative market 
making obligations imposed by Rule 1014. Thus, implementing the Wheel 
should promote just and equitable principles of trade and investor 
protection.
    Lastly, the Exchange is proposing to modify certain language in 
Advice F-24 for clarity, such as adding paragraph headings.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \8\ of the Act in general, and in particular, with 
Section 6(b)(5), in that the amendments are designed to promote just 
and equitable principles of trade, prevent fraudulent and manipulative 
acts and practices, to foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in securities, as well as to 
protect investors and the public interest, by promoting ROT 
participation as contra-parties to AUTO-X trades and reducing 
opportunities for keypunching errors through increased automation. The 
Exchange believes that the proposed amendments to Wheel procedures 
should encourage Wheel participation.
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    \8\ 15 U.S.C. 78f(b).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any 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

    This proposed rule change has been filed by the Exchange as a 
``noncontroversial'' rule change pursuant to paragraph (e)(6) of Rule 
19b-4.\9\ Consequently, the rule change shall become operative 30 days 
after the date of filing, or such shorter time as the Commission may 
designate, if consistent with the protection of investors and the 
public interest pursuant to Section 19(b)(3)(A)(iii) of the Act \10\ 
and subparagraph (e)(6) of Rule 19b-4 thereunder.
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    \9\ 17 CFR 240.19b-4(e)(6).
    \10\ 15 U.S.C. 78s(b)(3)(A)(iii).
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    The proposed rule change was originally submitted to the Commission 
on November 11, 1996. However, the submission of substantive Amendment 
No. 1 on November 20, 1996 delays the statutorily required 
implementation date to December 20, 1996.\11\ The Commission is 
shortening the 30 day delayed implementation period to allow the rule 
change to be implemented on December 13, 1996. The Commission believes 
that accelerated implementation is appropriate in order to prevent any 
longer delay to the PHLX's implementation of the Wheel, a program that 
has already been delayed for two years since its original approval. The 
Commission believes that further delay would not be beneficial to the 
protection of investors or the public interest.
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    \11\ The Commission notes that any substantive amendment to a 
proposed rule change filed under section (e)(6) of Rule 19b-4 causes 
the thirty day delayed implementation period to be restarted, from 
the date of the filing of the amendment. See Securities Exchange Act 
Release No. 35123 (December 28, 1994), 59 FR 66692 (December 28, 
1994).
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    At any time within 60 days of the filing of such proposed rule 
change,\12\ the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public

[[Page 63892]]

interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \12\ The 60 day abrogation period commences from November 20, 
1996, the date of the submission of substantive Amendment No. 1.
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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, 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 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 Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-PHLX-96-49 and 
should be submitted by December 23, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30611 Filed 11-29-96; 8:45 am]
BILLING CODE 8010-01-M