[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Pages 27099-27100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12882]
[[Page 27099]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38606; File No. SR-Phlx-97-20]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange,
Inc., Relating to Specialist Wheel Rotation Frequency
May 9, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 24, 1997, 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. On May 9, 1997, the Phlx submitted Amendment
No. 1 to the proposed rule change.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78x(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Philip H. Becker, Senior Vice President and
Chief Regulatory Officer, Phlx to Michael Walinskas, Senior Special
Counsel, Division of Market Regulation, SEC, dated May 8, 1997
(``Amendment No. 1''). In Amendment No. 1, the Phlx designated File
No. SR-Phlx-97-20 be submitted pursuant to Section 19(b)(2) of the
Act, rather than pursuant to Section 19(b)(3)(A), as originally
requested.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to amend Floor Procedure Advice (``Advice'') F-
24, AUTO-X Contra-Party Participation (the ``Wheel''), regarding Wheel
rotations to the specialist. The Wheel is an automated mechanism for
assigning floor traders (i.e., specialists and registered options
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,\4\ which
provides customers with automatic executions of eligible option orders
at displayed markets. Currently, the Wheel allocates the first trade of
every day to the specialist. Thereafter, if four or less ROTs are
participating on the Wheel, the specialist participates in a normal
rotation. However, if five or more ROTs have signed-on the Wheel, the
specialist receives every fifth execution.
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\4\ AUTOM is an electronic order routing and delivery system for
option orders.
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At this time, the Exchange proposes to amend Advice F-24(e) to
reduce the rotation frequency for the specialist in larger crowds.
Specifically, if there are, on average, five to 15 Wheel participants
(including the specialist), the specialist would receive every fifth
execution, and if there are, on average, 16 or more Wheel participants,
the specialist would receive every tenth execution. Where the Wheel
will be set to ``every tenth execution,'' the specialist's rotation
frequency will thereafter be automatically reduced from every tenth
execution to a normal, consecutive rotation, when the number of signed-
on Wheel participants becomes less than ten. Thus, where there were 16
or more Wheel participants on average, once only nine participants are
signed-on, the specialist rotation frequency drops to a normal
rotation. In contrast, in trading crowds averaging five to 15 Wheel
participants, the specialist rotation would be every fifth execution,
including where there are nine Wheel participants; if this crowd
dropped to three Wheel participants, the specialist would receive a
normal rotation (every fourth execution).
The average number of Wheel participants would be determined, in
accordance with procedures established by the Exchange, upon
implementation of this proposal, and adjusted thereafter by request
from a participant on that Wheel (except where adjusted automatically
under this proposal, as explained above). Specialist Wheel rotation
frequency would otherwise carry over from day-to-day. Adjustments would
become effective as soon as practicable the following trading day
(allowing staff time to count, input and activate a different rotation
level). The Exchange may establish procedures and limitations in order
to reasonably process such requests without impairing Wheel operations,
based on the availability of regulatory/surveillance and systems staff,
and with due regard for prevailing market conditions.
The Exchange also proposes to adopt a new provision into advice F-
24(e) permitting the Options Committee (or its designees) to establish
a larger minimum Wheel rotation increment than the current two-five-ten
lot rotation dependent upon the AUTO-X guarantee in that issue, if
requested by the specialist and Wheel participants. Any such larger
rotation cannot exceed ten contracts, such that this provision would
permit rotations of three--ten contracts in specific issues.
The complete 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 an basis for the proposed
rule change and discussed any comments it received on the proposed rule
change. The text of the these statements may be examined at the places
specified in Item IV below. The self-regulatory organization has
prepared summaries, set forth in section 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 Exchange's Wheel provisions were approved by the Commission in
1994 as Advice F-24.\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. Previously, only the specialist could be the
automatic contra-side participant to AUTO-X trades, with ROT
participation requiring manual intervention by the specialist. The
Wheel is intended to make AUTO-X more efficient, as contra-side
participation will be assigned automatically, and no longer 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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\5\ See Securities Exchange Act Release No. 35033 (November 30,
1994), 59 FR 63152 (December 7, 1994) (SR-Phlx-94-32).
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The floor-wide roll-out of the Wheel was completed the week of
April 21, 1997. In November, 1996, the Exchange filed a proposed rule
change to rotate the Wheel in a two-five-ten lot rotation, depending on
the size of the AUTO-X guarantee.\6\ As a result of that proposal,
experience and input from the continued roll-out and an in-depth review
by the sub-committee and committee processes, an additional change to
the Wheel procedures is proposed at this time. The proposed change to
the specialist wheel rotation frequency is intended to address the
comments and concerns of the membership, including improving the
[[Page 27100]]
efficiency of the Wheel and eliminating a disproportionate allotment to
the specialist in larger crowds. This proposal specifically addresses
the issue of specialist rotation frequency raised by commenters on the
aforementioned proposed rule change.\7\
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\6\ See Securities Exchange Act Release No. 37977 (November 25,
1994), 59 FR 63899 (December 2, 1994) (SR-Phlx-94-32).
\7\ See SR-Phlx-96-49.
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Specifically, Advice F-24(e) is proposed to be amended such that
the specialist would receive every tenth execution, if there are 16 or
more Wheel participants in a particular issue. As stated above, the
purpose of this change is to more equitably allocate Wheel
participation in larger crowds. The Exchange notes that a greater
participation level for specialists in smaller crowds is currently
applicable pursuant to Rule 1014(g)(ii) and (iii), the enhanced
specialist participation provisions.
The Exchange is also proposing to enable the Options Committee to
establish a different rotation increment not to exceed ten contracts.
Currently, as explained above, the Wheel rotates in different
increments, depending upon the size of the AUTO-X guarantee in that
issue. For instance, where the AUTO-X guarantee is for one to ten
contracts, the Wheel rotates in two lot increments, meaning a ten lot
would be divided in two lots to five Wheel participants. Where the
AUTO-X guarantee is 11-25 contracts, the Wheel rotates in five lot
increments, and where the guarantee exceeds 25 contracts (up to the
maximum permissible 50 contracts), the Wheel rotates in ten lot
increments. At this time, the Exchange proposes to allow the Wheel to
rotate in an increment larger than permissible under the current
framework, but no greater than ten contracts. The Options Committee may
determine to allow a differing rotation, if requested by the Specialist
and wheel participants, and following adequate notice to the trading
floor.
The purpose of this provision is to improve the efficiency of the
Wheel by allowing a greater rotation increment, meaning fewer
participants and reports generated, in specific situations. Certain
options may be subject to a lower, ten contract guarantee due to the
high volatility associated with the underlying security(ies), yet, due
to heavy volume, warrant a larger, more efficient wheel rotation
increment. Also, very small trading crowds (with few Wheel
participants) may request a larger rotation increment to reduce the
number of executions received by each participant, preferring to accept
larger but more infrequent execution reports. The Exchange believes
that this provision should improve Wheel efficiency by recognizing that
the trading patterns and dynamics of trading crowds differ extensively
across the options floor.
The Exchange notes that this proposal does not affect the price or
time of AUTO-X executions. AUTO-X trades receive an automatic execution
with immediate reporting, and the Wheel determines only the identity of
the contra-side participant, as opposed to the process, time of price
of the actual execution.
For these reasons, the Exchange believes the proposed rule change
is consistent with Section 6 of the Act \8\ in general, and in
particular, with Section 6(b)(5), \9\ in that it is designed to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and does not permit unfair discrimination between customers,
issuers, brokers and dealers, by more fairly allocating Wheel trades to
specialist in larger crowds.
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\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(5).
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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
Although no written comments were either solicited or received
specifically on this proposal, the Exchange received a petition dated
January 20, 1997 generally requesting changes to the Wheel.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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 reasons for so finding or (ii) as
which the self-regulatory organization consents, the Commission will:
(A) By order approve the 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 in the
Commission's Public Reference Section, 450 Fifth Street, NW,
Washington, DC 20549. 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-97-20 and should be
submitted by June 6, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12882 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M