[Federal Register Volume 62, Number 149 (Monday, August 4, 1997)]
[Notices]
[Pages 41986-41989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20412]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38881; File No. SR-Phlx-97-21]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the Philadelphia Stock Exchange, Inc., Relating 
to Wheel Removal and Assignment Areas

July 28, 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 25, 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 and II below, which Items have been prepared by the self-
regulatory organizations. On July 1, 1997, the Phlx submitted Amendment 
No. 1 to the proposed rule change.\3\ On July 24, 1997, the Phlx 
submitted Amendment No. 2 to the proposal.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and to grant accelerated approval to the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Edith Hallahan, Director and Special 
Counsel, Regulatory Services, Phlx, to Michael Walinskas, Senior 
Special Counsel, Division of Market Regulation (``Division''), SEC, 
dated June 25, 1997 (``Amendment No. 1''). In Amendment No. 1, the 
Phlx amended the proposal by: (1) Requiring the approval of the 
Options Committee, rather than two Floor Officials, to extend the 
Wheel assignment area beyond two contiguous quarter turrets; (2) 
deleting the requirement that a trade occur while a trader was away 
from the Wheel for more than a brief interval before the trader 
would be subject to removal and fines; and (3) clarifying several 
aspects of the proposal.
    \4\ See Letter from Philip H. Becker, Senior Vice President and 
Chief Regulatory Officer, Phlx, to Michael Walinskas, Senior Special 
Counsel, Division, SEC, dated July 22, 1997 (``Amendment No. 2''). 
In Amendment No. 2, the Phlx replaced the word ``crowd'' with the 
phrase ``Wheel assignment area'' in the text of the rule to clarify 
that the proposal requires the trader to be present in the Wheel 
assignment area, but not necessarily the trading crowd.
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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''), to: (1) 
Establish a procedure for the removal of Registered Options Traders 
(``ROTs'') from the Wheel; and (2) extend the Wheel assignment area in 
certain circumstances. The Wheel is an automated mechanism for 
assigning floor traders (i.e. specialists and 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,\5\ which provides customers with automatic 
executions of eligible equity option and index option orders at 
displayed markets.
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    \5\ AUTOM is an electronic order routing and delivery system for 
options orders.
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    Currently, an ROT must be actively making markets to be on the 
Wheel, and an ROT must be present in his Wheel assignment area to 
participate in Wheel executions. The Exchange proposes to amend Advice 
F-24 to state that ROTs must sign-off the Wheel when leaving the Wheel 
assignment area for more than a brief interval, which means 5 minutes 
or less, or in matters of a dispute, the amount of time it takes to 
call in a Floor Official and inform him/her of the issue at hand.\6\ If 
an ROT does

[[Page 41987]]

leave the Wheel assignment area for more than a brief interval, the ROT 
is subject to both removal from all Wheel participation for the 
remainder of the trading day and a fine in accordance with the 
established fine schedule.\7\ The establishment of the fine schedule 
for violations of Advice F-24 requires the Exchange to enact a 
corresponding amendment to the Exchange's minor rule violation 
enforcement and reporting plan (``minor rule plan''), as proposed 
herein.\8\ Specifically, violations will be subject to the following 
fine schedule, which will be implemented on a one year running calendar 
basis: 1st Occurence--Warning; 2nd Occurrence--$100.00; 3rd 
Occurrence--$250.00; 4th and Thereafter--Sanction is discretionary with 
Business Conduct Committee.
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    \6\ In Amendment No. 1, the Phlx clarified that a brief interval 
may exceed 5 minutes where an ROT has left the Wheel assignment area 
to summon a Floor Official. See Amendment No. 1, supra note 3.
    \7\ The proposal, as originally filed, subjected the ROT to 
removal and a fine only if the ROT left the Wheel assignment area 
for more than a brief interval and the ROT was assigned a trade 
while away from the Wheel. Pursuant to Amendment No. 1, the ROT is 
subject to both removal and a fine if the ROT leaves the Wheel 
assignment area for more than a brief interval without signing off 
the Wheel, regardless of whether a trade occurs during the trader's 
absence. Amendment No. 1 also clarified that once a Floor Official 
has determined that a violation has occurred, the Floor Official is 
required to subject the ROT to removal and a fine. See Amendment No. 
1, supra note 3.
    \8\ The Phlx's minor rule plan, codified in Phlx Rule 970, 
contains floor procedure advices, such as Advice F-24, with 
accompanying fine schedules. Rule 19d-1(c)(2) authorizes national 
securities exchanges to adopt minor rule violation plans for summary 
discipline and abbreviated reporting; Rule 19d-1(c)(1) requires 
prompt filing with the Commission of any final disciplinary actions. 
However, minor rule violations not exceeding $2,500 are deemed not 
final, thereby permitting periodic, as opposed to immediate, 
reporting.
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    In addition to a fine, the ROT being removed from the Wheel would 
be responsible for any trades assigned to his/her account until the 
sign-off has been processed through the system. When removed from the 
Wheel in this manner, the ROT will be prohibited from signing back on 
to any Wheel for the remainder of the trading day.
    The Exchange also proposes to extend the Wheel assignment area in 
certain circumstances. Currently, ROTs may elect to participate on the 
Wheel for any or all issues in which they maintain an ROT assignment, 
as long as those listed options are located within two contiguous 
quarter turrets of each other and the ROT is actively making markets in 
the specific issues. The Exchange proposes to permit an ROT to 
participate on Wheels that are not within two contiguous quarter 
turrets, if: the Options Committee approves it, the specialists and all 
Wheel participants on those Wheels agree, and the particular 
circumstances warrant extending the Wheel assignment area.\9\
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    \9\ As originally filed, the proposal established that the Wheel 
assignment area could be extended with the approval of two Floor 
Officials, both specialists and all Wheel participants on both 
Wheels. The proposal was amended to require the approval of the 
Phlx's Options Committee, rather than two Floor Officials, and to 
clarify that the proposed rule does not limit the extension of the 
assignment area to two Wheels. See Amendment No. 1, supra note 3.
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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 Statements Regarding 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 III 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

    The Exchange's Wheel provisions were approved by the Commission in 
1994 as Advice F-24.\10\ 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. Thus, 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 also is intended to promote 
liquidity by including ROTS, as opposed to solely Specialists, as a 
contra-side to AUTO-X orders.
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    \10\ 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. As a result of the experience garnered from Wheel 
implementation thus far, the Exchange proposes two changes to address 
specific issues that have arisen on the trading floor. First, the 
Exchange proposes to require ROTs to sign-off the Wheel after leaving 
the Wheel assignment area for more than a brief interval. The 
Exchange's Options Committee has determined that performing stock 
execution or hedging functions near the crowd does not constitute 
leaving the crowd. Further, the ROT is required to be present in the 
Wheel assignment area, but not necessarily the trading crowd. If an ROT 
does leave the Wheel assignment area for more than a brief interval, 
under the proposal, the ROT would be: fined, removed from all Wheel 
participation for the remainder of the day and held responsible for 
Wheel trades assigned until the sign-off is processed.\11\ The purpose 
of this provision is to encourage presence in the Wheel assignment 
area, to minimize marketplace disruptions by not reallocating Wheel 
trades from absent ROTs, and to deter violations by imposing a fine 
schedule for minor violations.
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    \11\ See supra note 7.
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    The second aspect of this proposal concerns the definition of the 
Wheel assignment area. During the roll-out, the Exchange learned that 
it is possible to be ``actively making markets in the specific issues'' 
and be considered ``present'' in a Wheel assignment area that is larger 
than two contiguous quarter turrets. Specifically, in certain areas of 
the trading floor, depending on the physical layout of the trading 
posts, and where there is little trading activity, visibility and 
access across turrets is greater than initially determined when Wheel 
procedures were drafted in 1994. Thus, the Exchange believes that this 
proposal, which takes into account trading activity and crowd size as 
well as the intervening trading posts, fairly extends the Wheel 
assignment area where warranted, which should promote liquidity and ROT 
Wheel participation in less active issues. Thus, the proposal is 
limited to extending the Wheel assignment area where, with the approval 
of the Options Committee, the specialists and all Wheel participants on 
those Wheels agree that an ROT can be actively making markets in that 
particular situation and can, thus, be considered present in such Wheel 
issues, until the specialists or any other Wheel participants in the 
affected Wheel assignment area no longer agree that the circumstances 
warrant an extension.\12\
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    \12\ See supra note 9.
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    For these reasons, the Exchange believes that the proposed rule 
change is consistent with Section 6 of the Act \13\ in general, and in 
particular, with Section 6(b)(5),\14\ in that the amendments are 
designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, to foster cooperation

[[Page 41988]]

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 encouraging ROT presence in the Wheel assignment 
area by establishing punitive measures for failure to do so and 
flexibly extending the Wheel assignment area where warranted to 
encourage additional ROT participation. This, in turn, should further 
the intent of the Wheel to promote ROT participation as contra-parties 
to AUTO-X trades and to reduce opportunities for keypunching errors 
through increased automation.
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    \13\ 15 U.S.C. 78f.
    \14\ 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

    No written comments were either solicited or received.

III. 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-97-21 and should be 
submitted by August 25, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission has reviewed carefully the Phlx's proposed rule 
change and believes, for the reasons set forth below, the proposal, as 
amended, is consistent with the requirements of Section 6 of the 
Act,\15\ and the rules and regulations thereunder applicable to a 
national securities exchange.\16\ Specifically, the Commission believes 
the proposal is consistent with Section 6(b)(5) of the Act \17\ because 
it will facilitate the operation of the Wheel, which will promote just 
and equitable principles of trade, foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities.
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    \15\ 15 U.S.C. 78f.
    \16\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed provision relating to 
removal of ROTs from the Wheel under specifically-defined circumstances 
should clarify the responsibilities and duties undertaken by Wheel 
participants, thereby resulting in less conflict and disruption 
relating to the operation of the Wheel. The Commission also believes 
that including violations of Advice F-24 in the Exchange's minor rule 
plan \18\ is consistent with the Act. The Commission believes that the 
Exchange's proposed changes to its minor rule plan are reasonable and 
provide fair procedures for appropriately discipling members and member 
organizations for minor rule violations that warrant a sanction more 
severe than a warning or cautionary letter, but for which a full 
disciplinary proceeding would be costly and time-consuming in light of 
the minor nature of the violation. The Commission notes that violations 
of Advice F-24 are objective and easily verifiable, and thus, lend 
themselves to the use of expedited proceedings. Specifically, the issue 
of whether an ROT has left the Wheel assignment area for more than a 
brief interval may be determined objectively and adjudicated quickly 
without complicated factual and interpretive inquiries.\19\ The 
Commission believes that the proposed fine schedule, coupled with the 
proposed provisions requiring the ROT to be removed from the Wheel for 
the rest of the day and to be responsible for all assigned trades, 
should serve to encourage consistent Wheel participation and to deter 
repeated violations of the Exchange's rules.
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    \18\ See supra note 8.
    \19\ The Commission notes that the Phlx has the discretion to 
take any violations, including those under the minor rule plan, to 
full disciplinary proceedings and would expect the Phlx to do so 
where appropriate, for example, in cases of egregious and repeated 
violations of Advice F-24.
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    In addition, the Commission believes that the proposed provision 
relating to Wheel assignment areas provides participants some 
flexibility in Wheel selection by extending an ROT's Wheel assignment 
area beyond two contiguous quarter turrets if circumstances warrant. 
The Commission notes that in evaluating a request for an extension of 
the Wheel assignment area, the Options Committee must, on a case-by-
case basis, consider the trading activity and crowd size in the 
particular options, as well as the intervening posts. The Commission 
further notes that all affected specialists and ROTs must agree with 
the determination of the Options Committee to expand the Wheel 
assignment area. The Commission believes that expansion of the Wheel 
assignment area should promote liquidity and ROT Wheel participation in 
less active issues. Accordingly, the Commission believes that the 
proposed changes will facilitate the operation of the Wheel and, 
therefore, the proposed rule change is appropriate and consistent with 
Section 6 of the Act.\20\
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    \20\ 15 U.S.C. 78f.
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    The Commission finds good cause for approving the proposed rule 
change, including Amendment Nos. 1 and 2, prior to the thirtieth day 
after the date of publication of notice thereof in the Federal 
Register. The Commission notes that the proposed changes reflect input 
received from several Exchange committees and floor members based on 
their experiences with the Wheel to date. Moreover, the Commission 
notes that the proposed changes concerning removal of floor traders and 
the extension of Wheel assignment areas relate specifically to Phlx 
member participation on the Wheel. The proposal does not affect public 
customers using AUTO-X, which will continue to execute public customer 
orders automatically. Further, the Commission notes that those directly 
affected by the proposed changes, Phlx member Wheel participants, will 
have an opportunity to express their views with respect to any request 
for the extension of Wheel assignment areas. With regard to the 
implementation of Wheel sign-off procedures and the institution of a 
fine mechanism for violations of such procedures, the Commission 
believes that expedited approval of the proposal is appropriate in 
order to ensure optimal performance of the Wheel and to prevent market 
disruptions that can occur if Wheel-assignment trades must be re-
allocated

[[Page 41989]]

from absent Wheel participants. Therefore, the Commission believes that 
granting accelerated approval of the proposed rule change, as amended, 
is consistent with Sections 6 and 19(b)(2) of the Act.\21\
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    \21\ 15 U.S.C. 78f and 78s(b)(2).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-Phlx-97-21), including 
Amendment Nos. 1 and 2, is hereby approved on an accelerated basis.

    \22\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20412 Filed 8-1-97; 8:45 am]
BILLING CODE 8010-01-M