[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