[Federal Register Volume 62, Number 226 (Monday, November 24, 1997)]
[Notices]
[Pages 62652-62654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30720]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39332; File No. SR-PHLX-97-52]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Options 
Trading Rotations

November 17, 1997.
    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 October 
23, 1997, the Philadelphia Stock Exchange, Inc. (``PHLX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') 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

    Pursuant to Rule 19b-4 of the Act, the PHLX proposes to amend PHLX 
Rule 1047, ``Trading Rotations, Halts and Suspensions,'' to (1) 
Emphasize that opening rotations are conducted daily; (2) replace 
references to ``the Exchange'' with references to ``two Floor Officials 
and a Market Regulation officer'' throughout PHLX Rule 1047; (3) delete 
references in PHLX Rule 1047, Commentary .01 (a) and (d) to puts and 
calls trading on the same security; (4) define modified, reverse and 
shotgun rotations in PHLX Rule 1047, Commentary .01(b); (5) require 
reverse rotations where there is a heavy influx of orders, unless 
exempted by two Floor Officials with the concurrence of a PHLX Market 
Regulation officer; (6) require that two Floor Officials, with the 
concurrence of a PHLX Market Regulation officer, approve second and 
subsequent rotations; (7) provide that, with the approval of two Floor 
Officials and the concurrence of a PHLX Market Regulation officer, 
modified rotations (other than a reverse or shotgun rotation) can be 
employed where there is a delayed opening, halt or suspension in 
trading or other unusual market conditions; and (8) regarding closing 
rotations at expiration, add ``or at an earlier time, with the 
concurrence of a Market Regulation officer,'' to allow the closing 
rotation at expiration to begin other than after the option normally 
ceases trading (4:02 p.m.).
    The PHLX proposes to make comparable changes to PHLX Rule 1047A, 
``Trading Rotations, Halts or Reopenings,'' regarding index options, 
and to Floor Procedure Advice (``Advice'') G-2, ``Trading Rotations, 
Halts or Reopenings.'' \1\ Because PHLX Rule 1047A(b) refers directly 
to PHLX Rule 1047, Commentary .01,\2\ most of the above-described 
amendments will apply to index options trading. For PHLX Rule 
1047A(a)(ii), (c), (d), and (f), and for the corresponding paragraphs 
of Advice G-2, the PHLX proposes to replace references to ``the 
Exchange'' with references to ``two Floor Officials and a Market 
Regulation officer.'' Under PHLX Rule 1047A(e), closing rotations for 
expiring index options are not required, nor are they prohibited.\3\
---------------------------------------------------------------------------

    \1\ Advice G-2 does not contain a fine schedule. Accordingly, 
the proposal does not affect the Exchange's minor rule violation 
enforcement and reporting plan.
    \2\ PHLX Rule 1047A(b) allows specialists to conduct a rotation 
in accordance with PHLX Rule 1047, Commentary .01 (b) and (c).
    \3\ See also CBOE Rule 6.2, Interpretation .03 (closing rotation 
for expiring index options is not ordinarily employed).
---------------------------------------------------------------------------

    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

    PHLX Rule 1047 governs options trading rotations \4\ (including 
opening rotations), delayed openings, halts or suspensions in trading, 
reopenings and closing rotations. Trading rotations are intended to 
produce fair and orderly markets by fairly setting opening prices, 
taking into account orders and bids/offers on the book and in the 
trading crowd. The Exchange has considered the types of opening 
rotations that should be permitted or required in order to reduce the 
length of option openings, especially in unusual circumstances, and to 
prevent subsequent rotations. The purpose of the proposed rule change 
is to improve the efficiency of option openings. PHLX Rule 1047A is the 
corresponding rule governing index options trading.
---------------------------------------------------------------------------

    \4\ A trading rotation is a series of brief time periods during 
which bids, offers and transactions in only specified series can be 
made.
---------------------------------------------------------------------------

    First, the Exchange proposes to amend PHLX Rule 1047(a) to 
emphasize that opening rotations are conducted daily, as opposed to 
closing rotations, which are conducted only at expiration. This change 
is designed to clarify PHLX Rule 1047(a).
    Second, the Exchange proposes to replace ``the Exchange'' with 
``two Floor Officials and a Market Regulation officer'' throughout PHLX 
Rule 1047. This term originated in a comparable rule of the American 
Stock Exchange, but lacks specificity and does not reflect that, in 
reality, the approval of two Floor Officials is received. The Exchange 
believes that trading rotations present the types of issues and need 
for prompt determinations that are particularly suited for Floor 
Official approval.\5\ The purpose of adding an Exchange officer is to 
trigger proper notification of the approval and further encourage 
prompt openings. It should also enable Exchange staff to better monitor 
the conditions giving rise to rotation-related Floor Official approval.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 35742 (May 19, 
1995), 60 FR 28188 (May 30, 1995) (order approving File No. SR-CBOE-
95-04) )``CBOE Approval Order'').
---------------------------------------------------------------------------

    Third, the Exchange proposes to delete references in PHLX Rule 
1047, Commentary .01(a) and (d) to puts and calls trading on the same 
security. The purpose of this change is to recognize that almost 
without exception, both puts and calls trade respecting all Exchange 
options, such that the preface ``if'' is confusing. The remainder of 
Commentary .01(a) states that the

[[Page 62653]]

Specialist shall determine which type of option should open first, and 
may alternate the opening of put series and call series or may open all 
series of one type before opening any series of the other type, 
depending on current market conditions. The proposal adds the language 
``except as provided below'' to emphasize that PHLX Rule 1047.01(b), 
for example, contains exceptions to these normal rotation procedures.
    Fourth, the Exchange proposes to define modified rotations in 
Commentary .01(b) to include reverse and shotgun rotations. Currently, 
Commentary .01(b) defines a modified rotation as an opening rotation 
where each option series opens in the same manner and sequence as 
during a regular trading rotation,\6\ but is permitted to freely trade 
once all option series with the same expiration month have been opened. 
The proposal is intended to correct PHLX Rule 1047 to reflect that this 
description refers to a type of modified rotation, a shotgun rotation. 
Further, the PHLX proposes to add a definition of a reverse rotation, 
stating that it involves opening the series with the most distant 
expiration first, proceeding to the next nearest expiration, and so 
forth, ending with the nearest expiration, until all series have been 
opened. Thus, the proposal is designed to update PHLX Rule 1047 to 
define rotations more thoroughly.
---------------------------------------------------------------------------

    \6\ PHLX Rule 1047, Commenary .01(a) describes a regular trading 
rotation as opening the series with the nearest expiration, 
proceeding to the next most distant expiration, and so forth, until 
all series have been opened.
---------------------------------------------------------------------------

    Fifth, the Exchange proposes to amend PHLX Rule 1047, Commentary 
.01(b)(ii) to require reverse rotations where there is a heavy influx 
of orders, unless exempted by two Floor Officials with the concurrence 
of a PHLX Market Regulation officer. Because a reverse rotation opens 
the most distant expiration first, it is intended to help decrease the 
number of rotations and result in more prompt openings. Specifically, 
most order flow and open interest is generally in the nearest months, 
such that starting with the nearest months and ending with the most 
distant often results in opening free trading with the most active 
months (the nearest) being outdated, which, in turn creates the need 
for subsequent rotations to update those first-rotated months. For 
purposes of this provision, a heavy influx of orders will be determined 
on a case-by-case basis, in light of order flow through the PHLX's 
Automated Options Market (``AUTOM'') system, the number of floor 
brokers in the trading crowd indicating handheld orders for the 
opening, and the number of orders placed on the book, relative to 
normal conditions for that option.
    Sixth, the Exchange proposes to amend PHLX Rule 1047, Commentary 
.01(b)(ii) to require that two Floor Officials, with the concurrence of 
a PHLX Market Regulation officer, approve second and subsequent 
rotations to ensure that they occur only when warranted, because of the 
additional delay in opening free trading. Subsequent rotations are 
conducted in situations, including the influx of near-month order flow 
described above, where the rotation was so time-consuming that certain 
series, such as those earlier in the rotation, become inundated with 
additional order flow or become priced incorrectly, as the underlying 
stock price changes. Currently, PHLX Rule 1047 does not refer to or 
prohibit more than one rotation. The purpose of this change is to 
expressly permit additional rotations, but to require Floor Official 
approval to ensure proper and limited use.
    Seventh, the PHLX proposes to amend PHLX Rule 1047, Commentary 
.01(b) to provide that modified rotations (other than a reverse or 
shotgun) can be employed where there is a delayed opening, halt or 
suspension in trading or other unusual market conditions, with the 
approval of two Floor Officials and the concurrence of a PHLX Market 
Regulation officer. This is intended to facilitate a prompt opening by 
permitting, although not requiring, a modified rotation in response to 
certain market conditions. Floor Officials' approval should ensure that 
expedited rotations are employed where warranted. Specialists could 
thus conduct rotations other than those defined in PHLX Rule 1047 
(shotgun and reverse rotations), which may be appropriate in certain 
situations.\7\
---------------------------------------------------------------------------

    \7\ See also CBOE Rule 6.2, Interpretation .04 (allowing for 
abbreviated rotations).
---------------------------------------------------------------------------

    Lastly, the Exchange proposes to amend the provision regarding 
equity option closing rotations at expiration. PHLX Rule 1047, 
Commentary .01(d) provides that when the PHLX's Options Committee 
decides to conduct a closing rotation on the trading day prior to 
expiration in an equity option for which the underlying did not trade, 
the rotation must commence as immediately as practicable following the 
time at which the option normally ceases free trading (4:02 p.m.). The 
proposal adds ``or at an earlier time, with the concurrence of a Market 
Regulation officer,'' similar to other option exchanges,\8\ which have 
conducted such rotations during the trading day. In certain situations, 
such as where an underlying stock has not traded for a length of time, 
where there is little likelihood that such stock will reopen that day, 
it would be more orderly to conduct the closing rotation during the 
trading day. The time after the close of trading is particularly 
hectic, due to that confirmation of all trading activity and the 
preparation of exercise decisions, among other things. The Exchange 
notes that notification of such an earlier rotation would take place, 
in accordance with this provision.
---------------------------------------------------------------------------

    \8\ See CBOE rule 6.2, Interpretation .03 (requiring a closing 
rotation for each series of individual stock options on the last 
business day prior to expiration, commencing at the later of 3:10 
p.m. Chicago time or after a closing price of the stock in its 
primary market is established).
---------------------------------------------------------------------------

    According to the PHLX, the Commission previously has acknowledged 
the importance of prompt and efficient openings, which decrease the 
amount of time required to obtain market quotes and allow free trading 
to commence as quickly as possible after the opening.\9\ This, in turn, 
should allow market participants to engage in option strategies 
promptly after opening and also should facilitate the prompt execution 
of customer orders. Further, the Commission has acknowledged that 
permitting Floor Officials to authorize deviations from normal 
operating procedures may be appropriate, because it facilitates a 
prompt response to market conditions.\10\ The current proposal is 
intended to promote prompt and efficient openings by updating PHLX 
rules 1047 and 1047A, and Advice G-2.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 29869 (October 28, 
1991), 56 FR 56537 (November 5, 1991) (order approving File No. SR-
PHLX-91-04).
    \10\ See CBOE Approval Order, supra note 5.
---------------------------------------------------------------------------

    For these reasons, the PHLX believes that the proposal is 
consistent with Section 6 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, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, as 
well as to protect investors and the public interest, by improving the 
efficiency of option openings.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

[[Page 62654]]

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 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 to 
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, 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 at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 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-97-52 and should be 
submitted by December 15, 1997.

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-30720 Filed 11-21-97; 8:45 am]
BILLING CODE 8010-01-M