[Federal Register Volume 63, Number 26 (Monday, February 9, 1998)]
[Notices]
[Pages 6591-6593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3120]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39610; File No. SR-PHLX-97-52]


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

February 2, 1998.

I. Introduction

    On October 23, 1997, the Philadelphia Stock Exchange, Inc. 
(``PHLX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposal to modify its rules governing options trading 
rotations.\3\ The proposed rule change was published for comment in the 
Federal Register on November 24, 1997.\4\ No comments were received 
regarding the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A trading rotation is a series of brief time periods during 
which bids, offers and transactions can be made only in specified 
series.
    \4\ See Securities Exchange Act Release No. 39332 (November 17, 
1997), 62 FR 62652.
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II. Description of the Proposal

    The PHLX proposes to make several changes to its rules governing 
options trading rotations. First, the PHLX proposes to amend paragraph 
(a) of Exchange Rule 1047, ``Trading Rotations, Halts and Suspension,'' 
to clarify that opening rotations for equity option contracts, unlike 
closing rotations, are conducted daily.\5\
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    \5\ Closing rotations in equity options are conducted only at 
expiration.
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    Second, the PHLX proposes to replace references to ``the Exchange'' 
with references to ``two Floor Officials, with the concurrence of a 
Market Regulation officer'' throughout PHLX Rule 1047; in paragraphs 
(a)(ii), (c), (d), and (f), of PHLX Rule 1047A. ``Trading Rotations, 
Halts or Reopenings;'' and in Floor Procedure Advice (``Advice'') G-2, 
``Trading Rotations, Halts or Re-openings,'' \6\ in order to specify 
the approval required to implement options trading halts, modified 
trading rotations, and other procedures. For example, PHLX Rule 
1047(b), as amended, will require the halt or suspension of trading in 
option contracts whenever two floor officials, with the concurrence of 
a PHLX market regulation officer, deem such action appropriate in the 
interest of a fair and orderly market and to protect investors. The 
PHLX believes that trading rotations present the types of issues and 
the need for prompt determinations that are particularly suited to 
floor official approval. In addition, the PHLX believes that requiring 
the concurrence of a PHLX market regulation officer will help to ensure 
proper notification of the approval and allow Exchange staff to better 
monitor the conditions giving rise to rotation-related floor official 
approval.
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    \6\ 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.
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    Third, the PHLX proposes to delete from PHLX rule 1047, Commentary 
.01(a) and (d) provisions stating ``if both puts and calls covering the 
same underlying security *** are traded ***.'' The PHLX believes that 
this language may be confusing because both puts and calls trade on 
almost all PHLX options. The PHLX also proposes to add the language 
``except as provided below'' to Commentary .01(a) to emphasize that 
Commentary .01(b) contains exceptions to the normal opening rotation 
procedures.
    Fourth, the PHLX proposes to amend Commentary .01(b) to define 
modified, reverse and shotgun rotations.\7\ Specifically, the PHLX 
proposes to amend Commentary .01(b) by adding paragraph (i), which 
will: (1) Define a shotgun rotation as opening rotation where each 
option series opens in the same manner and sequence as during a regular 
trading rotation,\8\ but is permitted to freely trade once all option 
series with the same expiration month have been opened;\9\ (2) state 
that modified rotations include reverse and shotgun rotations; and (3) 
define a reverse rotation as an opening rotation

[[Page 6592]]

where the specialist first opens series of options of a given class 
with the most distant expiration, then proceeds to the next nearest 
expiration and ends with the nearest expiration, until all series have 
been opened.
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    \7\ Because PHLX Rule 1047A(b) allows specialists to conduct a 
rotation in accordance with PHLX Rule 1047, Commentary .01(b) and 
(c), the proposed amendments to Commentary .01(b) and (c) also will 
apply to index options trading.
    \8\ PHLX Rule 1047, Commentary .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.
    \9\ This definition currently describes a modified rotation.
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    Fifth, the PHLX proposes to adopt Commentary .01(b)(ii), which will 
require the use of a reverse rotation in connection with openings and 
reopenings involving a heavy influx of orders, unless exempted by two 
floor officials, with the concurrence of a PHLX market regulation 
officer. The PHLX states that because most order flow and open interest 
is generally in the nearest expiration months, starting a rotation with 
the nearest months may mean that the nearest expiration months are 
outdated when free trading opens, and, accordingly, will require a 
subsequent rotation in order to update them. The reverse rotation is 
designed to produce more prompt openings by eliminating the need for a 
subsequent rotation of the nearest expiration 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.\10\
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    \10\ The specialist will determine the existence of a heavy 
influx of orders. Telephone conversation between Michelle Weisbaum, 
Associate General Counsel, PHLX, and Yvonne Fraticelli, Attorney, 
Office of Market Supervision (``OMS''), Division of Market 
Regulation (``Division''), Commission, on January 22, 1998 
(``January 22 Conversation'').
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    Sixth, the PHLX proposes to amend Commentary .01(b)(ii) to require 
that two floor officials, with the concurrence of a PHLX market 
regulation officer, approve any second or subsequent rotations to 
ensure that they occur only when warranted. According to the PHLX, 
subsequent rotations are conducted in situations where the rotation is 
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. 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 Commentary .01(b)(ii) to allow 
specialists to employ a modified rotation when there is a delayed 
opening, halt or suspension in trading or other unusual market 
conditions. The modified rotation a specialist may employ includes, but 
is not limited to, a reverse or shotgun rotation.\11\ According to the 
PHLX, this change is intended to facilitate a prompt opening by 
permitting, although not requiring, a modified rotation in response to 
certain market conditions. The PHLX believes that floor official 
approval should ensure that expedited rotations are employed where 
warranted.
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    \11\ A specialist must obtain floor official approval to use a 
modified rotation other than a reverse or shotgun rotation. See 
January 22 Conversation, supra note 10.
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    Eighth, the Exchange proposes to amend PHLX Rule 1047, Commentary 
.01(d). Commentary .01(d) currently 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 
equity did not trade, the rotation must commence as immediately as 
practicable following the time when the option normally ceases free 
trading (4:02 p.m.). The proposal will permit an earlier closing 
rotation for such options. The PHLX believes that, under certain 
circumstances (e.g., when an underlying stock has not traded for a 
length of time and there is little chance that the stock will reopen 
that day), it would be more orderly to conduct the closing rotation 
during the trading day because the time after the close of trading is 
particularly hectic, due to final confirmation of all trading activity 
and the preparation of exercise decisions. The Exchange would notify 
members of the earlier closing rotation through an announcement on the 
Exchange's floor.\12\
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    \12\ Telephone conversation between Michelle Weisbaum, Associate 
General Counsel, PHLX, and Yvonne Fraticelli, Attorney, OMS, 
Division, Commission, on November 21, 1997 (``November 21 
Conversation'').
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5),\13\ 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, and to protect investors and the public 
interest.\14\
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    Specifically, the Commission believes that the PHLX's proposal to 
amend PHLX Rule 1074(a) to indicate that opening rotations for equity 
options are conducted daily will clarify the PHLX's rule with regard to 
the frequency of opening rotations. Similarly, the Commission believes 
that deleting references in PHLX Rule 1047, Commentary .01 (a) and (d) 
to puts and calls traded on the same underlying security will clarify 
the PHLX's rules and eliminate potential confusion. Likewise, the 
addition of the language ``except as provided below'' to the 
description in Commentary .01(a) of a specialist's normal procedures 
during opening rotations will provide additional clarity by emphasizing 
that Commentary .01(b) provides exceptions to the normal opening 
rotation procedures.
    The Commission also believes that it is reasonable for the PHLX to 
replace references to ``the Exchange'' in PHLX Rules 1047 and 1047A and 
in Advice G-2 with references to ``two Floor Officials, with the 
concurrence of a Market Regulation officer'' in order to specify the 
authority required to approve options trading halts, modified trading 
rotations, and other procedures. According to the PHLX, the reference 
to approval by two floor officials will modify the Exchange's rules to 
reflect the PHLX's current procedures, and requiring the concurrence of 
a PHLX market regulation officer will ensure prompt notification of the 
approval and facilitate monitoring by the PHLX staff of the conditions 
giving rise to the floor officials' approval. The Commission notes that 
the rules of other options exchanges provide floor officials with 
similar discretion.\15\
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    \15\ See e.g., CBOE Rule 6.2 (allowing two floor officials to 
direct that one or more trading rotations be employed on any 
business day to aid in producing a fair and orderly market; CBOE 
Rule 6.3 (allowing two floor officials to halt trading in any 
security in the interests of a fair and orderly market); and 
American Stock Exchange, Inc. (``Amex'') Rule 918, Commentary .01(b) 
(allowing two floor officials to approve the use of a modified 
trading rotation in circumstances other than in connection with a 
delayed opening, halt or suspension of the underlying stock or after 
delayed openings, halts or suspensions of an option series listed on 
the Amex).
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    The Commission believes that the amendments to Commentary .01(b) 
regarding modified trading rotations are reasonable and consistent with 
the Act. As noted above, the PHLX proposes to amend Commentary .01(b) 
to revise the definition of a modified rotation and to define reverse 
and shotgun rotations. The Commission believes that defining reverse 
and shotgun rotations will help to clarify the PHLX's rules, while 
defining a modified rotation to include rotations other than reverse 
and shotgun rotations will provide the PHLX with greater flexibility in 
conducting modified trading rotations in response

[[Page 6593]]

to market conditions. The Commission notes that the rules of the 
Chicago Board Options Exchange, Inc. (``CBOE'') provide similar 
flexibility with regard to modified trading rotations.\16\
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    \16\ Under CBOE Rule 6.2, for example, an Order Book Official 
(``OBO'') may deviate from any rotation policy or procedure with the 
approval of two CBOE floor officials. CBOE Rule 6.2, Interpretation 
and Policy .04 provides that an abbreviated rotation is CBOE Rule 
6.2, Interpretation and Policy .04 provides that an abbreviated 
rotation is one of the deviations from rotation policy or procedure 
and one of the modifications of the rotation order and manner 
permitted under CBOE Rule 6.2.
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    The Commission also believes that it is reasonable for the PHLX to 
adopt Commentary .01(b)(ii) which, among other things, will require the 
use of a reverse trading rotation in connection with openings or 
reopenings involving a heavy influx of orders, unless exempted by two 
floor officials with the concurrence of a PHLX market regulation 
officer.\17\ According to the PHLX, the rotation of the nearest 
expiration months first under normal opening rotation procedures may 
result in the need for subsequent rotations in order to update the 
first-rotated months when there is a heavy influx of orders. The 
reverse rotation is designed to eliminate the need for subsequent 
rotations of the nearest expiration months by opening the most distant 
expiration first, then opening the next nearest expiration, until the 
nearest expiration opens last. The Commission previously has noted the 
importance of completing opening rotations as quickly as possible in 
order to allow free trading to commence.\18\ Accordingly, the 
Commission believes that it is reasonable for the PHLX to require a 
reverse rotation when there is a heavy influx of orders in order to 
produce a more prompt opening. The Commission believes that it is 
appropriate for the PHLX to allow flexibility in applying the rule by 
allowing two floor officials, with the concurrence of a PHLX market 
regulation officer, to provide an exemption from the use of a reverse 
rotation.
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    \17\ For purposes of this provision, the specialist will 
determine the existence of a heavy influx of orders on a case-by-
case basis, in light of order flow through the PHLX's 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.
    \18\ See Securities Exchange Act Release No. 29869 (October 28, 
1991), 56 FR 56537 (November 5, 1991) (order approving File No. SR-
PHLX-91-04) (Series Opening Request Ticket procedures adopted by the 
PHLX will decrease the time required to obtain opening market 
quotations and allow free trading to commence as quickly as possible 
after the opening; expedited free trading will allow market makers 
and customers to engage in various options strategies and will 
result in the prompt execution of customer orders).
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    Commentary .01(b)(ii) also will allow two floor officials, with the 
concurrence of a PHLX market regulation officer, to approve a second 
rotation. According to the PHLX, a subsequent rotation may be conducted 
when an opening rotation was so time-consuming that some series become 
inundated with additional order flow or became priced incorrectly as 
the underlying stock price changed. The Commission believes that 
allowing floor officials to approve a second rotation will help the 
PHLX to maintain fair and orderly markets by permitting a second 
trading rotation when market conditions warrant a second rotation. The 
Commission believes that requiring the approval of two floor officials, 
with the concurrence of a PHLX market regulation officer, will help to 
ensure that second rotations are used appropriately. The Commission 
notes that the rules of the CBOE also permit additional trading 
rotations.\19\
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    \19\ See CBOE Rule 6.2 (allowing two floor officials to direct 
that one or more trading rotations be employed on any given business 
day to aid in producing a fair and orderly market).
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    Commentary .01(b)(ii) also authorizes the use of a modified 
rotation in connection with delayed opening, halts, or suspensions of 
options trading or other unusual market conditions. With floor official 
approval, specialists may use modified trading rotations other than 
those defined in Commentary .01(b)(i) (i.e., shotgun and reverse 
rotations). According to the PHLX, this provision is designed to 
facilitate a prompt opening by allowing specialists to use a modified 
rotation in response to certain market conditions. The Commission 
believes that it is reasonable to provide PHLX specialists with the 
flexibility to evaluate market conditions and to modify trading 
rotations in order to facilitate a prompt opening. The Commission 
believes that proper exercise of this authority should contribute to 
the protection of investors and the public interest by allowing 
specialists to respond appropriately to current market conditions. In 
addition, the Commission notes that the rules of the other options 
exchanges contain similar provisions requiring or permitting the use of 
modified trading rotations.\20\
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    \20\ Amex Rule 918, Commentary .02(b), for example, requires the 
use of a modified trading rotation in connection with all delayed 
openings, halts, or suspensions of the underlying stock and after 
delayed openings, halts or suspensions of any option series listed 
for trading on the Amex, unless two floor officials approve 
otherwise. The Amex's rule also permits the use of a modified 
rotation in other circumstances or in a manner different from the 
procedures described in Commentary .02(b) if two floor officials 
determine that the procedure should be implemented due to unusual 
market conditions, such as a heavy influx of orders. See also CBOE 
Rule 6.2, Interpretation and Policy .01(b) (allowing a Board Broker, 
Designated Primary Market Maker, or OBO to conduct a modified 
trading rotation with the approval of two floor officials or at the 
direction of the appropriate CBOE Floor Procedure Committee); and 
CBOE Rule 24.13 (allowing an OBO, with the approval of two floor 
officials, to deviate from any rotation policy or procedure issued 
by the appropriate Floor Procedure Committee when they conclude in 
their judgment that such action is appropriate in the interests of a 
fair and orderly market).
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    Because PHLX Rule 1047A(b) allows specialists in index options to 
conduct rotations in accordance with PHLX Rule 1047, Commentary .01 (b) 
and (c), the changes described in PHLX Rule 1047, Commentary .01 (b) 
and (c) also will apply to index options trading. The Commission 
believes it is reasonable to apply these changes to index options in 
order to provide flexibility in the trading of index options as well as 
equity options.
    Finally, the Commission believes that it is reasonable for the PHLX 
to amend PHLX Rule 1047, Commentary .01(d) to permit an earlier closing 
rotation for certain equity options. According to the PHLX, there are 
circumstances (e.g., when the underlying stock has not traded for a 
length of time and there is little likelihood that the stock will 
reopen that day) in which it would be more orderly to conduct a trading 
rotation during the trading day.\21\ Accordingly, the Commission 
believes that it is appropriate to provide the PHLX with the discretion 
to conduct an earlier closing rotation in order to help the PHLX to 
maintain a fair and orderly market.
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    \21\ The PHLX will notify members of the earlier closing 
rotation through an announcement on the Exchange's floor. See 
November 21 Conversation, supra note 12.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (File No. SR-PHLX-97-52) is 
approved.

    \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. 98-3120 Filed 2-6-98; 8:45 am]
BILLING CODE 8010-01-M