[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47077-47078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23759]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40370; File No. SR-Phlx-98-34]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Relating to an Additional Participation in Wheel Trades 
Where the Enhanced Specialist Participation Applies

August 27, 1998.
    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 August 11, 1998, 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 
Exchange.\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. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On July 16, 1998, the Exchange filed a similar proposed rule 
change (File No. SR-Phlx-98-31). The Commission suggested that the 
Exchange make certain changes, and, rather than amend the filing, 
the Exchange determined to withdraw the filing and resubmit it. The 
Exchange withdrew SR-Phlx-98-31 on August 11, 1998.
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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 Options Floor Procedure Advice F-24, 
AUTO-X Contra-Party Participation (The Wheel), to allow specialists an 
additional participation in Wheel trades where the Enhanced Specialist 
Participation applies, with unanimous consent of the Wheel participants 
in that option. Specifically, the Exchange proposes to add the proposed 
enhanced specialist participation to paragraph (e), stating with the 
unanimous consent of Wheel participants, the specialist shall receive a 
split of twice the contracts where the Enhanced Specialist 
Participation of Rule 1014(g)(ii) applies. The text of the proposed 
rule change is set forth below. Proposed new language is in italics.

F-24  AUTO-X Contra-Party Participation (The Wheel)

    (a)-(d) No change.
    (e) Wheel Rotation/Assigning Contracts--AUTO-X participation shall 
be assigned to Wheel Participants on a rotating basis, beginning at a 
random place on the rotational Wheel each day from those participants 
signed-on in that listed option at the time. At a minimum, the Wheel 
shall rotate and assign contracts depending upon the size of the AUTO-X 
order, as follows:

1-10 contracts......................  Every 2 contracts.                
11-25 contracts.....................  Every 5 contracts.                
26 and more.........................  Every 10 contracts.               
                                                                        

    The Options Committee, or its designees, may approve a Wheel 
rotation in a size larger than the minimum stated above, if requested 
by the specialist and Wheel participants. However, the Wheel may not 
rotate in a size larger than ten contracts.
    Each remaining portion shall be successively assigned to individual 
Wheel Participants on that same basis. The specialist shall receive the 
first execution of the day; thereafter, if four or less ROTs are 
participating on the Wheel, the specialist shall participate in a 
normal rotation. However, if an average of five to 15 ROTs have signed-
on the Wheel, the specialist shall receive every fifth execution; if an 
average of 16 or more ROTs have signed on the Wheel, the specialist 
shall receive every tenth execution, unless Wheel participation falls 
below ten participants at any time, then the specialist shall 
automatically participate in a normal rotation.
    Exception to normal rotation: With the unanimous consent of Wheel 
participants in an option, the specialist shall receive twice the 
contracts where the Enhanced Specialist Participation of Rule 
1014(g)(ii) applies. This exception shall apply for the Enhanced 
Specialist Participation pilot program period.
    (f) No change.

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 Exchange 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 Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspect of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Wheel is an automated mechanism for assigning trade 
participation among 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. The Exchange's detailed Wheel provisions appear as 
Advice F-24.\5\ The purpose of the Wheel is to increase the efficiency 
of order execution through AUTO-X by including participating 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 is assigned automatically, and no longer 
entered manually.
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    \4\ AUTOM is an electronic order routing system for option 
orders. See Phlx Rule 1080.
    \5\ See Securities Exchange Act Release No. 35033 (Nov. 30, 
1994), 59 FR 63152 (Dec. 7, 1994) (order approving Advice F-24).
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    The Enhanced Specialist Participation is a pilot program whereby a 
specialist may select 50% of his/her issues for an enhanced split.\6\ 
Pursuant to Phlx Rule 1014(g)(ii), the enhanced split applies where an 
equity option or index option specialist is on parity \7\ with one or 
more controlled accounts for orders involving more than five contracts. 
Specifically, when such specialist is on parity with one controlled 
account, the specialist receives 60% of the contracts and the 
controlled account receives the remaining 40%; when a specialist is on 
parity with two controlled accounts, the specialist receives 40% of the 
contracts and each controlled account receives

[[Page 47078]]

30%; and when a specialist is on parity with three or more controlled 
accounts, the specialist is counted as two crowd participants for 
purposes of allocating the contracts.\8\ In all of these situations, if 
a customer is on parity, the customer may not receive a lesser 
allotment than any other crowd participant, including the specialist.
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    \6\ Initially, the program was approved as a one-year pilot 
until August 26, 1995. See Securities Exchange Act Release No. 34606 
(Aug. 26, 1994), 59 FR 45741 (Sept. 2, 1994). The pilot has 
subsequently been revised and extended and is currently scheduled to 
expire on December 31, 1998. See Securities Exchange Act Release 
Nos. 35028 (Nov. 30, 1994), 59 FR 63151 (Dec. 7, 1994); 35429 (Mar. 
1, 1995), 60 FR 12802 (Mar. 8, 1995); 36122 (Aug. 18, 1995), 60 FR 
44530 (Aug. 28, 1995); 37254 (Aug. 5, 1996), 61 FR 42080 (Aug. 13, 
1996); and 38924 (Aug. 11, 1997), 62 FR 44160 (Aug. 19, 1997); and 
39401 (Dec. 4, 1997), 62 FR 65300 (Dec. 11, 1997).
    \7\ Pursuant to Phlx Rule 1014(g)(i), a controlled account 
includes any account controlled by or under common control with a 
member broker-dealer.
    \8\ ``Parity'' refers to time parity (i.e., orders entered 
simultaneously). See Phlx Rules 119, 1014(g)(i).
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    The Phlx proposes to amend Advice F-24, AUTO-X Contra-Party 
Participation (the Wheel), to allow specialists an additional 
participation in Wheel trades where the Enhanced Specialist 
Participation pilot applies pursuant to Rule 1014. The proposed 
additional participation in Wheel trades would be in effect for the 
Enhanced Specialist Participation pilot period. For systems reasons, 
the additional participation would be in the form of a second sign-on 
for the Wheel,\9\ as opposed to the 60%/40% two crowd participant split 
discussed above. The second sign-on is contingent upon unanimous 
consent of the Wheel participants in that option, which is intended to 
implement the proposal where the ROTs on the Wheel agree that more 
participation for the specialist and hence, less for the ROTs, is fair 
and appropriate. The Exchange has determined that Wheel participants, 
as opposed to the whole trading crowd, should consent because those 
market makers who do not choose to sign-on to the Wheel are not 
affected by the additional Wheel participation. The purpose of the 
proposal is to extend the enhanced specialist split to the Wheel. In 
adopting the enhanced specialist split, the Exchange identified the 
need to attract new specialist units as well as to retain and encourage 
current specialist units to vigorously trade existing options and 
aggressively seek and apply for newly allocated options.
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    \9\ The Wheel has no built-in limitation as to the number of 
floor traders who may be signed on.
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2. Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\10\ in general, and furthers the objectives of 
Section 6(b)(5),\11\ in particular, in that it is designed to promote 
just and equitable principles of trade of trade, to prevent fraudulent 
and manipulative acts and practices, 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. The Exchange 
believes that the proposal will serve to aid the Exchange in attracting 
and retaining well-capitalized specialist units to the Exchange without 
unreasonably restraining competition or harming investors.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from August 11, 1998, the date on which it 
was filed, and the Exchange provided the Commission with written notice 
of its intent to file the proposed rule change at least five business 
days prior to the filing date,\12\ it has become effective pursuant to 
Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(e)(6) 
thereunder.\14\ In approving this rule, the Commission notes that it 
has considered the rule's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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    \12\ The Exchange provided advance written notice of its intent 
to file proposed rule change SR-Phlx-98-31, which proposed change it 
subsequently withdrew and replaced with this proposed rule change. 
See note 3, supra. The Commission accepts the advance notice 
provided for SR-Phlx-98-31 as advance notice of this proposed rule 
change.
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(e)(6).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 Room, 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-98-34 and should be submitted by September 
24, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23759 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M