[Federal Register Volume 66, Number 189 (Friday, September 28, 2001)]
[Notices]
[Pages 49730-49736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-24280]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44829; File No. SR-Phlx-2001-30]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. Relating to the Alternative Wheel Allocation Model

September 21, 2001.
    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 March 6, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The Phlx 
submitted Amendment No. 1 on May 21, 2001.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. 
Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated May 17, 2001 (``Amendment No. 
1''). In Amendment No. 1 the Phlx amended the proposed rule change 
by deleting rule language which would have set forth a minimum 
participation percentage of 30% for specialists and a maximum 
participation percentage of 60% for any single Wheel participant. In 
addition, in Amendment No. 1 the Phlx further amended its proposal 
to specify that the ``Review Period,'' during which the specialist 
and crowd participants may earn Participation Units, will last a 
maximum of 14 calendar days. Finally, the Phlx corrected several 
minor typographical errors contained in the original filing. The 
substance of Amendment No. 1 is incorporated into the description of 
the proposed rule change in Section II.A., below.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes, on a six-month pilot basis, to amend Exchange 
Options Floor Procedure Advice (``OFPA'') F-24, AUTO-X Contra-Party 
Participation, to allow specialists, on an issue-by-issue basis, to 
elect to implement a new order assignment model for contra-side 
participation in orders delivered via AUTOM and automatically executed 
via AUTO-X.\4\ The proposed order assignment model set forth in new 
proposed Section (e)(ii) of OFPA F-24 is called the Alternative Wheel 
Allocation Model (``Model'').
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    \4\ AUTOM is the Exchange's electronic order delivery and 
reporting system, which provides for the automatic entry and routing 
of equity option and index option orders to the Exchange trading 
floor. Orders delivered through AUTOM may be executed manually; 
alternatively, certain orders are eligible for AUTOM's automatic 
execution feature, AUTO-X. Equity option and index option 
specialists are required by the Exchange to participate in AUTOM and 
its features and enhancements. Option orders entered by Exchange 
members into AUTOM are routed to the appropriate specialist unit on 
the Exchange trading floor.
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    The proposed new rule text is as follows. Proposed new language is 
in italics.
F-24  AUTO-X Contra-Party Participation (The Wheel)
    (a) No change.
    (b) No change.
    (c) No change.
    (d) No change.
    (e)(i) 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 that time. At a 
minimum, the Wheel shall rotate and assign contracts depending upon the 
size of the AUTO-X guarantee, 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.

[[Page 49731]]

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 the normal rotation: With the unanimous consent of 
Wheel participants in an option and approval of the Options Committee 
Chairman or his designee, the specialist shall receive an enhanced 
participation substantially equivalent to twice the number of contracts 
as other crowd participants where the Enhanced Specialist Participation 
of Rule 1014(g)(ii) applies.
    The provisions of this clause (e)(i) will not apply under 
circumstances where clause (e)(ii) applies.
    (ii) Alternative Wheel Allocation Model. The Alternative Wheel 
Allocation Model (the ``Model'') is a method for allocating Wheel 
participation with respect to certain Eligible Options (as defined 
below). In general, the Model allocates contracts that comprise AUTO-X 
during a ``Trading Period'' (as defined below) by taking into account 
the participation of Wheel Participants in non-Wheel contracts and 
trade effected during a ``Review Period'' (as defined below) that 
immediately precedes the Trading Period. The Model allocates contracts 
for a given Trading Period based on the number of ``Participation 
Units'' (as defined below) earned by the Wheel Participant during the 
immediately preceding Review Period.
    Participation Units will be awarded to a Wheel Participant based on 
a weighted ``Ratio'' (as defined below) of the sum of such Wheel 
Participant's in-person, non-Wheel agency contracts traded and the 
number of such Wheel Participant's in-person, non-Wheel agency trades 
executed during the Review Period, divided by the sum of all in-person, 
non-Wheel agency contracts traded and all in-person, non-Wheel trades 
executed during the Review Period in the Eligible Option.
    The purpose of the Model is to reward liquidity providers by 
assigning contracts with respect to Auto-X orders in Eligible Options 
executed during a given Trading Period to each Wheel Participant in a 
manner that will approximate the product of the Ratio (as defined 
below) and the number of contracts eligible for allocation on the 
Wheel.
    With respect to any Trading Period, the Ratio for a Wheel 
Participant with respect to an Eligible Option shall be equal to the 
sum (expressed as a percentage, rounded to the nearest 1 percent) of A 
and B, where:
    A = 80% of (a) the number of Eligible Contracts effected by the 
Wheel Participants in the Eligible Option during the previous Review 
Period, divided by (b) the number of all Eligible Contracts effected by 
all Wheel Participants in the Eligible Option during the previous 
Review Period.
        And
    B = 20% of (a) the number of non-Wheel agency trades effected by 
the Participant in the Eligible Option during the previous Review 
Period, divided by (b) the number of all non-Wheel trades effected by 
all Wheel Participants in the Eligible Option during the previous 
Review Period.
    Once a Wheel Participant has signed onto the Wheel, he will be 
assigned contracts on the Wheel until his awarded number of Participant 
Units has been met. This may mean that multiple orders (or an order and 
a part of this succeeding order) will be assigned to the same Wheel 
Participant. To understand how the AUTO-X orders will actually be 
allocated to Wheel Participants to meet those percentages, one must 
understand the concepts of ``Participants Units'' and ``Wedges.'' A 
Participants Unit is 1% of the Wheel and often may be equal to one 
contract. The Options Committee may determine the number of contracts 
that make up one Participants Unit. Each Wheel Participant for that 
option class, regardless of whether such Wheel Participant executed any 
agency trades in Eligible Contracts during the immediately prior Review 
Period, is entitled to be assigned at least one Participation Unit on 
every revolution of the Wheel. For example, if a Participation Unit 
equals one contract then there will be 100 AUTO-X contracts that will 
be assigned to Wheel Participants on every revolution of the Wheel. If 
a Participation Unit is defined as five contracts then there will be 
500 AUTO-X contracts assigned to the Wheel Participants before the 
Wheel completes one revolution. Generally, the Wheel will consist of 
the number of Participation Units replicating the cumulative percentage 
of all Wheel Participants signed onto the system who have been awarded 
Participation Units based on agency trades in Eligible Contracts during 
the immediately prior Review Period, plus one Participation Unit for 
each market-maker that has not been awarded a specific number of 
Participation Units.
    A ``Wedge'' is a maximum number of Participation Units that a Wheel 
Participant may be consecutively assigned at any one time on the Wheel. 
The purpose of the Wedge is to break up the distribution of contracts 
into smaller groupings to reduce the exposure of any one Wheel 
Participation to market risk. If the size of the Wedge is smaller than 
the number of Participation Units to which a particular Wheel 
Participation is entitled, then that Wheel Participation would receive 
one or more additional assignments during one revolution of the Wheel.
    The decision to participation in the Model pilot (as opposed to the 
Wheel allocation set forth in Section (e)(i) of this Advice) shall be 
made by the specialist on an issue-by-issue basis. However, once the 
specialist determines to participate in the Model pilot, such 
participation shall be effective until the end of the review period as 
set forth in Section (f) of this Advice, unless the Options Committee 
determines to permit the specialist, on an issue-by-issue, to opt out 
the pilot program.
    Definitions: As used in this clause (e)(ii), the following terms 
have the meanings set forth below:
    ``Eligible Contracts'' means contracts comprising all in-person, 
non-Wheel agency trades in an Eligible Option effected during a given 
Review Period, provided that, except as otherwise determined by the 
Options Committee, in the event that the percentage that any individual 
non-Wheel agency trade effected by a Wheel Participation would exceed 
in size 5% of the total non-Wheel agency contracts effected during that 
Review Period (the ``Period Total''), then the number of Eligible 
Contracts attributable to such trade shall be counted, for purposes of 
calculating the Ratio, as the number of contracts equal to 5% of the 
Period Total.
    ``Eligible Options'' means those multiply listed equity options 
designated for inclusion in the Model by the specialist on an issue-by-
issue basis, subject to the approval of the Options Committee. The 
Options Committee will notify the membership of each class of options 
that is subject to the Model.
    A ``Participation Unit'' is 1% of the Wheel and often may be equal 
to one contract. The Options Committee may determine the number of 
contracts that make up one Participation Unit.
    ``Period Total'' means the number of all Eligible Contracts 
effected by all Wheel Participants in the Eligible Option during the 
Relevant Review Period.

[[Page 49732]]

    ``Review Period'' means a period (not to exceed 14 calendar days) 
determined by the Options Committee that commences on the trading day 
following the final day of the proceeding Review Period. The Ratio for 
a Wheel Participation for an Eligible Option for each Trading Period 
will be based upon the non-Wheel (in-crown) trading activity in the 
Eligible Option during the Review Period that ends immediately prior to 
the beginning of the Trading Period.
    ``Trading Period'' means a period (not to exceed 14 calendar days) 
determined by the Options Committee that commences on the trading day 
following the final day of the preceding Trading Period.
    A ``Wedge'' is the maximum number of Participation Units that a 
Wheel Participant may be consecutively assigned at any time on the 
Wheel. Because the size of the Wedge may be smaller than the number of 
contracts to which a particular Wheel Participant is entitled during 
one revolution of the Wheel, that Wheel Participant will receive more 
than one turn during one revolution of the Wheel. The Wedge size will 
be variable, at the discretion of the Options Committee and may be 
different for different option classes or the same for all option 
classes.
    ``Wheel Participant''--for the purpose of determining the Ratio and 
number of Participation Units awarded for a given Trading Period, a 
Wheel Participant is deemed to be a firm, regardless of which 
individual member of that firm has been designated to trade in a 
particular crowd during a particular trading day. In situations where 
such a firm has more than one crowd participant at one time, the Ratio 
and number of Participation Units would be calculated as through all 
such crowd participants that are members of the same firm are trading 
as the beneficial owner of one single account.
    (f) The provisions of section (e) above will be reviewed and 
evaluated by the Options Committee as needed, but not less frequently 
than on a six month basis, to determine the effectiveness of the 
program to achieve its stated purpose as well as to resolve specific 
issues, including, without limitation, continued eligibility of an 
option on an issue-by-issue basis.
Fine Schedule
    F-24  Fine not applicable, except paragraph (c). Matters subject to 
review by the Business Conduct Committee.

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 aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to institute a new 
method for assigning contra-side participation in orders delivered 
through AUTOM and automatically executed on AUTO-X via the Exchange's 
``Wheel.'' \5\
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    \5\ The ``Wheel'' is a feature of AUTOM that provides an 
automated mechanism for assigning specialists and Registered Options 
Traders (``ROTs'') signed on the Wheel for a given listed option, on 
a rotating basis, as contra-side participants to trades executed via 
AUTO-X. See Exchange Rule 1080(g).
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    Currently, OFPA F-24 sets forth the method of allocation of trades 
executed via AUTO-X among specialists and ROTS \6\ signed on to the 
Wheel in a particular option (``Wheel Participants''). Under the 
current rule, AUTO-X participation is assigned to Wheel Participants on 
a rotating basis, beginning at a random place on the Wheel each day. 
The Wheel signs contracts depending upon the size of the AUTO-X 
guarantee, based on (1) the number of contracts to be assigned, and (2) 
the number of Wheel Participants signed on the Wheel for a given 
option.
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    \6\ A ROT is a regular member or a foreign currency options 
participant of the Exchange located on the trading floor who has 
received permission from the Exchange to trade in options for his 
own account. See Exchange Rule 1014(b).
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    The current method of assignment does not take into account, or 
reward, the overall level of liquidity in respect of non-Wheel agency 
contracts and trades provided by a Wheel Participant in a given option. 
The Model is intended, primarily, to enhance incentives for Wheel 
Participants to quote competitively \7\ and to reward such Wheel 
Participants by assigning contracts with respect to AUTO-X orders based 
on the number of in-person, non-Wheel agency contracts and trades (on a 
weighted basis as set forth in detail below) effected by such Wheel 
Participant during a given Review Period (as defined below).\8\ The 
Exchange believes that the Model will encourage Phlx specialists and 
ROTs in Eligible Options (as defined below) to quote more aggressively 
because the potential rewards therefore will be increased.
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    \7\ The Exchange notes that the Commission has directed that the 
options markets adopt new, or amend existing, rules concerning its 
automated quotation and execution systems which substantially 
enhance incentives to quote competitively and reduce disincentives 
for market participants to act competitively. See Section IV 
.B.h.(i), Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions, Securities Exchange 
Act Release No. 43268 (September 11, 2000) and Administrative 
Proceeding File 3-10282 (the ``Order'').
    \8\ The Exchange represents that this is not intended to be 
interpreted to imply that the current Wheel model fails to encourage 
competition among Wheel Participants. The Exchange states that, 
under the current system, if a ROT wishes to participate in more 
Wheel contracts, he or she may place an order on the limit order 
book that improves the Phlx market. This causes the Wheel to stop, 
and incoming executable AUTOM orders that would otherwise be 
allocated on the Wheel would be executed manually against the booked 
order until it is exhausted (see Exchange Rule 1080(c)). The 
Exchange represents that this feature, which creates strong 
incentives for price improvement, would be retained under the 
proposed Model.
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    The Exchange notes that because this proposal is primarily 
descriptive in nature, the Fine Schedule applicable to OFPA F-24 will 
remain limited to member violations of the sign-on requirements of 
Section (c). To the extent a member may violate any other provision of 
OFPA F-24, such matters are subject to review by the Business Conduct 
Committee.\9\
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    \9\ Telephone conversation between Richard S. Rudolph, Counsel, 
Phlx, and Geoffrey Pemble, Attorney, Division of Market Regulation, 
Commission (June 26, 2001).
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    (a) Definitions. For purposes of this proposed rule, the following 
definitions apply:
     ``Eligible Contracts'' means contracts comprising all in-
person, non-Wheel agency trades in an Eligible Option effected during a 
given Review Period, provided that, except as otherwise determined by 
the Options Committee, in the event that the percentage that any 
individual non-Wheel agency trade effected by a Wheel Participant would 
exceed in size 5% of the total non-Wheel agency contracts effected 
during that Review Period (the ``Period Total''), then the number of 
Eligible Contracts attributable to such trade shall be counted, for 
purposes of calculating the Ratio, as the number of

[[Page 49733]]

contracts equal to 5% of the Period Total.\10\
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    \10\ The purpose of this ``5% cap'' is to avoid the circumstance 
in which a Wheel Participant could obtain an unfair advantage over 
other regular Wheel Participants as a result of a single trade 
during the Review Period for an extraordinarily large size. In 
effect, the ``cap'' limits the extent to which very large trades 
would count as Eligible Contracts to be included in the Period 
Total.
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     ``Eligible Options'' means those multiply listed equity 
options designated for inclusion in the Model by the specialist on an 
issue-by-issue basis, subject to the approval of the Options Committee. 
The Options Committee will notify the membership of each class of 
options that is subject to the Model.
     A ``Participation Unit'' is 1% of the Wheel and often may 
be equal to one contract. The Options Committee may determine the 
number of contracts that make up one Participation Unit.
     ``Period Total'' means the number of all Eligible 
Contracts effected by all Wheel Participants in the Eligible Option 
during the relevant Review Period.
     The ``Ratio'' for a Wheel Participant with respect to an 
Eligible Option means the sum (expressed as a percentage, rounded to 
the nearest 1 percent) of A and B, where:
    A=80% of (a) the number of Eligible Contracts effected by the Wheel 
Participant in the Eligible Option during the previous Review Period, 
divided by (b) the number of all Eligible Contracts effected by all 
Wheel Participants in the Eligible Option during the previous Review 
Period;
      and
    B=20% of (a) the number of non-Wheel agency trades effected by the 
Participant in the Eligible Option during the previous Review Period, 
divided by (b) the number of all non-Wheel trades effected by all Wheel 
Participants in the Eligible Option during the previous Review Record.
     ``Review Period'' means a period (not to exceed 14 
calendar days calculated on a rolling basis) determined by the Options 
Committee, that commences on the trading day following the final day of 
the preceding Review Period.\11\ The Ratio for a Wheel Participant for 
an Eligible Option for each Trading Period will be based upon the non-
Wheel, in-person trading activity in the Eligible Option during the 
Review Period that ends immediately prior to the beginning of the 
Trading Period.
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    \11\ The Exchange represents that the review period will be set 
at 14 calendar days for all options classes and that the Options 
Committee will not vary the term of the review period except in the 
case of exigent circumstances. Telephone conversation between 
Richard S. Rudolph, Counsel, Phlx and Gordon Fuller, Counsel to the 
Assistant Director, Division of Market Regulation, Commission 
(September 21, 2001).
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     ``Trading Period'' means a period (not to exceed 14 
calendar days) determined by the Options Committee that commences on 
the trading day following the final day of the preceding Trading 
Period.
     A ``Wedge'' is the maximum number of Participation Units 
that a Wheel Participant may be consecutively assigned at any one time 
on the Wheel. Because the size of the Wedge may be smaller than the 
number of contracts to which a particular Wheel Participant is entitled 
during one revolution of the Wheel, that Wheel Participant will receive 
more than one turn during one revolution of the Wheel. The Wedge size 
will be variable, at the discretion of the Options Committee and may be 
different for different option classes or the same for all option 
classes.\12\
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    \12\ The purpose of the Wedge is to break up the distribution of 
contracts into smaller groupings to reduce the exposure of any one 
Wheel Participant to market risk by limiting the number of contracts 
that would be consecutively assigned to a given Wheel Participant.
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     Solely for the purpose of determining the Ratio and number 
of Participation Units awarded for a given Trading Period, the term 
``Wheel Participant'' shall be deemed to include a firm, regardless of 
which individual member of that firm has been designated to trade in a 
particular crowd during a particular trading day. In situations where 
such a firm has more than one crowd participant at one time, the Ratio 
and number of Participation Units would be calculated as though as such 
crowd participants that are members of the same firm are trading as the 
beneficial owner of one single account.\13\
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    \13\ The purpose of this provision is to avoid unduly penalizing 
a Wheel Participant if an individual associated with such Wheel 
Participant is absent from the trading crowd during the Review 
Period, and thus unable to participate in in-person, non-Wheel, 
agency trades. A firm could substitute a different, qualified 
individual for the absent individual, and not be penalized for such 
absence.
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    (b) The Model. Under the Model, AUTO-X orders in Eligible Options 
would be assigned to signed-on Wheel Participants according to the 
percentage of a weighted sum of their in-person, non-Wheel agency 
contracts and trades in a given option, compared to a weighted sum of 
all in-person, non-Wheel agency contracts and trades in such an option 
during the Review Period. Under the Model, on each revolution of the 
Wheel, each Wheel Participant that is signed-on to the Wheel at the 
time would be assigned enough contracts so that the percentage of Wheel 
contracts allocated to such Wheel participant on that revolution of the 
Wheel will approximate the weighted percentage of agency contracts and 
trades that he or she executed in-person in that option during the 
Review Period (except those contracts excluded by the ``5% cap'' set 
forth in the definition of Eligible Contracts). The Options Committee 
would determine the duration of the Review Period, which will be 
calculated on a ``rolling basis'' and will in no event exceed the 
previous 14 calendar days.\14\
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    \14\ The ``rolling basis'' means that the Review Period will be 
for a duration not to exceed the most recent 14 calendar days. The 
Options Committee may shorten the Review Period, but in no event 
shall it exceed 14 calendar days. The purpose of the ``rolling'' 14-
day Review Period is to avoid unduly penalizing a Wheel Participant 
that cannot participate in in-person, non-Wheel agency trades due to 
absence during the Review Period. The reason for limiting the Review 
Period to a maximum of 14 calendar days (the Options Committee may 
determine to shorten the Review Period) is to ensure that the Model 
does not operate to prevent Wheel Participants from increasing their 
attained number of Participation Units by entrenching other Wheel 
Participants who initially have a large number of in-person, non-
Wheel agency contracts and trades. A long Review Period could have 
the effect of ``freezing'' the status quo, thus effectively 
preventing, or at least delaying, Wheel Participants from increasing 
their number of Participation Units.
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    (i) Participation Units. During the Trading Period, a Wheel 
Participant would be assigned contracts on the Wheel for trades 
executed via AUTO-X based on the number of Participation Units such 
Wheel Participant attained during the immediately preceding Review 
Period. The number of Participation Units awarded will be calculated 
for each Wheel Participant for each option the wheel Participant 
trades. A new Wheel participant (who did not participate in the 
immediately previous Review Period) would be entitled to one 
Participation Unit.
    (ii) Formula Determining Participation Units. Participation Units 
(for Wheel Participant ``A'' in this Example) during the preceding 
Review Period (``trades'' refers to trades in the given Eligible 
Option) are determined as follows:

[[Page 49734]]

[GRAPHIC] [TIFF OMITTED] TN28SE01.024

    As stated above, the calculation of the number of Participation 
Units to be attained by a Wheel Participant is based on a weighted 
Ratio of (a) the number of Eligible Contracts and trades effected by 
the Wheel Participant in an Eligible Option during the previous Review 
Period, divided by (b) the number of all Eligible Contracts and trades 
effected by all Wheel Participants in the Eligible Option during the 
previous Review Period. The number of Eligible Contracts executed 
during the Review Period would be weighted as 80% of the Ratio, and the 
number of trades effected during the Review Period would be weighted as 
20% of the Ratio.
    The number of Participation Units to be attained by a Wheel 
Participant in a given option would be calculated as follows for a 
given Review Period.

Example--How Participation Units Are Calculated
    In this example, assume three Wheel Participants attained 
Participation Units during the Review Period, and that no single trade 
accounted for greater than 5% of the Period Total.
[GRAPHIC] [TIFF OMITTED] TN28SE01.025

    (c) Discussion. Once a Wheel Participant has signed onto the Wheel, 
he or she will be assigned contracts on the Wheel during each 
revolution of the Wheel until his or her awarded number of 
Participation Units has been approximated. This may mean that multiple 
orders (or an order and a part of the succeeding order) will be 
assigned to the same Wheel Participant.
    To understand how the AUTO-X orders will be allocated to Wheel 
Participants to meet those percentages, one must understand the 
concepts of ``Participation Units'' and ``Wedges.'' A

[[Page 49735]]

``Participation Unit'' is 1% of the Wheel and often may be equal to one 
contract. The Options Committee may determine the number of contracts 
that make up one Participation Unit. For example, if a Participation 
Unit equals one contract then there will be 100 AUTO-X contracts that 
will be assigned to Wheel Participants on every revolution of the 
Wheel. If a Participation Unit is defined as five contracts then there 
will be 500 AUTO-X contracts assigned to the Wheel Participants on 
every revolution of the Wheel.
    Each Wheel Participant for a given option, regardless of whether 
such Wheel Participant executed any agency trades in Eligible Contracts 
during the immediately prior Review Period, is entitled to be assigned 
at least one Participation Unit on every revolution of the Wheel. 
Generally, the Wheel will consist of the number of Participation Units 
replicating the cumulative percentage of all Wheel Participants signed 
onto the system who have been awarded Participation Units based on 
agency trades in Eligible Contracts during the immediately prior Review 
Period, plus one Participation Unit for each Wheel Participant that has 
not been awarded a specific number of Participation Units.\15\
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    \15\ In the event that a new Wheel Participant signs onto the 
Wheel and is assigned one Participation Unit (representing 1% of the 
Wheel), the remaining 99 Participation Units would be allocated 
among all Wheel Participants that had attained Participation Units 
during the previous Review Period on a pro-rata basis according to 
their percentage of Participation Units attained. In the event that 
two new Wheel Participants sign onto the Wheel and each is assigned 
one Participation Unit (representing a total of 2% of the Wheel), 
the remaining 98 Participation Units would be allocated among all 
Wheel Participants that had attained Participation Units during the 
previous Review Period in the same fashion, etc.
    In the event that a Wheel Participant that has attained 
Participation Units during the previous Review Period is not signed-
on to the Wheel during a portion of the Trading Period, the Wheel 
will consist of the number of Participation Units remaining while 
such Wheel Participant is not signed-on to the Wheel. For example, 
if a Wheel Participant attains 7 Participation Units during the 
previous Review Period and is not signed-on during a portion of the 
Trading Period, the Wheel will consist of 93 Participation Units. In 
this case, a full revolution of the Wheel would occur every 93 
contracts.
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    A``Wedge'' is the maximum number of Participation Units that a 
Wheel Participant may be consecutively assigned at any one time on the 
Wheel. The purpose of the Wedge is to break up the distribution of 
contracts into smaller groupings to reduce the exposure of any one 
Wheel Participant to market risk. If the size of the Wedge is smaller 
than the number of Participation Units to which a particular Wheel 
Participant is entitled, then that Wheel Participant would receive one 
or more additional assignments during one revolution of the Wheel.
    (i) Miscellaneous Aspects of the Operation of the Model. a. 5% Cap 
for Large Trades. The proposed rule provides that, in the event that 
the percentage that any individual non-Wheel agency trade effected by a 
Wheel Participant would exceed in size 5% of the Period total, then the 
number of Eligible Contracts attributable to such trade shall be 
counted, for purposes of calculating the Ratio, as the number of 
contracts equal to 5% of the Period Total. The purpose of this 
provision is to avoid the circumstance in which a Wheel Participant 
could obtain an unfair advantage in Participation Units over other 
regular Wheel Participants as a result of a single trade during the 
Review Period for an extraordinarily large size. The Exchange believes 
that this limitation on the number of contracts in any single 
transaction counted towards the Period Total, combined with the 
weighted calculation of total number of trades in Eligible Options 
during the Review Period, enhances incentives for specialists and ROTs 
to quote competitively by rewarding them not only for the number of 
Eligible Contracts traded the review Period, but also by taking into 
account the number of trades effected in Eligible Options during the 
Review Period.
    b. Specialist Election. The proposed rule provides that the 
decision to participate in the Model pilot (as opposed to the Wheel 
allocation set forth in Section (e)(i) of the current OFPA) shall be 
made by the specialist on an issue-by-issue basis.\16\ However, once 
the specialist determines to participate in the Model pilot, such 
participation shall be effective until the end of the Options 
Committee's periodic review described in Section (f) of the proposed 
rule, unless the Options Committee determines to permit the specialist, 
on an issue-by-issue basis, to opt out of the pilot program.
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    \16\ The Exchange has represented that it will amend the 
proposal to clarify that the decision by the specialist to 
participate in the Model pilot is subject to the approval of the 
Options Committee. Telephone conversation between Richard S. 
Rudolph, Counsel, Phlx, and Gordon Fuller, Counsel to the Assistant 
Director, Division of Market Regulation, Commission (September 21, 
2001).
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    c. Options Committee Review. The proposed rule would require the 
Options Committee to review and evaluate the Model as needed, but not 
less frequently than on a six-month basis, to determine the 
effectiveness of the program to achieve its stated purpose as well as 
to resolve specific issues, including, without limitation, continued 
eligibility of an option on an issue-by-issues, including,without 
limitation, continued eligibility of an option on an issue-by-issue 
basis. The purpose of this provision is to enable the Options Committee 
to continually evaluate the effectiveness of the Model and to determine 
whether the Model is assigning contracts on the Wheel in proportion to 
a Wheel Participant's in-person, non-Wheel agency contracts traded 
during the Review Period. This provision would also enable the Options 
Committee to effect changes as needed in the Model that would further 
its stated purpose.
    It is the Exchange's intent to implement the Model at or around the 
same time as two other proposals, specifically proposing (i) ROT access 
to the limit order book through electronic interface with AUTOM; and 
(ii) broker-dealer access to AUTOM.\17\
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    \17\ The Exchange represents that the proposal regarding broker-
dealer access to AUTOM was filed as SR-Phlx-2001-40 on May 2, 2001 
and is pending with the Commission. The Exchange also represents 
that the proposal regarding ROT access to the limit order book has 
not yet been filed with the Commission. The Exchange will notify all 
members on the Options Floor when it has completed the development 
of the systems necessary to implement these changes, and/or deployed 
such systems on the Options Floor. This provision is included in the 
proposed rule change because, in the event that the Commission 
approves this proposal, the Exchange's ability to deploy such 
systems may not coincide with the effective date of the rule.
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2. Statutory Basis
    The Exchange believes that the implementation of the pilot program 
for the Model will result in AUTO-X contra-party participation that 
will essentially approximate a Wheel Participant's percentage of in-
person, non-Wheel agency contracts executed, and number of trades 
effected, in options in which such Wheel participant is assigned. The 
Exchange further believes that such implementation will result in a 
higher Wheel Participation for those specialists and ROTs who are most 
active in providing the services that specialists and ROTs are expected 
to perform, i.e., consistently providing liquidity in agency trades in 
the options in which such specialists and ROTs are assigned.
    For these reasons, the Exchange believes that the proposed rule 
change is consistent with Section 6(b) of the Act \18\ in general, and 
furthers the objectives of Section 6(b)(5) \19\ in particular, in that 
it is designed to perfect the mechanism of a free and open market and a 
national market

[[Page 49736]]

system, protect investors and the public interest and promote just and 
equitable principles of trade by enhancing incentives for Exchange 
specialists and ROTs to quote competitively by assigning AUTO-X contra-
side participation in proportion to their in-person, non-Wheel agency 
contracts traded and number of trades effected.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 inappropriate burden on competition.

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of 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, including whether the proposed rule 
change, as amended, 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 20549-0609. 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 room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange.
    All submissions should refer to File No. SR-Phlx-2001-30 and should 
be submitted by October 19, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-24280 Filed 9-27-01; 8:45 am]
BILLING CODE 8010-01-M