[Federal Register Volume 59, Number 4 (Thursday, January 6, 1994)] [Notices] [Pages 790-792] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-239] [[Page Unknown]] [Federal Register: January 6, 1994] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-33405; File No. SR-Phlx-93-57] Self-Regulatory Organizations; Filing and Order Granting Accelerated Approval of a Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating To Extending the AUTOM Pilot Program December 30, 1993. 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 December 1, 1993, the Philadelphia Stock Exchange (``Phlx'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I and II 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 The Phlx is requesting Commission approval to extend the Exchange's Automated Options Market (``AUTOM'') system, a pilot program, until December 31, 1994. AUTOM is an electronic delivery system of small options orders to the Phlx trading floor, with an automatic execution feature.\1\ --------------------------------------------------------------------------- \1\The original proposal included a request for permanent approval of AUTOM. Because the Phlx is in the process of modifying and upgrading the computer system on which the AUTOM system operates, the Phlx submitted a letter, dated December 17, 1993, withdrawing that request from the proposal (``Amendment No. 1''). The Phlx states that it will resubmit its request for permanent approval after the Phlx and the Commission have had the opportunity to evaluate the operation of the system in light of the current modifications and upgrades. See letter from J. Keith Kessel, Staff Counsel, Phlx, to Richard L. Zack, Branch Chief, Division of Market Regulation, Commission, dated December 17, 1993. --------------------------------------------------------------------------- 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 states 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 On March 31, 1988, the Commission approved the establishment of AUTOM as a pilot program.\2\ The Exchange currently is proposing to extend the AUTOM pilot program until December 31, 1994. The Exchange represents that, from the date of the last Commission order extending the AUTOM pilot program, AUTOM has operated efficiently and without any material problems being reported by Phlx members or AUTOM users. --------------------------------------------------------------------------- \2\The Commission approved AUTOM on a pilot basis for market orders of up to five contracts for all exercise prices in the near month covering twelve Phlx equity options. See Securities Exchange Act Release No. 25540 (March 31, 1988), 53 FR 11390 (April 6, 1988). Since then, the order routing feature of AUTOM has been expanded to include all orders in all exercise prices and months in all Phlx equity options. In addition, day orders, good until cancelled orders, and cabinet orders (accommodation transactions) have become eligible for delivery through the system, and the eligible order size for the order routing feature of AUTOM has been increased from five to one hundred contracts. See Securities Exchange Act Release No. 28643 (November 26, 1990), 55 FR 49960 (December 3, 1990) at notes 2-6 for citations to Commission orders approving these expansions of the AUTOM pilot. See also Securities Exchange Act Release No. 28978 (March 15, 1991), 56 FR 12050 (March 21, 1991). --------------------------------------------------------------------------- The AUTOM system is an online system that allows electronic delivery of options orders from member firms directly to the appropriate specialist on the Phlx options trading floor, with electronic confirmation of order executions. Specifically, once AUTOM orders are entered into the system and routed to the specialists' post, they are executed manually by the specialist who, upon execution of the order, enters the relevant trade information into the system. An execution report is then automatically transmitted to the firm that placed the order. The AUTOM system also has an automatic execution feature called ``Auto-X.'' Currently, Auto-X is available to public customer market and marketable limit orders of up to 20 contracts. Orders eligible for automatic execution through AUTOM are: (1) Printed in hard copy form at the floor representative booth of the delivering member organization; (2) displayed on the trading crowd screen with buy/sell information omitted; and (3) printed in hard copy form at the specialist post. The order is priced and executed automatically at the best displayed bid or offer, and the execution is reported automatically to the Options Price Reporting Authority (``OPRA''). A report of the execution also is electronically sent to the delivering member organization. Under Auto- X, the specialist is the contra-side of all trades. However, the specialist is required to ensure participation of bids and offers on the limit order book and in the trading crowd that are entitled to execution pursuant to the Phlx's rules of priority, parity, and precedence. The Phlx represents that, as a general matter, the AUTOM system has functioned well, servicing member firms options orders. The Phlx states that two major groups of figures best reflect the performance of AUTOM: (1) The capacity figures; and (2) the order flow figures.\3\ First, the Phlx believes that information regarding AUTOM's system capacity shows that AUTOM continues to have the ability to service the volume of incoming orders. Specifically, the Phlx represented, in February 1993, that it would make enhancements to systems capacity (i.e., the ability of the system's hardware to properly route orders and service potential order volume) if order volume during peak time exceeded 80% of CPU capacity. The Exchange represents that since making these representations with respect to AUTOM's capacity, this 80% level has not been attained. --------------------------------------------------------------------------- \3\See letter from J. Keith Kessel, Staff Counsel, Phlx, to Monica C. Michelizzi, Staff Attorney, Division of Market Regulation, Commission, dated November 19, 1993. --------------------------------------------------------------------------- Second, the Phlx also believes that an analysis of current customer order flow demonstrates that the system capacity is adequate to handle the current and potential number of orders transmitted through the system. Specifically, the Phlx represents that only about two-thirds of all orders placed on AUTOM are executed because the other one-third of the orders are too far away from the market to receive execution. The orders routed through AUTOM that receive execution are either automatically executed through Auto-X or are manually executed by the receiving Phlx specialist. Accordingly, the Phlx believes that AUTOM continues to facilitate smooth and liquid markets on the equity options floor, and otherwise represents a favorable development for all concerned parties. The Phlx further believes that AUTOM has performed well, servicing member firms' options orders. The Phlx, therefore, believes that it is consistent with the Act and the rules and regulations promulgated thereunder for the Commission to permanently approve the AUTOM system. Specifically, the Phlx believes that the current proposal is consistent with section 6(b)(5) of the Act because it is designed to promote just and equitable principles of trade and to protect investors and the public interest. (B) Self-Regulatory Organization's Statement on Burden on Competition The Phlx believes that the proposed rule change will not impose a burden on competition. (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 The Exchange has requested that the proposed rule change be given accelerated effectiveness pursuant to section 19(b)(2) of the Act. The Commission finds that the proposed rule change, including Amendment No. 1 to 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 Sections 6 and 11A.\4\ Specifically, the Commission continues to believe that the development and implementation of the AUTOM system provides for more efficient handling and reporting of orders in Phlx equity options through the use of new data processing and communications techniques, thereby improving order processing and turnaround time. The Commission also believes that the extension of the pilot program until December 31, 1994, will provide the Exchange with a better opportunity to study its operation and effectiveness prior to permanent approval of the program.\5\ --------------------------------------------------------------------------- \4\15 U.S.C. 78f and 78k-1 (1988). \5\The Commission notes that the Phlx is in the process of modifying and upgrading the computer system on which AUTOM operates. Before granting permanent approval or any further extension of the pilot, the Commission expects the Phlx to submit a full report, by November 1, 1994, describing the effect these modifications have had on the operation of AUTOM and updating the information, submitted to the Commission on November 24, 1993, which set forth the benefits provided by AUTOM, the degree of AUTOM usage, including the number and size of the orders routed through AUTOM and the number and size of the orders automatically executed through the Auto-X system, and the system capacity of AUTOM and Auto-X and any problems that have been encountered with the routing and execution features. The Commission also requests that the Phlx submit its request for an extension of the pilot or permanent approval by November 1, 1994. --------------------------------------------------------------------------- The Commission further notes that the Exchange has represented that from January 1, 1993 until present, AUTOM has not suffered any operational failures and the Phlx has not received any formal complaints with respect to the system's operation.\6\ Finally, since the pilot program is being extended without expansion of the scope of the pilot, the Commission does not believe that the capacity of the Exchange's automated systems will be adversely effected by this extension.\7\ --------------------------------------------------------------------------- \6\See letter dated December 17, 1993, supra note 3. \7\The Commission recognizes that additional options classes added onto the system can have an effect on the systems operations. In this context, the Commission expects that the Phlx will notify the Commission if the expansion of options multiple trading, pursuant to Rule 19c-5 under the Act, has any material effect on the capacity of the Phlx's automated systems. --------------------------------------------------------------------------- The Commission finds good cause for approving the proposed rule change, including Amendment No. 1 to the proposed rule change, prior to the thirtieth day after the date of publication of notice of filing thereof in the Federal Register in order to permit the Phlx to continue the AUTOM pilot program on an uninterrupted basis. Specifically, the Commission believes that the Phlx's proposal to extend the AUTOM pilot program does not raise any new issues since it merely extends the pilot program as it is currently operating. Further, the Commission believes that the pilot is beneficial in maintaining the quality and efficiency of the Phlx's market. The Commission also notes that there have been no adverse comments concerning the pilot program since its implementation. Accordingly, the Commission believes that granting accelerated approval of the proposed rule change is appropriate and consistent with Sections 6 and 11A of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the proposed rule change, including Amendment No. 1 to the proposed rule change. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC. Copies of such filing will also be available for inspection and copying at the principal office of the above mentioned self-regulatory organization. All submissions should refer to the file number in the caption above and should be submitted by January 27, 1994. It is therefore ordered, Pursuant to section 19(b)(2) of the Act,\8\ that the proposed rule change (File No. SR-Phlx-93-57) is approved through December 31, 1994. \8\15 U.S.C. 78s(b)(2) (1988). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\9\ --------------------------------------------------------------------------- \9\17 CFR 200.30-3(a)(12) (1993). Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-239 Filed 1-5-94; 8:45 am] BILLING CODE 8010-01-M