[Federal Register Volume 61, Number 232 (Monday, December 2, 1996)]
[Notices]
[Pages 63889-63892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30611]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37977; File No. SR-PHLX-96-49]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Philadelphia Stock
Exchange, Incorporated, Relating to Amending Floor Procedure Advice F-
24, The Wheel
November 25, 1996.
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 November
11, 1996,\1\ the Philadelphia Stock Exchange Incorporated (``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 self-regulatory
organization. The Exchange has designated the proposed rule change as
constituting a ``non-controversial'' rule change under paragraph (e)(6)
of Rule 19b-4 under the Act which renders the proposal effective upon
receipt of this filing by the Commission.\2\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ On November 20, 1996, the PHLX filed Amendment No. 1 with
the Commission. Amendment No. 1 constitutes a substantive change in
the proposal in that it redesignates the proposal as a
``noncontroversial'' rule filing under Rule 19b-4(e)(6) rather a
19b-4(e)(5). The amendment also states that the Exchange intends to
monitor the operation of the Wheel for excessive sign-on and sign-
off practices by ROTs, and that Wheel participation is mandatory for
specialists. See Letter from Philip H. Becker, Senior Vice
President, Chief Regulatory Officer, PHLX, to Michael Walinskas,
Senior Special Counsel, Division of Market Regulation, Commission,
dated November 19, 1996.
\2\ The Exchange has requested that this proposal be implemented
on December 13, 1996. The Exchange has represented that this
proposed rule change: (i) will not significantly affect the
protection of investors or the public interest; (ii) will not impose
any significant burden on competition; and (iii) will not become
operative for 30 days after the date of the filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Floor Procedure Advice (``Advice'')
F-24, AUTO-X Contra-Party Participation (``The Wheel''), to: (1)
eliminate most of the sign-on and sign-off provisions; (2) rotate the
Wheel in two, five and ten lot increments, depending on the size of the
trading crowd's AUTO-X guarantee, as opposed to ten lot increments, as
is currently stated in Advice F-24; (3) permit two Floor Officials to
require all assigned ROTs to participate on the Wheel; and (4) update
the text with minor revisions. The Wheel is an automated mechanism for
assigning floor traders (Specialists and Registered Option 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,\3\ which provides
customers with automatic executions of
[[Page 63890]]
eligible option orders at displayed markets.
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\3\ AUTOM is an electronic order routing system for options
orders.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange's Wheel provisions were approved by the Commission in
1994 as Advice F-24.\4\ These provisions do not currently appear in any
other Exchange rules.\5\ The purpose of the Wheel is to increase the
efficiency and liquidity of order execution through AUTO-X by including
all floor traders in the automated assignment of contra-parties to
incoming AUTO-X orders. The Wheel is intended to make AUTO-X more
efficient, as contra-side participation will be assigned automatically,
and no longer be entered manually. The Wheel is also intended to
promote liquidity by including ROTs, as opposed to solely specialists,
as a contra-side to AUTO-X orders.
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\4\ Securities Exchange Act Release No. 35033 (November 30,
1994), 59 FR 63152 (December 7, 1994).
\5\ Separately, the Exchange intends to incorporate the Wheel
provisions, as amended, into an AUTOM Rule.
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The Exchange does not believe that the proposed amendments will
impair the price or time of the AUTO-X executions or the quality of
markets for PHLX-listed options. The Wheel affects only who the contra-
side participant may be, not the process, price or time of the actual
execution. The Exchange does not believe that the market making and
AUTO-X burden of the specialists will be increased by Wheel
implementation, even if a particular Wheel only consists of specialist
participation. For example, the Exchange does not believe that a
specialist, alone on the Wheel, would disseminate wider markets,
because the specialist would only be impairing his own business and
reputation as a specialist. Also, AUTO-X volume represents a small
percentage of Exchange options volume. In addition, the Exchange notes
that quote spread parameters help ensure that markets remain within
certain limits. In fact, with the Wheel in effect, specialists will be
freed of the manual process of inserting ROTs at parity as contra-side
participants, which may better enable specialists to monitor and
perhaps improve markets.
Due to technical delays associated with balancing various option
automation projects, the Wheel has not yet been implemented, but is
currently scheduled for implementation by the end of 1996. The Exchange
continues to believe that the Wheel offers important benefits to AUTO-X
participants, as stated above.
Currently, respecting AUTO-X orders, as stated in the proposal to
adopt the Wheel, floor trader contra-side participation defaults to the
account of the specialist if no step is taken to manually add the
participation of an ROT. The specialist is the party who manually
enters ROT participation. ROTs are eligible for participation when they
have established priority or parity at the execution price.
Consequently, before contra-side information can be added, the trading
crowd has to resolve among itself which floor trader(s) had priority or
parity at the execution price. Quite often, several floor traders are
on parity, thus requiring keypunch entries for each such trader. The
more contra-side participants that must be added to a trade, the more
of a delay there is in processing the participant information to the
trade and the more the process becomes prone to keypunch errors and
additional manual paperwork. The implementation of the proposed rule
change to the Wheel will automatically include eligible ROTs in AUTO-X
executions according to a specific rotation procedure, thus reducing
the manual inclusion of ROTs as contra-side participants. An additional
result of the change will be that ROTs on parity who are not signed-on
the Wheel will not participate in AUTO-X trades. The Exchange believes
that the inability of ROTs at parity to participate in AUTO-X trades
absent Wheel participation will be a strong incentive for Wheel sign-
on.
Several changes to the Wheel are proposed at this time, as listed
above. First, certain sign-on and sign-off provisions are being deleted
in order to encourage maximum participation on the Wheel. Currently, in
order to be placed on the Wheel for an entire trade day, PHLX
requirements state that the respective ROT must sign-on, in person on
the trading floor for that listed option by no later than 9:30 AM on
that day. If not signed on by 9:30 A.M., an ROT may be added to the
Wheel for all or any portion of the half-day session, commencing at
12:30 P.M., by signing-on in person at any time during that morning
session. An ROT may sign-off the Wheel at any time during the trade
day. An ROT signed-on for an entire day may sign-off up to twice during
that day and still be eligible to sign-on again on that day, but a
third sign-off in the same day will cause that ROT to become ineligible
for the Wheel for the remainder of that trade day. An ROT who has
signed-on for the half-day session may sign-off once during that
session and still be eligible to sign-on again for that session, but a
second sign-off during that half-day session will cause that ROT to be
ineligible for the Wheel for the remainder of that session.
The limitations on the number of sign-ons and sign-offs per day as
well as the requirement that an ROT sign-on by 9:30 A.M. are being
deleted. The Exchange does not want to limit Wheel participation by
imposing stringent sign-on/sign-off requirements. However, the Exchange
realizes that if experience gained through operation of the Wheel
demonstrates that such requirements are needed, the Options Committee
will consider such changes. Certain provisions concerning sign-on and
sign-off will remain in effect. ROTs will continue to be subject to
certain log-on requirements, including that an ROT sign-on in person on
the trading floor in individual listed options. Sign-offs are effective
immediately for all options for which the ROT is on the Wheel, and a
sign-off shall be effective immediately upon being processed for
deletion in the system. Also, no two associated or dually affiliated
ROTs may be on the Wheel for the same option at the same time. In
addition, to address the concern expressed by the Commission that ROTs
fulfill their market making obligations, the Exchange will monitor the
operation of the Wheel for indications of excessive sign-on and sign-
off practices by ROTs, through terminal access to sign-on and sign-off
information for each ROT and the next-day reports.
The Exchange emphasizes that the specialist's obligations
respecting AUTO-X and the Wheel are obligatory and central to the
specialist function. Floor Procedure Advice (``Advice'') A-13 requires
specialists to engage AUTO-X within three minutes of completing an
opening or reopening rotation. This means that AUTO-X participation is
required for specialists. Advice F-24 concerning the Wheel also
specifically states that specialists on the options floor are required
to participate on the
[[Page 63891]]
Wheel in assigned issues. Also, the mandatory nature of the Wheel for
specialists was stated in the original proposed rule change to adopt
the Wheel and in the Commission's approval order.\6\
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\6\ See Securities Exchange Act Release No. 35033 (November 30,
1994), 59 FR 63152 (December 7, 1994) at n.9.
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Second, the purpose of amending the Wheel rotation and assignment
process is to expand the number of automatic participants to each AUTO-
X trade. Currently, paragraph (e) details the rotation of trades among
Wheel participants. Specifically, the specialist receives the first
execution of the day in each respective listed option. Thereafter, the
Wheel would have rotated among participants in ten-lot increments. For
those AUTO-X orders greater than ten contracts, each additional ten-lot
or remaining portion thereof would have been assigned to the next
individual Wheel participant. Under the proposal, the Wheel will rotate
in increments depending upon the size of the crowd's AUTO-X guarantee,
as follows:
1-10 contracts............................. Every 2
contracts.
11-25 contracts............................ Every 5
contracts.
26 and more................................ Every 10
contracts.
For customer orders, Phlx Rule 1033(a) requires that markets be
firm for ten contracts, which serves as the minimum AUTO-X guarantee.
The fact that the Wheel will begin its rotation in a random place each
day after the specialist's first execution of the day is being added
into the provision. The maximum size of an AUTO-X guarantee is 50
contracts.\7\ The remainder of the provision remains unchanged, such
that if there are five or more ROTs signed onto the Wheel, the
specialist will receive every fifth execution, in addition to being
assigned to the first AUTO-X order in the option.
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\7\ Securities Exchange Act Release No. 36601 (December 18,
1995), 60 FR 66817 (December 18, 1996).
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The Options Committee has determined that this rotation process
should encourage Wheel participation and allot trades more fairly by
dividing each trade among more participants, such that each participant
will participate in a greater number and variety of AUTO-X executions.
As an example of the proposed rotation process, in AQL, for which the
guarantee is ten contracts, a ten lot AUTO-X order would be split
evenly among five Wheel participants, or where there are only two
participants, the split would be six contracts and four contracts,
respectively. A 50 lot AUTO-X order received in FNM options would also
be split among five participants, due to its 50-up guarantee. The
Exchange notes that the size of the AUTO-X guarantee is displayed in
the trading crowd along with the markets for the option as well as
published periodically as an Exchange memorandum to the options
membership.
Thirdly, paragraph (d) currently permits a Floor Official to modify
the aforementioned sign-on/sign-off procedures in extraordinary
circumstances. The Exchange is proposing to add the ability of two
Floor Officials to require Wheel participation in extraordinary
circumstances. This ability is limited to ROTs assigned in that option
and situations where liquidity is required. Stating that two Floor
Officials may require all assigned ROTs to sign-on the Wheel is
intended to prevent unfairly singling out certain ROTs; where liquidity
is needed, all assigned ROTs should be obligated to participate on the
Wheel. This new requirement is consistent with the affirmative market
making obligations imposed by Rule 1014. Thus, implementing the Wheel
should promote just and equitable principles of trade and investor
protection.
Lastly, the Exchange is proposing to modify certain language in
Advice F-24 for clarity, such as adding paragraph headings.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \8\ of the Act in general, and in particular, with
Section 6(b)(5), in that the amendments are designed to promote just
and equitable principles of trade, prevent fraudulent and manipulative
acts and practices, to foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in securities, as well as to
protect investors and the public interest, by promoting ROT
participation as contra-parties to AUTO-X trades and reducing
opportunities for keypunching errors through increased automation. The
Exchange believes that the proposed amendments to Wheel procedures
should encourage Wheel participation.
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\8\ 15 U.S.C. 78f(b).
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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.
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
This proposed rule change has been filed by the Exchange as a
``noncontroversial'' rule change pursuant to paragraph (e)(6) of Rule
19b-4.\9\ Consequently, the rule change shall become operative 30 days
after the date of filing, or such shorter time as the Commission may
designate, if consistent with the protection of investors and the
public interest pursuant to Section 19(b)(3)(A)(iii) of the Act \10\
and subparagraph (e)(6) of Rule 19b-4 thereunder.
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\9\ 17 CFR 240.19b-4(e)(6).
\10\ 15 U.S.C. 78s(b)(3)(A)(iii).
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The proposed rule change was originally submitted to the Commission
on November 11, 1996. However, the submission of substantive Amendment
No. 1 on November 20, 1996 delays the statutorily required
implementation date to December 20, 1996.\11\ The Commission is
shortening the 30 day delayed implementation period to allow the rule
change to be implemented on December 13, 1996. The Commission believes
that accelerated implementation is appropriate in order to prevent any
longer delay to the PHLX's implementation of the Wheel, a program that
has already been delayed for two years since its original approval. The
Commission believes that further delay would not be beneficial to the
protection of investors or the public interest.
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\11\ The Commission notes that any substantive amendment to a
proposed rule change filed under section (e)(6) of Rule 19b-4 causes
the thirty day delayed implementation period to be restarted, from
the date of the filing of the amendment. See Securities Exchange Act
Release No. 35123 (December 28, 1994), 59 FR 66692 (December 28,
1994).
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At any time within 60 days of the filing of such proposed rule
change,\12\ the Commission may summarily abrogate such rule change if
it appears to the Commission that such action is necessary or
appropriate in the public
[[Page 63892]]
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Act.
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\12\ The 60 day abrogation period commences from November 20,
1996, the date of the submission of substantive Amendment No. 1.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in 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-96-49 and
should be submitted by December 23, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30611 Filed 11-29-96; 8:45 am]
BILLING CODE 8010-01-M