[Federal Register Volume 60, Number 221 (Thursday, November 16, 1995)]
[Notices]
[Pages 57615-57616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28250]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36467; File No. SR-PHLX-95-33]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to the
Automatic Execution of National Over-the-Counter Index Options
November 8, 1995.
On May 11, 1995, the Philadelphia Stock Exchange, Inc. (``PHLX'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to limit the eligibility of
National Over-the-Counter Index (``XOC'') options for execution through
the automatic execution (``AUTO-X'') feature of the PHLX's Automated
Options Market (``AUTOM'') system. Specifically, the PHLX proposes to
limit the AUTO-X eligibility of XOC options to XOC series where the bid
is $10 or less. Under the proposal, XOC series where the bid is greater
than $10 will no longer be AUTO-X eligible and will be executed
manually.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4 (1994).
---------------------------------------------------------------------------
Notice of the proposal appeared in the Federal Register on June 16,
1995. \3\ No comment letters were received on the proposed rule change.
\3\ See Securities Exchange Act Release No. 35822 (June 8,
1995), 60 FR 31334.
---------------------------------------------------------------------------
AUTOM, which has operated on a pilot basis since 1988 and was most
recently extended through December 31, 1995,\4\ is the PHLX's
electronic order routing, delivery, execution and reporting system for
equity and index options. AUTOM is an on-line system that allows
electronic delivery of options orders from member firms directly to the
appropriate specialist on the Exchange's trading floor.
\4\ See Securities Exchange Act Release No. 35183 (December 30,
1994), 60 FR 2420 ( January 9, 1995) (order approving File No. SR-
PHLX-94-41). See also Securities Exchange Act Release Nos. 25540
(March 31, 1988), 53 FR 11390 (order approving AUTOM on a pilot
basis); 25868 (June 30, 1988), 53 FR 25563 (order approving File No.
SR-PHLX-88-22, extending pilot through December 31, 1988); 26354
(December 13, 1988), 53 FR 51185 (order approving File No. SR-PHLX-
88-33, extending pilot program through June 30, 1989); 26522
(February 3, 1989), 54 FR 6465 (order approving File No. SR-PHLX-89-
1, extending pilot through December 31, 1989); 27599 January 9,
1990), 55 FR 1751 (order approving File No. SR-PHLX-89-03, extending
pilot through June 30, 1990); 28625 (July 26, 1990), 55 FR 31274
(order approving File No. SR-PHLX-90-16, extending pilot through
December 31, 1990); 28978 (March 15, 1991), 56 FR 12050 (order
approving File No. SR-PHLX-90-34), extending pilot through December
31, 1991); 29662 (September 9, 1991), 56 FR 46816 (order approving
File No. SR-PHLX-91-31, permitting AUTO-X orders up to 20 contracts
in Duracell options only); 29782 (October 3, 1991), 56 FR 55146
(order approving File No. SR-PHLX-91-33, permitting AUTO-X for all
strike prices and expiration months); 29837 (October 18, 1991), 56
FR 36496 (order approving File No. SR-PHLX-90-03, extending pilot
through December 31, 1993); 32906 (September 15, 1993), 58 FR 15168
(order approving File No. SR-PHLX-92-38, permitting AUTO-X orders up
to 25 contracts in all equity options); 34920 (October 31, 1994), 59
FR 55510 (November 7, 1994) (order approving File No. SR-PHLX-94-40,
codifying eligibility of index options for AUTO-X); and 33405
(December 30, 1993), 59 FR 790 (order approving File No. SR-PHLX-93-
57, extending pilot through December 31, 1994).
---------------------------------------------------------------------------
Certain orders are eligible for AUTOM's automatic execution
feature, AUTO-X,\5\ which was approved as part of the AUTOM pilot
program in 1990.\6\ AUTO-X orders are executed automatically at the
disseminated quotation price on the Exchange and reported to the
originating firm. Orders that are not eligible for AUTO-X are handled
manually by the specialist.\7\
\5\ Orders for up to 500 contracts are eligible for AUTOM and,
in general, public customer orders for up to 25 contracts are
eligible for AUTO-X. Currently, public customer orders in XOC
options for up to 20 contracts are eligible for AUTO-X. See
Securities Exchange Act Release Nos. 35782 (May 30, 1995), 60 FR
30136 (June 7, 1995) (order approving File No. SR-PHLX-95-30); and
32000 (March 15, 1993), 58 FR 15168 (March 19, 1994) (order
approving File No. SR-PHLX-92-38). In USTOP 100 Index options,
public customer orders for up to 50 contracts are eligible for
executions through AUTO-X. See Securities Exchange Act Release No.
35781 (May 30, 1995), 60 FR 30131 (June 7, 1995) (order approving
File No. SR-PHLX-95-29).
\6\ See Securities Exchange Act Release No. 27599 (January 9,
1990), 55 FR 1751 (January 18, 1990) (order approving File No. SR-
PHLX-89-03).
\7\ See note 14, infra.
---------------------------------------------------------------------------
In 1991, the Commission approved a PHLX proposal to extend AUTO-X
to all equity options.\8\ According to the PHLX, the Exchange initially
implemented AUTO-X for all equity and index options.\9\ The PHLX now
proposes to limit the use of AUTO-X for XOC orders to XOC series where
the bid is at or below $10; under the proposal, only those XOC series
where the bid is at or below $10 at the end of the trading day will be
eligible for AUTO-X, effective the next trading day.\10\ The PHLX
states that these lower-priced XOC series generally receive the most
interest from public customers (i.e., ``customers'' who are not
associated with broker-dealer organizations or subject to discretionary
authorization by associated persons of broker-dealers).\11\
[[Page 57616]]
Accordingly, the Exchange believes that these series are the most
appropriate for automatic execution.
\8\ See Securities Exchange Act Release No. 28978 (March 15,
1991), 56 FR 12050 (March 21, 1991) (order approving File No. SR-
PHLX-90-34).
\9\ According to the PHLX, index options became AUTO-X eligible
in March 1991. In October 1994, the Exchange codified its practice
of using AUTO-X for index options. See Securities Exchange Act
Release No. 34920 supra note 4.
\10\ The PHLX periodically will notify members that only those
XOC series where the bid is at or below $10 at the end of the
trading day will be eligible for AUTO-X. Telephone conversation
between Edith Hallahan, Special Counsel, Regulatory Services, PHLX,
and Yvonne Fraticelli, Attorney, Office of Market Supervision,
Division of Market Regulation, Commission, on November 7, 1995.
\11\ For example, the PHLX states that on trade date January 25,
1995, 40 XOC transactions occurred, 38 of which involved a customer.
Only two of these trades involved execution prices greater than $20,
while 10 trades were above $10 but less than $20; 28 customer trades
were below $10. The 28 customer trades represented 439 contracts out
of a total of 531 contracts.
---------------------------------------------------------------------------
According to the PHLX, the proposal is also a response to recent
volatility in the over-the-counter (``OTC'') markets, which has made it
increasingly difficult for specialists and market makers to monitor
quotations to reflect changes in the markets for the underlying
securities. The PHLX believes that market makers and specialists
require sufficient time to adjust their quotations, particularly
because participation in AUTOM and AUTO-X is mandatory.
In addition, the PHLX states that it is consistent with the
practices of other options exchanges to limit automatic execution
eligibility to certain series, such as near-term, at-the-money
series.\12\ Thus, for competitive reasons, the Exchange seeks to create
a level playing field with respect to automatic execution parameters.
\12\ See note 17, infra, and accompanying text.
---------------------------------------------------------------------------
The Exchange notes that the proposal does not affect the AUTO-X
eligibility of any other equity or index option. The PHLX intends to
clearly communicate to its membership and AUTOM users, on a periodic
basis, the proposed AUTO-X limitation for XOC options through an
information circular.
The PHLX believes that the proposal is consistent with Section 6(b)
of the Act, in general, and, in particular, with Section 6(b)(5), in
that it is designed to promote just and equitable principles of trade
and to prevent fraudulent and manipulative acts and practices.
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) in that the proposal is
designed to promote just and equitable principles of trade and to
protect investors and the public interest.\13\ Specifically, the
Commission believes that the proposal strikes a reasonable balance
between preserving the benefits of AUTO-X for the XOC series traded
most frequently by public consumers and providing PHLX market makers
and specialists with sufficient time to update their quotations in
higher-priced XOC series. In this regard, the PHLX has stated that most
public customer orders in XOC options are for series where the bid is
at or below $10. Thus, by maintaining the AUTO-X eligibility of such
XOC orders, the proposal ensures that public customer orders in XOC
options where the bid is at or below $10 will continue to receive the
benefits of AUTO-X, including the guaranteed execution of public
customer orders for up to 20 contracts in such XOC options at the
displayed quote. Despite the change in AUTO-X eligibility for certain
XOC series, the Commission notes that under PHLX rules public customer
orders in XOC series where the bid is above $10 will continue to be
guaranteed the best quoted bid or offer for at least 10 contracts.\14\
\13\ 15 U.S.C. Sec. 78f(b) (1988 & Supp. V 1993).
\14\ The Commission notes that under PHLX Rule 1033(a), ``Bids
and Offers--Premium,'' specialists and Registered Options Traders
are required to fill public customer orders to a minimum depth of 10
contracts at the best quoted bid or offer. As a matter of policy,
public customer orders in XOC options where the bid is at or below
$10 that are executed manually will be filled to a depth of 20
contracts at the best quoted bid or offer.
---------------------------------------------------------------------------
The continued availability of AUTO-X for those XOC series where the
bid is $10 or less should help to maintain the depth and liquidity of
the market for XOC options and minimize the number of XOC transactions
that require manual execution on the Exchange floor, thereby providing
the opportunity for increased efficiency in the handling of non-AUTOM
orders. At the same time, requiring manual execution of orders in XOC
series where the bid is greater than $10 should help to ensure that
market makers and specialists have sufficient time to update their
quotations to reflect changes in the markets for the underlying
securities before executing an option order. Accordingly, the proposal
should address the problems associated with the high volatility of the
securities comprising the XOC, which has resulted in the need for PHLX
specialists to frequently change quotes in the XOC.\15\
\15\ The Commission notes that it considered the volatility of
the XOC, in addition to other factors, in approving a PHLX proposal
to widen the maximum quote spread parameters for higher-priced XOC
options. See Securities Exchange Act Release No. 34781 (October 3,
1994), 59 FR 51467 (October 11, 1994) (order approving File No. SR-
PHLX-94-28) (approving quote spreads of $2.00 for XOC options with
bids of $20.00 to less than $40.00 and $3.00 for XOC options with
bids of $40.00 or more).
---------------------------------------------------------------------------
The Commission notes that the Chicago Board Options Exchange, Inc.
(``CBOE'') limits the availability of automatic execution to certain
options series. Specifically, on the CBOE only the four most active
puts and calls in the two near-term months in Nasdaq 100 Index options,
Standard & Poor's (``S&P'') 500 Index options, and S&P 100 Index
options are eligible for the CBOE's Retail Automated Execution System
(``RAES'').\16\ The Commission is not aware of any significant negative
comments associated with the CBOE's RAES policy. Accordingly, the
Commission believes that it is reasonable for the PHLX, like the CBOE,
to limit the use of automatic execution to those series most actively
used by public customers.\17\
\16\ Telephone conversation between Dan Hustad, CBOE, and Yvonne
Fraticelli, Attorney, Options Branch, Division, Commission, on July
7, 1995.
\17\ The Commission would be concerned about any proposal that
would limit the availability of automatic execution systems to only
out-of-the-money series. See The Division of Market Regulation, The
October 1987 Market Break (February 1988) at 8-22.
---------------------------------------------------------------------------
Finally, the PHLX has represented that it will communicate the
change in AUTO-X eligibility to its members and AUTOM users through an
information circular prior to implementing the rule. The PHLX also will
periodically notify members about the new rule. The Commission believes
that this will provide PHLX members and AUTOM users with adequate
notice of the change in the availability of AUTO-X for XOC options.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (File No. SR-PHLX-95-33) is
approved.
\18\ 15 U.S.C. 78s(b)(2) (1984).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
\19\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28250 Filed 11-15-95; 8:45 am]
BILLING CODE 8010-01-M
