[Federal Register Volume 60, Number 247 (Tuesday, December 26, 1995)]
[Notices]
[Pages 66817-66819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31219]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36601; File No. SR-PHLX-95-39]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to Increasing
the Maximum Size of Options Orders Eligible for Automatic Execution
December 18, 1995.
On August 21, 1995, the Philadelphia Stock Exchange, Inc. (``PHLX''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to increase the maximum automatic
execution (``AUTO-X'') order size eligibility for public customer
market and marketable limit orders for all equity and index options
from 25 contracts to 50 contracts.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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Notice of the proposed rule change was published for comment in the
Federal Register on September 26, 1995.\3\ No comments were received on
the proposal.\4\
\3\ See Securities Exchange Act Release No. 36248 (September 19,
1995), 60 FR 49653.
\4\ On December 13, 1995, the PHLX submitted a letter indicating
that the Exchange's Automated Options Market (``AUTOM'') system and
AUTO-X have sufficient capacity to accommodate the proposed rule
change. Specifically, the PHLX states that its equity and index
option trading floor currently trades approximately 75,000 contracts
per day; a small percentage of those orders are filled through AUTO-
X. According to the PHLX, AUTOM currently is approximately 30%
utilized during peak market activity and can easily support any
additional volume associated with the proposal. See Letter from
William H. Morgan, Vice President, Trading Systems, PHLX, to Michael
Walinskas, Branch Chief, Office of Market Supervision, Commission,
dated December 12, 1995 (``December 12 Letter'').
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Generally, public customer market and marketable limit orders for
up to 25 option contracts are eligible for execution through the AUTO-X
feature of AUTOM.\5\ The PHLX proposes to
[[Page 66818]]
increase the maximum AUTO-X order size eligibility for public customer
market and marketable limit orders for all equity and index options
from 25 contracts to 50 contracts. Under the proposal, 50 contracts
represents the maximum size of a permissible AUTO-X order, which a
determined by the specialist in that option. Consistent with the PHLX's
10-up rule,\6\ the minimum size of the Exchange's AUTO-X guarantee is
10 contracts.
\5\ See Securities Exchange Act Release No. 32906 (September 15,
1993), 58 FR 49345 (September 22, 1993) (order approving File No.
SR-PHLX-92-38). For USTOP 100 Index (``TPX'') options, public
customer market and marketable limit orders for up to 50 contracts
are eligible for AUTO-X. See Securities Exchange Act Release No.
35781 (May 30, 1995), 60 FR 30131 (June 7, 1995) (File No. SR-PHLX-
95-29). Orders for up to 500 contracts are eligible for AUTOM. See
Securities Exchange Act Release No. 35782 (May 30, 1995), 60 FR
30136 (June 7, 1995) (order approving File No. SR-PHLX-95-30).
\6\ See PHLX Rule 1033(a), ``Size of Bid/Offer and 10-up
Guarantee.''
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AUTOM, which has operated on a pilot basis since 1988 and was most
recently extended through December 31, 1996,\7\ is the PHLX's
electronic order routing, delivery, execution and reporting system for
equity and index options. AUTOM is an online system that allows
electronics delivery of options orders from member firms directly to
the appropriate specialist on the Exchange's trading floor.
\7\ See Securities Exchange Act Release No. 36582 (December 13,
1995) (order approving File No. SR-PHLX-95-78). See also Securities
Exchange Act Release Nos. 25540 (March 31, 1988), 53 FR 11390 (April
6, 1988) (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);29837
(October 18, 1991), 56 FR 36496 (order approving File No. SR-PHLX-
90-03, extending pilot through December 31, 1993); and 33405
(December 30, 1993), 59 FR 790 (order approving File No. SR-PHLX-90-
57, extending pilot through December 31, 1994); 35183 (December 30,
1994), 60 FR 2420 (January 9, 1995) (order approving File No. SR-
PHLX-90-41, extending pilot through December 31, 1995); 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); 29837 (October 18, 1991), 56 FR 55146 (October 24,
1991) (order approving File No. SR-PHLX-93-33, increasing AUTO-X for
equity options to 20 contracts); 33405 (December 30, 1993), 59 FR
790 (order approving File No. SR-PHLX-93-57, extending pilot through
December 31, 1994); 34920 (October 31, 1994), 59 FR 55510 (November
7, 1994) (File No. SR-PHLX-94-40, codifying use of AUTOM for index
options); 35601 (April 13, 1995), 60 FR 19616 (File No. SR-PHLX-95-
18, codifying the use of AUTOM for certain order types); 36429
(October 27, 1995), 60 FR 55874 (November 3, 1995) (File No. SR-
PHLX-95-35, allowing broker-dealer USTOP 100 Index option orders to
be routed through AUTOM); and 36467 (November 8, 1995), 60 FR 57615
(November 16, 1995) (order approving File No. SR-PHLX-95-33,
limiting AUTO-X for National Over-the-Counter Index Options to
series where the bid is $10 or less).
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In 1990, AUTO-X was approved as part of the AUTOM pilot program.\8\
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.
\8\ See Securities Exchange Act Release No. 27599 (January 9,
1990), 55 FR 1751 (January 18, 1990) (order approving File No. SR-
PHLX-89-03). In 1991, the Commission approved a PHLX proposal to
extend AUTO-X to all equity options. See Securities Exchange Act
Release No. 28978 (March 15, 1991), 56 FR 12050 (March 21, 1991)
(order approving File No. SR-PHLX-90-34).
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The PHLX believes that the proposal should improve the AUTOM system
by offering the benefits of AUTO-X, including prompt and efficient
automatic executions at the displayed price, to additional customer
orders. The Exchange states that the proposed AUTO-X increase from a
maximum of 25 to 50 contracts is in line with prior changes. For
example, the PHLX notes that the Commission previously has approved
other PHLX proposals to increase the maximum AUTO-X contract size
limit.\9\
\9\ See, e.g., Securities Exchange Act Release No. 29837, supra
note 7.
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Further, the Exchange believes that it is appropriate to permit
automatic executions of option orders up to 50 contracts for several
reasons. First, the PHLX states that AUTO-X orders, although
immediately reported with the best bid/offer as the execution price,
may be subject to price improvement by the specialist, if a better bid/
offer is available. For example, a superior Registered Options Trader
(``ROT'') bid/offer established immediately prior to the receipt of an
AUTO-X order may not be disseminated in time to be matched with the
AUTO-X order electronically but the superior bid/offer may be matched
with the AUTO-X order through manual intervention by the
specialist.\10\
\10\ But see note 14 and accompanying text regarding the
provision of meaningful opportunity for price improvement.
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Second, the PHLX notes that Exchange rules and policies contain
safeguards designed to protect customers, as well as ROTs and
specialists, in the event quotations are not up-to-date, not
disseminating, or otherwise malfunctioning. For example, in
extraordinary (fast) market conditions, quotations are disseminated
with an ``F'' once the 10-up guarantee on screen markets is suspended
pursuant to Option Floor Procedure Advice (``Advice'') F-10,
``Extraordinary Market Conditions (Fast Markets).'' \4\ In addition,
Advice A-13, ``Auto Execution Engagement/Disengagement
Responsibility,'' allows a specialist to disengage AUTO-X in
extraordinary circumstances, upon approval by two floor officials. The
PHLX believes that these provisions serve to protect the integrity of
AUTO-X by preventing inaccurate executions.
\11\ Under Advice F-10, when a fast market is in effect,
displayed options quotes are not firm and the 10-up guarantee is not
applicable, although specialists and trading crowds are required to
use best efforts to update quotes and fill incoming orders in
accordance with the 10-up rule.
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Third, the Exchange notes that specialists have the flexibility to
establish the AUTO-X guarantee size for each option up to the maximum
permissible size. In addition, the Exchange's ``Wheel'' for
electronically assigning AUTO-X participation (although not yet
operational) is voluntary for ROTs and will provide executions in 10-
lot increments.\12\ Thus, the PHLX believes that increasing the maximum
AUTO-X order size up to 50 contracts does not raise financial viability
concerns because ROTs can choose whether to participate on the Wheel
and because the Wheel assigns orders in 10-lot increments. With respect
to the financial integrity of PHLX specialists and ROTs, the Exchange
notes that it monitors compliance with PHLX Rules 703, ``Financial
Responsibility and Reporting,'' and 722, ``Margin Accounts,'' on a
regular basis.
\12\ The Wheel is an automated mechanism for assigning
specialists and ROTs, on a rotating basis, as contra-side
participants for AUTO-X orders. Specialists must participate on the
Wheel and ROTs may participate on the Wheel in assigned issues. On
the Wheel, the specialist receives the first assignment of trades
for the day in each respective option. Thereafter, the Wheel assigns
trades to ROTs in an order standardized for that day on a random
basis. Each 10 lot or order (whichever is smaller) constitutes an
assignment. See Securities Exchange Act Release No. 35033 (November
30, 1994), 59 FR 63152 (December 7, 1994) (order approving File No.
SR-PHLX-94-32).
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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, as well
as to protect investors and the public interests, by extending the
benefits of AUTO-X to a larger number of customer orders.
The Commission finds that the proposed rule change is consistent
with
[[Page 66819]]
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.\13\ The Commission notes that the
development and implementation to date of the AUTOM system has provided
for more efficient handling and reporting of orders in PHLX equity and
index options through the use of new data processing and communications
techniques, thereby improving order processing and turnaround time. The
Commission does not object at this time to extending the benefits
available through the use of an automated system to larger-size
customer options orders of up to 50 contracts.
\13\ 15 U.S.C. 78f and 78k-1 (1988).
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Public customers may benefit from the proposal because public
customer orders for up to 50 option contracts may be executed
automatically and guaranteed by the specialist at the displayed market
quote. In addition, public customers will have the benefit or receiving
immediate executions and nearly instantaneous confirmations for orders
of up to 50 contracts.\14\ The increase in the AUTO-X feature for all
equity and index options may also increase the depth and liquidity of
the market for the options where the specialist chooses to fill orders
to a depth of up to 50 contracts. The Commission notes, however, that
AUTO-X currently, and as proposed, does not require an opportunity for
price improvement on a systematic basis. The Commission expects the
PHLX to examine the feasibility of modifying AUTO-X to provide a
mechanism for price improvement on a systematic basis.\15\
\14\ As noted above, the PHLX's rules will not require a
specialist to guarantee AUTO-X orders to a depth of 50 contracts.
Instead, the proposal will allow specialists to establish an AUTO-X
guarantee for each option up to the permissible size of 50
contracts, with a minimum guarantee of 10 contracts required.
\15\ CF. Securities Exchange Act Release Nos. 36310 (September
29, 1995), 60 FR 52792 (October 10, 1995) (rule proposals and
amendments to improve the handling and execution of customer
orders); and 33894 (April 11, 1994), 59 FR 18429 (April 18, 1994)
(order approving File No. SR-Amex-93-32, noting that limiting the
automatic execution of orders for Hong Kong Index options to 50
contracts or less will ensure that larger orders are exposed to the
floor for potential price improvement).
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The Commission also believes, based on representations by the
Exchange,\16\ that expanding the order eligibility size of AUTO-X for
all equity and index options to 50 contracts will not expose the PHLX's
options markets or equity markets to risk of failure or operational
break-down. In particular, the Exchange represents that only a small
percentage of total daily trades on the PHLX are filled through AUTO-X;
in addition, the Exchange notes that, currently, AUTOM is approximately
30% utilized during peak market activity. The Exchange represents that
AUTOM can easily support any volume associated with the proposal. In
addition, since the AUTOM system is completely independent from the
PHLX's Automated Communication and Execution (``PACE'') system for
routing and executing stock orders, neither AUTOM nor PACE should
impact the other during periods of high volume.
\16\ See December 12, Letter, Supra note 4.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
\17\ that the proposed rule change (SR-PHLX-95-39) is approved.
\17\ 15 U.S.C. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
\18\ 17 CFR 200.30-3(a)(12) (1994).
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[FR Doc. 95-31219 Filed 12-22-95; 8:45 am]
BILLING CODE 8010-01-M
