[Federal Register Volume 63, Number 26 (Monday, February 9, 1998)]
[Notices]
[Pages 6591-6593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3120]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39610; File No. SR-PHLX-97-52]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to Options
Trading Rotations
February 2, 1998.
I. Introduction
On October 23, 1997, the Philadelphia Stock Exchange, Inc.
(``PHLX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposal to modify its rules governing options trading
rotations.\3\ The proposed rule change was published for comment in the
Federal Register on November 24, 1997.\4\ No comments were received
regarding the proposal. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ A trading rotation is a series of brief time periods during
which bids, offers and transactions can be made only in specified
series.
\4\ See Securities Exchange Act Release No. 39332 (November 17,
1997), 62 FR 62652.
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II. Description of the Proposal
The PHLX proposes to make several changes to its rules governing
options trading rotations. First, the PHLX proposes to amend paragraph
(a) of Exchange Rule 1047, ``Trading Rotations, Halts and Suspension,''
to clarify that opening rotations for equity option contracts, unlike
closing rotations, are conducted daily.\5\
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\5\ Closing rotations in equity options are conducted only at
expiration.
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Second, the PHLX proposes to replace references to ``the Exchange''
with references to ``two Floor Officials, with the concurrence of a
Market Regulation officer'' throughout PHLX Rule 1047; in paragraphs
(a)(ii), (c), (d), and (f), of PHLX Rule 1047A. ``Trading Rotations,
Halts or Reopenings;'' and in Floor Procedure Advice (``Advice'') G-2,
``Trading Rotations, Halts or Re-openings,'' \6\ in order to specify
the approval required to implement options trading halts, modified
trading rotations, and other procedures. For example, PHLX Rule
1047(b), as amended, will require the halt or suspension of trading in
option contracts whenever two floor officials, with the concurrence of
a PHLX market regulation officer, deem such action appropriate in the
interest of a fair and orderly market and to protect investors. The
PHLX believes that trading rotations present the types of issues and
the need for prompt determinations that are particularly suited to
floor official approval. In addition, the PHLX believes that requiring
the concurrence of a PHLX market regulation officer will help to ensure
proper notification of the approval and allow Exchange staff to better
monitor the conditions giving rise to rotation-related floor official
approval.
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\6\ Advice G-2 does not contain a fine schedule. Accordingly,
the proposal does not affect the Exchange's minor rule violation
enforcement and reporting plan.
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Third, the PHLX proposes to delete from PHLX rule 1047, Commentary
.01(a) and (d) provisions stating ``if both puts and calls covering the
same underlying security *** are traded ***.'' The PHLX believes that
this language may be confusing because both puts and calls trade on
almost all PHLX options. The PHLX also proposes to add the language
``except as provided below'' to Commentary .01(a) to emphasize that
Commentary .01(b) contains exceptions to the normal opening rotation
procedures.
Fourth, the PHLX proposes to amend Commentary .01(b) to define
modified, reverse and shotgun rotations.\7\ Specifically, the PHLX
proposes to amend Commentary .01(b) by adding paragraph (i), which
will: (1) Define a shotgun rotation as opening rotation where each
option series opens in the same manner and sequence as during a regular
trading rotation,\8\ but is permitted to freely trade once all option
series with the same expiration month have been opened;\9\ (2) state
that modified rotations include reverse and shotgun rotations; and (3)
define a reverse rotation as an opening rotation
[[Page 6592]]
where the specialist first opens series of options of a given class
with the most distant expiration, then proceeds to the next nearest
expiration and ends with the nearest expiration, until all series have
been opened.
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\7\ Because PHLX Rule 1047A(b) allows specialists to conduct a
rotation in accordance with PHLX Rule 1047, Commentary .01(b) and
(c), the proposed amendments to Commentary .01(b) and (c) also will
apply to index options trading.
\8\ PHLX Rule 1047, Commentary .01(a) describes a regular
trading rotation as opening the series with the nearest expiration,
proceeding to the next most distant expiration, and so forth, until
all series have been opened.
\9\ This definition currently describes a modified rotation.
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Fifth, the PHLX proposes to adopt Commentary .01(b)(ii), which will
require the use of a reverse rotation in connection with openings and
reopenings involving a heavy influx of orders, unless exempted by two
floor officials, with the concurrence of a PHLX market regulation
officer. The PHLX states that because most order flow and open interest
is generally in the nearest expiration months, starting a rotation with
the nearest months may mean that the nearest expiration months are
outdated when free trading opens, and, accordingly, will require a
subsequent rotation in order to update them. The reverse rotation is
designed to produce more prompt openings by eliminating the need for a
subsequent rotation of the nearest expiration months. For purposes of
this provision, a heavy influx of orders will be determined on a case-
by-case basis, in light of order flow through the PHLX's Automated
Options Market (``AUTOM'') system, the number of floor brokers in the
trading crowd indicating handheld orders for the opening, and the
number of orders placed on the book, relative to normal conditions for
that option.\10\
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\10\ The specialist will determine the existence of a heavy
influx of orders. Telephone conversation between Michelle Weisbaum,
Associate General Counsel, PHLX, and Yvonne Fraticelli, Attorney,
Office of Market Supervision (``OMS''), Division of Market
Regulation (``Division''), Commission, on January 22, 1998
(``January 22 Conversation'').
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Sixth, the PHLX proposes to amend Commentary .01(b)(ii) to require
that two floor officials, with the concurrence of a PHLX market
regulation officer, approve any second or subsequent rotations to
ensure that they occur only when warranted. According to the PHLX,
subsequent rotations are conducted in situations where the rotation is
so time-consuming that certain series, such as those earlier in the
rotation, become inundated with additional order flow or become priced
incorrectly as the underlying stock price changes. The purpose of this
change is to expressly permit additional rotations, but to require
floor official approval to ensure proper and limited use.
Seventh, the PHLX proposes to amend Commentary .01(b)(ii) to allow
specialists to employ a modified rotation when there is a delayed
opening, halt or suspension in trading or other unusual market
conditions. The modified rotation a specialist may employ includes, but
is not limited to, a reverse or shotgun rotation.\11\ According to the
PHLX, this change is intended to facilitate a prompt opening by
permitting, although not requiring, a modified rotation in response to
certain market conditions. The PHLX believes that floor official
approval should ensure that expedited rotations are employed where
warranted.
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\11\ A specialist must obtain floor official approval to use a
modified rotation other than a reverse or shotgun rotation. See
January 22 Conversation, supra note 10.
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Eighth, the Exchange proposes to amend PHLX Rule 1047, Commentary
.01(d). Commentary .01(d) currently provides that when the PHLX's
Options Committee decides to conduct a closing rotation on the trading
day prior to expiration in an equity option for which the underlying
equity did not trade, the rotation must commence as immediately as
practicable following the time when the option normally ceases free
trading (4:02 p.m.). The proposal will permit an earlier closing
rotation for such options. The PHLX believes that, under certain
circumstances (e.g., when an underlying stock has not traded for a
length of time and there is little chance that the stock will reopen
that day), it would be more orderly to conduct the closing rotation
during the trading day because the time after the close of trading is
particularly hectic, due to final confirmation of all trading activity
and the preparation of exercise decisions. The Exchange would notify
members of the earlier closing rotation through an announcement on the
Exchange's floor.\12\
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\12\ Telephone conversation between Michelle Weisbaum, Associate
General Counsel, PHLX, and Yvonne Fraticelli, Attorney, OMS,
Division, Commission, on November 21, 1997 (``November 21
Conversation'').
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III. Discussion
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),\13\ in that it is
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and to protect investors and the public
interest.\14\
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\13\ 15 U.S.C. 78f(b)(5).
\14\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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Specifically, the Commission believes that the PHLX's proposal to
amend PHLX Rule 1074(a) to indicate that opening rotations for equity
options are conducted daily will clarify the PHLX's rule with regard to
the frequency of opening rotations. Similarly, the Commission believes
that deleting references in PHLX Rule 1047, Commentary .01 (a) and (d)
to puts and calls traded on the same underlying security will clarify
the PHLX's rules and eliminate potential confusion. Likewise, the
addition of the language ``except as provided below'' to the
description in Commentary .01(a) of a specialist's normal procedures
during opening rotations will provide additional clarity by emphasizing
that Commentary .01(b) provides exceptions to the normal opening
rotation procedures.
The Commission also believes that it is reasonable for the PHLX to
replace references to ``the Exchange'' in PHLX Rules 1047 and 1047A and
in Advice G-2 with references to ``two Floor Officials, with the
concurrence of a Market Regulation officer'' in order to specify the
authority required to approve options trading halts, modified trading
rotations, and other procedures. According to the PHLX, the reference
to approval by two floor officials will modify the Exchange's rules to
reflect the PHLX's current procedures, and requiring the concurrence of
a PHLX market regulation officer will ensure prompt notification of the
approval and facilitate monitoring by the PHLX staff of the conditions
giving rise to the floor officials' approval. The Commission notes that
the rules of other options exchanges provide floor officials with
similar discretion.\15\
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\15\ See e.g., CBOE Rule 6.2 (allowing two floor officials to
direct that one or more trading rotations be employed on any
business day to aid in producing a fair and orderly market; CBOE
Rule 6.3 (allowing two floor officials to halt trading in any
security in the interests of a fair and orderly market); and
American Stock Exchange, Inc. (``Amex'') Rule 918, Commentary .01(b)
(allowing two floor officials to approve the use of a modified
trading rotation in circumstances other than in connection with a
delayed opening, halt or suspension of the underlying stock or after
delayed openings, halts or suspensions of an option series listed on
the Amex).
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The Commission believes that the amendments to Commentary .01(b)
regarding modified trading rotations are reasonable and consistent with
the Act. As noted above, the PHLX proposes to amend Commentary .01(b)
to revise the definition of a modified rotation and to define reverse
and shotgun rotations. The Commission believes that defining reverse
and shotgun rotations will help to clarify the PHLX's rules, while
defining a modified rotation to include rotations other than reverse
and shotgun rotations will provide the PHLX with greater flexibility in
conducting modified trading rotations in response
[[Page 6593]]
to market conditions. The Commission notes that the rules of the
Chicago Board Options Exchange, Inc. (``CBOE'') provide similar
flexibility with regard to modified trading rotations.\16\
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\16\ Under CBOE Rule 6.2, for example, an Order Book Official
(``OBO'') may deviate from any rotation policy or procedure with the
approval of two CBOE floor officials. CBOE Rule 6.2, Interpretation
and Policy .04 provides that an abbreviated rotation is CBOE Rule
6.2, Interpretation and Policy .04 provides that an abbreviated
rotation is one of the deviations from rotation policy or procedure
and one of the modifications of the rotation order and manner
permitted under CBOE Rule 6.2.
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The Commission also believes that it is reasonable for the PHLX to
adopt Commentary .01(b)(ii) which, among other things, will require the
use of a reverse trading rotation in connection with openings or
reopenings involving a heavy influx of orders, unless exempted by two
floor officials with the concurrence of a PHLX market regulation
officer.\17\ According to the PHLX, the rotation of the nearest
expiration months first under normal opening rotation procedures may
result in the need for subsequent rotations in order to update the
first-rotated months when there is a heavy influx of orders. The
reverse rotation is designed to eliminate the need for subsequent
rotations of the nearest expiration months by opening the most distant
expiration first, then opening the next nearest expiration, until the
nearest expiration opens last. The Commission previously has noted the
importance of completing opening rotations as quickly as possible in
order to allow free trading to commence.\18\ Accordingly, the
Commission believes that it is reasonable for the PHLX to require a
reverse rotation when there is a heavy influx of orders in order to
produce a more prompt opening. The Commission believes that it is
appropriate for the PHLX to allow flexibility in applying the rule by
allowing two floor officials, with the concurrence of a PHLX market
regulation officer, to provide an exemption from the use of a reverse
rotation.
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\17\ For purposes of this provision, the specialist will
determine the existence of a heavy influx of orders on a case-by-
case basis, in light of order flow through the PHLX's AUTOM system,
the number of floor brokers in the trading crowd indicating handheld
orders for the opening, and the number of orders placed on the book.
\18\ See Securities Exchange Act Release No. 29869 (October 28,
1991), 56 FR 56537 (November 5, 1991) (order approving File No. SR-
PHLX-91-04) (Series Opening Request Ticket procedures adopted by the
PHLX will decrease the time required to obtain opening market
quotations and allow free trading to commence as quickly as possible
after the opening; expedited free trading will allow market makers
and customers to engage in various options strategies and will
result in the prompt execution of customer orders).
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Commentary .01(b)(ii) also will allow two floor officials, with the
concurrence of a PHLX market regulation officer, to approve a second
rotation. According to the PHLX, a subsequent rotation may be conducted
when an opening rotation was so time-consuming that some series become
inundated with additional order flow or became priced incorrectly as
the underlying stock price changed. The Commission believes that
allowing floor officials to approve a second rotation will help the
PHLX to maintain fair and orderly markets by permitting a second
trading rotation when market conditions warrant a second rotation. The
Commission believes that requiring the approval of two floor officials,
with the concurrence of a PHLX market regulation officer, will help to
ensure that second rotations are used appropriately. The Commission
notes that the rules of the CBOE also permit additional trading
rotations.\19\
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\19\ See CBOE Rule 6.2 (allowing two floor officials to direct
that one or more trading rotations be employed on any given business
day to aid in producing a fair and orderly market).
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Commentary .01(b)(ii) also authorizes the use of a modified
rotation in connection with delayed opening, halts, or suspensions of
options trading or other unusual market conditions. With floor official
approval, specialists may use modified trading rotations other than
those defined in Commentary .01(b)(i) (i.e., shotgun and reverse
rotations). According to the PHLX, this provision is designed to
facilitate a prompt opening by allowing specialists to use a modified
rotation in response to certain market conditions. The Commission
believes that it is reasonable to provide PHLX specialists with the
flexibility to evaluate market conditions and to modify trading
rotations in order to facilitate a prompt opening. The Commission
believes that proper exercise of this authority should contribute to
the protection of investors and the public interest by allowing
specialists to respond appropriately to current market conditions. In
addition, the Commission notes that the rules of the other options
exchanges contain similar provisions requiring or permitting the use of
modified trading rotations.\20\
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\20\ Amex Rule 918, Commentary .02(b), for example, requires the
use of a modified trading rotation in connection with all delayed
openings, halts, or suspensions of the underlying stock and after
delayed openings, halts or suspensions of any option series listed
for trading on the Amex, unless two floor officials approve
otherwise. The Amex's rule also permits the use of a modified
rotation in other circumstances or in a manner different from the
procedures described in Commentary .02(b) if two floor officials
determine that the procedure should be implemented due to unusual
market conditions, such as a heavy influx of orders. See also CBOE
Rule 6.2, Interpretation and Policy .01(b) (allowing a Board Broker,
Designated Primary Market Maker, or OBO to conduct a modified
trading rotation with the approval of two floor officials or at the
direction of the appropriate CBOE Floor Procedure Committee); and
CBOE Rule 24.13 (allowing an OBO, with the approval of two floor
officials, to deviate from any rotation policy or procedure issued
by the appropriate Floor Procedure Committee when they conclude in
their judgment that such action is appropriate in the interests of a
fair and orderly market).
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Because PHLX Rule 1047A(b) allows specialists in index options to
conduct rotations in accordance with PHLX Rule 1047, Commentary .01 (b)
and (c), the changes described in PHLX Rule 1047, Commentary .01 (b)
and (c) also will apply to index options trading. The Commission
believes it is reasonable to apply these changes to index options in
order to provide flexibility in the trading of index options as well as
equity options.
Finally, the Commission believes that it is reasonable for the PHLX
to amend PHLX Rule 1047, Commentary .01(d) to permit an earlier closing
rotation for certain equity options. According to the PHLX, there are
circumstances (e.g., when the underlying stock has not traded for a
length of time and there is little likelihood that the stock will
reopen that day) in which it would be more orderly to conduct a trading
rotation during the trading day.\21\ Accordingly, the Commission
believes that it is appropriate to provide the PHLX with the discretion
to conduct an earlier closing rotation in order to help the PHLX to
maintain a fair and orderly market.
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\21\ The PHLX will notify members of the earlier closing
rotation through an announcement on the Exchange's floor. See
November 21 Conversation, supra note 12.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change (File No. SR-PHLX-97-52) is
approved.
\22\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3120 Filed 2-6-98; 8:45 am]
BILLING CODE 8010-01-M
