[Federal Register Volume 60, Number 114 (Wednesday, June 14, 1995)]
[Notices]
[Pages 31334-31336]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14538]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35822; File No. SR-PHLX-95-33]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to the
Automatic Execution of National Over-the-Counter Index Options
June 8, 1995.
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 May 11,
1995, the Philadelphia Stock Exchange, Inc., (``PHLX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``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 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 proposes 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.
XOC series where the bid is greater than $10 will no longer be AUTO-X
eligible and any such AUTOM-delivered orders will be subject to manual
execution.
The text of the proposed rule change is available at the Office of
the Secretary, PHLX, and at the Commission.
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
AUTOM, which has operated on a pilot basis since 1988 and was most
recently extended through December 31, 1995,\1\ is the PHLX's
electronic order
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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.
\1\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 options); and 33405 (December 30, 1993), 59
FR 790 (order approving File No. SR-PHLX-93-57, extending pilot
through December 31, 1994).
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Certain orders are eligible for AUTOM's automatic execution
feature, AUTO-X.\2\ 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.
\2\Orders for up to 100 contracts are eligible for AUTOM and
public customer orders for up to 25 contracts are eligible for AUTO-
X. See Securities Exchange Act Release No. 32000 (March 15, 1993),
58 FR 15168 (March 19, 1994) (order approving File No. SR-PHLX-92-
38).
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The Commission approved the use of AUTO-X as part of the AUTOM
pilot program in 1990.\3\ In 1991, the Commission approved a PHLX
proposal to extend AUTO-X to all equity options.\4\ According to the
PHLX, the Exchange initially implemented AUTO-X for all equity options
and index options. The PHLX notes that in its order approving the
extension of AUTO-X to all equity options, the Commission noted that
the proposal would enable all PHLX equity options to be eligible for
AUTO-X.\5\ Accordingly, the Exchange believes that because extending
AUTO-X to all options was not required nor was it filed as mandatory,
the Exchange retains the ability to limit its implementation,
consistent with the Act. Similarly, the Exchange states that orders for
up to 25 contracts are eligible for AUTO-X, but this number is a
maximum, such that different PHLX options are subject to a different
AUTO-X order size cap.
\3\See Securities Exchange Act Release No. 27599 (January 9,
1990), 55 FR 1751 (January 18, 1990) (order approving File No. SR-
PHLX-89-03).
\4\See Securities Exchange Act Release No. 28978 (March 15,
1991), 56 FR 12050 (March 21, 1991) (order approving File No. SR-
PHLX-90-34).
\5\See Securities Exchange Act Release No. 28978, supra note 4.
Notwithstanding this ability, as part of an effort to extend the
benefits of automatic execution floor-wide, the Exchange implemented
Floor Procedure Advice (``Advice'') A-13, ``Auto-X Engagement/
Disengagement Responsibility.''\6\ The PHLX states that in Advice A-13
the Exchange adopted an affirmative obligation, punishable by a fine
administered pursuant to the PHLX's minor rule plan, that AUTO-X be
implemented floor-wide. In that proposal, the Exchange cited the goal
of maximizing floor-wide use of AUTO-X and ensuring specialist activity
during adverse market conditions. The PHLX does not believe that these
goals are eroded by the proposal at hand, which is limited to certain
series in one index option.
\6\See Securities Exchange Act Release No. 29575 (August 16,
1991), 56 FR 41715 (August 22, 1994) (order approving File No. SR-
PHLX-91-16). Advice A-13 states that options specialists are
responsible for engaging AUTO-X for an assigned option within three
minutes of completing the opening or reopening rotation of that
option. In addition, the Advice indicates that, under extraordinary
circumstances, a specialist may be provided with an exemption from
receiving orders through AUTO-X and may disengage the system upon
approval by two floor officials.
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In direct contrast to the Commission's concerns with options
exchanges limiting the availability of execution systems to out-of-the-
money call series,\7\ The PHLX is limiting AUTO-X to the most active
around-the-money series. The Exchange also included in Advice A-13 the
ability to disengage AUTO-X in extraordinary circumstances with Floor
Official approval. Thus, the Exchange recognized that conditions may
exist which warrant the limitation of AUTO-X.
\7\See The Division of Market Regulation, The October 1987
Market Break (February 1988).
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At this time, the PHLX proposes to limit the use of AUTO-X for XOC
orders. 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. The PHLX states that these lower-priced
XOC series generally receive the most interest from public customers.
Accordingly, the Exchange believes that these series are most
appropriate for automatic execution.\8\ The Exchange intends to clearly
communicate to its membership and AUTOM users the proposed AUTO-X
limitation for XOC options through an information circular.
\8\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.
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The proposal is also in 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 states
that sufficient time is necessary for such adjustments, particularly
because participation in AUTOM and AUTO-X is obligatory.
In addition to volatility, the Exchange believes that a
specialist's obstacles in hedging XOC positions with underlying OTC
securities, which is particularly relevant to the XOC, also warrants
the proposed AUTO-X limitation. For example, in order to hedge XOC
exposure, positions in OTC securities are typically purchased and sold.
The PHLX states that the aggregate bid/ask differential for the XOC's
component securities is often greater than $5 wide, reflecting the
volatility of those markets as well as the relatively high value of the
XOC itself.\9\ The PHLX states that in recognition of these
circumstances, the Commission recently approved an Exchange proposal to
widen the quotation spread parameters applicable to the XOC.\10\
\9\The bid/ask differential in the underlying securities is
determined by adding the bids for such securities and dividing by
100 (the number of securities comprising the XOC) to arrive at the
composite bid; and then similarly adding the offers and dividing by
100 to arrive at a composite, or average, offer.
\10\See Securities Exchange Act Release No. 34781 (October 3,
1994), 59 FR 51467 (October 11, 1994) (order approving File No. SR-
PHLX-94-28).
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Exchange By-Law Article X, ``Standing Committee,'' Section 10-18,
``Options Committee,'' grants authority over all connections and
communications on the options floor, such as AUTOM, to be Options
Committee, which has authorized the proposed AUTO-X limitation.
Pursuant to this authority, the Options Committee has determined, in
the interest of maintaining fair and orderly markets, to amend the
eligibility of XOC orders for automatic execution.
The Exchange notes that AUTOM users will continue to be afforded
the advantages of automatic execution for XOC series priced at low or
moderate levels. According to the PHLX, public customers (i.e.,
``customers'' who are not associated with broker-dealer organizations
or subject to discretionary authorization by associated persons of
broker-dealers) most often choose XOC series priced at $10 or less for
investment.\11\ The proposal does not affect the AUTO-X eligibility of
any other equity or index option.
\11\See note 7, supra. The Exchange notes similar results on
trade date February 7, 1995.
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In addition, the PHLX notes 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
[[Page 31336]]
series.\12\ Thus, for competitive reasons, the Exchange seeks to create
a level playing field with respecting automatic execution parameters.
\12\For example, on the Chicago Board Options Exchange, Inc.
(``CBOE''), only the four most active puts and calls in the two
near-term months in Nasdaq 100 Index options are eligible for the
CBOE's Retail Automated Execution System.
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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.
Specifically, the Exchange believes that the aforementioned
circumstances (volatility and hedging) respecting the XOC warrant an
AUTO-X limitation in the interest of maintaining fair and orderly
markets. The PHLX notes that option series where the bid is more than
$10 may represent a premium of $1,000 ($10 multiplied by 100);
accordingly, expensive errors may result from the automatic execution
of a high-priced option series before the option quote has been updated
to reflect a change in the price of an underlying security. According
to the PHLX, in certain cases such trades occur by way of orders from
professional investors, which undercut the use of market making
capital, and, in turn, detrimentally affect liquidity.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The PHLX does not believe that the proposed rule change will impose
any inappropriate burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(a) By order approve such proposed rule change, or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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 at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 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 July 5, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
\13\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14538 Filed 6-13-95; 8:45 am]
BILLING CODE 8010-01-M
