[Federal Register Volume 62, Number 106 (Tuesday, June 3, 1997)]
[Notices]
[Pages 30366-30371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14412]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38683; File No. SR-Phlx-97-24]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. To Adopt an AUTOM Rule
and To Request Permanent Approval for the AUTOM Pilot Program
May 27, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 2, 1997, 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to adopt Rule 1080, Philadelphia Stock Exchange
Automated Options Market (``AUTOM'') and Automatic Executive System
(``AUTO-X''), codifying and amending the policies and procedures
concerning AUTOM. The Exchange also requests permanent approval of the
AUTOM pilot program. The AUTOM System and the proposed rule are
described below.
Proposed AUTOM Rule
Proposed Rule 1080 describes the AUTOM System and its features,
with paragraph (a) as the general introduction. AUTOM is the Exchange's
electronic order delivery and reporting system, which provides for the
automatic entry and routing of Exchange-listed equity options and index
options orders to the Exchange trading floor. Option orders entered by
Exchange member organizations into AUTOM are routed to the appropriate
specialist unit on the Exchange trading floor. Orders delivered through
AUTOM may be executed manually, or certain orders are eligible for
AUTOM's automatic execution feature, AUTO-X, in accordance with the
provisions of this Rule. Equity option and index option specialists are
required by the Exchange to participate in AUTOM and its features and
enhancements. This paragraph also provides that Rule 1080 shall govern
the orders, execution reports and administrative messages (``order
messages'') transmitted between the offices of member organizations and
the trading floors of the Exchange through AUTOM.
Proposed Rule 1080(b) lists the types of orders eligible for AUTOM.
Generally, only agency orders may be entered. With respect to U.S. Top
100 Index options (``TPX''), broker-dealer orders may be entered into
AUTOM, but are not eligible for AUTO-X.\3\ For purposes of AUTOM, an
agency order is an order entered on behalf of a public customer, and
does not include any order entered for the account of a broker-dealer
or any account in which a broker-dealer or an associated person of a
broker-dealer has any direct or indirect interest. In addition,
respecting order size, orders up to the maximum number of contracts
permitted by the Exchange may be entered. Currently, orders up to 100
contracts are eligible for AUTOM,\4\ except the maximum order size for
TPX options if 500 contracts.\5\ Separate maximum order sizes apply to
AUTO-X, which is discussed below.
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\3\ See Securities Exchange Act Release No. 36429 (October 27,
1995), 60 FR 55874 (November 3, 1995) (SR-Phlx-95-35).
\4\ See Securities Exchange Act Release No. 28516 (October 3,
1990), 55 FR 41408 (October 11, 1990) (SR-Phlx-90-18).
\5\ See Securities Exchange Act Release No. 38782 (May 30,
1995), 60 FR 30136 (June 7, 1995) (SR-Phlx-90-30). Although the
Exchange received approval to expand the maximum AUTOM order size to
500 contracts, the Exchange's Board of Governors has limited
implementation to TPX only.
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The following types of orders are eligible for AUTOM: day, good-
till-cancelled (``GTC''), market, limit, stop, stop limit, all or none,
or better, simple cancel, simple cancel to reduce size (cancel leaves),
cancel to change price, cancel with replacement order, market close,
market on opening, limit on opening, limit close, and possible
[[Page 30367]]
duplicate orders.\6\ The Exchange's Options Committee may determine to
accept additional types of orders as well as to discontinue accepting
certain types of orders. Orders may not be unbundled for the purposes
of eligibility for AUTOM and AUTO-X, nor may a firm solicit a customer
to unbundle an order for this purpose.
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\6\ See Securities Exchange Act Release No. 35601 (April 13,
1995), 60 FR 19616 (April 19, 1995) (SR-Phlx-95-18).
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Proposed paragraph (c) defines AUTO-X. AUTO-X is a feature of AUTOM
that automatically executes public customer market and marketable limit
orders up to the number of contracts permitted by the Exchange for
certain strike prices and expiration months in equity options and index
options, unless the Options Committee determines otherwise. AUTO-X
automatically executes eligible orders using the Exchange disseminated
quotation and then automatically routes execution reports to the
originating member organization. AUTOM orders not eligible for AUTO-X
are executed manually in accordance with Exchange rules. Manual
execution of otherwise AUTO-X eligible orders may also occur when AUTO-
X is not engaged.
This paragraph also provides that the Options Committee may, for
any period, restrict the use of AUTO-X on the Exchange in any option,
series, user or account type. Currently, orders up to 50 contracts,
subject to the approval of the Options Committee, are eligible for
AUTO-X.\7\
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\7\ See Securities Exchange Act Release No. 36601 (December 18,
1995), 60 FR 66817 (December 26, 1995) (SR-Phlx-95-39).
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In addition, the Options Committee may, in its discretion, increase
the size of orders in one or more classes of multiply-traded equity
options eligible for AUTO-X to the extent necessary to match the size
of orders in the same options eligible for entry into the automated
execution system of any other options exchange, provided that the
effectiveness of any such increase shall be conditioned upon its having
been filed with the Commission pursuant to Section 19(b)(3)(A) of the
Act.
The hours of the AUTOM System are contained in paragraph (d). The
AUTOM System accepts orders beginning at 8:00 a.m. (ET). Orders
received by the close of trading, as determined electronically by the
AUTOM System, are eligible for execution. Orders received after such
time will be rejected and returned to the order entry firm.
The functioning of AUTOM in extraordinary circumstances is governed
by paragraph (e) of the proposed rule, which specifies the procedure
for re-routing AUTOM orders or disengaging AUTO-X. In the event
extraordinary circumstances exist in connection with a particular class
of options, two Floor Officials may determine to disengage AUTO-X with
respect to that option, in accordance with Exchange procedures. In the
event extraordinary conditions exist floor-wide, two Exchange Floor
Officials, the Chairperson of the Options Committee or his designee may
determine to disengage the AUTO-X feature floor-wide. To ensure proper
notification to AUTOM users, a specialist must promptly notify the
Surveillance Post of any AUTOM-related Floor Official exemptions in
order for such an exemption to be valid. The Exchange's Emergency
Committee, pursuant to Rule 98, may take other action respecting AUTOM
in extraordinary circumstances.
Paragraph (f) outlines the specialist's obligations respecting
AUTOM orders. A specialist must accept eligible orders delivered
through AUTOM. A specialist must comply with the obligations of Rule
1014, as well as other Exchange rules, in the handling of AUTOM orders.
A specialist is responsible for engaging AUTO-X with respect to an
assigned option within three minutes after completing an opening or
reopening rotation of that option. However, where extraordinary
circumstances exist, an exemption may be obtained pursuant to paragraph
(e) above.
A specialist must respond promptly to all messages communicated
through AUTOM, including order entry, execution and cancellation and
replacement of orders as well as administrative messages. A specialist
is responsible for the remainder of an AUTOM order where a partial
execution occurred. Lastly, a specialist is responsible for the
visibility to the trading crowd of both the screens displaying incoming
AUTO-X orders as well as the bids/offers for the at-the-money strike
prices in displayed options.
Proposed paragraph (g) contains Wheel provisions, which are
discussed below.
Proposed paragraph (h) is entitled ``Responsibility for AUTOM
Orders.'' A member organization who initiates the transmission of an
order message to the floor through AUTOM is responsible for that order
message up to the point that a legible and properly formatted copy of
the order message is received on the trading floor by the specialist
unit. Thereafter, the specialist who is registered in the option
specified in the order message is responsible for the contents of the
order message received and is responsible for the order until one of
the following occurs: (i) an execution report for the entire amount of
the order is properly sent; (ii) a cancellation acknowledgment is
properly sent; or (iii) an order properly expires.
For the convenience of members using AUTOM, the Exchange provides
an AUTOM Service Desk on the trading floor to assist in the operation
of AUTOM.\8\ In accordance with Exchange By-Law Article XII, Section
12-11, the Exchange shall not be liable for any loss, expense or damage
resulting from or claimed to have resulted from the acts, errors or
omissions of its agents, employees or members in connection with AUTOM,
or of the AUTOM System.
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\8\ See Securities Exchange Act Release No. 25540 (March 31,
1988), 53 FR 11390) (April 6, 1988) (SR-Phlx-88-10 stating the
Exchange shall establish an AUTOM service desk on the options
trading floor to handle AUTOM trade inquiries and status of
reports).
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Lastly, proposed Commentary .01 to the Rule pertains to Auto-Quote,
another feature of AUTOM. Automatic Quotation (``Auto-Quote'') is the
Exchange's electronic options pricing system, which enables specialists
to automatically monitor and instantly update quotations. Commentary
.02 states that the Electronic Order Book is the Exchange's automated
specialist limit order book, which automatically routes unexecuted
AUTOM orders to the book and displays orders real-time in order of
price/time priority. Orders not delivered through AUTOM may also be
entered onto the Electronic Order Book.
Wheel Provisions
The Wheel is an automated mechanism for assigning floor traders
(i.e. specialists and Registered Options Traders (``ROTs'')), on a
rotating basis, as contra-side participants to AUTO-X orders. The
Exchange's Wheel provisions were approved by the Commission in 1994 as
Floor Procedure Advice (``Advice'') F-24, \9\ but do not currently
appear in other Exchange rules. Certain Wheel provisions are currently
being amended, separately. \10\
[[Page 30368]]
At this time, the Exchange is proposing to incorporate the Wheel
provisions of Advice F-24 into the proposed AUTOM Rule as paragraph
(h).
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\9\ See Securities Exchange Act Release No. 35033 (November 30,
1994), 59 FR 63152 (December 4, 1994) (SR-Phlx-94-32).
\10\ See SR-Phlx-97-20 (proposing to amend Wheel provisions to
reduce the rotation frequency for the specialist in large crowds)
and SR-Phlx-97-21 (proposing to establish a procedure for the
removal of ROTs from the Wheel to extend the Wheel assignment area
in certain circumstances. See also Securities Exchange Act Release
No. 37977 (November 25, 1996), 61 FR 63889 (December 2, 1996) (SR-
Phlx-96-49).
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Specifically, contra-party participation for AUTO-X automatic
executions shall rotate among Wheel Participants (which are specialists
and ROTs signed-up on the Wheel for that listed option) in each option
in accordance with procedures established by the Exchange. The Wheel
will be activated each trading day within three minutes following the
completion of the opening rotation for that listed option. An ROT must
be present in his Wheel assignment area to participate in Wheel
Executions. Specialists on the options floor are required to
participate on the Wheel in assigned issues.
No two associated or dually-affiliated ROTs may be on the Wheel for
the same option at the same time. Regardless of an ROT's total assigned
issues, an ROT may only sign-on the Wheel in line assignment area at
any given time. \11\ In order to be placed on the Wheel for an entire
trade day, the respective ROT must sign-on, in person, on the trading
floor for that listed option.
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\11\ However, the Exchange recently filed with the Commission a
proposed rule change (SR-Phlx-97-21) to permit a floor trader to
participate on Wheels not located within one assignment area,
defined as two contiguous quarter turrets, so long as the floor
trade obtained the approval of two floor officials and the agreement
of the specialists and participants on those particular Wheels.
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AUTO-X participation shall be assigned to Wheel Participants on a
rotating basis, beginning at a random place on the rotational Wheel
each day, from those participants signed-on in the listed option. The
Wheel shall rotate and assign contracts in accordance with procedures
established by the Exchange.
Permanent Approval of Pilot Program
The AUTOM system has operated on a pilot basis since 1998, when it
was first approved by the Commission for market orders of up to five
contracts for twelve Phlx near-month equity options. \12\ Since that
time, AUTOM has been extended several times, generally in one-year
increments. \13\ AUTOM has also been amended several times. \14\
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\12\ See supra note 8.
\13\ See Securities Exchange Act Release Nos. 25868 (June 30,
1988), 53 FR 25563 (SR-Phlx-88-22 extended through December 31,
1988); 26354 (December 13, 1988), 53 FR 51185 (SR-Phlx-88-33
extended through June 30, 1989); 26522 (February 3, 1989), 54 FR
6465 (SR-Phlx-89-01 extended through December 31, 1989); 27599
(January 9, 1990), 55 FR 1751 (SR-Phlx-89-03 extended through June
30, 1990); 28265 (July 26, 1990), 55 FR 31274 (SR-Phlx-90-16
extended through December 31, 1990); 28978 (March 15, 1991), 56 FR
12050 (SR-Phlx-90-34 extended through December 31, 1991); 32559
(June 30, 1993), 58 FR 36496 (SR-Phlx-93-03 extended through
December 31, 1993); 33405 (December 30, 1993), 59 FR 790 (SR-Phlx-
93-57 extended through December 31, 1994); 35183 (December 30,
1994), 60 FR 2420 (SR-Phlx-94-41 extended through December 31,
1995); 36582 (December 13, 1995), 60 FR 65364 (SR-Phlx-95-78
extended through December 31, 1996); and 38104 (December 31, 1996),
62 FR 1017 (SR-Phlx-96-51 extended through June 30, 1997).
\14\ See Securities Exchange Act Release Nos. 25868 (June 30,
1988), 53 FR 25563 (SR-Phlx-88-22 AUTOM extended to 37 options);
26354 (December 13, 1988), 53 FR 51185 (SR-Phlx-88-33 expanded from
5 to 10 contracts in all strikes and months); 26522 (February 3,
1989), 54 FR 6455 (SR-Phlx-89-01 adding 25 additional equity options
totaling 62); 2,599 (January 9, 1990), 55 FR 1751 (SR-Phlx-89-03
approving AUTO-X for market and marketable limit orders in three
strikes and all months up to ten contracts in 12 equity options and
day limit orders deliverable though AUTOM); 28516 (October 3, 1990),
55 FR 41408 (SR-Phlx-90-18 expanding from 10 to 100 contracts);
28978 (March 15, 1991), 56 FR 12050 (SR-Phlx-90-34 extending AUTO-X
to all equity options and AUTOM to accept GTC and cabinet orders);
29782 (October 3, 1991), 56 FR 55146 (SR-Phlx-91-19 extending AUTO-X
to all strike prices and expiration months); 29662 (September 9,
1991), 56 FR 46816 (SR-Phlx-91-31 expanding AUTO-X to 20 contracts
for Duracell options to match CBOE/Amex/NYSE); 29837 (October 18,
1991), 56 FR 36496 (SR-Phlx-91-33 expanding AUTO-X from ten to 20
contracts); 32906 (September 15, 1993), 58 FR 15168 (SR-Phlx-92-38
expanding AUTO-X from 20 to 25 contracts); 34920 (October 31, 1994),
59 FR 55510 (SR-Phlx-94-40 codifying AUTOM for index options); 35033
(November 30, 1994), 59 FR 63152 (SR-Phlx-94-32 adopting the Wheel);
35601 (April 13, 1995), 60 FR 19616 (SR-Phlx-95-18 codifying order
types);35781 (May 30, 1995), 60 FR 30131 (SR-Phlx-95-29 expanding
AUTO-X to 50 contracts for TPX only); 35782 (May 30, 1995), 60 FR
30136 (SR-Phlx-95-30 extending AUTOM from 100 to 500 contracts);
36429 (October 27, 1995); 60 FR 55874 (SR-Phlx-95-35 permitting
broker-dealer orders in AUTOM for TPX only); 36467 (November 8,
1995), 60 FR 57615 (SR-Phlx-95-33 limiting AUTO-X in XOC); 36601
(December 18, 1995), 60 FR 66817 (SR-Phlx-95-39 expanding AUTO-X
from 25 to 50 contracts); and 37977 (November 25, 1996), 61 FR 63889
(SR-Phlx-96-49 amending Wheel provisions).
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At this time, the Exchange proposes permanent approval of the AUTOM
pilot program. In the most recent extension of the pilot program until
June 30, 1997, the Commission stated that the Exchange's request for
permanent approval should be accompanied by a report covering the
period between June 30, 1996 and January 1, 1997, describing: (1) the
benefits provided by AUTOM; (2) the degree of AUTOM usage, including
the number and size of orders routed through AUTOM as well as the
number and size of orders routed through AUTO-X; (3) the system
capacity of AUTOM and AUTO-X; and (4) any problems the Exchange has
encountered with the routing and execution features. This report is
submitted separately. Generally, the Exchange believes that, since the
last extension of the pilot program, AUTOM has functioned properly and
efficiently, without any material problems reported by Phlx members or
AUTOM users, and without significant malfunctions or operational
failures.
The complete text of the proposed rule change is available at the
Office of the Secretary, the Phlx, and at the Commission.
II. Self-Regulatory Organization's Statements 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
Currently, the Exchange has no rule in place respecting the use of
AUTOM, such as Rule 229, Philadelphia Stock Exchange Automated
Communication and Execution System (``PACE''). Most other exchanges
have adopted such rules with respect to their automated systems.\15\
These rules generally describe the systems and its features, eligible
orders and responsibilities pertaining to the systems. The purpose of
the proposed rule change is to adopt Rule 1080 to govern as the AUTOM
Rule. Future amendments to AUTOM, such as increasing the size of
eligible orders, would include an amendment to the proposed rule.
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\15\ See e.g., American Stock Exchange (``Amex'') Rule 60.
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This proposal identifies three types of proposed amendments within
the AUTOM Rule. The first category consists of provisions previously
approved by the Commission. The second category is comprised of
provisions which, although not
[[Page 30369]]
specifically approved by the Commission, codify existing practice. The
remaining provisions, included in the third category, are being
introduced into AUTOM by way of this proposal.
a. Existing Provisions
First, the definition of the AUTOM System was specifically approved
by the Commission and appears repeatedly in Commission orders amending
and extending the pilot program.\16\ AUTOM is described as the
Exchange's electronic order delivery and reporting system through which
automatically-entered orders are routed directly to the appropriate
specialist on the Exchange's equity/index option trading floor.
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\16\ See e.g., Securities Exchange Act Release No. 32559 (June
30, 1993), 58 FR 36496 (July 7, 1993) (SR-Phlx-93-03 at I. and
II.A., second paragraph).
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Second, Rule 1080(b) is intended to identify the types of orders
eligible for entry into AUTOM. The eligibility of specific sizes and
order types has been approved by the Commission.\17\ The prohibition
against unbundling orders was also approved by the Commission.\18\
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\17\ See supra note 6.
\18\ See Securities Exchange Act Release No. 27599 (January 9,
1990), 55 FR 1751 (January 18, 1990) (SR-Phlx-89-03 at note 9, which
states that a retail user of the AUTOM System may not separate a 20
contract order into two 10 contract orders for the purpose of making
such order eligible for automatic execution). See also Phlx Rules
229.19 and 1015(a)(vii).
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Rule 1080(c) defines AUTO-X and lists the types of orders eligible
for automatic execution. In 1991, the commission approved the use of
AUTO-X as part of the AUTOM pilot program for market and marketable
limit orders.\19\ Thus, AUTO-X has been previously described and
approved by the Commission.
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\19\ See Securities Exchange Act Release No. 28978 (March 15,
1991), 56 FR 12050 (March 21, 1991) (SR-Phlx-90-34).
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Lastly, the Exchange proposes to incorporate the provisions of
Advice F-24, concerning the Wheel, into the proposed AUTOM Rule. 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. Thus,
the Wheel is intended to make AUTO-X more efficient, as contra-side
participation will be assigned automatically, and no longer 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. The floor-wide roll-out of the Wheel was completed the week of
April 21, 1997.
b. Codification Provisions
Certain parts of the proposed rule merely explain aspects of AUTOM
and codify existing policies respecting the System. For example, in
Rule 1080(a), the requirement that equity option and index option
specialists are required to participate in AUTOM is implicit to the
functioning of AUTOM, but is not codified in any Exchange rule. This
requirement is rooted in the obligations of Rule 1014, such that
Exchange specialists are required to participate in facilitating AUTOM
orders, because depth and liquidity are integral to the fair execution
of such orders.
Proposed sub-paragraph (b)(iii) would state that the Exchange's
Options Committee determines the eligibility of order types for AUTOM
and AUTO-X, including to discontinue accepting certain order types.
Although this statement has not been specifically approved by the
Commission, it restates the authority of the Options Committee, which
is enumerated in Exchange By-Law Article X, Section 10-18.\20\
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\20\ Generally, the Options Committee has supervision over the
dealings of members on the equity/index options trading floor,
including floor employees of members, and of the premises of the
Exchange facility, including the location of equipment and the use
of space. Specifically, the Options Committee supervises all
connections or means of communications with the equity/index options
floor.
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Rule 1080(e) governs extraordinary circumstances respecting AUTOM
and AUTO-X. In the event such circumstances arise with respect to a
particular option class, pursuant to Advice A-13, two Floor Officials
may authorize the disengagement of AUTO-X.\21\ Accordingly, this
existing requirement would be incorporated into the proposed AUTOM
Rule. Further, the requirement in Advice A-13 that the specialist
engage AUTO-X within three minutes of completing an opening rotation is
also codified in Rule 1080(e). However, in the event the extraordinary
circumstances prevail floor-wide, the approval of two Floor Officials
as well as the Chairperson of the Options Committee would be required
to disengage AUTO-X.
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\21\ See Securities Exchange Act Release No. 29575 (August 16,
1991), 56 FR 41715 (August 22, 1991) (SR-Phlx-91-16).
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Commentaries .01 and .02 describe two AUTOM System features
currently in place. As stated above, Auto-Quote is the Exchange's
electronic options pricing system, which enables specialists to
automatically monitor and instantly update quotations. The Electronic
Order Book is the automated specialist limit order book, which
automatically routes unexecuted AUTOM orders to the book and displays
orders real-time in order of price/time priority. Both are existing
features being codified into the AUTOM Rule.
c. New AUTOM Provisions
The first new provision respecting AUTOM is the second paragraph of
Rule 1080(a), which states that Rule 1080 shall govern all order
messages transmitted between the offices of member organizations and
Phlx trading floors through AUTOM. This provision is intended to
establish Rule 1080 as the AUTOM Rule. Sub-paragraph (b)(i) provides
that only agency orders may be entered into AUTOM. The purpose of this
provision is to incorporate a general agency definition, similar to
other systems rules.\22\
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\22\ See e.g., Phlx Rule 229.02.
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The Exchange is proposing to codify the ability of the Options
Committee to restrict the use of AUTO-X with respect to a particular
option class, series, user or account type. As the Exchange standing
committee governing options trading floor systems pursuant to Exchange
By-Law Article X, Section 10-18, the Options Committee currently
determines the maximum order size eligibility for AUTOM and AUTO-X, as
well as any other AUTOM-related issues.\23\ The Exchange believes that
the ability to limit the availability of AUTO-X may be necessary to
maintain fair and orderly markets and maintain AUTO-X volume
guarantees, consistent with AUTO-X's purpose of facilitating
expeditious executions of small customer orders at fair prices.
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\23\ See supra note 23.
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The Exchange notes that AUTO-X is generally available for all
option series. In 1995, the Exchange received Commission approval to
limit the availability of AUTO-X for certain, high-priced series of
National Over-the-Counter Index options (``XOC'').\24\ At this time,
the Exchange proposes to restore these XOC series to AUTO-X
eligibility. The Exchange seeks to codify a provision enabling the
Options Committee to restrict AUTO-X to certain series or options, as
stated above. The Exchange believes that this is consistent with the
provisions and practices of other exchanges.\25\ The Exchange believes
that such a limitation is appropriate in light of the market conditions
respecting certain options or series that may render it difficult for
floor traders to quickly update their
[[Page 30370]]
quotations. Thus, the Exchange believes that the proposed language is a
reasonable balance between preserving the availability of AUTO-X and
enabling the floor traders who honor the markets subject to automatic
execution to properly update such markets.
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\24\ See Securities Exchange Act Release No. 36467 (November 8,
1995), 60 FR 57615 (November 16, 1995) (SR-Phlx-95-33 limiting AUTO-
X eligibility to XOC series where the bid is $10 or less).
\25\ See supra note 24 at footnotes 16-17 and accompanying text.
See CBOE Rule 6.8(e).
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The second paragraph of Rule 1080(c) propose the ability to
increase the maximum size of orders eligible for AUTO-X to correspond
to the largest maximum size permitted by any options exchange on which
a multiply-traded issue trades. This provision is intended to provide
consistent eligibility standards for the automatic execution of orders
among options exchanges. For example, assuming XYZ is a multiply-traded
option, if another options exchange receives Commission approval to
increase the automatic execution size eligibility, which thus becomes
applicable to XYZ option, then the Phlx would file a proposed rule
change pursuant to Section 19(b)(3)(A) of the Act with the Commission
\26\ to identically increase the automatic execution size eligibility
of XYZ respecting Phlx AUTO-X orders to match such higher amount. The
higher size eligibility would only apply to a Phlx option meeting these
requirements--all other Phlx options could only be subject to a higher
AUTO-X size eligibility standard by Commission approval of a proposed
rule change pursuant to Section 19(b)(2) of the Act. The Exchange
believes that this provision should facilitate uniformity and
efficiency by eliminating duplicative filings published for comment
from the various options exchanges.\27\
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\26\ Such a proposed rule change may qualify as a systems change
that could become effective upon filing pursuant to Rule 19b-
4(e)(5).
\27\ See e.g., Securities Exchange Act Release Nos. 36420
(October 26, 1995), 60 FR 55619 (November 1, 1995) (SR-CBOE-95-66);
and 32956 (September 24, 1993), 58 FR 51893 (October 5, 1993) (SR-
CBOE-92-40). See also CBOE Rule 6.8, Interpretation and Policies
.01.
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Rule 1080(d), Hours, states that AUTOM orders are accepted
beginning at 8:00 AM (ET) until the close of trading. Orders received
after such time, as determined electronically by the AUTOM System, are
rejected and returned to the order entry firm. Although this provision
was not discussed in the AUTOM pilot program, the AUTOM System
obviously has certain hours during which orders can be entered. Thus,
the Exchange proposes at this time to codify such hours into its AUTOM
Rule.
Next, proposed paragraph (f) pertains to a specialist's obligations
respecting AUTOM, and generally requires that a specialist must accept
all eligible orders and handle such orders consistent with Rule 1014.
For example, Rule 1014 requires the specialist to maintain fair and
orderly markets. Further, sub-paragraph (f)(ii) provides that a
specialist must respond promptly to all AUTOM messages, which is
intended to promote just and equitable principles of trade. Sub-
paragraph (f)(iii) states that a specialist is responsible for the
remainder of partially executed orders, consistent with the maintenance
of fair and orderly markets. The specialist will be responsible for the
visibility to the trading crowd of both the OpView screens displaying
incoming AUTO-X orders as well as the at-the-money strikes in displayed
options. Disputes within the trading crowd regarding what should be
displayed are to be referred to a Floor Official. The purpose of this
provision is to provide the trading crowd with the most pertinent
trading information.
In the event extraordinary conditions exist floor-wide, two
Exchange Floor Officials and the Chairperson of the Options Committee
or his designee may determine to disengage the AUTO-X feature floor-
wide. This provision represents a change to prior representations that
the Emergency Committee must authorize any floor-wide disengagement or
nonactivation of AUTO-X. At the same time, this provision codifies
Advice A-13 into the proposed AUTOM Rule. Although the Exchange
believes that AUTO-X is an important feature of the AUTOM System, there
are situations where, as contemplated by Advice A-13, it may be
inappropriate to engage AUTO-X.
The Exchange is also proposing to adopt a liability provision,
premised with a paragraph on member responsibility. The purpose of the
provision is to recognize that, absent such language, specialists may
be deemed accountable for AUTOM orders, regardless of the
circumstances. Thus, apportioning responsibility for AUTOM messages
based on the status of such message is intended to place responsibility
on the party taking the last action respecting that message. In the
interest of fairness and certainty, the Exchange believes that party is
best suited to follow-up on the order message. This provision is
similar to that of other exchanges.\28\ As for Exchange liability,
express reference is made to the important Exchange by-law stating that
the Exchange shall not be liable for any damages sustained by a member
or member organization growing out of the use or enjoyment of the
facilities afforded to members for the conduct of their business.
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\28\ See e.g., Amex Rule 60.
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2. Statutory Basis
In view of its automatic order routing, delivery and execution
functions, the Exchange believes that the AUTOM System increases the
speed and efficiency of the execution of its orders. The proposed rule
change is intended to incorporate the many features, benefits and
procedures of the AUTOM System into an AUTOM Rule. In sum, the Exchange
believes that the proposal is consistent with Section 6 of the Act\29\
in general and in particular with Section 6(b)(5),\30\ because it is
designed to promote just and equitable principles of trade, prevent
fraudulent and manipulative acts and practices, as well as to protect
investors and the public interest. Some provisions of the AUTOM rule
incorporate different Exchange statements approved in prior proposed
rule changes respecting the AUTOM pilot program. Other provisions
codify the functions, features and obligations respecting AUTOM,
including incorporating different Exchange statements from prior
proposed rule changes respecting the AUTOM pilot program. The Exchange
believes that a single AUTOM Rule should facilitate AUTOM System usage
and certainty respecting order handling, by providing an easy reference
for users of the System.
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\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the new AUTOM provisions should solidify
AUTOM procedures, which should, in turn, promote liquidity, enhance the
use of AUTOM and facilitate transactions through AUTOM. More
specifically, the Phlx believes that the proposed amendment relating to
maximum automatic execution order size should promote the use of
exchange automated systems and prevent investor confusion by fostering
uniformity among exchanges in maximum automatic execution order sizes
in multiply-traded issues.
The Exchange also believes that the proposed rule change is
consistent with Section 11A(a)(1)(B) of the Act,\31\ in that AUTOM is
intended to improve, through the use of new data processing and
communications techniques, the efficiency with which transactions in
Phlx equity and index options are executed. Further, the Exchange
believes that AUTOM fosters competition among the options
[[Page 30371]]
exchanges, which have similar systems in place.
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\31\ 15 U.S.C. 78k-1(a)(1)(B).
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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 within such longer period (i) as the Commission may
designate up to 90 days or such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Phlx 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, NW, Washington, DC 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 Section, 450 Fifth Street, NW,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-97-24 and should be
submitted by June 24, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14412 Filed 6-2-97; 8:45 am]
BILLING CODE 8010-01-M
