Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Filing of a Proposed Rule Change Relating to Implementing a ``Wheel'' for the Registered Options Trader Contra-Side Participation to AUTO-X Trades

SECURITIES EXCHANGE COMMISSION

[Release No. 34-34481; File No. SR-PHLX-94-32]

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;

Filing of a Proposed Rule Change Relating to Implementing a ``Wheel''

for the Registered Options Trader Contra-Side Participation to AUTO-X

Trades

August 3, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on July 18, 1994, the

Philadelphia Stock Exchange, Inc. (``Phlx''or ``Exchange'') filed with

the Securities and Exchange Commission (``Commission'') the proposed

rule change as described in Items I, II, and III below, which items

have been prepared by the Phlx. The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

\1\15 U.S.C. Sec. 78s(b)(1) (1988).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Phlx, pursuant to Rule 19b-4 under the Act, proposes to adopt

Floor Procedure Advice F-24, AUTO-X Contra-Party Participation (The

Wheel), in order to implement an automated mechanism for assigning

floor traders (i.e., specialists and Registered Option Traders

(``ROTs'')), on a rotating basis, as contra-side participants to AUTO-X

orders.

Advice F-24 codifies Wheel eligibility and the procedures by which

Wheel participants must sign on/sign off. It also establishes the

rotation upon which trades will be allocated among Wheel participants.

Paragraph (a) of the Advice summarizes AUTO-X eligibility by

stating that public customer orders up to the maximum permissible size

would be eligible for AUTO-X.\2\ Paragraph (b) establishes that the

Wheel will assign contra-parties by rotating through the list, in

consecutive order, trade by trade. Paragraph (c) requires specialists

to participate on the Wheel and permits ROTs to participate in assigned

issues. It also limits ROTs to Wheel participation in one Wheel

assignment area, which is defined as two contiguous quarter turrets at

any one given time.\3\ ROTs must sign onto the Wheel in person on the

trading floor from terminals designated by the Exchange and may sign on

in individual options. ROTs who sign on before 9:30 a.m. may remain on

the Wheel for the entire trading day; those who sign on after 9:30 a.m.

are eligible for Wheel participation beginning at 12:30 p.m. After

12:30 p.m., no new sign ons are permitted.

\2\Currently, the maximum permissible size eligible for AUTO-X

is 25 contracts. Securities Exchange Act Release No. 32906

(September 15, 1993), 58 FR 49345.

\3\A turret is one contiguous portion of a post on the option

floor, which is generally divided into four ``quarters.''

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Paragraph (c) also governs signing off the Wheel. An ROT may sign

off the Wheel at any time during the trading day, which becomes

effective for all listed options. However, an ROT may sign off twice

each trading day and still be eligible to sign on again that day; after

the third sign off, that ROT is no longer eligible for the Wheel that

day. ROTs who sign on for the half-day session beginning at 12:30 p.m.

may only sign off once and still be eligible to sign on again that day.

In addition, no two associated or dually affiliated ROTs may be on the

Wheel for the same option at the same time. Paragraph (d) permits a

Floor Official to modify the aforementioned sign on/sign off procedures

in extraordinary circumstances.

Paragraph (e) details the rotation of trades among Wheel

participants. Specifically, the first ten contracts of any AUTO-X order

are assigned to a single Wheel participant, with the specialist

receiving the first execution of the day in each respective listed

option. For those AUTO-X orders greater than ten contracts, each

additional ten-lot or remaining portion thereof is assigned to the next

individual Wheel participant. The next order is similarly assigned,

beginning with the next participant after the last to receive an

execution. If there are five or more ROTs signed onto the Wheel, the

specialist will receive every fifth execution, in addition to being

assigned to the first AUTO-X order in the option.

Lastly, paragraph (f) states that paragraph (e) will be reviewed by

the Exchange's Allocation, Evaluation, and Securities Committee after

six months.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, Phlx 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. Phlx 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

The purpose of the proposed rule change is to increase the

efficiency and liquidity of order execution through AUTO-X by adopting

a ``Wheel'' for the automated assignment of floor traders as contra-

parties to incoming AUTO-X orders. The Phlx believes that the Wheel

will make AUTO-X more efficient, as contra-side participation will be

assigned automatically and no longer entered manually.

The AUTO-X system is the automatic execution feature of the

Exchange's Automated Options Market (``AUTOM'') system.\4\ AUTO-X

provides customers with automatic executions of eligible option orders

at displayed markets.\5\ AUTO-X orders are currently given executions

automatically and immediately. ROTs are added later as contra-side

participants to such orders with manual keypunch entries, which can

cause delays and errors in processing executions. The proposed Wheel is

designed to eliminate manual keypunching of contra-side participant

information relating to AUTO-X executions and the errors that sometimes

result from such keypunching. It also provides a rotation schedule by

which floor traders will automatically be assigned as the contra-party

to AUTO-X orders and will do so in a manner that reduces the number of

contra-side participants, which in most cases will be reduced to one

contra-side per trade.

\4\AUTOM is an on-line system that allows electronic delivery of

options orders from member firms directly to the appropriate

specialist on the Phlx options trading floor, with electronic

confirmation of order executions. On March 31, 1988, the Commission

first approved the Phlx's operation of the AUTOM system on a pilot

basis. Securities Exchange Act Release No. 25540 (March 31, 1988),

53 FR 11390.

\5\Orders eligible for automatic execution are (1) printed in

hard copy form at the floor representative booth of the delivering

member organization; (2) displayed on the trading crowd screen with

buy/sell information omitted; and (3) printed in hard copy form at

the specialist post.

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Currently, floor trader contra-side participation currently

defaults to the account of the specialist if no step is taken to

manually add the participation of a ROT. ROTs are eligible for

participation when they have established priority or parity at the

execution price.\6\ Consequently, before contra-side information can be

added, the trading crowd has to resolve among itself which floor

trader(s) had priority or parity at the execution price. Quite often,

several floor traders are on parity, thus requiring keypunch entries

for each such trader. The more contra-side participants which must be

added to a trade, the more of a delay there is in processing the

participant information to the trade and the more the process becomes

prone to keypunch errors and additional manual paperwork.

\6\Currently, if one or more ROTs have priority or parity, the

order will be split as evenly as possible between all such ROTs and

the specialist.

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The Wheel will automatically include eligible ROTs in AUTO-X

executions and specify how such trades will be split among the

specialist and ROTs. The specialist and any signed on ROTs will be

listed on the Wheel, and contra-side participation of AUTO-X orders

will then be assigned to them in circular rotation with each ten lot or

order (whichever is smaller) constituting an assignment. The specialist

receives the first trade of the day in each respective option.

Thereafter, the Wheel turns to assign trades to ROTs in an order

standardized for that day on a random basis.\7\

\7\The first ROT is selected randomly from all ROTs that sign on

prior to 9:30 a.m. All other ROTs are prioritized for receipt of

orders based on the badge numbers following sequentially the first

ROT's badge number. If other ROTs sign on for the 12:30 p.m.

session, the priority list is rerandomized for that session.

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For example, if specialist S and ROTs R, O, and T are on the Wheel

in XYZ option, the first order for 9 contracts is assigned

automatically to S. The next order, which is for 25 contracts, is

assigned ten each to R and O, and five to T. The third order, for 20

contracts, is assigned ten contracts to S and ten to R. If there are

five or more ROTs signed onto the Wheel, the specialist participates in

the first trade of the day and thereafter receives every fifth

execution.

The Exchange believe that the proposed AUTO-X Wheel and

corresponding Advice are intended to facilitate orderly transactions in

AUTO-X, with full trading crowd participation. The sign on/sign off

requirements, including the assigned option and Wheel assignment area

requirements, are intended to ensure that the ROT is present and

actively awaiting AUTO-X orders in those options in which AUTO-X

executions are to be manually received.\8\

\8\Currently, the specialist will only add an ROT as a contra-

side participant if the ROT is present and has bid at the execution

price.

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The Phlx believes that the proposed rule change is consistent with

Section 6 of the Act in general, and in particular, with Section

6(b)(5),\9\ in that 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 by

promoting ROT participation as contra-parties to AUTO-X trades and

reducing opportunities for keypunching errors through increased

automation.

\9\15 U.S.C. Sec. 78f(b)(5) (1988).

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B. Self-Regulatory Organization's Statement on Burden on Competition

The Phlx does not believe that the proposed rule change imposes any

burden on competition not necessary or appropriate in furtherance of

the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants, or Others

Comments on the proposed rule change have not yet been solicited or

received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within thirty 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 ninety days of such date if it finds such longer period

to be appropriate and publishes its reasons for so findings or (ii) as

to which the self-regulatory organizations 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 any person, other than those that

may be withheld from the public in accordance with the provisions of 5

U.S.C. Sec. 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 Phlx. All submissions

should refer to file number SR-Phlx-94-32 and should be submitted by

August 31, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\10\

\10\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-19521 Filed 8-9-94; 8:45 am]

BILLING CODE 8010-01-M