Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Approving a Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendments No. 1 and No. 2 to Proposed Rule Change To Implement a ``Wheel'' for the Registered Options Trader Contra-Side Participation to AUTO-X Trades

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35033; File No. SR-PHLX-94-32]

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

Order Approving a Proposed Rule Change and Notice of Filing and Order

Granting Accelerated Approval to Amendments No. 1 and No. 2 to Proposed

Rule Change To Implement a ``Wheel'' for the Registered Options Trader

Contra-Side Participation to AUTO-X Trades

November 30, 1994.

On July 18, 1994, pursuant to Section 19(b)(1) of the Securities

Exchange Act of 1934 (``Act''),\1\ the Philadelphia Stock Exchange,

Inc. (``PHLX'' or ``Exchange'') filed with the Securities and Exchange

Commission (``Commission'') a proposed rule change that implements a

new procedure for assigning contra-side participants to AUTO-X orders.

On August 10, 1994, the Commission published notice of the proposed

rule change in the Federal Register to solicit comment from interested

persons.\2\ No comments were received. On October 28, 1994, PHLX filed

with the Commission Amendment No. 1 in order to clarify certain

operations of the Wheel and to amend certain provisions of Floor

Procedure Advice F-24.\3\ On November 15, 1994, PHLX filed with the

Commission Amendment No. 2 which clarifies the interaction between the

Wheel and the trading crowd.\4\ This order approves the proposal,

including Amendments No. 1 and No. 2 on an accelerated basis.

---------------------------------------------------------------------------

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

\2\Securities Exchange Act Release No. 34481 (August 3, 1994),

59 FR 40943.

\3\Specifically, Amendment No. 1 will require that an ROT be

present in its Wheel assignment area to participate in Wheel

executions; that an ROT be actively making a market in options in

order to participate in the Wheel; and to permit the Options

Committee to conduct the six month review of the Wheel, instead of

the Allocation, Evaluation and Securities Committee. Letter from

Gerald D. O'Connell, First Vice President, Market Regulation and

Trading Operations, PHLX, to Michael Walinskas, Branch Chief, Office

of Market Supervision, Division of Market Regulation, Commission

(October 24, 1994).

\4\Letter from Gerald D. O'Connell, First Vice President, Market

Regulation and Trading Operations, PHLX, to Christine Sibille,

Office of Market Supervision, Division of Market Regulation,

Commission (November 15, 1994).

---------------------------------------------------------------------------

I. Description

The proposed rule change adopts Floor Procedure Advice F-24, AUTO-X

Contra-Party Participation (The Wheel), which establishes 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.

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

Exchange's Automated Options Market (``AUTOM'') system.\5\ AUTO-X

provides customers with automatic executions of eligible option orders

at displayed markets.\6\ Currently, floor trader contraside

participation defaults to the account of the specialist, and the

addition of ROTs or orders from the trading crowd or the specialist's

limit order book as contra-side participants to AUTO-X orders requires

manual keypunch entries.\7\ The Wheel automatically includes eligible

ROTs in AUTO-X executions and specifies how such trades will be split

among the specialist and ROTs. Customer orders, both on the limit order

book and in the trading crowd, will continue to receive priority in

accordance with PHLX rules. An ROT, whether on the Wheel or not, also

may have priority.\8\ If priority is established for the limit order

book, a member of the trading crowd, or an ROT, the specialist will

stop the Wheel's operation and manually assign the trade to the contra-

party with priority.

---------------------------------------------------------------------------

\5\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.

\6\Public customer orders up to 25 contracts are eligible for

AUTO-X. Securities Exchange Act Release No. 32906 (September 15,

1993), 58 FR 49345. 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.

\7\Under the previous method, ROTs were eligible for

participation when they had established priority or parity at the

execution price. Under the proposal, an ROT at parity may only be

assigned trades through the Wheel.

\8\An ROT may have price priority (if the best bid or offer is

the ROT's alone) or time priority (the ROT's bid or offer was

clearly established first at that price).

---------------------------------------------------------------------------

The specialist and any signed on ROTs will be listed on the

Wheel.\9\ ROTs must sign on to the Wheel in person on the trading floor

from terminals designated by the Exchange. ROTs may sign on before 9:30

a.m. for the entire trading day or before 12:30 p.m. for trading after

12:30 p.m. An ROT may not sign on after 12:30 p.m. for the first time

that trading day.

---------------------------------------------------------------------------

\9\Specialists must participate on the Wheel. ROTs may

participate on the Wheel in assigned issues. ROTs are limited to

participating in one Wheel assignment area (two contiguous quarter

turrets) at any given time. ROTs must be present in the Wheel

assignment area to participate in Wheel executions, although brief,

reasonable absences will be permitted. ROTs must be actively making

markets in assigned options. ROTs may sign on in individual options.

No two associated or dually affiliated ROTs may be on the Wheel for

the same option at the same time.

---------------------------------------------------------------------------

Contra-side participation of AUTO-X orders are assigned to Wheel

participants in circular rotation. 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.\10\ If there are five or more ROTs signed onto the

Wheel, the specialist participates in the first trade of the day and

every fifth assignment thereafter. Each ten lot or order (whichever is

smaller) constitutes an assignment. For AUTO-X orders greater than ten

contracts, each ten lot or remaining portion of the order constitutes

an assignment. The procedure for rotating trades among participants

will be reviewed by the Exchange's Option Committee after six months.

---------------------------------------------------------------------------

\10\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 re-randomized for that session.

---------------------------------------------------------------------------

An ROT may sign off the Wheel at any time during the trading day,

which becomes effective for all listed options. 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. A floor official may modify the sign on/sign off procedures in

extraordinary circumstances.

II. 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 and the rules and regulations

thereunder. Section 6(b)(5) of the Act provides that the rules of the

exchange must promote just and equitable principles of trade and remove

impediments to and perfect the mechanism of a free and open market, and

in general to protect investors and the public interest.\11\

---------------------------------------------------------------------------

\11\15 U.S.C. Sec. 78f(b)(5) (1988).

---------------------------------------------------------------------------

The proposal will help the PHLX to provide an orderly market and to

encourage small investor participation in the options markets by

facilitating the use of AUTO-X. AUTO-X enhances the Exchange's ability

to execute small public customer orders in a timely, accurate, and

efficient manner. The manual assignment of contra-participation

increases the time needed to execute each trade through AUTO-X. During

periods of heavy trading volume, this manual operation may severely

restrict AUTO-X's utility. Therefore, the automation of assignments of

contra-parties for AUTO-X trades should improve order processing and

turnaround time. By not manually entering contra-participant

information for each trade, the Wheel should reduce opportunities for

keypunching errors. In addition, the Wheel should generally reduce the

number of contra-participants for each trade.\12\ The reduction in the

number of contra-parties to each contract may increase the efficiency

of order processing. By enhancing AUTO-X's utility, the proposal should

assist in providing a free and open market.

---------------------------------------------------------------------------

\12\Currently, the specialist and all ROTs with parity or

priority at the execution price would be contra-participants to an

AUTO-X trade. Under the Wheel, the maximum number of contra-

participants would be three. (The maximum permissible size for AUTO-

X orders is twenty-five contracts, which would be split into two

ten-contract assignments and one five-contract assignment.)

---------------------------------------------------------------------------

Finally, the Commission finds good cause for approving Amendments

No. 1 and No. 2 prior to the thirtieth day after the date of

publication of notice of filing thereof. Amendment No. 1 provides minor

amendments to the procedure consistent with the original proposal.

Amendment No. 2 merely clarifies the interaction between the Wheel and

the trading crowd and limit order book. The Commission did not receive

any comments on the original proposal, which was noticed for the full

statutory period.

Interested persons are invited to submit written data, views, and

arguments concerning Amendments No. 1 and No. 2 to the proposed rule

change. 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 Amendments No. 1 and No. 2 between

the Commission and any persons, other than those that may be withheld

from the public in accordance with the provisions of 5 U.S.C. Sec. 522,

will be available for inspection and copying in the Commission's Public

Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of such filing also will be available at the principal office of

PHLX. All submissions should refer to file No. SR-PHLX-94-32 and should

be submitted by December 28, 1994.

III. Conclusion

For the reasons stated above, the Commission finds that the

proposed file change is consistent with Section 6(b)(5) of the Act.

It is therefore ordered, Pursuant to Section 19(b)(2) of the

Act,\13\ that the proposed rule change (File No. SR-PHLX-94-32) be, and

hereby is, approved.

---------------------------------------------------------------------------

\13\15 U.S.C. Sec. 78s(b)(2) (1988).

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\14\

---------------------------------------------------------------------------

\14\17 CFR Sec. 200.30-3(a)(12) (1994).

---------------------------------------------------------------------------

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-30031 Filed 12-6-94; 8:45 am]

BILLING CODE 8010-01-M