# 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 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-30031 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** December 7, 1994 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-30031. Public record. Not legal advice.