[Federal Register Volume 65, Number 80 (Tuesday, April 25, 2000)]
[Notices]
[Pages 24248-24250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10259]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42699; File No. SR-Phlx-99-04]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Enhanced Specialists Participation in Wheel 
Trades

April 18, 2000.
    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 June 14, 1999, 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 Phlx. 
The proposed rule change was filed by the Exchange as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) \3\ under the Act. 
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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposal amends Options Floor Procedure Advise F-24, AUTO-
X Contra-Party Participation (The Wheel) (``Advise F-24''), as it 
relates to Enhanced Specialist Participation in Wheel trades. 
Specifically, the proposal modifies paragraph (e) to state that where 
the Enhanced Specialist Participation of Rule 1014(g)(ii) applies, the 
specialist shall receive an enhanced participation ``substantially 
equivalent to twice the number of contracts as other crowd 
participants,'' rather than ``twice the contracts,'' as the text of 
Advise F-24 previously stated.
    The proposal retains the provision that the Enhanced Specialist 
Participation on the Wheel requires the unanimous consent of Wheel 
participants, but adds the requirement that it be approved by the 
Options Committee Chairman or his designee.
    In addition, the proposal amends paragraph (e) to clarify that the 
Wheel will rotate in increments depending upon the size of the AUTO-X 
guarantee, not the size of each individual AUTO-X order.\4\
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    \4\ See Securities Exchange Act Release No. 37977 (November 26, 
1996), 61 FR 63889 (December 2, 1996.)
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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 Phlx includes statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comment it received on the proposed rule change. The text 
of these statements may be examined at the places specified in Item IV 
below. The Phlx has prepared summaries, set forth in Section A, B, and 
C below, of the most significant aspects of such statement.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Wheel is an automated mechanism for assigning trade 
participation among specialists and Registered Options Traders 
(``ROTs'') on a rotating basis, as contra-side participants to AUTO-X 
orders. AUTO-X is the automatic execution feature of the Exchange's 
Automated Options Market (``AUTOM'') system,\5\ which provides 
customers with automatic execution of eligible option orders at 
displayed markets.
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    \5\ AUTOM is an electronic order routing and delivery system for 
option orders.
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    The purpose of the Wheel is to increase the efficiency of order 
execution through AUTO-X by including 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 
is assigned automatically, and no longer entered manually. The 
Exchange's detailed Wheel provisions appear as Advise F-24.\6\
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    \6\ See Securities Exchange Act Release No. 35033 (November 30, 
1994), 59 FR 63152 (December 7, 1994).
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    The Enhanced Specialist Participation is a program whereby an 
equity or index option specialist receives an ``enhanced'' or 
additional ``split,'' meaning a higher participation in the execution 
of an order.\7\ The enhanced parity split applies to: (i) All index 
options; (ii) all new option classes allocated to a specialist during 
the year; and (iii) 50% of a specialist's equity option issues, which 
issues are designated by the specialist and approved by the Exchange's 
Allocation, Evaluation, and Securities Committee. The program also 
permits specialists to revise the list of eligible equity options 
(i.e., the designated equity options for which the specialist is 
entitled to receive the enhanced parity split) on a quarterly basis. 
Pursuant to Rule 1014(g)(ii), the enhanced split applies in those 
situations where an equity or index option specialist is on parity with 
one or more controlled accounts \8\ for orders involving more than five 
contracts.
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    \7\ The program was initially approved in 1994 as a one year 
pilot. See Securities Exchange Act Release No. 34606 (August 26, 
1994), 59 FR 45741 (September 2, 1994). It has subsequently been 
extended and revised. See Securities Exchange Act Release Nos. 35028 
(November 30, 1994), 59 FR 63151 (December 7, 1994); 35429 (March 1, 
1995), 60 FR 12802 (March 8, 1995); 36122 (August 18, 1995), 60 FR 
44530 (August 28, 1995); 37254 (August 5, 1996), 61 FR 42080 (August 
13, 1996); 38924 (August 11, 1997), 62 FR 44160 (August 19, 1997); 
39401 (December 4, 1997), 62 FR 65300 (December 11, 1997); and 40876 
(December 31, 1998), 64 FR 1849 (January 12, 1999). The Commission 
granted the pilot permanent approval in July 1999. See Securities 
Exchange Act Release No. 41588 (July 1, 1999), 64 FR 37185 (July 9, 
1999).
    \8\ Pursuant to Rule 1014(g)(i), a controlled account includes 
any account controlled by or under common control with a member 
broker-dealer.
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    As of the date this proposed change to the Wheel allocation was 
filed, the enhanced specialist split was defined by Rule 1014(g)(ii) as 
follows: when the specialist was on parity with one controlled account, 
the specialist received 60% of the contracts and the controlled account 
received the remaining 40%. When the specialist was on parity with two 
controlled accounts, the specialist received 40% of the contracts and 
each controlled account received 30%; and when the specialist was on 
parity with three or more controlled accounts, the specialist was 
counted as two crowd participants for purposes of allocating the 
contracts. In all of these situations, if a customer is on parity, the 
customer could not receive a lesser allotment than any other crowd 
participant, including the specialist.
    In August of 1998, the Phlx amended Advice F-24 to allow 
specialists to receive twice the number of contracts as other Wheel 
participants to achieve an enhanced participation consistent with the 
provisions of Phlx Rule 1014(g)(ii). The enhanced participation was 
implemented in the form of an

[[Page 24249]]

additional sign-on for the specialist on the Wheel rotation.\9\
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    \9\ Although, as described above, Rule 1014(g)(ii)) implements a 
three-tiered scheme, allocating 60% or 40% of contracts to the 
specialist when one or two other controlled accounts are on parity, 
respectively, the thrust of the rule resided in the ``two-for-one'' 
allocation of its third tier, applied when three or more other 
controlled accounts were on parity. Due to systems reasons, this 
two-for-one enhanced participation was adopted for all trades 
assigned by the Wheel, regardless of the number of participants on 
parity. See Securities Exchange Act Release No. 40370 (August 27, 
1998), 63 FR 47077 (September 3, 1998). See also infra, note 10.
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    Thereafter, however, the Phlx learned that due to systems 
configurations that could not be altered without significant 
programming change, the additional specialist sign-on did not result in 
the specialist receiving twice the number of contracts. More 
specifically, the system was treating the second sign-on like an ROT 
sign-on as opposed to that of a specialist. As a result, because of the 
many variables that determine how contracts are allocated among 
participants, the specialist would not always receive twice the number 
of contracts for trade.
    Consequently, the Phlx proposed to amend Advice F-24 to delete the 
language stating that the specialist will receive twice the number of 
contracts. Instead, under the new language of the proposal, the 
specialist will receive an enhanced participation that is substantially 
equivalent to twice the number of contracts as other crowd 
participants.\10\ Actual participation will be determined by a number 
of factors, including the number of participants on the Wheel, and the 
AUTO-X guarantee for the particular issue.
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    \10\ The Commission notes that the Exchange filed a proposed 
rule change to amend Rule 1014(g)(ii)--the predicate of Advice F-
24--to state that when the specialist is at parity with three or 
more controlled accounts, the enhanced specialist participation will 
be 30%, rather than ``two-for-one.'' See Securities Exchange Act 
Release No. 42161 (November 19, 1999), 64 FR 66958 (November 30, 
1999) (File No. SR-Phlx-99-39). The Commission has today approved 
this other proposed rule change. See Securities Exchange Act Release 
No. 34-42700, April 18, 2000. The Commission notes, however, that 
enhanced participations provided to specialists for Wheel trades 
will continue to be governed by the standard approved in this Order 
(i.e., substantially equivalent to twice the number of contracts as 
other crowd participants). The Phlx may consider in the future 
whether to propose a further change to Advice F-24 to apply the new, 
30% enhanced specialist split to Wheel trades, as well. Telephone 
conversation between Nandita Yagnik, the Phlx, and Michael Loftus 
and Ira Brandriss, Division of Market Regulation, the Commission, 
January 6, 2000.
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    The Phlx represents that although reconfiguring the Wheel to allow 
a second specialist sign-on would involve a significant programming 
change, reconfiguring the specialist frequency and the number of 
contracts received per participation can be achieved without a 
significant programming change. Thus, the Phlx's Regulatory Services 
Department (or other Exchange personnel charged with this function) 
will configure specialist Wheel participation under the proposal on a 
crowd-by-crowd basis based upon the factors above.
    The Phlx further represents that it will monitor these factors and 
the actual participation levels on a monthly basis to ensure that 
specialist Wheel enhanced participation in fact remains at a level 
substantially equivalent to twice the number of contracts compared to 
other participants on the Wheel.
    For example, if there is a specialist and three ROTs for a 
particular issue, and the AUTO-X guarantee is 25 contracts (such that 
each order will be allocated 5 contracts to each Wheel 
participant),\11\ Regulatory Services personnel will configure the 
Wheel such that the specialist would participate after two ROTs (i.e., 
specialist, first ROT, second ROT, specialist, third ROT, first ROT, 
specialist). At the end of the trading day, the specialist should 
receive an enhanced split approximately equal to twice the number of 
contracts as other Wheel participants.\12\
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    \11\ See Advice F-24(e), which specifies that for AUTO-X orders 
consisting of 11 to 25 contracts, minimum allocations for Wheel 
participants must be approximately 5 contracts.
    \12\ Attached as Exhibit C to the Phlx's filing, which is 
available for public inspection at the Commission's Public Reference 
Room, is a chart which shows how the enhanced split will operate for 
different size trading crowds and with different AUTO-X guarantees.
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    Enhanced participation on the Wheel will continue to be contingent 
upon unanimous consent of the Wheel participants in a particular option 
issue, a provision intended to ensure implementation only where the 
ROTs on the Wheel agree that more participation for the specialist and 
hence, less for the ROTs, is fair and appropriate. The proposal adds a 
new clause requiring the approval of the Chairman of the Options 
Committee or his designee.
    The proposal also amends the text of Advice F-24 to clarify that 
the Wheel will rotate in increments depending upon the size of the 
AUTO-X guarantee, not the size of each individual AUTO-X order.
2. Statutory Basis
    The Phlx believes that the rule change is consistent with section 6 
of the Act \13\ in general, and with section 6(b)(5) of the Act,\14\ in 
particular, which requires that the Exchange's rules be designed to 
promote just and equitable principles of trade, prevent fraudulent and 
manipulative acts and practices, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, as 
well as protect investors and the public interest.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(5).
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    The purpose of Advice F-24 is to fairly and efficiently extend the 
enhanced specialist split to the Wheel. In originally adopting the 
enhanced specialist split, the Exchange identified the need to attract 
new specialist units as well as retain and encourage current specialist 
units to vigorously trade existing options and aggressively seek and 
apply for newly allocated options. The Phlx believes the proposed rule 
change furthers these purposes.

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

    The foregoing proposed rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) thereunder 
\16\ because the proposed rule change (1) Does not significantly affect 
the protection of investors or the public interest; (2) does not impose 
any significant burden on competition; and (3) was to become operative 
more than 30 days from the date on which it was filed, and the Phlx 
provided the Commission with written notice of its intent to file the 
proposed rule change at least five days prior to the filing date.\17\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ In reviewing this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether it is consistent 
with the Act. Persons making written submissions should file six copies 
thereof with the Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. Copies of the submission, 
all subsequent amendments, all written

[[Page 24250]]

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 Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Phlx-99-04 and 
should be submitted May 16, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-10259 Filed 4-24-00; 8:45 am]
BILLING CODE 8010-01-M