[Federal Register Volume 65, Number 120 (Wednesday, June 21, 2000)]
[Notices]
[Pages 38621-38623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-15615]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42932; File No. SR-Phlx-99-32]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., to Increase the 
Maximum Order Size Eligibility for Automatic Execution

June 13, 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 August 23, 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. 
On September 27, 1999 and January 23, 2000 the Phlx submitted 
Amendments Nos. 1 and 2 to the proposed rule change, respectively.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange designated the proposal as 
filed pursuant to Section 19(b)(2) of the Act. See Letter from Edith 
Hallahan, Deputy General Counsel, Phlx, to Nancy Sanow, Senior 
Special Counsel, Division of Market Regulation, Commission, dated 
September 23, 1999 (``Amendment No. 1''). In Amendment No. 2, the 
Exchange deleted a provision in the original proposal that 
restricted the increase in maximum order size eligibility to 100 
options. See Letter from Nandita Yagnik, Phlx, to Nancy Sanow, 
Senior Special Counsel, Division of Market Regulation, Commission 
dated January 20, 2000 (``Amendment No. 2'').
---------------------------------------------------------------------------

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 amend 
Phlx Rule 1080(c) to increase its maximum order size eligibility for 
the AUTO-X feature of the Phlx Automated Options Market (``AUTOM''). 
AUTOM is the Exchange's electronic order routing and delivery system 
for equity and index options. Currently, AUTO-X automatically executes 
customer market and marketable limit orders up to fifty contracts. The 
Exchange now proposes to permit AUTO-X to execute orders of up to 
seventy-five contracts.

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 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 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

1. Purpose
    The purpose of the proposed rule change is to increase the maximum 
order size eligibility for AUTO-X from fifty to seventy-five contracts. 
Under the

[[Page 38622]]

rules of the Exchange, customer market and marketable limit orders are 
routed to AUTO-X as follows. Through AUTOM, orders are routed from 
member firms directly to the appropriate specialist on the trading 
floor. Certain orders are eligible for AUTOM's automatic execution 
feature, AUTO-X. These orders are automatically executed at the 
disseminated quotation price on the Exchange and reported back to the 
originating firm.\4\
---------------------------------------------------------------------------

    \4\ See Phlx Rule 1080(c).
---------------------------------------------------------------------------

    The Exchange represents that AUTO-X affords prompt and efficient 
automatic executions at the displayed price. Therefore, the Exchange 
believes that increasing automatic execution levels should provide the 
benefits of automatic execution to a larger number of customer orders. 
Further, the Exchanges notes that this increase from fifty to seventy-
five contracts is in line with prior changes to AUTO-X levels.\5\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 36248 (September 19, 
1995), 60 FR 49653 (September 26, 1995) (approving a proposed rule 
change to increase the maximum automatic execution order size 
eligibility for public customer market and marketable limit orders 
for all equity and index options from twenty-five to fifty 
contracts.)
---------------------------------------------------------------------------

    The Exchange notes that there are many safeguards incorporated into 
Exchanges rules to ensure the appropriate handling of AUTO-X orders. 
For example, Phlx Rule 1080(f)(iii) states that the specialist is 
responsible for the remainder of an AUTOM order where a partial 
execution has occurred. Phlx Rule 1015 governs quotation guarantees and 
requires the trading crowd to ensure that public customer orders are 
filled at the best market, at least to the extent of 10 contracts 
(``10-contract guarantee''). In addition, Options Floor Procedure 
Advice F-7 states that the volume guarantees (including AUTO-X levels) 
are deemed to be the stated size in any bid or offer voiced or 
displayed on the Options Floor. Therefore, quoted markets are 
guaranteed up to that size. Violations of any of these provisions could 
be referred to the Business Conduct Committee for disciplinary action.
    The Wheel is a mechanism that allocates AUTO-X trades among 
specialists and Registered Options Traders (``ROTs''). An ROT has 
discretion to participate on the Wheel to trade any option class to 
which he is assigned. An increase in the maximum AUTO-X order size does 
not prevent an ROT from declining to participate on the Wheel. Because 
the Wheel rotates in 2-lot to 10-lot increments depending upon the size 
of the order, no single ROT will be allocated the entire seventy-five 
contracts.\6\
---------------------------------------------------------------------------

    \6\ Unlike ROTs (see discussion supra), specialists are required 
to participate on the Wheel. See Phlx Rule 1080(g).
---------------------------------------------------------------------------

    The Exchange also has procedures that permit a specialist to 
suspend AUTO-X in extraordinary circumstances.\7\ AUTOM users are 
notified of such situations. For example, in extraordinary (fast 
market) conditions, quotations are disseminated with an ``F'' once the 
ten-contract guarantee on the screen markets is suspended pursuant to 
Options Floor Procedure Advice F-10.
---------------------------------------------------------------------------

    \7\ See Phlx Rule 1080(e) and Advice A-13.
---------------------------------------------------------------------------

    With respect to financial responsibility issues, the Exchange notes 
that it has a minimum net capital requirement respecting ROTs.\8\ 
Furthermore, an ROT's clearing firm performs risk management functions 
to ensure that the ROT has sufficient financial resources to cover 
positions throughout the day. In this regard, the function includes 
real-time monitoring of positions. The Exchange believes that clearing 
firm procedures address the issue of whether an ROT has the financial 
capability to support trading of options orders as large as 75 
contracts.
---------------------------------------------------------------------------

    \8\ See Phlx Rule 703.
---------------------------------------------------------------------------

    The Exchange believes that the increase should provide customers 
with quicker executions for a larger number of orders, by providing 
automatic rather than manual executions, thereby reducing the number of 
orders subject to manual processing. Increasing the AUTO-X maximum 
order size should not impose a significant burden on operation or 
capacity of the AUTOM System.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 \9\ of the Act in general, and in particular, with 
Section 6(b)(5).\10\ Specifically, the Exchange believes that the 
proposal is designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; remove impediments to and perfect the mechanism of a free 
and open market; and protect investors and the public interest. 
Further, the Exchange believes that the proposal should enhance 
efficiency by providing automatic executions to a larger number of 
options orders.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    Phlx does not believe that the proposed rule change will impose any 
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 solicited or received with respect to the 
proposed rule change.

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 or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization 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

    The Commission invites interested persons to submit written data, 
views, and arguments concerning the foregoing, including whether the 
proposed rule change is consistent with the Act. In addition, the 
Commission seeks comment concerning whether the proposed rule change 
fosters quote competition among options market professionals and 
enhances investors' interests in obtaining the best available price.
    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 2054-0609. 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 maybe 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 Phlx. All 
submissions should refer to File No.

[[Page 38623]]

SR-Phlx-99-32 and should be submitted by July 12, 2000.

    For the Commission, by the Division of Market regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12)
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-15615 Filed 6-20-00; 8:45 am]
BILLING CODE 8010-01-M