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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

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Start Preamble 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.

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 Start Printed Page 38622rules 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]

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]

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]

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.

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.

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.

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. Start Printed Page 38623SR-Phlx-99-32 and should be submitted by July 12, 2000.

Start Signature

For the Commission, by the Division of Market regulation, pursuant to delegated authority.[11]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


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”).

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4.  See Phlx Rule 1080(c).

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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.)

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

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

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8.  See Phlx Rule 703.

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[FR Doc. 00-15615 Filed 6-20-00; 8:45 am]