[Federal Register Volume 65, Number 179 (Thursday, September 14, 2000)]
[Notices]
[Pages 55663-55664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23564]



[[Page 55663]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43254; File No. SR-Phlx-00-62]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change of the Philadelphia Stock Exchange; Inc. Relating to Mandatory 
Auto-Quote Settings To Update Quotations Based on a Certain Minimum 
Movement in the Underlying Security

September 6, 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 1, 2000, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Phlx. 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to amend Commentary .01 to Exchange Rule 1080, 
``Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X),'' to allow the Chairman of the 
Exchange's Board of Governors to mandate that, for quote capacity 
management purposes, the Exchange's Auto-Quote system (``Auto-quote'') 
\3\ be set to update options quotations based on a certain minimum 
movement in the underlying security.
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    \3\ Auto-Quote is the Exchange's electronic options pricing 
system that enables specialists to automatically monitor and 
instantly update quotations, based on incremental changes in the 
price of the security underlying the option.
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    The proposed rule would state that if options trading systems 
throttle quotations for at least three minutes, the Chairman of the 
Exchange's Board of Governors or his designee may, for capacity 
management purposes, mandate that Auto-Quote be set to update 
quotations based on a certain minimum movement in the underlying 
security.\4\ Such minimum setting may continue for a period of 15 
minutes, and may be continued every 15 thereafter, provided that the 
Exchange's options trading systems are throttling quotations at the end 
of such 15-minute period.
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    \4\ For example, Auto-Quote may be set to update options 
quotations based on a price change of\1/8\, meaning that each time 
the price of the underlying security increases or decreases by that 
amount, Auto-Quote would update the quotation on the overlying 
option on reflect such a change. The proposed rule would allow the 
Chairman or his designee to mandate that the Auto-Quote be set to 
update quotations in the options based on, for example, a price 
change of\1/4\ in the underlying security, meaning that Auto-Quote 
would not update quotations on the overlying option until the price 
of the underlying security increases or decreases by\1/4\. The 
increase in the incremental price change in the underlying security 
would result in fewer options quotations being disseminated.
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    The text of the proposed rule follows. Additions to the rule are in 
italics.
* * * * *

Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM) 
and Automatic Execution System (AUTO-X)

    (a)-(h) No change.
    Commentary:
    .01  Automatic Quotation (Auto-Quote) is the Exchange's 
electronic options pricing system, which enables specialists to 
automatically monitor and instantly update quotations. If options 
trading systems throttle quotations for at least three minutes, the 
Chairman of the Board of Governors or is designee may, for capacity 
management purposes, mandate that the Auto-Quote be set to update 
quotations based on a certain minimum movement in the underlying 
security for: (i) all options; (ii) index options only; or (c) 
certain specified options, taking into account certain factors that 
may include, but are not limited to, the price of the underlying 
security, volatility in the underlying security, or whether there 
has been any trading volume over the last two trading days. Such 
mandated minimum setting may continue for a period of 15 minutes, 
and may be continued every 15 minutes thereafter, provided that the 
Exchange's options trading systems are throttling quotations at the 
end of each such 15-minute period.
    .02-.03  No change.
* * * * *

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 self-regulatory organization 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 allow the Exchange's 
Chairman or his designee to take measures to reduce the volume of 
outbound options quotations during periods of peak Auto-Quote capacity 
usage on the Exchange's Options Floor. Currently, Auto-Quote includes 
three commonly used options pricing algorithms: the Black Scholes 
Option Pricing Model; the Cox, Ross and Rubenstein Binomial Option 
Pricing Model; and the Barone, Adesi and Whaley American Option Pricing 
Model. In addition, a specialist unit may separately employ other 
pricing models (called specialized quote feed). Each specialist decides 
which pricing model to use and may change the trading model during the 
trading day.
    Outbound options quotations are forwarded electronically to the 
Options Price Reporting Authority (``OPRA''), which in turn 
disseminates them to various vendors of the information. Recently, due 
to increased overall options volume and significant increases in the 
number of quotations generated, OPRA has, at times, been unable to 
disseminate quotation traffic on a timely basis. In order to address 
the capacity constraints, each exchange has been assigned a specific 
allotment of bandwidth capacity for messages transmitted to, and 
received from OPRA. Each exchange must limit the volume of the 
quotation traffic it transmits to OPRA to its specific capacity 
allocation.\5\
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    \5\ See Securities Exchange Act Release No. 42779 (May 12, 
2000), 65 FR 36180 (May 19, 2000) (pertaining to OPRA temporary 
capacity allocation plan).
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    In order to address its own capacity issues, OPRA has set a 
timetable for increasing its ability to process message traffic. OPRA 
has stated that, by September 30, 2000, it expects all options 
exchanges sending quotation information, as well as the vendors 
receiving this information from OPRA, to be ready to operate in an 
enhanced environment utilizing telecommunications lines with 
substantially greater message traffic capability (from 5,000 to 8,000 
messages per second).
    The proposed rule is intended to address the Exchange's ability to 
manage quote traffic while the various solutions to quote capacity 
issues are being implemented. Currently, one

[[Page 55664]]

longstanding method the Exchange has used to manage quote traffic is 
``throttling,'' or capping outbound quote traffic to OPRA. For many 
years, the Exchange has had in place, within its options trading 
systems, the ability to internally throttle total outbound message 
traffic to OPRA by limiting, to a level equal to the Exchange's 
capacity allocation, the amount of messages sent to OPRA in a given 
second. This is accomplished by withholding some Auto-Quote generated 
messages from dissemination each second until the next second. 
Throttling may result in some quotations being overridden by subsequent 
quotations. Throttling may, therefore, prevent older quotations-in-
waiting from ever being disseminated.
    The proposed rule addresses the Exchange's ability to manage the 
actual number of option quotations being generated by permitting the 
Chairman or his designee to direct that Auto-Quote be set to update 
quotations based on a certain minimum movement in the underlying 
security.
2. Statutory Basis
    The Phlx believes that the proposed rule change is consistent with 
Section 6 of the Act \6\ in general, and with Section 6(b)(5) of the 
Act \7\ specifically, in that it is designed to perfect the mechanisms 
of a free and open market and the national market system, and to 
protect investors and the public interest.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden 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 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 Phlx 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

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 
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 
Phlx. All submissions should refer to File No. SR-Phlx-00-62 and should 
be submitted by October 5, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-23564 Filed 9-13-00; 8:45 am]
BILLING CODE 8010-01-M