[Federal Register Volume 65, Number 237 (Friday, December 8, 2000)]
[Notices]
[Pages 77059-77061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31299]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43652; File No. SR-Phlx-00-96]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Philadelphia Stock Exchange, Inc. To Disengage Its 
Automatic Execution System (``AUTO-X'') for a Period of Thirty Seconds 
After the Number of Contracts Automatically Executed in a Given Option 
Meets the AUTO-X Minimum Guarantee for That Option

December 1, 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 October 30, 2000, 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 and II below, which Items have been prepared by the Exchange. 
On November 27, 2000, the Phlx filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons and to approve the amended proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated November 24, 2000 (``Amendment No. 1''). In 
Amendment No. 1, the Phlx clarified certain aspects of the proposed 
rule change. Among other things, Amendment No. 1: (i) Specifies the 
number of, and selection criteria for, options selected for the 
pilot program; (ii) represents that the Exchange will post on its 
website a list of options included in the program and will issue a 
circular to this effect; (ii) clarifies that orders received by 
AUTO-X that exceed the minimum guarantee will receive a partial 
automatic execution; and (iv) clarifies that upon the implementation 
of quotes with size, initially size will not be decremented, and the 
specialist will be responsible to fill orders at its disseminated 
quote up to the disseminated size.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes a systems change to ``AUTO-X,'' the automatic 
execution feature of the Exchange's Automated Options Market System 
(``AUTOM''),\4\ that would disengage AUTO-X for a period of thirty 
seconds after the number of contracts automatically executed in a given 
option meets the AUTO-X minimum guarantee for that option. During such 
thirty-second period, all orders received via AUTOM would be executed 
manually by the specialist. The Exchange proposes to implement the 
systems change on a six-month pilot basis initially involving fifteen 
to thirty options approved by the Exchange's Options Committee.\5\ 
AUTOM users would be notified of the systems change and of the options 
included in the pilot program through the issuance of a regulatory 
circular and on the Exchange's website.\6\
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    \4\ AUTOM is the Exchange's electronic order delivery and 
reporting system, which provides for the automatic entry and routing 
of equity option and index option orders to the Exchange trading 
floor. Orders delivered through AUTOM may be executed manually, or 
certain orders are eligible for AUTOM's automatic execution feature, 
AUTO-X. Equity option and index option specialists are required by 
the Exchange to participate in AUTOM and its features and 
enhancements. Option orders entered by Exchange members into AUTOM 
are routed to the appropriate specialist unit on the Exchange 
trading floor.
    \5\ See Amendment No. 1, supra note 3.
    \6\ See Amendment No. 1, supra note 3.
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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 Exchange 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 III below. The Exchange 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 enable the Exchange 
to take a first step towards the implementation of the dissemination of 
options quotations with size, as expected to be made available by the 
Options Price Reporting Authority (``OPRA'') in January, 2001. It is 
anticipated that the systems change would assist specialists in 
maintaining fair and orderly markets during peak market activity, by 
allowing specialists to execute orders delivered via AUTOM manually for 
a limited period of time after the AUTO-X minimum guarantee is met.
    The Exchange's Options Committee, pursuant to its authority under 
Exchange Rule 1080(c),\7\ has determined to propose the implementation 
of a limited pilot program that would include the following features:
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    \7\ Exchange Rule 1080(c) provides, in relevant part, that 
``[t]he Options Committee may for any period restrict the use of 
AUTO-X on the Exchange in any option series.'' See Securities 
Exchange Act Release No. 38792 (June 30, 1997), 62 FR 36602 (July 8, 
1997) (SR-Phlx-97-24).
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     Once an automatic execution occurs via AUTO-X in an 
option, the system would begin a ``counting'' program, which would 
count the number of contracts executed automatically for that option, 
up to the AUTO-X guarantee, regardless of the number of executions.
     When the number of contracts executed automatically for 
that option meets the AUTO-X guarantee (for example, fifty contracts 
executed) within a fifteen second time frame, the system would cease to 
automatically execute for that option, and would drop all AUTO-X 
eligible orders in that option for manual handling by the specialist 
for a period of thirty seconds to enable the specialist to refresh 
quotes in that option.\8\
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    \8\ Any orders delivered in excess of the minimum AUTO-X 
guarantee will be executed to the guaranteed amount and the excess 
will be dropped to the specialist for manual execution. See 
Amendment No. 1, supra note 3.
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     Upon the expiration of thirty seconds, automatic 
executions would resume and the ``counting'' program would be set to 
zero and begin counting the number of contracts executed automatically 
within a fifteen second time frame again, up to the AUTO-X guarantee.
     Again, when the number of contracts automatically executed 
meets the AUTO-X guarantee within a fifteen second time frame, the 
system would drop all subsequent AUTO-X eligible orders for manual 
handling by the specialist for a period of thirty seconds.
    The Exchange believes that the pilot program set forth above would 
enable the Exchange to take a first step towards the implementation of 
options quotations that include size (i.e., the number of contracts 
generally available

[[Page 77060]]

at the posted bid and ask for a given option). Currently, options 
quotations are disseminated without size.\9\ The ``counting'' feature 
of the proposed system change would function to disengage AUTO-X for a 
period of thirty seconds in a given option once the number of contracts 
automatically executed meets the AUTO-X guarantee for that option 
within a fifteen-second time frame. A similar ``counting'' mechanism is 
expected to be utilized upon the implementation of the dissemination of 
options quotations with size. Thus, the proposed pilot program should 
allow the Exchange to begin the process of moving towards the 
implementation of quotations with size.\10\
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    \9\ Currently, Exchange specialists and registered options 
traders (``ROTs'') are required to fill orders at the best market to 
a minimum of ten contracts. See Exchange Rule 1015(a). Exchange Rule 
1080(c) provides that orders with a size of up to seventy-five 
contracts, subject to the approval of the Options Committee, are 
eligible for automatic execution via AUTO-X. However, quotations 
disseminated for options do not currently reflect the minimum AUTO-X 
size guarantee for a given option, or any size. Rather, AUTOM 
customers are advised of the minimum size guarantee by way of 
regularly published memoranda that include a list of all AUTO-X 
eligible options and the minimum guaranteed AUTO-X size for each 
such option. A major OPRA enhancement to the dissemination of 
quotations, to include size, is anticipated in January, 2001.
    \10\ Specialists will be required to fill orders up to the AUTO-
X guarantee size. Upon the implementation of quotes with size, 
initially size will not be decremented, and the specialist will be 
responsible to fill orders at the disseminated quote up to the 
disseminated size. See Amendment No. 1, supra note 3.
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    It is also anticipated that the system change would assist 
specialists in maintaining fair and orderly markets during peak market 
activity, by allowing specialists to execute orders delivered via AUTOM 
manually for a limited period of time after the AUTO-X minimum 
guarantee is met to enable specialists to refresh their quotes.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act \11\ in general, and with section 6(b)(5) in 
particular,\12\ in that it is designed to perfect the mechanism of a 
free and open market and a national market system, protect investors 
and the public interest and promote just and equitable principles of 
trade by enabling the Exchange to prepare for the dissemination of 
option quotes with size, and by enabling Exchange specialists to 
maintain fair and orderly markets during periods of peak market 
activity.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    The Exchange did not receive or solicit any written comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 thay may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying at 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 the 
File No. SR-Phlx-00-96 and should be submitted by December 29, 2000.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    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. In particular, 
the Commission finds that the proposed rule change is consistent with 
section 6(b)(5) of the Act, which requires that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
remove impediments to and perfect the mechanism of a free and open 
market and a national securities system, and protect investors and the 
public interest.\13\ The Commission believes that the proposed rule 
change should help the Exchange to prepare for disseminating its 
options quotes with size. In addition, the Commission believes that the 
proposal may assist specialists in maintaining fair and orderly markets 
during periods of peak market activity.
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    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Exchange is implementing the proposed 
systems change to AUTO-X on a pilot basis in a limited number of 
options, which should enable the Phlx to evaluate the program's 
effectiveness with respect to dissemination of quotations with size, 
and whether the change is assisting its specialists in maintaining a 
fair and orderly market. Specifically, the Commission notes that the 
Exchange has represented that it will evaluate the pilot program by 
reviewing specialists' performance in the selected options, and by 
monitoring and complaints relating to the pilot program. Furthermore, 
the Commission believes that the Phlx has provided adequate notice of 
the proposed change to AUTO-X to members, member organizations, and the 
public. The Commission notes that the Exchange has represented that it 
will post on its website a list of options included in the pilot 
program, as well as issue a circular to this effect to members, member 
organizations, participants, and participant organizations.
    Finally, the Commission, pursuant to section 19(b)(2) of the 
Act,\14\ finds good cause for approving the proposed rule change prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register.\15\ The Commission believes that granting 
accelerated approval to this pilot program will allow Phlx to evaluate, 
without delay, the effectiveness of this systems change to AUTO-X and 
whether the change allows Phlx specialists the opportunity to update 
their quotes and maintain a fair and orderly market. Accordingly, the 
Commission finds that there is good cause, consistent with section 
19(b)(2) of the Act,\16\ to approve the proposal on an accelerated 
basis.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \16\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-Phlx-00-96) and Amendment 
No. 1 thereto, are hereby approved on an accelerated basis.
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    \17\ Id.


[[Page 77061]]


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    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. 00-31299 Filed 12-7-00; 8:45 am]
BILLING CODE 8010-01-M