[Federal Register Volume 66, Number 109 (Wednesday, June 6, 2001)]
[Notices]
[Pages 30496-30497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14156]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44369; File No. SR-Phlx-2001-26]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the Philadelphia Stock Exchange, Inc. Relating to ROT 
Vocalization Requirements for Options Quotations

May 30, 2001.
    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 March 5, 2001, 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 add an express vocalization 
requirement for Phlx Registered Options Traders (``ROTs'') \3\ whose 
quotation for a particular option series is different from the 
disseminated quote. The proposal also would codify the Exchange's 
policy that the disseminated market is deemed to represent the 
quotation of all ROTs in that option, unless otherwise indicated 
pursuant to Phlx Rule 1080. The proposed rule change would be set forth 
in new subsection (c) of Commentary .01. The text of the proposed rule 
change is set forth below. New language is in italics.
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    \3\ A ROT is a regular member or a foreign currency options 
participant of the Exchange located on the trading floor who has 
received permission from the Exchange to trade options for his own 
account. See Phlx Rule 1014(b).
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Rule 1080. Philadelphia Stock Exchange Automated Options Market 
(AUTOM) and Automatic Execution System (AUTO-X)

    (a)-(j) No change.
    Commentary:
.01
    (a) Automatic Quotation (Auto-Quote) is the Exchange's electronic 
options pricing system, which enables specialists to automatically 
monitor and instantly update quotations.
    (b) [RESERVED]
    (c) The disseminated market (whether by Auto-Quote or specialized 
quote feed) is deemed to represent the quotations of all ROTs in that 
option unless a ROT has expressly indicated otherwise in a clear and 
audible manner, respecting either a specific series, the class or the 
option (specifying LEAPs), and with sufficient time for the specialist 
to take action to update the quote if necessary.
    (d) If options trading systems throttle quotations for at least 
three minutes, the Chairman of the Board of Governors or his 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 
(iii) 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.
* * * * *

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 clarify that the 
quote disseminated by the Exchange's Auto-Quote system \4\ or by a 
specialist's proprietary system that interfaces with AUTOM 
(``Specialized Quote Feed''), which electronically prices options, is 
deemed to be the quote of all ROTs in the crowd unless the ROT has 
vocalized a different quote in a clear and audible manner with 
sufficient time for the specialist to take action to update the quote, 
if necessary.\5\
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    \4\ Auto-Quote is the Exchange's electronic options pricing 
system, which enables specialists to automatically monitor and 
instantly update quotations.
    \5\ The ROT must vocalize a different quote before an order 
enters the system. If an ROT believes that he or she has been 
unfairly allocated a portion of the order, he or she can challenge 
the allocation pursuant to Phlx Rule 124. Telephone call between 
Rick Rudolph, Counsel, Phlx, Terri Evans, Special Counsel, Division 
of Market Regulation (``Division''), Commission, and Sonia Patton, 
Staff Attorney, Division, Commission (May 24, 2001).
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    On September 11, 2000, the Commission issued an order \6\ that 
requires four of the five options exchanges, including the Phlx to 
adopt new, or amend existing, rules to include any practice or 
procedure, not currently authorized by rule, whereby market makers 
determine by agreement the spreads or option prices at which they will 
trade any option, or the allocation of orders in that option.\7\ 
Specifically, the Order required by the Exchange to file by March 12, 
2001, draft proposed

[[Page 30497]]

rules and required the Exchange to take all reasonable steps to 
promptly stop any such practice or procedure that has not been filed or 
is not already authorized by rule. The Exchange believes that the 
proposed rule change is responsive to, and compliant with, the Order.
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    \6\ See Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions. Securities Exchange 
Act Release No. 43268 (September 11, 2000(``Order'').
    \7\ See Section IV.B.j. of the Order.
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    Currently, Phlx Rule 1080 governs the operation of AUTOM, the 
Exchange's automated order routing, delivery, execution and reporting 
system for options. Auto-Quote, one feature of AUTOM, is currently 
defined in Commentary .01 as the Exchange's electronic options pricing 
system, which enables specialists to automatically monitor and 
instantly update quotations.\8\ Alternatively, specialists may elect to 
establish a specialized proprietary connection (``specialized quote 
feed'') that by-passed the Auto-Quote system. The proposed rule change 
would codify the Exchange's vocalization requirement when a ROT 
indicates that his quote in an option is not the Exchange's 
disseminated quote. Absent such vocalization, the disseminated quote 
would be deemed to be that of all ROTs in that option.
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    \8\ The Exchange is separately proposing new subsection (b) of 
Commentary .01 to Phlx Rule 1080, which will provide a more thorough 
description of Auto-Quote. See SR-Phlx-2001-25.
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    The current on-floor trading environment, which involves increased 
trading volume, more option classes traded than every before, and less 
physical space within which ROTs operate, has resulted in a natural 
increase in reliance on technology by ROTs in order to function 
effectively while providing liquidity in their assigned options. One 
area of such increased reliance on technology involves quotations in 
options disseminated electronically by Auto-Quote. The Exchange 
believes that changes in such quotations occur rapidly, and often 
simultaneously, in myriad quotations, rendering it difficult to voice 
each bid or offer as it is being disseminated electronically. Thus, the 
Exchange believes that it is reasonable to deem the disseminated quote 
to be that of all ROTs in the option unless they vocally opt out of the 
disseminated quote.
    The proposed rule would require the ROT to specify the series or 
option class (specifying LEAPS), and would provide for sufficient time 
within which the specialist could take action to update the quote if 
necessary. The Exchange is proposing the new language to reflect the 
fact that the disseminated quote reflects the crowd quote (unless a ROT 
has expressly indicated in a clear and audible manner).\9\
2. Statutory Basis
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    \9\ According to the Phlx, this new language is being proposed 
inasmuch as ROT's failure to vocalize any different quote from the 
disseminated quote could be viewed as determining option prices by 
agreement for purposes of the Order and is therefore required by the 
Order to be provided for in Exchange rules.
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    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \10\ in general and furthers the 
objectives of Section 6(b)(5) \11\ in particular in that it is designed 
to promote just and equitable principles of trade, remove impediments 
to a free and open market and a national market system, and protect 
investors and the public interest by clarifying and describing clearly 
in Exchange rules the requirement that ROTs vocalize any intent to 
establish quotes that are different from the Exchange's disseminated 
quote.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Phlx did not solicit or receive written comments on 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 its 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 revisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filings will also be 
available for inspection and copying at the principal office of the 
Phlx. All submissions should refer to the File No. SR-Phlx-2001-26 and 
should be submitted by June 27, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 01-14156 Filed 6-5-01; 8:45 am]
BILLING CODE 8010-01-M