[Federal Register Volume 66, Number 117 (Monday, June 18, 2001)]
[Notices]
[Pages 32857-32859]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15222]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44404; File No. SR-Phlx-2001-51]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Increasing the Maximum Guaranteed AUTO-X Size to 100 
Contracts

June 11, 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 May 21, 2001, the Philadelphia Stock Exchange, Inc. (``Exchange'' or 
``Phlx'') 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. The proposed 
rule change has been filed by the Phlx as a ``non-controversial'' rule 
change under Rule 19b-4(f)(6) under the Act.\3\ 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposed to amend Phlx Rule 1080(c) to increase to 100 
contracts the maximum order size of option contracts that are eligible 
to be executed on the Exchange's automatic execution system (``AUTO-
X''), which is part of the Exchange's Automated Options Market 
(``AUTOM'') System.\4\ Currently, customer market and marketable limit 
orders of up to 75 contracts are eligible for AUTO-X.\5\
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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 
routed to AUTOM's automatic execution feature, AUTO-X, if they are 
eligible for execution on 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 Securities Exchange Act Release No. 43515 (November 3, 
2000), 65 FR 69114 (November 15, 2000) (File No. SR-Phlx-99-32) 
(order approving maximum order size eligibility of 75 contracts for 
AUTO-X).
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    Phlx also proposed to delete a section of Phlx Rule 1080(c) that 
states that orders for OTC Prime Index (``OTX'') options are eligible 
for AUTO-X execution for up to 100 contracts.
    Below is the text of the proposed rule change. Proposed new 
language is italicized and proposed deletions are in brackets.
* * * * *

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

    (a)-(b) No change.
    (c) AUTO-X-AUTO-X is a feature of AUTOM that automatically 
executes public customer market and marketable limit orders up to 
the number of contracts permitted by the Exchange for certain strike 
prices and expiration months in equity options and index options, 
unless the Options Committee determines otherwise. AUTO-X 
automatically executes eligible orders using the Exchange 
disseminated quotation and then automatically routes execution 
reports to the originating member organization. AUTOM orders not 
eligible for AUTO-X are executed manually in accordance with 
Exchange rules. Manual execution may also occur when AUTO-X is not 
engaged. An order may also be executed partially by AUTO-X and 
partially manually.
    The Options Committee may for any period restrict the use of 
AUTO-X on the Exchange in any option or series. Currently, orders up 
to [75] 100 contracts, subject to the approval

[[Page 32858]]

of the Options Committee, are eligible for AUTO-X. [With respect to 
OTC Prime Index (``OTX'') options, orders of up to 100 contracts are 
eligible for AUTO-X.] The Options Committee may, in its discretion, 
increase the size of orders in one or more classes of multiply-
traded equity options eligible for AUTO-X to the extent necessary to 
match the size of orders in the same options eligible for entry into 
the automated execution system of any other options exchange, 
provided that the effectiveness of any such increase shall be 
conditioned upon its having been filed with the Securities and 
Exchange Commission pursuant to Section 19(b)(3)(A) of the 
Securities Exchange Act of 1934.
    (c)(i)(A)-(E) No change.
    (d)-(j) No change.
    Commentary. 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 propose 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 
Items 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 Phlx proposes to increase the maximum order size for 
eligibility for AUTO-X from 75 contracts to 100 contracts.\6\ Under the 
rules of the Exchange, through AUTOM, orders are routed from member 
firms directly to the appropriate specialist on the trading floor. Of 
the public customer market and marketable limit orders routed through 
AUTOM, 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.\7\
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    \6\ Id.
    \7\ See Phlx Rule 1080(c).
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    The Exchange represents that AUTO-X affords prompt and efficient 
automatic executions at the disseminated quotation price on the 
Exchange. 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 Exchange notes that 
this increase from 75 contracts to 100 contracts is consistent with 
similar Commission-approved increases to the automatic executions 
levels on other options exchanges.\8\
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    \8\ The Exchange notes that the Commission has approved 
increases in the automatic execution levels from 75 contracts to 100 
contracts on the American Stock Exchange, LLC (``Amex''); the 
Pacific Exchange, Inc. (``PCX''); and the Chicago Board Options 
Exchange, Inc. (``CBOE''). See Securities Exchange Act Release Nos. 
43887 (January 25, 2001), 66 FR 8831 (February 2, 2001) (order 
jointly approving File Nos. SR-Amex-00-57 and SR-PCX-00-18); 44008 
(February 27, 2001), 66 FR 13599 (March 6, 2001) (order approving 
File No. SR-CBOE-01-03).
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    The Exchange notes that there are many safeguards incorporated into 
Exchange 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 execution guarantees and 
requires the trading crowd to ensure that public orders are filled at 
the best market to a minimum of the disseminated size. In addition, 
Options Floor Procedure Advice F-7 provides that the size of any 
disseminated bid or offer shall be equal to the AUTO-X guarantee for 
the quoted options and shall be firm, except that the disseminated size 
of bids and offers of limit orders on the book shall be 10 contracts 
and shall be firm. 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'').\9\ 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.\10\ 
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 100 
contracts.
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    \9\ Unlike ROTs, specialists are required to participate on the 
Wheel. See Phlx Rule 1080(g).
    \10\ See Exchange Options Floor Procedure Advice F-24(e)(i).
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    The Exchange also has procedures that permit a specialist to 
suspend AUTO-X in extraordinary circumstances.\11\ AUTOM users are 
notified of such circumstances.
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    \11\ See Phlx Rule 1080(e) and Options Floor Procedure Advice A-
13.
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    With respect to financial responsibility issues, the Exchange notes 
that it has a minimum net capital requirement respecting ROTs.\12\ 
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 100 
contracts.
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    \12\ See Phlx Rule 703.
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    The Exchange believes that the increase in order size eligibility 
for AUTO-X orders 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. The Exchange also believes that increasing the AUTO-X 
maximum order size should not impose a significant burden on operation 
or capacity of the AUTOM System and will give the Exchange better means 
of competing with other options exchanges for order flow.
    Additionally, the Exchange proposes to delete a section of Phlx 
Rule 1080(c) that sates that orders for OTX options are eligible for 
AUTO-X execution for up to 100 contracts, in order to eliminate any 
potential for confusion over the permissible parameters applicable to 
AUTO-X eligible orders for both equity and index options.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act \13\ in general, and furthers the objectives of 
section 6(b)(5) of the act \14\ in particular, because it is designed 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, as well as to protect investors and the public interest 
by enhancing efficiency by providing automatic executions to a larger 
number of options orders.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 that is not necessary in 
furtherance of the purposes of the Act.

[[Page 32859]]

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days after the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest,\15\ the proposed 
rule change has become effective pursuant to section 19(b)(3)(A) \16\ 
of the Act and Rule 19b-4(f)(6) \17\ thereunder.
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    \15\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Phlx seeks to have the proposed 
rule change become operative immediately in order to remain competitive 
with other exchanges with similar rules in effect.\18\
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    \18\ See supra note 8.
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
operative immediately upon filing as of May 21, 2001, to allow the Phlx 
to compete with other options exchanges that currently have a maximum 
automatic execution eligibility limit of 100 contracts.\19\ At any time 
within 60 days of the filing of the proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.\20\
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    \19\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \20\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78(b)(3)(C).
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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-2001-51 and 
should be submitted by July 9, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-15222 Filed 6-15-01; 8:45 am]
BILLING CODE 8010-01-M