[Federal Register Volume 66, Number 160 (Friday, August 17, 2001)]
[Notices]
[Pages 43287-43289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20766]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44687; File No. SR-Phlx-2001-58]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Philadelphia Stock Exchange, Inc. Establishing Obligations of AUTOM 
Order Entry Firms and Users and Prohibiting Entry of Multiple Orders 
Via AUTOM for the Account(s) of the Same Owner of Beneficial Interest 
for the Same Option Within 15 Seconds

August 13, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on June 8, 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. On July 13, 2001, the Phlx submitted Amendment No. 1 to 
the proposed rule change.\3\ The proposed rule change, as amended, has 
been filed by the Phlx as a ``non-controversial'' rule change under 
Rule 19b-4(f)(6) \4\ under the Act. The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Edith Hallahan, First Vice President & 
Deputy General Counsel, Phlx, to Nancy Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated July 
12, 2001 (``Amendment No. 1''). In Amendment No. 1, Phlx made a 
change to the proposed rule language. Specifically, Phlx removed the 
word ``issue'' from Phlx Rule 1080(c)(ii)(B)(3). For purposes of 
calculating the 60-day period within which the Commission may 
summarily abrogate the proposed rule change under Section 
19(b)(3)(C) of the Act, the Commission considers that period to 
commence on July 13, 2001, the date the Phlx filed Amendment No. 1. 
See 15 U.S.C. 78s(b)(3)(C).
    \4\ 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 proposes to amend Exchange Rule 1080, Philadelphia Stock 
Exchange Automated Options Market (``AUTOM'') and Automatic Execution 
System (``AUTO-X''),\5\ to define an

[[Page 43288]]

``Order Entry Firm'' as a member organization of the Exchange that is 
able to route orders to AUTOM and to define a ``User'' as any person or 
firm that obtains access to AUTO-X through an Order Entry Firm.
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    \5\ 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.
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    The proposed rule change, as amended, would also impose certain 
obligations on Order Entry Firms, specifically to: (1) Follow 
applicable Exchange rules and procedures; (2) provide written notice to 
all Users regarding the proper use of AUTO-X; and (3) prohibit Order 
Entry Firms from either entering or permitting the entry of multiple 
orders in call options and/or put options for the same option within 
any 15-second period for an account or accounts of the same beneficial 
owner.
    Below is the text of the proposed rule change. Proposed new 
language is italicized.
* * * * *

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 100 
contracts, subject to the approval of the Options Committee, 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 Act of 1934.
    (i) No change.
    (ii) Order entry firms and Users \6\
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    \6\ This section has been renumbered from Rule 1080(c)(vi) to 
Rule 1080(c)(ii). Telephone conversation between Richard S. Rudolph, 
Counsel, Phlx, and Gordon Fuller, Counsel to the Assistant Director, 
Division, Commission, and Frank N. Genco, Attorney Advisor, 
Division, Commission, on June 22, 2001.
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    (A) Definitions
    (1) The term ``Order Entry Firm'' means a member organization of 
the Exchange that is able to route orders to AUTOM.
    (2) The term ``User'' means any person or firm that obtains access 
to AUTO-X through an Order Entry Firm.
    (B) Obligations of Order Entry Firms. Order Entry Firms shall:
    (1) Comply with all applicable Exchange options trading rules and 
procedures;
    (2) Provide written notice to all users regarding the proper use of 
AUTO-X; and
    (3) Neither enter nor permit the entry of multiple orders in call 
options and/or put options in the same option within any 15-second 
period for an account or accounts of the same beneficial owner.
* * * * *

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, as 
amended, 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, as amended, is to protect 
investors and other market participants from the potential negative 
consequences that might result from Order Entry Firms engaging in 
prohibited conduct. A further purpose is to ensure that an Exchange 
member that provides access to AUTO-X to its customers would ultimately 
be responsible for the orders that are entered by its customers.
    The proposed amendments to Rule 1080(c), codifying and defining the 
terms ``User'' and ``Order Entry Firm'' are intended to create 
definitions of AUTOM and AUTO-X participants and to help define and 
clarify the rights and obligations of AUTOM and AUTO-X participants 
currently, and in possible proposed Exchange rules and policies 
concerning such participants in the future. The instant proposed rule 
change applies these terms in proposed Rule 1080(c)(ii)(B), which sets 
forth obligations of Order entry firms.
    Proposed Rule 1080(c)(ii)(B) would require Order Entry firms to 
comply with certain requirements. Specifically, the proposed rule would 
require Order Entry Firms to comply with all applicable Exchange 
options trading rules and procedures and to provide written notice to 
all Users regarding the proper use of AUTO-X. In addition, the proposed 
rule would prohibit Order Entry Firms from either entering or 
permitting the entry of multiple orders in call options and/or put 
options in the same option within any 15-second period for an account 
or accounts of the same beneficial owner.
    The purpose of proposed Rule 1080(c)(ii)(B) is to make explicit the 
responsibilities and requirements of Order Entry Firms. In addition to 
the compliance and written notice provisions, proposed Rule 
1080(c)(ii)(B)(3) would place a specific prohibition against Order 
Entry Firms entering or permitting the entry of orders in call options 
and/or put options in the same option within any 15-second period for 
an account or accounts of the same beneficial owner. The Exchange 
believes that the establishment of a prohibition on members and member 
organizations entering or permitting the entry of multiple orders from 
the account or accounts of the same beneficial owner within any 15-
second period should add certainty and consistency to the enforcement 
of the Rule and should provide clarity as to what conduct violates the 
Rule.\7\
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    \7\ In this regard, the Commission notes that the Exchange may 
not take punitive action against the customer of a particular Order 
Entry Firm in the event that the Order Entry Firm violates Rule 
1080(c)(ii)(B)(3).
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2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent

[[Page 43289]]

with Section 6 of the Act \8\ in general, and with Section 6(b)(5) of 
the Act \9\ specifically, 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 providing AUTOM Users and Order Entry 
Firms with specific requirements concerning AUTO-X and multiple orders 
for the account or accounts of the same beneficial owner, and by 
providing Users and Order Entry Firms with a specific description of 
conduct that violates the rule.
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    \8\ 15 U.S.C. 78f.
    \9\ 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, as 
amended, 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

    Because the foregoing proposed rule change, as amended: (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; provided that the 
self-regulatory organization has given the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission, the proposed rule 
change, as amended.\10\ has become effective pursuant to Section 
19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) \12\ thereunder.
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    \10\ See Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
Sanow, Assistant Director, Division, Commission, dated May 30, 2001 
(``Pre-Filing Notice''). 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.
    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 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, as amended, become operative immediately in order to 
remain competitive with other exchanges with similar rules in 
effect.\13\
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    \13\ See Pre-Filing Notice.
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change, as 
amended, operative as of July 13, 2001.\14\ The Commission notes that 
the proposed rule change, as amended, is identical in all material 
respects to the rule of another exchange that the Commission has 
already noticed for public comment and recently approved and the 
proposed rule change raises no new issues.\15\ At any time within 60 
days of the filing of the proposed rule change, as amended, 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.\16\
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    \14\ 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).
    \15\ See, e.g., Securities Exchange Act Release No. 44104 (March 
26, 2001), 66 FR 18127 (April 5, 2001) (order approving File No. SR-
CBOE-00-47).
    \16\ 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 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-2001-58 and should 
be submitted by September 7, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret McFarland,
Deputy Secretary.
[FR Doc. 01-20766 Filed 8-16-01; 8:45 am]
BILLING CODE 8010-01-M