[Federal Register Volume 66, Number 176 (Tuesday, September 11, 2001)]
[Notices]
[Pages 47253-47255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-22674]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44760; File No. SR-Phlx-2001-79]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. To Increase the Number of Options 
Included in Its Pilot Program 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 Guarantees for That Option

August 31, 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 August 21, 2001, 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. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to approve the 
proposal on an accelerated basis, for the duration of the six-month 
pilot, which expires on November 30, 2001.
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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 expand the number of options eligible for 
inclusion in its pilot effecting a system change to the Exchange's 
Automated Options Market (``AUTOM'') System,\3\ whereby AUTO-X is 
disengaged 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. The pilot currently includes up to 100 
option classes, subject to the approval of the Options Committee. The 
Phlx

[[Page 47254]]

proposes to expand the amount of options eligible for the pilot to 
include all Exchange-traded options on a floor-wide basis,\4\ subject 
to the approval of the Options Committee.\5\
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    \3\ 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.
    \4\ According to the Exchange, this would include all index, 
equity, and foreign currency options. Telephone conversation between 
Richard S. Rudolph, Counsel, Phlx, and Deborah L. Flynn, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
on August 31, 2001.
    \5\ The Exchange notes that participation in the pilot is not 
mandatory. Specialists may request inclusion of a particular option 
or options in the pilot program, subject to the approval of the 
Options Committee. The instant proposal would simply expand the list 
of options eligible for the pilot to include all Exchange-traded 
options.
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    The pilot program was originally approved by the Commission on 
December 1, 2000 on a six-month pilot basis,\6\ and the approval was 
subsequently renewed on May 29, 2001 for an additional six-month 
period.\7\
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    \6\ See Securities Exchange Act Release No. 43652 (December 1, 
2000), 65 FR 77059 (December 8, 2000) (SR-Phlx-00-96) (``Initial 
Pilot Program'').
    \7\ See Securities Exchange Act Release No. 44362 (May 29, 
2000), 66 FR 30037 (June 4, 2000) (SR-Phlx-2001-56).
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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 expand the number of 
options eligible for inclusion in the pilot from the current amount of 
up to 100 options to include all Exchange-traded options on a floor-
wide basis, subject to the approval of the Options Committee, for the 
duration of the pilot, which is scheduled to expire on November 30, 
2001.
    The pilot program includes the following features:
     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 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 maximum AUTO-X 
guarantee will be executed to the guaranteed amount and the excess 
will be kicked out of the system for manual handling by the 
specialist. See Initial Pilot Program, supra note 6.
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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.
    A significant purpose of this pilot is to enable the Exchange to 
move towards the dissemination of options quotations with size.\9\ The 
``counting'' feature of the pilot functions 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 systems 
necessary for the dissemination of options quotations with size. Thus, 
the pilot should allow the Exchange to continue its efforts in the 
process of moving towards the implementation of quotations with size.
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    \9\ Currently, the size of any disseminated bid or offer by the 
Exchange is equal to the AUTO-X guarantee for the quoted option, 
except that the disseminated size of bids and offers of limit orders 
on the book is ten contracts and must be firm regardless of the 
actual size of such orders. See Exchange Options Floor Procedure 
Advice F-7. The Exchange has established this rule setting forth the 
size for which its quotes are firm, and periodically publishes that 
size in accordance with recently amended Rule 11Ac1-1 under the Act 
(``Quote Rule''). See Securities Exchange Act Release No. 44145 
(April 2, 2001), 66 FR 18662 (April 10, 2001) (File No. SR-Phlx-
2001-37).
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    The Exchange believes that the pilot will enable specialists in the 
options included in the pilot to continue to provide fair and orderly 
markets during peak market activity by manually executing orders at 
correct market prices and refreshing quotations to reflect market 
demand. The Exchange proposes to expand the number of options eligible 
for inclusion in the pilot to all Exchange traded options on a floor-
wide basis to further enable the Exchange to prepare for, and ascertain 
the readiness of its systems for, the eventual floor-wide dissemination 
of options quotations with size. The Exchange represents that any 
option(s) approved for inclusion in the pilot will be posted on the 
Exchange's web site.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \10\ in general, and with section 6(b)(5) in 
particular,\11\ 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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    \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 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 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

[[Page 47255]]

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 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-2001-79 and should be submitted by October 2, 2001.

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.\12\ 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 
increasing the number of options included in the pilot to all Exchange-
traded options floor-wide, subject to approval of the Options 
Committee, should help the Exchange to test its systems in preparing 
for the dissemination of 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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    \12\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that during the six months of the Initial 
Pilot Program and since the pilot's renewal for an additional six-month 
period, the Phlx has received no complaints from customers, floor 
traders, or member firms. The Exchange also clarified that orders will 
not be executed at an inferior price simply because they are routed to 
the specialist for manual handling. Rather, the orders will be handled 
in a manner consistent with the Exchange's rules on priority, parity, 
and precedence and in compliance with the SEC's Quote Rule and Phlx 
Rule 1082 (``Firm Quotations'').
    The Commission notes that the Exchange has represented that it will 
continue to evaluate the pilot by reviewing specialists' performance in 
the selected options, and by monitoring any complaints relating to the 
pilot program.\14\ Furthermore, the Commission notes that the Exchange 
has represented that it will continue to post on its website a list of 
options included in the pilot, as well as issue a circular to this 
effect to members, member organizations, participants, and participant 
organizations explaining the pilot program and the circumstances in 
which the Auto-X system will not be available for customer orders.\15\
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    \14\ Telephone conversation between Richard S. Rudolph, Counsel, 
Phlx, and Sonia Patton, Attorney, Division, Commission, on August 
31, 2001.
    \15\ Id. Phlx also represented that it would include language in 
its circular clarifying that Auto-X will not be re-engaged until the 
expiration of the thirty-second period, even after a quote is 
revised, and that the Exchange is considering revising that practice 
prior to seeking permanent approval of the pilot program. Telephone 
conversation between Richard S. Rudolph, Counsel, Phlx, and Sonia 
Patton, Attorney, Division, Commission, on August 31, 2001.
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    Finally, the Commission finds good cause, pursuant to section 
19(b)(2) of the Act,\16\ for approving the proposed rule change prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. The Commission believes that granting accelerated 
approval will enable the Exchange to increase the number of options 
included in its pilot, for the duration of the six-month period 
commencing on May 29, 2001, without undue delay and without 
interrupting the existing operation of its Auto-X system.
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    \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-2001-79) is hereby 
approved on an accelerated basis, for the duration of the six-month 
pilot, scheduled to expire on November 30, 2001.
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    \17\ Id.
    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-22674 Filed 9-10-01; 8:45 am]
BILLING CODE 8010-01-M