[Federal Register Volume 66, Number 221 (Thursday, November 15, 2001)]
[Notices]
[Pages 57500-57501]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28585]



[[Page 57500]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45046; File No. SR-Phlx-2001-89]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. Relating to an Increase in the Maximum Guaranteed Size for Auto-X 
Eligible Orders in Options on the Nasdaq-100 Index Tracking Stock 
(``QQQ'' from 100 Contracts to 250 Contracts

November 7, 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 September 27, 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 October 9, 2001, 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 from interested 
persons.
---------------------------------------------------------------------------

    \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 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated October 5, 2001 (``Amendment No. 1''). In 
Amendment No. 1, the Phlx changed the status of the proposal from a 
filing made pursuant to section 19(b)(3)(A) of the Act to a filing 
made pursuant to section 19(b)(2) of the Act.
---------------------------------------------------------------------------

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),'' to increase its automatic execution guarantee for 
options overlying the QQQ \4\ from 100 contracts to 250 contracts.
---------------------------------------------------------------------------

    \4\ The Phlx represents that Nasdaq-100, Nasdaq-100 Index 
(``Index''), Nasdaq, The Nasdaq Stock Market, Nasdaq-100 Shares, 
Nasdaq-100 Trust, Nasdaq-100 Index Tracking Stock, and QQQ are 
trademarks or service marks of The Nasdaq Stock Market, Inc. 
(``Nasdaq'') and have been licensed for use for certain purposes by 
the Phlx (``Licensee'') pursuant to a License Agreement with Nasdaq. 
The Index determined, composed, and calculated by Nasdaq without 
regard to the Licensee, the Nasdaq-100 Trust, or the beneficial 
owners of Nasdaq-100 Shares. The Phlx represents that Nasdaq has 
complete control and sole discretion in determining, comprising, or 
calculating the Index or in modifying in any way its method for 
determining, comprising or calculating the Index in the future.
---------------------------------------------------------------------------

    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. With respect to options on the Nasdaq-100 Index 
Tracking Stock (``QQQ''), orders of up to 250 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.
* * * * *

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 Phlx proposes to increase the maximum order size eligibility 
for Auto-X in QQQ options from 100 contracts to 250 contracts. Under 
the rules of the Exchange, through AUTOM,\5\ 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.\6\
---------------------------------------------------------------------------

    \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 
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. Options orders entered by Exchange 
members into AUTOM are routed to the appropriate specialist unit on 
the Exchange trading floor.
    \6\ See Phlx Rule 1080(c).
---------------------------------------------------------------------------

    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 for eligible orders in QQQ options from 100 contracts 
to 250 contracts should provide the benefits of automatic execution to 
a larger number of customer orders. Further, the Exchange notes that 
this increase in the automatic execution levels in QQQ options should 
enable the Exchange to remain competitive for order flow with other 
exchanges that trade QQQ options.
    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

[[Page 57501]]

trading crowd to ensure that public orders are filled at the best 
market to a minimum of the disseminated size. In addition, Phlx Options 
Floor Procedure Advice F-7 provides that the size of any disseminated 
bid or offer by the Exchange shall be equal to the AUTO-X guarantee for 
the quoted option 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 firms, regardless of the actual size of the orders. 
Violations of any of theses 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'').\7\ 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 in 
QQQ options does not prevent an ROT from declining to participate on 
the Wheel. Because the wheel rotates in two-lot to ten-lot increments 
depending upon the size of the order,\8\ no single ROT will be 
allocated the entire 250 contracts.
---------------------------------------------------------------------------

    \7\ Unlike ROTs, specialists are required to participate on the 
wheel. See Phlx Rule 1080(g).
    \8\ See Exchange Options Floor Procedure Advice F-24(e).
---------------------------------------------------------------------------

    The Exchange also has procedures that permits a specialist to 
disengage AUTO-X in extraordinary circumstances.\9\ The Exchange 
represents that AUTOM users will be notified of such circumstances.
---------------------------------------------------------------------------

    \9\ See Phlx Rule 1080(e) and Exchange Options Floor Procedure 
Advice A-13.
---------------------------------------------------------------------------

    With respect to financial responsibility issues, the Exchange notes 
that it has a minimum net capital requirement respecting ROTs.\10\ 
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 the Auto-X trading of orders in QQQ options as 
large as 250 contracts.
---------------------------------------------------------------------------

    \10\ See Phlx Rule 703.
---------------------------------------------------------------------------

    The Exchange believes that automatic execution of orders in QQQ 
options for up to 250 contracts 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 in QQQ options 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.
2. Statutory Basis
    For the reasons stated above, the Exchange believes the proposed 
rule change is consistent with Section 6(b) of the Act \11\ in general, 
and furthers the objectives of Section 6(b)(5) of the Act \12\ 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, and, in general, to 
protest investors and the public interest by providing automatic 
executions to a larger number orders in QQQ options.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    No written comments were either solicited or received.

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 it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange 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, 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 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-2001-89 and should be submitted by December 6, 2001.

    For the Commission, by the Division of Market Regulation, 
Pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28585 Filed 11-14-01; 8:45 am]
BILLING CODE 8010-01-M