[Federal Register Volume 66, Number 226 (Friday, November 23, 2001)]
[Notices]
[Pages 58771-58773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29248]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45060; File No. SR-Phlx-2001-25]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to the 
Exchange's Auto-Quote System

November 15, 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 Phlx 
submitted amendments to the proposed rule change on August 29,

[[Page 58772]]

2001 \3\ and October 31, 2001.\4\ 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\ Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. 
Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated August 28, 2001 (``Amendment No. 
1''). Among other things, Amendment No. 1: (i) States the reasons 
why a specialist would wish to consult with the trading crowd about 
specific Auto-Quote parameters; (ii) clarifies that if a specialist 
decides to consult with one member of the trading crowd about the 
Auto-Quote parameters, all members of the crowd that are present at 
the time must be given the opportunity to consult; and (iii) revises 
proposed Commentary .01(b)(ii) to Phlx Rule 1080 to state that the 
specialist may determine which model to select per option, not per 
series, as previously stated.
    \4\ Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. 
Sanow, Assistant Director, Division, Commission, dated October 30, 
2001 (``Amendment No. 2''). Amendment No. 2 revises the text of 
proposed Commentary .01(b)(ii) to Phlx Rule 1080 to clarify that 
where the specialist determines to consult with and/or agree with 
the trading crowd with respect to selecting the Auto Quote System 
model or setting the parameters, members of the trading crowd are 
not required to provide input to the specialist about these 
decisions.
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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 
Automated Execution System (``AUTO-X''), to add language providing an 
enhanced description of Auto-Quote, the Exchange's electronic options 
pricing system and to permit the specialist to consult with the trading 
crowd in setting Auto-Quote parameters. The proposed language would be 
set forth in new subsection (b) of the Commentary .01. The text of the 
proposed rule change is set forth below. New language is in italics. 
Deletions are in brackets.

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)(i) The Auto-Quote System includes three commonly used options 
pricing algorithms: the Black Scholes Option Pricing Model; the Cox, 
Ross and Rubenstein Binomial Option Pricing Model; and the Barone, 
Adesi and Whaley American Option Pricing Model. In addition, a 
specialist may separately employ other pricing models, by establishing 
a specialized connection by-passing the Exchange's Auto-Quote System, 
which is known as a specialized quote feed.
    (ii) Specialists determine which model to select per option and may 
change models during the trading day. Each pricing model requires the 
specialist to input various parameters, such as interest rates, 
volatilities (delta, vega, theta, gamma, etc.) and dividends. The 
specialist may, but is not required to (a) consult with and/or (b) 
agree with the trading crowd in setting these parameters or selecting a 
model, but the members of the trading crowd are not required to provide 
input in these decisions, and in all cases, the specialist has the 
responsibility and authority to make the final determination.
* * * * *

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 codify a description 
of the Exchange's Auto-Quote system, which electronically prices 
options, and to permit the specialist to consult with the trading crowd 
in setting Auto-Quote parameters. On September 11, 2000, the Commission 
issued an order \5\ that requires the options exchanges 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.\6\ This proposed 
rule change is being submitted pursuant to this undertaking.
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    \5\ 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'').
    \6\ See Section IV.B.j. of the Order.
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    Currently, Exchange 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.
    Phlx option quotations are maintained and updated electronically 
through Auto-quote, which generates automatic pricing of all option 
series and allows modification of pricing models to guarantee accurate 
reflection of option prices based on the value of the underlying stock. 
Auto-Quote also facilitates dissemination of improving bid/offer prices 
for orders entered through AUTOM. Auto-Quote provides for the 
dissemination of appropriate and accurate prices through automatic 
updating.
    The proposed rule change incorporates a more thorough description 
of Auto-Quote into Exchange rules. First, it describes its various 
pricing models, inputs, and parameters. Second, it provides that 
specialists may establish a specialized proprietary connection 
(``specialized quote feed'') that by-passes the Auto-Quote system. 
Finally, it provides that while the specialist selects the pricing 
model and inputs for Auto-Quote, he or she may (but is not required to 
and may, for proprietary business reasons, determine not to) consult 
with the trading crowd on the pricing model and the inputs to be 
used.\7\ The proposed rule change also provides that if the specialist 
consults with one member of the crowd, all members of the crowd present 
must be given the opportunity to provide input.\8\ However, members of 
the trading crowd would not be required

[[Page 58773]]

to provide input to the specialist in setting Auto-Quote parameters.\9\
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    \7\ This new language is being proposed inasmuch as the 
specialist's consultation with market makers on the pricing model 
and Auto Quote parameters 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. The 
specialist may elect to discuss the pricing model with market makers 
for any reason, including as a check against possible error in use 
of the model. The specialist also may determine that such 
discussions are appropriate in view of the fact that the 
disseminated quote is deemed to be the quote of the ROTs in the 
crowd, unless the ROT clearly and audibly communicates, on a timely 
basis, an intent to adopt a different quote. See Phlx Rule 1080, 
Commentary .01(c).
    \8\ See Amendment No. 1, supra note 3.
    \9\ See Amendment No. 2, supra note 4.
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2. Statutory Basis
    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 Auto-
Quote, including the specialized quote feed, in Exchange rules.
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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 it 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, 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 
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-2001-25 and should be submitted by December 14, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-29248 Filed 11-21-01; 8:45 am]
BILLING CODE 8010-01-M