[Federal Register Volume 66, Number 231 (Friday, November 30, 2001)]
[Notices]
[Pages 59834-59836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29718]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45090; file No. SR-Phlx-2001-100


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the Philadelphia Stock Exchange, Inc. To Extend 
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 
Guarantee for That Option

November 21, 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 October 30, 2001, the Philadelphia Stock

[[Page 59835]]

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. On November 8, 2001, the Phlx filed Amendment 
No. 1 to the proposed rule change.\3\ On November 19, 2001, the Phlx 
filed Amendment No. 2 to the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and to approve the proposal, as 
amended, on an accelerated basis, for an additional six-month pilot, 
expiring on May 31, 2002.
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    \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 
J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated November 7, 2001 (``Amendment No. 
1''). In Amendment No. 1, the Phlx amended its proposal by deleting 
a paragraph inadvertently placed in its original filing. The Phlx 
also clarified that it was taking steps to address the possibility 
of re-engaging AUTO-X prior to thirty seconds if the specialist 
revises its quote before thirty seconds.
    \4\ See Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated November 
16, 2001 (``Amendment No. 2''). In Amendment No. 2, the Phlx 
confirmed that it has completed all actions required to be taken 
under its by-laws and rules. The Phlx's Executive Committee, 
pursuant to delegated authority, approved the proposed rule change 
for filing with the Commission on November 13, 2001.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to extend, for an additional six months, its 
pilot program effecting a systems change to AUTO-X, the automatic 
execution feature of the Exchange's Automated Options Market System 
(``AUTOM''),\5\ that would disengage AUTO-X 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 
program was originally approved on a six-month basis for a limited 
number of eligible options,\6\ and subsequently extended for an 
additional six-month period.\7\ Recently, the number of options 
eligible for the pilot was expanded to include all Phlx-traded 
options.\8\ The current pilot is scheduled to expire on November 30, 
2001.
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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's 
trading floor.
    \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, 
2001), 66 FR 30037 (June 4, 2001) (SR-Phlx-2001-56).
    \8\ See Securities Exchange Act Release No. 44760 (August 31, 
2001), 66 FR 47253 (September 11, 2001) (SR-Phlx-2001-79).
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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 Phlx proposes to extend the pilot program for an additional 
six-month period. On December 1, 2000, the Initial Pilot Program became 
effective.\9\ The pilot program was then extended for an additional six 
months and is currently scheduled to end on November 30, 2001.\10\ The 
pilot program includes the following features:
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    \9\ See supra note 6.
    \10\ See supra note 7.
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     Once an automatic execution occurs in an option via AUTO-
X, 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.\11\
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    \11\ Any orders delivered in excess of the minimum AUTO-X 
guarantee will be executed to the guaranteed amount and the excess 
will be dropped to the specialist for manual execution. 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 program is to enable the 
Exchange to move towards the dissemination of options quotations with 
size.\12\ The ``counting'' feature of the pilot program 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 proposed extension of the pilot 
program should allow the Exchange to continue its efforts in the 
process of moving towards the implementation of quotations with size.
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    \12\ 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 is 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 (the 
``Quote Rule''). See Securities Exchange Act Release No. 44145 
(April 2, 2001), 66 FR 18662 (April 10, 2001) (SR-Phlx-01-37). The 
pilot program is designed, in part, to enable the Exchange to roll 
out the system designed to decrement the disseminated size of 
Exchange quotes once such system is deployed.
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    The Exchange believes that an extension of the pilot program would 
enable specialists 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.
    In addition, the Exchange recognizes that the Commission has 
inquired into the possibility of re-engaging AUTO-X in less than thirty 
seconds once the specialist revises the quote. The Exchange's Financial 
Automation, Legal, and Regulatory staff have begun to review the issue, 
specifically as to whether it is feasible to re-engage AUTO-X for an 
entire issue based upon

[[Page 59836]]

the revision of a quotation in one single series.\13\
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    \13\ Under Phlx's current pilot program, AUTO-X is programmed to 
re-engage after thirty seconds regardless of whether the specialist 
has updated its quote prior to that period of time. Division staff 
have informed the Phlx that it would not grant the pilot program 
permanent approval unless the Phlx addresses this issue.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \14\ in general, and with Section 6(b)(5) in 
particular,\15\ 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 Exchange specialists to maintain fair and orderly 
markets during periods of peak market activity.
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    \14\ 25 U.S.C. 78f.
    \15\ 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 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 File No. SR-Phlx-2001-100 and 
should be submitted by December 21, 2001.

IV. Commission's Finding 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.\16\ 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.\17\ The Commission believes that an 
extension of the pilot program for an additional six months should help 
the Exchange to prepare for disseminating 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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    \16\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that during the last six-month extension 
of the pilot program, the Phlx has received no complaints from 
customers, floor traders, or member firms. The Exchange noted that Phlx 
Rule 1080(c) provides the Phlx's Options Committee discretion to 
restrict the use of AUTO-X in any options series. The Exchange also 
clarified that orders would not be executed at an inferior price simply 
because they are routed to the specialist for manual handling; the 
orders would be handled in a manner consistent with the Exchange's 
rules on priority, parity, and precedence and in compliance with SEC's 
Quote Rule and Phlx Rule 1082 (``Firm quotations``). In addition, the 
Commission notes that the Exchange is attempting to address its concern 
regarding the feasibility of re-engaging AUTO-X for a particular issue 
prior to thirty seconds if the quote has been revised by the specialist 
before that time period.\18\ Consequently, the Commission believes that 
extending the pilot program for an additional six months should enable 
the Phlx to further evaluate the effect of disengaging AUTO-X under 
certain circumstances.
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    \18\ See supra note 13.
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    The Commission notes that the Exchange has represented that it will 
continue to evaluate the pilot program by reviewing specialists' 
performance, and by monitoring any complaints relating to the pilot 
program.\19\ 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 program, 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.\20\
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    \19\ Telephone conversation between Richard S. Rudolph, Counsel, 
Phlx, and Sapna C. Patel, Attorney, Division, Commission, on 
November 16, 2001.
    \20\ Id. Phlx also represented that it would include language in 
its circular clarifying that AURO-X will not be re-engaged until the 
expiration of the thirty second period, even after a quote is 
revised. Telephone conversation between Richard S. Rudolph, Counsel, 
Phlx, and Sapna C. Patel, Attorney, Division, Commission, on 
November 16, 2001.
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    Finally, the Commission finds good cause, pursuant to section 
19(b)(2) of the Act,\21\ for approving the proposed rule change, as 
amended, prior to the thirtieth day after the date of publication of 
notice thereof the Federal Register. The Commission believes that 
granting accelerated approval to extend the pilot program for an 
additional six months will allow Phlx to continue, without 
interruption, the existing operation of its AUTO-X system.
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    \21\ 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,\22\ that the proposed rule change (SR-Phlx-2001-100), as amended, 
is hereby approved on an accelerated basis, as a six-month pilot, 
scheduled to expire on May 31, 2002.
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    \22\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
Margaret H. McFarland,
Deputy Secretary.
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    \23\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 01-29718 Filed 11-29-01; 8:45 am]
BILLING CODE 8010-01-M