[Federal Register Volume 67, Number 45 (Thursday, March 7, 2002)]
[Notices]
[Pages 10465-10468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5390]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45484; File No. SR-Phlx-2001-40]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, 3, and 4 Thereto by the Philadelphia 
Stock Exchange, Inc. Relating to Broker-Dealer Access to AUTOM

February 27, 2002.

    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 May 2, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by Phlx. On 
July 26, 2001, the Exchange filed Amendment No. 1 \3\ with the 
Commission; on November 28, 2001, the Exchange filed Amendment No. 2 
\4\ with the

[[Page 10466]]

Commission; on February 1, 2002, the Exchange filed Amendment No. 3 \5\ 
with the Commission; and on February 20, 2002, the Exchange filed 
Amendment No. 4 with the Commission.\6\ 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 to Nancy J. Sanow, Senior Special Counsel, 
Division of Market Regulation (``Division''), SEC, from Richard S. 
Rudolph, Counsel, Phlx, dated July 25, 2001 (``Amendment No. 1''). 
In Amendment No. 1, the Phlx deleted unapproved rule language in 
Rule 1080(b)(i)(A)-(B) and reserved such sections for future use.
    \4\ See letter to Nancy J. Sanow, Senior Special Counsel, 
Division, SEC, from Richard S. Rudolph, Counsel, Phlx, dated 
November 28, 2001 (``Amendment No. 2''). In Amendment No. 2, the 
Exchange proposes to change its previously filed rule amendments as 
follows: (i) off-floor broker-dealer orders would be eligible for 
automatic execution via the Automatic Execution System (``AUTO-X'') 
on an issue-by-issue basis and the size of the AUTO-X guarantee for 
broker-dealer orders also would be decided on an issue-by-issue 
basis, and may differ from the AUTO-X guarantee for customer orders; 
(ii) the maximum order delivery size for off-floor broker-dealer 
orders would be 200 contracts, unless increased by the Options 
Committee. Broker-dealer orders must be for a minimum volume of 1 
contract; (iii) Good Till Cancelled (``GTC'') orders for the 
accounts of off-floor broker-dealers would be accepted; (iv) broker-
dealer orders entered for the same beneficial owner may not be 
entered in options on the same underlying issue more frequently than 
every 15 seconds; and (v) the provision that specialists may elect 
to discontinue accepting off-floor broker-dealer orders with proper 
approval and notice to AUTOM users is deleted.
    \5\ See letter to Nancy J. Sanow, Senior Special Counsel, 
Division, SEC, from Richard S. Rudolph, Counsel, Phlx, dated 
February 1, 2002 (``Amendment No. 3''). In Amendment No. 3, the Phlx 
proposes to change its previously filed rule amendments as follows: 
(i) the Options Committee may determine to increase the eligible 
order delivery size to an amount greater than 200 contracts; (ii) to 
clarify that Phlx Rule 1080(b)(ii) applies solely to agency orders; 
and (iii) the restriction on broker-dealer limit orders entered for 
the same beneficial owner in options on the same underlying issue to 
no more frequently than every 15 seconds applies only to AUTO-X 
eligible limit orders.
    \6\ See letter to Nancy J. Sanow, Senior Special Counsel, 
Division, SEC, from Richard S. Rudolph, Counsel, Phlx, dated 
February 19, 2002 (``Amendment No. 4''). In Amendment No. 4, the 
Phlx clarified that the term ``off-floor broker-dealer'' would 
include both broker-dealers that deliver orders from ``upstairs'' 
for the proprietary account of such broker-dealer and market makers 
located on an exchange or trading floor other than Phlx that elect 
to deliver orders via AUTOM for the proprietary accounts of such 
broker-dealer. The Exchange stated that orders of market makers from 
other markets could elect either to deliver orders via AUTOM or via 
the proposed Plan for the Purpose of Creating and Operating an 
Intermarket Option Linkage (``Linkage''). The Exchange also noted 
that off-floor broker-dealer orders would be eligible for automatic 
execution via the Exchange's National Best Bid or Offer (``NBBO'') 
step-up feature, provided that the order is for an ``NBBO Step-Up 
Option'' as described in Phlx Rule 1080(c)(i) and provided that the 
NBBO does not differ from the Exchange's best bid or offer by more 
than the step-up parameter.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Phlx proposes to amend Exchange Rule 1080, Philadelphia Stock 
Exchange Automated Options Market (AUTOM) and Automated Execution 
System (AUTO-X), to permit access to AUTOM, the Exchange's options 
order routing, delivery, execution and reporting system, to off-floor 
broker-dealers on a six-month pilot basis. The proposal would add new 
section (b)(i)(C) and new Commentary .05 to Phlx Rule 1080. The text of 
the proposed rule change, as amended, is set forth below.
    New text is in italics; deletions are [bracketed].

Rule 1080. Philadelphia Stock Exchange Automated Options Market 
(AUTOM) and Automatic Execution System (AUTO-X)

    (a) General--AUTOM is the Exchange's electronic order delivery and 
reporting system, which provides for the automatic entry and routing of 
Exchange-listed equity options and index options 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, in accordance with the provisions of this Rule. 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 member organizations into AUTOM are routed to the 
appropriate specialist unit on the Exchange trading floor.
    This Rule shall govern the orders, execution reports and 
administrative messages (``order messages'') transmitted between the 
offices of member organizations and the trading floors of the Exchange 
through AUTOM.
    (b) Eligible Orders--The following types of orders are eligible for 
entry into AUTOM:
    (i) Generally, only agency orders may be entered. [With respect to 
U.S. Top 100 Index options (``TPX''), broker-dealer orders may be 
entered into AUTOM, and are eligible for AUTO-X up to a maximum of 50 
contracts.]
    (A)-(B) Reserved.
    (C) Off-floor broker-dealer limit orders, up to the maximum number 
of contracts permitted by the Exchange, subject to the restrictions on 
order entry set forth in Commentary .05 of this Rule. Generally, orders 
up to 200 contracts, depending on the option, are eligible for AUTOM 
order delivery on an issue-by-issue basis, subject to the approval of 
the Options Committee. The Options Committee may determine to increase 
the eligible order delivery size to an amount greater than 200 
contracts, on an issue-by-issue basis. The following types of broker-
dealer limit orders are eligible for AUTOM: day, GTC, simple cancel, 
simple cancel to reduce size (cancel leaves), cancel to change price, 
cancel with replacement order.
    (ii) Agency o[O]rders up to the maximum number of contracts 
permitted by the Exchange may be entered. Agency o[O]rders up to 1000 
contracts, depending on the option, are eligible for AUTOM order 
delivery, subject to the approval of the Options Committee. The 
following types of agency orders are eligible for AUTOM: day, GTC, 
market, limit, stop, stop limit, all or none, or better, simple cancel, 
simple cancel to reduce size (cancel leaves), cancel to change price, 
cancel with replacement order, market close, market on opening, limit 
on opening, limit close, and possible duplicate orders.
    (iii) The Exchange's Options Committee may determine to accept 
additional types of orders as well as to discontinue accepting certain 
types of orders.
    (iv) Orders may not be unbundled for the purposes of eligibility 
for AUTOM and AUTO-X, nor may a firm solicit a customer to unbundle an 
order for this purpose.
    (c)-(j) No change.

Commentary:

    .01-.03 No change.
    .04 Reserved.
    .05 Off-floor broker-dealer limit orders delivered through AUTOM 
must be represented on the Exchange Floor by a floor member. Off-floor 
broker-dealer orders delivered via AUTOM shall be for a minimum size of 
one (1) contract. Off-floor broker-dealer limit orders are subject to 
the following other provisions:
    (i) the restrictions and prohibitions concerning electronically 
generated orders and off-floor market makers set forth in Rules 1080(i) 
and (j).
    (ii) Off-floor broker-dealer limit orders entered via AUTOM 
establishing a bid or offer may establish priority, and the specialist 
and crowd may match such a bid or offer and be at parity, subject to 
the yield provisions set forth in Exchange Rule 1014.
    (iii) Off-floor broker-dealer limit orders that are eligible for 
execution via AUTO-X entered via AUTOM for the account(s) of the same 
beneficial owner may not be entered in options on the same underlying 
security more frequently than every 15 seconds.
    (iv) Off-floor broker-dealer limit orders may be eligible for 
automatic execution via AUTO-X on an issue-by-issue basis, subject to 
the approval of the Options Committee. The AUTO-X guarantee for off-
floor broker-dealer limit orders may be for a different number of 
contracts, on an issue-by-issue basis, than the AUTO-X guarantee for 
public customer orders, subject to the approval of the Options 
Committee.

[[Page 10467]]

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 IV below. 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
    Exchange Rule 1080, Philadelphia Stock Exchange Automated Options 
Market (AUTOM) and Automated Execution System (AUTO-X), governs the 
operation of AUTOM, the Exchange's automated order routing, delivery, 
execution and reporting system for options. The purpose of the proposed 
rule change is to permit off-floor broker-dealers, on a six-month pilot 
basis and subject to certain restrictions designed to ensure the 
maintenance of a fair and orderly market, to have electronic access to 
the specialist's limit order book \7\ through AUTOM.
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    \7\ The electronic ``limit order book'' is the Exchange's 
automated specialist limit order book, which automatically routes 
all unexecuted AUTOM orders to the book and displays orders real-
time in order of price-time priority. Orders not delivered through 
AUTOM may also be entered onto the limit order book. See Exchange 
Rule 1080, Commentary .02.
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    Incoming broker-dealer orders delivered via AUTOM are ineligible 
for delivery to the specialist, such that they are rejected by the 
system and routed either to the appropriate Floor Broker booth or to 
the point of origin of the order. Such orders may be represented by the 
appropriate Floor Broker on the Exchange or rerouted to the originating 
broker or dealer.
    The amended proposed rule change would allow orders for the 
account(s) of broker-dealers to be delivered electronically via AUTOM, 
and also would permit such orders to be executed automatically, on an 
issue-by-issue basis subject to the approval of the Exchange's Options 
Committee, via AUTO-X, the automatic execution feature of AUTOM.
    The Exchange is proposing this rule change to remain competitive, 
and to improve the efficiency with which orders for the account(s) of 
broker-dealers are currently executed.\8\ The Exchange believes that 
providing broker-dealers with access to the specialist's limit order 
book and automatic executions would promote more efficient and 
expeditious execution of broker-dealer orders than under the current 
Exchange practice of re-routing to a Floor Broker booth. Under the 
current Exchange practice, such orders are represented in the crowd by 
a Floor Broker after such Floor Broker's receipt thereof.
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    \8\ In Amendment No. 3, the Exchange clarified that the proposed 
rule change applies only to off-floor broker-dealer limit orders. 
The Exchange noted that on-floor broker-dealer limit orders (such as 
those entered via electronic interface with AUTOM by registered 
options traders (``ROTs'') and specialists) would be governed by a 
separate proposed rule that the Exchange has filed with the 
Commission. See File No. SR-Phlx-2002-04.
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    The Exchange also believes that the proposed rule change is 
consistent with the purposes underlying the Commission mandate to adopt 
new, or amend existing, rules that substantially enhance incentives to 
quote competitively and substantially reduce disincentives for market 
participants to act competitively.\9\ The Exchange believes that 
providing broker-dealers with access to the specialist's limit order 
book should eliminate any actual or perceived technological advantage 
the specialist may have respecting access to the limit order book.\10\
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    \9\ The Exchange notes that on September 11, 2000, the 
Commission issued an order (the ``Order''), which requires the 
Exchange (as well as the other respondent options exchanges, 
American Stock Exchange LLC, Chicago Board Options Exchange, Inc., 
and Pacific Exchange, Inc.) to implement certain undertakings. 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) and Administrative Proceeding 
File 3-10282.
    \10\ When an off-floor broker-dealer limit order is delivered 
via AUTOM, such an order would be automatically executed via AUTO-X 
if the Exchange's disseminated market is the ``crowd'' quote 
determined by Auto-Quote or Specialized Quote Feed. When the 
Exchange's disseminated bid or offer is a limit order on the limit 
order book, contra-side inbound off-floor broker-dealer limit orders 
that are eligible for execution would be executed manually by the 
specialist. See Amendment No. 3.
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    The proposal would permit certain off-floor broker-dealer limit 
orders for up to 200 contracts, depending on the option, to be eligible 
for AUTOM order delivery subject to the approval of the Options 
Committee. Specifically, the proposed rule provides that the following 
types of broker-dealer limit orders are eligible for AUTOM order 
delivery: day, GTC, simple cancel, simple cancel to reduce size (cancel 
leaves), cancel to change price, and cancel with replacement order. The 
purpose of this provision is to ensure that off-floor broker-dealers do 
not have an actual or perceived disadvantage respecting on-floor 
specialists and ROTs.
    Proposed Commentary .05 establishes certain conditions and 
restrictions on the new use of AUTOM. First, the proposed rule states 
that orders for the account(s) of broker-dealers must be represented on 
the Exchange floor by a floor member. The proposed rule contemplates 
that such a floor member may be a floor broker or the specialist. The 
Exchange believes that the proposed rule change should create more 
orders that are handled electronically (as opposed to the current 
practice of causing broker-dealer orders to be handled manually), 
thereby enhancing the audit trail for broker-dealer orders. Second, the 
proposal provides that off-floor broker-dealer orders delivered via 
AUTOM shall be for a minimum size of one (1) contract.
    Third, proposed Commentary .05 states that the restrictions and 
prohibitions concerning electronically generated orders and off-floor 
market makers set forth in Exchange Rules 1080(i) and (j) would apply 
to orders entered for the account(s) of off-floor broker-dealers. 
Exchange Rule 1080(i) prohibits members from entering, permitting, or 
facilitating the entry of orders into AUTOM if those orders are created 
and communicated electronically without manual input (i.e., order entry 
by public customers or associated persons of members must involve 
manual input such as entering the terms of an order into an order-entry 
screen or manually selecting a displayed order against which an off-
setting order should be sent).\11\
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    \11\ See Securities Exchange Act Release No. 43376 (September 
28, 2000), 65 FR 59488 (October 5, 2000) (SR-Phlx-00-79).
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    Exchange Rule 1080(j) prohibits members from entering, or 
facilitating the entry into AUTOM, as principal or agent, limit orders 
in the same options series from off the floor of the Exchange, for the 
account or accounts of the same or related beneficial owners, in such a 
manner that the off-floor member or the beneficial owner(s) effectively 
is operating as a market maker by holding itself out as willing to buy 
and sell such options contract on a regular or continuous basis.\12\
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    \12\ See Securities Exchange Act Release No. 43939 (February 7, 
2001), 66 FR 10547 (February 15, 2001) (SR-Phlx-01-05).
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    Fourth, proposed Commentary .05 provides that off-floor broker-
dealer limit orders entered via AUTOM establishing a bid or offer may 
establish

[[Page 10468]]

priority, and the specialist and crowd may match such a bid or offer 
and be at parity. The proposed rule provides that the specialist and 
any other ROTs then in the trading crowd may match an off-floor broker-
dealer's bid or offer. The Exchange believes that allowing the 
specialist and ROTs to match an off-floor broker-dealer's order, and 
thus be on parity, would preserve the important affirmative market-
making obligations of specialists and ROTs. In Amendment No. 3, the 
Exchange clarifies that off-floor broker-dealer orders are subject to 
the priority yielding provisions set forth in Exchange Rule 1014.\13\
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    \13\ Specifically, the Exchange notes that Phlx Rule 1014(g)(i) 
provides that orders on controlled accounts must yield priority to 
customer orders, but are not required to yield priority to other 
controlled accounts. Thus, under proposed Commentary .05(ii), if an 
off-floor broker-dealer limit order entered via AUTOM establishes 
priority, and a customer order is entered into the limit order book 
at the same price, the off-floor broker-dealer limit order would be 
required to yield priority to the customer order. Phlx Rule 
1014(g)(i) provides that a ``controlled account'' includes any 
account controlled by or under common control with a broker-dealer. 
See Securities Exchange Act Release No. 45114 (November 28, 2001) 66 
FR 63277 (December 5, 2001).
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    Fifth, the proposal provides that off-floor broker-dealer limit 
orders that are eligible for execution via AUTO-X entered via AUTOM for 
the account(s) of the same beneficial owner may not be entered in 
options on the same underlying security more frequently than every 15 
seconds. The purpose of this amended provision is to remain consistent 
with recently adopted Exchange rules that include such a 15-second 
restriction against orders entered via AUTOM for the account(s) of the 
same beneficial owner in options on the same underlying security more 
frequently than every 15 seconds.\14\
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    \14\ See Exchange Rule 1080(c)(ii).
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    Finally, the proposed rule requires specialists to accept off-floor 
broker-dealer day or GTC orders, and to allow them to be automatically 
executed via AUTO-X. The Exchange believes that this requirement should 
enable the Exchange to be competitive with other options exchanges that 
allow automatic executions for broker-dealer orders by assuring broker-
dealers sending their proprietary orders to the Exchange that 
electronic delivery and execution of such orders would not be 
interrupted. Additionally, the proposal would allow the AUTO-X 
guarantee for off-floor broker-dealer limit orders to be for a 
different number of contracts, on an issue-by-issue basis, than the 
AUTO-X guarantee for public customer orders, subject to the approval of 
the Options Committee.\15\ The Exchange believes that this provision is 
consistent with the recently expanded Quote Rule\16\ and recently 
adopted Exchange Rules that allow different firm size guarantees for 
customers than for broker-dealers.\17\
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    \15\ The Exchange believes that this amended provision should 
result in a larger number of AUTO-X eligible orders delivered 
electronically to the Exchange.
    \16\ 17 CFR 240.11Ac1-1.
    \17\ See Exchange Rule 1082(d); see also, Exchange Rule 1015(b).
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    The Exchange is requesting that the effectiveness of the rule 
change be contingent upon the completion of systems development and 
testing required for its implementation and the notification of such 
completion by the Exchange to its members.

2. Basis

    For these reasons, the Exchange believes that proposed rule change 
is consistent with Section 6 of the Act \18\ in general, and with 
Section 6(b)(5) of the Act \19\ specifically, in that it is designed to 
perfect the mechanisms of a free and open market and the national 
market system, protect investors and the public interest and promote 
just and equitable principles of trade by providing off-floor broker-
dealers increased access to the specialist's limit order book, and 
automatic executions, which should provide incentives for Phlx market 
participants to quote competitively, and which, in turn, should result 
in competitive pricing and enhanced liquidity on the Exchange 
specifically, and in the options markets in general.
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    \18\ 15 U.S.C. 78f.
    \19\ 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 that is not necessary or appropriate in 
furtherance of the purposes of the Act.

A. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Phlx has neither solicited nor received written comments with 
respect to 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 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-2001-40 and 
should be submitted by March 28, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-5390 Filed 3-6-02; 8:45 am]
BILLING CODE 8010-01-P