[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Notices]
[Page 13395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6896]



[[Page 13395]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45575; File No. SR-Phlx-2001-25]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the Philadelphia Stock 
Exchange, Inc. Relating to the Exchange's Auto-Quote System

March 15, 2002.

I. Introduction

    On March 5, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to the Exchange's Auto-Quote System. The 
Phlx submitted amendments to the proposed rule change on August 29, 
2001 \3\ and October 31, 2001.\4\ The Federal Register published the 
proposed rule change and Amendment Nos. 1 and 2 for comment on November 
23, 2001.\5\ The Commission received no comments on the proposed rule 
change. This order approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \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'').
    \4\ Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. 
Sanow, Assistant Director, Division, Commission, dated October 30, 
2001 (``Amendment No. 2'').
    \5\ Securities Exchange Act Release No. 45060 (November 15, 
2001), 66 FR 58771.
---------------------------------------------------------------------------

II. Description of Proposal

    The Phlx proposes to amend Commentary .01 to Exchange Rule 1080 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.
    On September 11, 2000, the Commission issued an order \6\ that 
requires in part that the Phlx 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 class.\7\ The Exchange 
submitted the proposed rule change pursuant to this undertaking.
---------------------------------------------------------------------------

    \6\ 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'').
    \7\ See Section IV.B.j. of the Order.
---------------------------------------------------------------------------

    The proposed rule change would incorporate a more thorough 
description of Auto-Quote into Exchange rules. First, it would describe 
its various pricing models, inputs, and parameters. Second, it would 
provide that specialists may establish a specialized proprietary 
connection (``specialized quote feed'') that by-passes the Auto-Quote 
system. Finally, it would provide 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. 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 to provide 
input to the specialist in setting Auto-Quote parameters.\9\
---------------------------------------------------------------------------

    \8\ See Amendment No. 1, supra note 3. 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.
    \9\ See Amendment No. 2, supra note 4. 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.
---------------------------------------------------------------------------

III. Discussion

    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.\10\ 
Specifically, the Commission believes that the proposed rule change is 
consistent with the section 6(b)(8) \11\ requirement that the rules of 
an exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \10\ In approving the proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change should deter 
collective action, except as authorized by the Exchange's rules, by 
clearly establishing in the Exchange's rules the responsibilities of, 
and conduct permitted by, Exchange members in setting Auto-Quote 
parameters.\12\ For instance, the proposal would permit specialists to 
receive input from members of the crowd in setting the parameters of 
the formula used to automatically update options quotations. The 
Commission believes it is reasonable for the Exchange's rules to permit 
the members of the crowd to be given a voice in setting autoquote 
parameters because, pursuant to the Exchange's rules, they will be 
obligated to execute orders at the resultant quote. Finally, the 
Commission finds that the proposed rule change is designed to 
effectively limit the circumstances in which collective action is 
permissible.
---------------------------------------------------------------------------

    \12\ The Commission expects the Exchange to monitor the 
collective actions that are undertaken pursuant to the rule change 
approved herein for any undesirable or inappropriate anticompetitive 
effects. The Commission's examination staff will monitor the 
Exchange's efforts in this regard.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Phlx-2001-25) is approved, 
as amended.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6896 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P