[Federal Register Volume 67, Number 72 (Monday, April 15, 2002)]
[Notices]
[Pages 18289-18291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9058]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45714; File No. SR-Phlx-00-93]


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
4, 5, 6 and 7 to That Portion of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Not Granted Accelerated Approval 
Relating to Providing Automatic Executions for Public Customer Orders 
at the NBBO

April 9, 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 January 15, 2002, March 1, 2002, March 8, 2002, and April 3, 2002, 
the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') Amendment 
Nos. 4,\3\ 5,\4\ 6,\5\ and 7,\6\ respectively, to that portion of the 
proposed rule change not previously granted accelerated approval, as 
described in Items I, II, and III below, which Items have been prepared 
by the Phlx.\7\ The proposed rule change and Amendment Nos. 1 and 2 
thereto were granted partial accelerated approval and were originally 
published for comment in the Federal Register on December 14, 2000.\8\ 
On September 18, 2001, the Phlx filed Amendment No. 3 to the proposed 
rule change.\9\ The Commission is publishing this notice to solicit 
comments on Amendment Nos. 4, 5, 6, and 7 to the proposed rule change 
from interested persons.
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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 January 15, 2002 (``Amendment No. 
4''). In Amendment No. 4, the Exchange proposes to revise its 
proposed procedures for determining when quotes from away markets 
are excludable from the calculation of the National Best Bid or 
Offer (``NBBO''). Amendment No. 4 supersedes and replaces Amendment 
No. 3 in its entirety.
    \4\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission dated February 
28, 2002 (``Amendment No. 5''). In Amendment No. 5, the Exchange: 
(1) Clarified that the Exchange may determine to exclude quotes from 
its calculation of the NBBO on a series-by-series basis or issue-by-
issue basis, or may determine to exclude all options quotes from an 
exchange, where appropriate; (2) represented that it maintains, on a 
daily basis, records of each instance in which it determines to 
exclude quotes from another exchange from the Exchange's calculation 
of the NBBO on a daily basis; and (3) stated that it will notify 
other exchanges of the determination to exclude its quotes from the 
Exchange's calculation of the NBBO and of any determination to re-
include such exchange's quotes in the Exchange's calculation of the 
NBBO.
    \5\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated March 7, 
2002 (``Amendment No. 6''). In Amendment No. 6, the Exchange 
proposed to amend the rule text to require the Exchange to maintain 
a record of each instance in which another exchange's quotes are 
excluded from the Exchange's calculation of the NBBO, and to notify 
such other exchange that its quotes have been so excluded.
    \6\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated April 2, 
2002 (``Amendment No. 7''). In Amendment No. 7, the Exchange 
proposed to amend the rule text to provide that documentation of 
each instance in which another exchange's quotes are excluded from 
the Exchange's calculation of NBBO shall include: identification of 
the option(s) affected by such action; the date and time such action 
was taken and concluded; identification of the other exchange(s) 
whose quotes were excluded from the Exchange's calculation of NBBO; 
identification of the Chairman of the Options Committee, his 
designee, or two Floor Officials (as applicable) who approved such 
action; the reasons for which such action was taken; and 
identification of the specialist and the specialist unit.
    \7\ At the request of the Phlx, these sections have been revised 
to conform to subsequent amendments. Telephone conversation among 
Deborah Flynn, Assistant Director, Division, Commission, Jennifer 
Lewis, Attorney, Division, Commission, and Richard S. Rudolph, 
Counsel, Phlx, on February 21, 2002.
    \8\ See Securities Exchange Act Release No. 43684 (December 6, 
2000), 65 FR 78237 (``Original Filing'').
    \9\ See letter from Richard S. Rudolph, Counsel, Phlx to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated September 
18, 2001 (``Amendment No. 3'').

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[[Page 18290]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to ensure that customer orders would not be 
disqualified from receiving an automatic execution due to another 
market's dissemination of unreliable quotes. In the Original Filing, 
the Phlx proposed to permit the Chairman of the Options Committee or 
his designee (or if the Chairman of the Options Committee or his 
designee is unavailable, two Floor Officials) to rely on a variety of 
factors to determine that if quotes in certain automatic step-up 
options on the Exchange or other markets were deemed not to be 
reliable, such unreliable quotes would be excluded from the calculation 
of NBBO, and customers would receive an automatic execution at NBBO 
based on the remaining markets whose quotes were not deemed to be 
unreliable. The Phlx proposes to limit the factors that the Chairman of 
the Options Committee or his designee (or if the Chairman of the 
Options Committee or his designee is unavailable, two Floor Officials), 
may rely upon to determine that quotes in options on the Exchange or 
another market or markets are unreliable.\10\
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    \10\ See Amendment No. 4, Supra note 3.
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    The text of the proposed rule change, as modified by Amendment Nos. 
4, 5, 6, and 7, is provided below. Text that has been added to the 
current Exchange rule is in italics.

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

    (a)-(b) No change.
    (c) No change.
    (i) (A)-(C) No change.
    (D) Where the Chairman of the Options Committee or his designee (or 
if the Chairman of the Options Committee or his designee is 
unavailable, two Floor Officials), determines that quotes in options on 
the Exchange or another market or markets are subject to relief from 
the firm quote requirement set forth in the SEC Quote Rule, as defined 
in Exchange Rule 1082(a)(iii) (the ``Quote Rule''), customer market 
orders will receive an automatic execution at NBBO based on the best 
bid or offer in markets whose quotes are not subject to relief from the 
firm quote requirement set forth in the Quote Rule. Such determination 
may be made by way of notification from another market that its quotes 
are not firm or are unreliable; administrative message from the Option 
Price Reporting Authority (``OPRA''); quotes received from another 
market designated as ``not firm'' using the appropriate indicator; and/
or telephonic or electronic inquiry to, and verification from, another 
market that its quotes are not firm. AUTOM customers will be duly 
notified via electronic message from AUTOM that such quotes are 
excluded from the calculation of NBBO. The Exchange may determine to 
exclude quotes from its calculation of NBBO on a series-by-series basis 
or issue-by-issue basis, or may determine to exclude all options quotes 
from an exchange, where appropriate. The Exchange shall maintain a 
record of each instance in which another exchange's quotes are excluded 
from the Exchange's calculation of NBBO, and shall notify such other 
exchange that its quotes have been so excluded. Such documentation 
shall include: identification of the option(s) affected by such action; 
the date and time such action was taken and concluded; identification 
of the other exchange(s) whose quotes were excluded from the Exchange's 
calculation of NBBO; identification of the Chairman of the Options 
Committee, his designee, or two Floor Officials (as applicable) who 
approved such action; the reasons for which such action was taken; and 
identification of the specialist and the specialist unit. The Exchange 
will maintain these documents pursuant to the record retention 
requirements of the Securities Exchange Act of 1934 and the rules and 
regulations thereunder.
    (E) Where the Chairman of the Options Committee or his designee (or 
if the Chairman of the Options Committee or his designee is 
unavailable, two Floor Officials), determines that quotes in options on 
the Exchange or another market or markets previously subject to relief 
from the firm quote requirement set forth in the Quote Rule are no 
longer subject to such relief, such quotations will be included in the 
calculation of NBBO for such options. Such determination may be made by 
way of notification from another market that its quotes are firm; 
administrative message from the Option Price Reporting Authority 
(``OPRA''); and/or telephonic or electronic inquiry to, and 
verification from, another market that its quotes are firm. AUTOM 
customers will be duly notified via electronic message from AUTOM that 
such quotes are again included in the calculation of NBBO.
    (d)-(j) No change.
    Commentary: No change.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filings 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.\11\ 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.\12\
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    \11\ See Original Filing, supra note 8.
    \12\ Id.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In the Original Filing, the Phlx proposed an enhancement to AUTO-X, 
the automatic execution feature of the Exchange's Automated Options 
Market (``AUTOM'') System, that would allow AUTO-X eligible orders to 
be automatically executed at the NBBO, provided that the NBBO is not 
better than the specialist's BBO by a predetermined ``step-up 
parameter.'' \13\ The Commission granted accelerated approval to this 
part of the Original Filing.
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    \13\ For a full discussion of Phlx's proposa, see the Original 
Filing.
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    In addition, in the Original Filing, the Phlx proposed to permit 
the Chairman of the Options Committee or his designee (or if the 
Chairman of the Options Committee or his designee is unavailable, two 
Floor Officials) to determine that if quotes in certain automatic step-
up options on the Exchange or other markets were deemed not to be 
reliable, such unreliable quotes would be excluded from the calculation 
of NBBO, and customers would receive an automatic execution at NBBO 
based on the remaining markets whose quotes were not deemed to be 
unreliable. The original filing proposed that quotes would be 
determined to be unreliable due to Exchange communications or systems 
problems; fast markets; delays in the dissemination of quotes because 
of queues on the Options Price Reporting Authority (``OPRA'') which 
would likely render such quotes stale; or if the Exchange is advised by 
another exchange that it is experiencing communication or system 
problems that would cause its disseminated quotes to be unreliable.

[[Page 18291]]

    The Phlx now proposes to limit the factors that the Chairman of the 
Options Committee or his designee (or if the Chairman of the Options 
Committee or his designee is unavailable, two Floor Officials), may 
rely upon to determine that quotes in options on the Exchange or 
another market or markets are unreliable.\14\ Such determination may be 
made by way of notification from another market that its quotes are not 
firm or are unreliable; administrative message from the Option Price 
Reporting Authority (``OPRA''); quotes received from another market 
designated as ``not firm'' using the appropriate indicator; and/or 
telephonic or electronic inquiry to, and verification from, another 
market that its quotes are not firm.\15\
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    \14\ See Amendment No. 4, supra note 3.
    \15\ Id.
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    In addition, AUTOM customers would be duly notified via electronic 
message from AUTOM that such quotes are excluded from the calculation 
of NBBO.
    Further, where the Chairman of the Options Committee or his 
designee (or if the Chairman of the Options Committee or his designee 
is unavailable, two Floor Officials), determines that responsible 
brokers or dealers on the Exchange or another market or markets 
previously relieved of their obligations under the Commission's Quote 
Rule \16\ are no longer subject to such relief, the quotations of such 
responsible broker or dealer would be included in the calculation of 
the NBBO for such options. Such determination would be permitted to be 
made by way of notification from another market that its quotes are 
firm; administrative message from OPRA; and/or telephonic or electronic 
inquiry to, and verification from, another market that its quotes are 
firm.
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    \16\ Rule 11Ac1-1 under the Act, 17 CFR 240.11Ac1-1.
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    AUTOM customers would be duly notified via electronic message from 
AUTOM that such quotes are again included in the calculation of 
NBBO.\17\
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    \17\ For a full discussion of Phlx's proposal, see the Original 
Filing.
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    The Exchange also would be permitted to determine to exclude quotes 
from its calculation of the NBBO on a series-by-series basis or issue-
by-issue basis, or to determine to exclude all options quotes from an 
exchange, where appropriate.\18\
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    \18\ See Amendment No. 5, supra note 4.
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    The Phlx also proposes to require the Exchange to maintain a record 
of each instance in which another exchange's quotes are excluded from 
the Exchange's calculation of the NBBO, and to notify such other 
exchange that its quotes have been so excluded.\19\
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    \19\ See Amendment No. 6, supra note 5.
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    In addition, Phlx proposes to amend the rule text to provide that 
documentation of each instance in which another exchange's quotes are 
excluded from the Exchange's calculation of NBBO shall include: 
identification of the option(s) affected by such action; the date and 
time such action was taken and concluded; identification of the other 
exchange(s) whose quotes were excluded from the Exchange's calculation 
of NBBO; identification of the Chairman of the Options Committee, his 
designee, or two Floor Officials (as applicable) who approved such 
action; the reasons for which such action was taken; and identification 
of the specialist and the specialist unit. The Exchange will maintain 
these documents pursuant to the record retention requirements of the 
Securities Exchange Act of 1934 and the rules and regulations 
thereunder.\20\
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    \20\ See Amendment No. 7, supra note 6.
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2. Statutory Basis
    The Phlx believes that the proposed rule change, as amended, is 
consistent section 6(b) of the Act,\21\ in general, and furthers the 
objectives of Section 6(b)(5),\22\ in particular, because 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 enhancing the 
Exchange's ability to provide automatic execution of public customers' 
orders at the best available prices.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 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, as 
amended, will impose any burden on competition that is 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 Exchange received one comment letter on the proposed rule 
change.\23\ In its comment letter, CBOE recommended that the Phlx amend 
its rule to require the Exchange to make and keep a written record of 
decisions to remove an exchange from the NBBO calculation and to notify 
an exchange when its markets have been removed from the Phlx's NBBO 
calculation. In response to CBOE's comments, Phlx proposed Amendment 
Nos. 5 and 6.
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    \23\ See letter from Edward J. Joyce, President and Chief 
Operating Officer, Chicago Board Options Exchange, Inc. (``CBOE''), 
to Mr. Jonathan G. Katz, Secretary, Commission, dated February 8, 
2001.
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III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the 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 the 
proposed rule change, as amended, or (B) institute proceedings to 
determine whether the proposed rule change, as amended, should be 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 4, 5, 6, and 7, including whether 
Amendment Nos. 4, 5, 6, and 7 are 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 Number SR-Phlx-00-93 and should be 
submitted by May 6, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9058 Filed 4-12-02; 8:45 am]
BILLING CODE 8010-01-P