[Federal Register Volume 67, Number 72 (Monday, April 15, 2002)]
[Notices]
[Pages 18295-18298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9060]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45710; File No. SR-Phlx-2001-27]


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 Disengagement of Auto-Ex Due to 
Extraordinary Circumstances

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 March 7, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. Phlx submitted Amendment No. 1 to the proposed 
rule change on March 28, 2001.\3\ Phlx submitted Amendment No. 2 to the 
proposed rule change on December 20, 2001.\4\ Phlx submitted Amendment 
Nos. 3 and 4 to the proposed rule change on March 1, 2002,\5\ and March 
8, 2002,\6\ respectively. The Commission's 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 20.19b-4.
    \3\ In Amendment No. 1, the Exchange requested accelerated 
effectiveness and deleted the following sentence from footnote 4: 
``The Exchange also notes that extraordinary circumstances are 
``unusual market conditions'' for purposes of Rule 11Ac1-1 under the 
Act.'' See letter from Diana Tenenbaum, Phlx, to Nancy J. Sanow, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated March 27, 2001 (``Amendment No. 1'').
    \4\ In Amendment No. 2, the Exchange withdrew File No. SR-Phlx-
2001-17 and proposed to define the extraordinary circumstances that 
would result in the disengagement of the Exchange's Automatic 
Execution System (``AUTO-X'') and to set forth procedures to be 
followed when AUTO-X is disengaged due to extraordinary 
circumstances. See letter from Richard S. Rudolph, Counsel, Phlx, to 
Nancy J. Sanow, Assistant Director, Division, Commission, dated 
December 19, 2001 (``Amendment No. 2''). Amendment No. 2 supersedes 
and replaces Amendment No. 1 in its entirety.
    \5\ In Amendment No. 3, the Exchange: (1) Proposed conforming 
amendments to Option Floor Procedure Advice A-13; (2) proposed an 
amendment to Exchange Rule 1080(c) to provide that the Options 
Committee may for any period restrict the use of AUTO-X on the 
Exchange in any option or series, provided that the effectiveness of 
any such restriction shall be conditioned upon its having been 
approved by the Commission pursuant to section 19(b) of the Act and 
the rules and regulations thereunder; and (3) represented that, 
pursuant to Exchange Rule 1080(f)(v), AUTOM users are notified in 
the event that AUTO-X is disengaged. See letter from Richard S. 
Rudolph, Counsel, Phlx, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated February 28, 2002 (``Amendment No. 3'').
    \6\ In Amendment No. 4, the Exchange proposed to amend the rule 
text to provide that AUTOM users are notified in the event that 
AUTO-X is disengaged. See letter from Richard S. Rudolph, Counsel, 
Phlx, to Nancy J. Sanow, Assistant Director, Division, Commission, 
dated March 7, 2002 (``Amendment No. 4'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Options Floor Procedure Advice 
(``OFPA'') A-13, Auto Execution Engagement/Disengagement 
Responsibility, and Phlx Rule 1080(e), Extraordinary Circumstances, to 
provide for a re-evaluation of the disengagement of AUTO-X \7\ during 
extraordinary circumstances. Specifically, when AUTO-X is disengaged 
due to extraordinary circumstances, the Exchange would be required to 
review and confirm that such circumstances still exist five minutes 
after the initial declaration of extraordinary circumstances, and every 
fifteen minutes thereafter. Additionally, the Exchange proposes to 
amend Phlx Rule 1080(e) to specify the definition of extraordinary 
circumstances under which AUTO-X may be disengaged,\8\ or operated in a 
manner other than the normal manner set forth in the Exchange's 
rules.\9\ The Exchange is also proposing record keeping requirements to 
be kept when AUTO-X is disengaged and reengaged. The text of the 
proposed rule change, as amended, follows. New text is italicized; 
deletions are in brackets.
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    \7\ AUTO-X is a feature of AUTOM, the Exchange's electronic 
order delivery and reporting system that automatically executes 
public customer market and marketable limit orders up to the number 
of contracts permitted by the Exchange for certain strike prices and 
expiration months in equity options and index options.
    \8\ The Exchange notes that the Commission has directed that the 
respondent options exchanges adopt new rules, or amend existing 
rules, concerning their automated quotation and execution systems. 
The Exchanges must ``specify the circumstances, if any, under which 
automated execution systems can be disengaged or operated in any 
manner other than the normal manner set forth in the exchange's 
rules and require the documentation of the reasons for each decision 
to disengage an automated execution system or operate it in any 
manner other than the normal manner.'' See Section IV.B.h.(i)(bb) of 
the Order Instituting Public Administrative Proceedings Pursuant to 
Section 19(h)(1) of the Securities Exchange Act of 1934, Making 
Findings and Imposing Remedial Actions; In the Matter of Certain 
Activities of Options Exchanges, Securities Exchange Act Release No. 
43268 (September 11, 2000).
    \9\ See Exchange Rule 1080(c) generally. See also SR-Phlx-2001-
24, a proposed rule change to set forth the circumstances in which 
AUTO-X will be disengaged. Securities Exchange Act Release No. 45436 
(February 12, 2002), 67 FR 7728 (February 20, 2002).
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Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM) 
and Automatic Execution System (AUTO-X)
    (a)-(b) No change.
    (c) AUTO-X--AUTO-X is a feature of AUTOM that automatically 
executes public customer market and marketable limit orders up to the 
number of contracts permitted by the Exchange for certain strike prices 
and expiration months in equity options and index options, unless the 
Options Committee determines otherwise. AUTO-X automatically executes 
eligible orders using the Exchange disseminated quotation and then 
automatically routes execution reports to the originating member 
organization. AUTOM orders not eligible for AUTO-X are executed 
manually in accordance with Exchange rules. Manual execution may also 
occur when AUTO-X is not engaged. An order may also be executed 
partially by AUTO-X and partially manually.
    The Options Committee may for any period restrict the use of AUTO-X 
on the Exchange in any option or series provided that the effectiveness 
of any such restriction shall be conditioned upon its having been 
approved by the Securities and Exchange Commission pursuant to section 
19(b) of the Securities Exchange Act of 1934 and the rules and 
regulations thereunder. Currently, orders up to 100 contracts, subject 
to the approval of the Options Committee, are eligible for AUTO-X.
    The Options Committee may, in its discretion, increase the size of 
orders in one or more classes of multiply-traded equity options 
eligible for AUTO-X to the extent necessary to match the size of orders 
in the same options eligible for entry into the automated execution 
system of any other options exchange, provided that the effectiveness 
of any such increase shall be conditioned upon its having been filed 
with the Securities and Exchange Commission pursuant to

[[Page 18296]]

section 19(b)(3)(A) of the Securities Exchange Act of 1934.
    (i)-(ii) No change.
    (e) Extraordinary Circumstances-In the event of extraordinary 
circumstances with respect to a particular class of options exist, two 
Floor Officials may determine to disengage AUTO-X with respect to that 
option, in accordance with Exchange procedures. Five minutes subsequent 
to the disengagement of AUTO-X for extraordinary circumstances (and 
every 15 minutes thereafter as long as AUTO-X is disengaged), the 
requesting Specialist or his/her designee, two Floor Officials, and a 
designated surveillance staff person, shall re-evaluate the 
circumstances to determine if the extraordinary circumstances still 
exist. AUTO-X will be re-engaged when either: (i) the Specialist or 
his/her designee determines that the conditions supporting the 
extraordinary circumstances no longer exist, at which time the 
Specialist or his/her designee shall inform the Market Surveillance 
staff that the extraordinary circumstances no longer exist and that the 
Specialist is re-engaging AUTO-X; or (ii) when two Floor Officials and 
the designated surveillance staff person determine that the conditions 
supporting the extraordinary circumstances no longer exist. In the 
event extraordinary [conditions] circumstances exist floor-wide, two 
Exchange Floor Officials[,] and the Chairperson of the Options 
Committee or his/or her designee may determine to disengage the AUTO-X 
feature floor-wide. Five minutes subsequent to a floor-wide 
disengagement of AUTO-X for extraordinary circumstances (and every 15 
minutes thereafter as long as AUTO-X is disengaged), two Floor 
Officials, the Chairperson of the Options Committee or his/her designee 
and a designated Market Surveillance staff person shall re-evaluate the 
circumstances to determine if the extraordinary circumstances still 
exist. AUTO-X will be re-engaged when either: (1) The Specialist 
determines that the conditions supporting the extraordinary 
circumstances no longer exist for their particular class of options at 
which time the Specialist or his/her designee will inform Market 
Surveillance staff that the extraordinary circumstances no longer exist 
for their particular class of options and that the Specialist is re-
engaging AUTO-X; or (2) when two Floor Officials, the Chairperson of 
the Options Committee or his/her designee and the designated Market 
Surveillance staff person determine that the extraordinary 
circumstances no longer exist. The NBBO feature is always disengaged 
when AUTO-X is disengaged.
    Extraordinary circumstances include market occurrences and system 
malfunctions that impact a Specialist's ability to accurately price and 
disseminate option quotations in a timely manner. Such occurrences 
include fast market conditions such as volatility, order imbalances, 
volume surges or significant price variances in the underlying 
security; internal system malfunctions including the Exchange's Auto-
Quote system; or malfunctions of external systems such as a specialized 
quote feed, or delays in the dissemination of quotes from the Option 
Price Reporting Authority; or other similar occurrences.
    The Exchange shall document any action taken to disengage AUTO-X 
pursuant to this Rule 1080(e), and shall notify all AUTOM Users of each 
instance in which AUTO-X is disengaged due to extraordinary 
circumstances. Such documentation shall include: identification of the 
option(s) affected by such action (except in a case of floor-wide 
disengagement); the date and time such action was taken and concluded; 
identification of the Floor Officials who approved such action; the 
reasons for which such action was taken; identification of the 
Specialist and the Specialist Unit (or in the case of floor-wide 
disengagement, identification of the Options Committee Chairperson or 
his/her designee); and identification of the Market Surveillance staff 
person monitoring the situation. 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.
* * * * *
A-13 Auto Execution Engagement/Disengagement Responsibility
    It is the responsibility of the option Specialist to engage the 
Auto Execution (Auto-X) system for an assigned option within three (3) 
minutes of completing the opening or reopening rotation of that option.
    Where extraordinary circumstances occur, a Specialist may be 
provided an exemption from receiving orders through AUTO-X and may then 
disengage the system upon approval by two Floor Officials. Five minutes 
subsequent to the disengagement of AUTO-X for extraordinary 
circumstances (and every 15 minutes thereafter as long as AUTO-X is 
disengaged), the requesting Specialist or his/her designee, two Floor 
Officials, and a designated surveillance staff person, shall re-
evaluate the circumstances to determine if the extraordinary 
circumstances still exist. AUTO-X will be re-engaged when either: (i) 
the Specialist or his/her designee determines that the conditions 
supporting the extraordinary circumstances no longer exist, at which 
time the Specialist or his/her designee shall inform the Market 
Surveillance staff that the extraordinary circumstances no longer exist 
and that the Specialist is re-engaging AUTO-X; or (ii) when two Floor 
Officials and the designated surveillance staff person determine that 
the conditions supporting the extraordinary circumstances no longer 
exist. In the event extraordinary [conditions] circumstances exist 
floor-wide, two Exchange Floor Officials[,] and the Chairperson of the 
Options Committee or his/or her designee may determine to disengage the 
AUTO-X feature floor-wide. Five minutes subsequent to a floor-wide 
disengagement of AUTO-X for extraordinary circumstances (and every 15 
minutes thereafter as long as AUTO-X is disengaged), two Floor 
Officials, the Chairperson of the Options Committee or his/her designee 
and a designated Market Surveillance staff person shall re-evaluate the 
circumstances to determine if the extraordinary circumstances still 
exist. AUTO-X will be re-engaged when either: (1) the Specialist 
determines that the conditions supporting the extraordinary 
circumstances no longer exist for their particular class of options at 
which time the Specialist or his/her designee will inform Market 
Surveillance staff that the extraordinary circumstances no longer exist 
for their particular class of options and that the Specialist is re-
engaging AUTO-X; or (2) when two Floor Officials, the Chairperson of 
the Options Committee or his/her designee and the designated Market 
Surveillance staff person determine that the extraordinary 
circumstances no longer exist. The NBBO feature is always disengaged 
when AUTO-X is disengaged.
    Extraordinary circumstances include market occurrences and system 
malfunctions that impact a Specialist's ability to accurately price and 
disseminate option quotations in a timely manner. Such occurrences 
include fast market conditions such as volatility, order imbalances, 
volume surges or significant price variances in the underlying 
security; internal system malfunctions including the Exchange's Auto-
Quote system; or malfunctions of external systems such as a specialized 
quote feed, or delays in the dissemination of quotes from the Option

[[Page 18297]]

Price Reporting Authority; or other similar occurrences.
    The Exchange shall document any action taken to disengage AUTO-X 
pursuant to this Rule 1080(e), and shall notify all AUTOM Users of each 
instance in which AUTO-X is disengaged due to extraordinary 
circumstances. Such documentation shall include: identification of the 
option(s) affected by such action (except in a case of floor-wide 
disengagement); the date and time such action was taken and concluded; 
identification of the Floor Officials who approved such action; the 
reasons for which such action was taken; identification of the 
Specialist and the Specialist Unit (or in the case of floor-wide 
disengagement, identification of the Options Committee Chairperson or 
his/her designee); and identification of the Market Surveillance staff 
person monitoring the situation. 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.

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. 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 purpose of the proposed rule change is to limit the duration 
for which Floor Officials may grant relief in the form of AUTO-X 
disengagement due to extraordinary circumstances, and to add the 
participation of the Phlx Market Surveillance staff in determining the 
continuation of the existence of extraordinary circumstances.
    Currently, in order to obtain AUTO-X disengagement relief for a 
specific class of option due to extraordinary circumstances, the 
specialist must promptly notify the Phlx Market Surveillance Department 
that relief is requested.\10\ The specialist must also obtain 
authorization from two Floor Officials. Currently, OFPA A-13 and Rule 
1080(e) do not provide a specified time frame to re-evaluate the 
conditions under which a continuation of extraordinary circumstances 
may continue. Nor do they provide for substantial participation for 
Market Surveillance staff.
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    \10\ See Exchange Rule 1080(f)(v).
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    Under the proposed rules, the specialist would be required to 
notify the Phlx Market Surveillance Department that relief is requested 
to ensure proper notification to AUTOM users in accordance with Phlx 
Rule 1080(f)(v). The specialist also would be required to obtain 
authorization from two Floor Officials for relief. Two Floor Officials 
would continue to determine if relief is warranted.\11\ Under the 
proposal, five minutes after the initial determination, and every 
fifteen minutes thereafter, as long as the extraordinary circumstances 
are in effect, the requesting specialist and two Floor Officials, with 
the concurrence of a designated Market Surveillance staff person, must 
re-evaluate whether extraordinary circumstances still exist. Thus, the 
proposed rules would provide substantial participation of Phlx Market 
Surveillance staff as well as a time period for re-evaluation. The 
Exchange believes that the amendments should assist in limiting the 
length of time that AUTO-X disengagement relief due to extraordinary 
circumstances continues.
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    \11\ Under the current proposal, if such relief is granted, 
surveillance staff will announce to the Options Floor, and the AUTOM 
desk, that the particular option is in extraordinary circumstances.
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    The proposed rule changes, among other things, codify the 
Exchange's current practice as described in this paragraph. If at any 
time the specialist determines to re-engage AUTO-X, he/she may re-
engage the system. The specialist must notify the Market Surveillance 
staff that the conditions supporting the extraordinary circumstances no 
longer exist, and that the specialist is re-engaging AUTO-X. This may 
be done after AUTO-X is re-engaged.
    Currently, in the event extraordinary circumstances exist floor-
wide, two Exchange Floor Officials and the Chairperson of the Options 
Committee or his/her designee may determine to disengage the AUTO-X 
feature floor-wide. Under the proposal, five minutes after the initial 
declaration and every fifteen minutes thereafter, as long as the 
extraordinary circumstances are in effect floor wide, two Floor 
Officials, the Chairperson of the Options Committee or his/her 
designee, with the concurrence of a designated Market Surveillance 
staff person, must re-evaluate the circumstances to determine if the 
floor-wide extraordinary circumstances still exist. Thus, the proposed 
rules would provide substantial participation of Market Surveillance 
staff during floor-wide extraordinary circumstances as well as a time 
period for re-evaluation. The Exchange believes that the amendment 
should assist in limiting the length of time floor-wide extraordinary 
circumstances continue.
    The Exchange also proposes to define ``extraordinary 
circumstances'' under which AUTO-X may be disengaged and to specify in 
the rules the requirement that certain relevant information is 
documented by the Exchange upon actual disengagement and re-engagement 
of AUTO-X. Currently, extraordinary circumstances that justify 
disengagement include ``fast market conditions, systems malfunctions, 
and other circumstances that limit the Exchange's ability to 
disseminate or update market quotations in a timely and accurate 
manner.'' \12\ The instant proposal would amend and clarify this 
definition, which was used in the original proposed rule change 
adopting Exchange Rule 1080.\13\
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    \12\ See Securities Exchange Act Release No. 38792 at note 17 
(June 30, 1997), 62 FR 36602 (July 8, 1997).
    \13\ Id.
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    The proposed rule would define extraordinary circumstances to 
include market occurrences and system malfunctions that impact a 
specialist's ability to accurately price and disseminate option 
quotations in a timely manner. Such occurrences include fast market 
conditions such as increased volatility, order imbalances, volume 
surges or significant price variances in the underlying security; 
internal system malfunctions including the Exchange's Auto-Quote 
system; or malfunctions of external systems such as a specialized quote 
feed, or delays in the dissemination of quotes from the Option Price 
Reporting Authority; or other similar occurrences.
    The Exchange believes that these factors can quickly and 
precipitously affect the price of the underlying security, and thereby 
the option overlying the security. All these situations may result in 
the Exchange's inability to disseminate accurate and timely quotes. In 
such extraordinary circumstances, the Exchange believes that it is 
appropriate to allow specialists to execute orders manually that would 
otherwise be AUTO-X eligible in order to ensure that the specialist is 
able to

[[Page 18298]]

continue to make fair and orderly markets.
    The proposed rule changes, among other things, codify the 
Exchange's current practice as described in this paragraph. With 
respect to record keeping requirements, the Exchange maintains an 
electronic audit trail, called an AUTO-X Disengagement Log, that 
electronically monitors and electronically records every situation in 
which AUTO-X is disengaged. With respect to any request for AUTO-X 
disengagement relief, the Exchange currently records: (1) Any action 
taken to disengage AUTO-X or to operate it in any manner other than 
normal; (2) the date of the specialist's request to disengage AUTO-X; 
(3) the time the specialist's request was granted, and the time of re-
engagement; (4) the reason for the request to disengage (e.g., 
extraordinary circumstances or other); (5) whether another market has 
implemented comparable relief; (6) the specialist's name; (7) the 
specialist unit's name; (8) the options class (except in a case of 
floor-wide disengagement); (9) the particular problem that the 
specialist experienced; and (10) the two Floor Officials' signatures 
(in case of floor-wide disengagement, the Options Committee Chairperson 
or his designee's signature is also required). Under the proposed rule, 
the Exchange would codify its practice of maintaining this 
documentation pursuant to the Exchange's record retention requirements 
under section 17 of the Act.\14\
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    \14\ 15 U.S.C. 78q.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act,\15\ in general, and section 
6(b)(5),\16\ in particular, because it is designed to perfect the 
mechanisms of a free and open market and a national market system, to 
promote just and equitable principles of trade, and to protect 
investors and the public interest, by codifying a definition of 
extraordinary circumstances that would give rise to relief from AUTO-X 
engagement, and by codifying procedures to be followed in extraordinary 
circumstances when AUTO-X is disengaged.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 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 inappropriate burden on competition.

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

    No written comments were either solicited or received.

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 or 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 proposal, 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 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-2001-27 and 
should be submitted by May 6, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9060 Filed 4-12-02; 8:45 am]
BILLING CODE 8010-01-P