[Federal Register Volume 67, Number 94 (Wednesday, May 15, 2002)]
[Notices]
[Pages 34746-34748]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12117]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45893; File No. SR-Phlx-2002-25]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Philadelphia Stock Exchange, Inc. Increasing the Maximum Guaranteed 
AUTO-X Size to 250 Contracts

May 8, 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 April 19, 2002, the Philadelphia Stock Exchange, Inc. (``Exchange'' 
or ``Phlx'') 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 Phlx. On April 
25, 2002, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The proposed rule change has been filed by the Phlx as a 
``non-controversial'' rule change under Rule 19b-4(f)(6) under the 
Act.\4\ 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 from Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated April 24, 2002 (``Amendment No. 1''). 
In Amendment No. 1, the Phlx amended its proposed rule text to 
eliminate a redundant sentence regarding the 250 contract maximum 
AUTO-X guarantee size for options on the Nasdaq-100 Index Tracking 
Stock (``QQQ'').
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1080(c) to increase to 250 
contracts the maximum order size of option contracts that are eligible 
to be executed on the Exchange's automatic execution system (``AUTO-
X''), which is part of the Exchange's Automated Options

[[Page 34747]]

Market (``AUTOM'') System. 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 routed to AUTOM's automatic execution feature, AUTO-X, if they are 
eligible for execution on 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 trading floor. Currently, customer market and marketable limit 
orders of up to 100 contracts are eligible for AUTO-X.\5\
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    \5\ See Securities Exchange Act Release No. 44404 (June 11, 
2001), 66 FR 32857 (June 18, 2001) (File No. SR-Phlx-2001-51) (order 
approving maximum order size eligibility of 100 contracts for AUTO-
X).
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    Below is the text of the proposed rule change. Proposed new 
language is italicized and proposed deletions are in [brackets].
* * * * *

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. Currently, orders up to [100] 
250 contracts, subject to the approval of the Options Committee, are 
eligible for AUTO-X. [With respect to options on the Nasdaq-100 Index 
Tracking Stock (``QQQ''), orders of up to 250 contracts 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 section 
19(b)(3)(A) of the Securities Exchange Act of 1934.
    (c)(i)(A)-(E) No change.
    (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 filing 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. 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.

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

1. Purpose
    The Phlx proposes to increase the maximum order size for 
eligibility for AUTO-X from 100 contracts to 250 contracts.\6\ Under 
the rules of the Exchange, through AUTOM, orders are routed from member 
firms directly to the appropriate specialist on the trading floor. Of 
the public customer market and marketable limit orders routed through 
AUTOM, certain orders are eligible for AUTOM's automatic execution 
feature, AUTO-X. These orders are automatically executed at the 
disseminated quotation price on the Exchange and reported back to the 
originating firm.\7\
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    \6\ Id.
    \7\ See Phlx Rule 1080(c).
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    The Exchange represents that AUTO-X affords prompt and efficient 
automatic executions at the disseminated quotation price on the 
Exchange. Therefore, the Exchange believes that increasing automatic 
execution levels should provide the benefits of automatic execution to 
a larger number of customer orders. Further, the Exchange notes that 
this increase from 100 contracts to 250 contracts is consistent with 
similar Commission-approved increases to the automatic executions 
levels on other options exchanges.\8\
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    \8\ The Exchange notes that the Commission has approved 
increases in automatic execution levels from 100 contracts to 250 
contracts on the American Stock Exchange LLC (``Amex''). See 
Securities Exchange Act Release No. 45628 (March 22, 2002), 67 FR 
15262 (March 29, 2002) (SR-Amex-2001-94). The Exchange further notes 
that the Commission has approved increases in automatic execution 
levels from 100 contracts to 250 contracts on the Pacific Exchange, 
Inc. (``PCX''). See Securities Exchange Act Release No. 45641 (March 
25, 2002), 67 FR 15445 (April 1, 2002) (SR-PCX-2001-48).
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    The Exchange notes that there are many safeguards incorporated into 
Exchange rules to ensure the appropriate handling of AUTO-X orders. For 
example, Phlx Rule 1080(f)(iii) states that the specialist is 
responsible for the remainder of an AUTOM order where a partial 
execution has occurred. Phlx Rule 1015 governs execution guarantees and 
requires the trading crowd to ensure that public orders are filled at 
the best market to a minimum of the disseminated size. Violations of 
any of these provisions could be referred to the Business Conduct 
Committee for disciplinary action.
    The Wheel is a mechanism that allocates AUTO-X trades among 
specialists and Registered Options Traders (``ROTs'').\9\ An ROT has 
discretion to participate on the Wheel to trade any option class to 
which he is assigned. An increase in the maximum AUTO-X order size does 
not prevent an ROT from declining to participate on the Wheel.\10\ 
Because the Wheel rotates in two-lot to ten-lot increments depending 
upon the size of the order, no single ROT will be allocated the entire 
250 contracts.
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    \9\ Unlike ROTs, specialists are required to participate on the 
Wheel. See Phlx Rule 1080(g).
    \10\ See Exchange Options Floor Procedure Advice F-24(e)(i).
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    The Exchange also has procedures that permit a specialist to 
disengage AUTO-X in extraordinary circumstances.\11\ AUTOM users are 
notified of such circumstances.
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    \11\ See Phlx Rule 1080(e). The Exchange notes that it has filed 
amendments relating to the disengagement of AUTO-X in extraordinary 
circumstances pursuant to the 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) (File No. 3-10282), which are not effective as 
of the date of filing of the instant proposal. See File No. SR-Phlx-
2001-27.
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    With respect to financial responsibility issues, the Exchange notes 
that it has a minimum net capital

[[Page 34748]]

requirement respecting ROTs.\12\ Furthermore, an ROT's clearing firm 
performs risk management functions to ensure that the ROT has 
sufficient financial resources to cover positions throughout the day. 
In this regard, the function includes real-time monitoring of 
positions. The Exchange believes that clearing firm procedures address 
the issue of whether an ROT has the financial capability to support 
trading of options orders as large as 250 contracts.
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    \12\ See Phlx Rule 703.
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    The Exchange believes that the increase in order size eligibility 
for AUTO-X orders should provide customers with quicker executions for 
a larger number of orders, by providing automatic rather than manual 
executions, thereby reducing the number of orders subject to manual 
processing. The Exchange also believes that increasing the AUTO-X 
maximum order size should not impose a significant burden on operation 
or capacity of the AUTOM System and will give the Exchange better means 
of competing with other options exchanges for order flow.
    The Exchange represents that it will issue a circular to members 
and member organizations advising them of the increased maximum AUTO-X 
guarantee. The Exchange also represents that it posts AUTO-X guarantees 
on its web site on an issue-by-issue basis.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with section 6(b) of the Act \13\ in general, and furthers 
the objectives of section 6(b)(5) of the Act \14\ in particular, 
because it is designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, as well as to 
protect investors and the public interest by enhancing efficiency by 
providing automatic executions to a larger number of options orders.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 that is not necessary 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

    No written comments were either solicited or received.

IV. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule change, as amended: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to section 19(b)(3)(A) \15\ of the 
Act and Rule 19b-4(f)(6) \16\ thereunder.\17\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Phlx seeks to have the proposed 
rule change, as amended, become operative immediately in order to 
remain competitive with other exchanges with similar rules in 
effect.\18\
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    \18\ See supra note 8.
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change, as 
amended, operative immediately upon filing as of April 19, 2002, to 
allow the Phlx to compete with other options exchanges that currently 
have a maximum automatic execution eligibility limit of 250 
contracts.\19\ At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\20\
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    \19\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \20\ See section 19(b)(3)(C) of the Act, 15 U.S.C. 78(b)(3)(C). 
For purposes of calculating the 60 day abrogation period, the 
Commission considers the period to commence on April 25, 2002, the 
date that the Exchange filed Amendment No. 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, 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-2002-25 and should be submitted by June 5, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12117 Filed 5-14-02; 8:45 am]
BILLING CODE 8010-01-P