[Federal Register Volume 67, Number 99 (Wednesday, May 22, 2002)]
[Notices]
[Pages 36059-36060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12804]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45928; File No. SR-Phlx-2001-27]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Amendment Nos. 1, 
2, 3, and 4 Thereto Relating to Disengagement of Auto-Ex Due to 
Extraordinary Circumstances

May 15, 2002.

I. Introduction

    On March 7, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 disengagement of 
AUTO-X, the automatic execution feature of the Exchange's Automated 
Options Market (``AUTOM'').\3\ On March 28, 2001, December 20, 2001, 
March 1, 2002 and March 8, 2002, Phlx submitted Amendment Nos. 1,\4\ 
2,\5\ 3, \6\ and 4,\7\ respectively. The proposed rule change, as 
amended by Amendment Nos. 1, 2, 3, and 4, was published for comment in 
the Federal Register on April 12, 2002.\8\ The Commission received no 
comments on the amended proposed rule change. This order approves the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed this proposed rule change pursuant to the 
requirements of Section IV.B.h.(i)(bb) of the Commission's September 
11, 2000 Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Act, which required the Phlx (as 
well as the other floor-based options exchanges) to adopt new, or 
amend existing rules concerning automatic quotation and execution 
systems which specify the circumstances, if any, by which automated 
execution systems would be disengaged or operated in any manner 
other than the normal manner set forth in the exchange's rules; and, 
requires the documentation of the reasons for each decision to 
disengage an automatic execution system or operate it in any manner 
other than the normal manner. See Securities Exchange Act Release 
No. 43268 (September 11, 2000), Administrative Proceeding File No. 
3-10282.
    \4\ 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'').
    \5\ 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 superseded and 
replaced Amendment No. 1 in its entirety.
    \6\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated February 
28, 2002 (``Amendment No. 3'').
    \7\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated March 7, 
2002 (``Amendment No. 4'').
    \8\ See Securities Exchange Act Release No. 45710 (April 9, 
2002), 67 FR 18295 (April 12, 2002).
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II. Description of the Proposal

    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 \9\ 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, or operated in a 
manner other than the normal manner set forth in the Exchange's 
rules.\10\ The Exchange also proposes record keeping requirements to be 
kept when AUTO-X is disengaged and reengaged.
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    \9\ 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.
    \10\ 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 operated in a manner other than the normal manner. 
Securities Exchange Act Release No. 45436 (February 12, 2002), 67 FR 
7728 (February 20, 2002).
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    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.\11\ The specialist must also obtain 
authorization from two Floor Officials. Currently, OFPA A-13 and Phlx 
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 of 
Market Surveillance staff.
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    \11\ 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.\12\ 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.
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    \12\ If such relief is granted, surveillance staff would 
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, would codify the 
Exchange's current practice as described in this paragraph. If at any 
time the

[[Page 36060]]

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.
    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.'' \13\ The proposal would amend and clarify this definition, 
which was used in the original proposed rule change adopting Exchange 
Rule 1080.\14\
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    \13\ See Securities Exchange Act Release No. 38792 at note 17 
(June 30, 1997), 62 FR 36602 (July 8, 1997).
    \14\ 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 proposed rule changes, among other things, would 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.\15\
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    \15\ 15 U.S.C. 78q.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended by Amendment Nos. 1, 2, 3, and 4, is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange \16\ and, in particular, 
the requirements of Section 6 of the Act \17\ and the rules and 
regulations thereunder. The Commission finds specifically that the 
proposed rule change is consistent with Section 6(b)(5) of the Act \18\ 
because it provides objective criteria and well-defined procedures for 
disengaging and reengaging AUTO-X, which should increase the likelihood 
that AUTO-X will not be disengaged in a discriminatory manner. 
Moreover, the record keeping requirements and other proposed procedures 
are not unreasonable.
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    \16\ In approving this proposed rule change, the Commission 
notes that it has considered its impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Phlx-2001-27), as amended by 
Amendment Nos. 1, 2, 3, and 4, is approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    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. 02-12804 Filed 5-21-02; 8:45 am]
BILLING CODE 8010-01-P