[Federal Register Volume 67, Number 100 (Thursday, May 23, 2002)]
[Notices]
[Pages 36286-36287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12894]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45931; File No. SR-Phlx-2001-35]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval To Proposed Rule Change, As Amended By 
Amendment Nos. 1, 2, 3, 4, and 5 Thereto, Relating To Providing 
Automatic Executions For Public Customer Orders When Another Market Is 
Disseminating Quotes Deemed Not To Be Reliable

May 15, 2002.

I. Introduction

    On March 12, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with 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 \3\ relating to providing automatic executions for 
public customer orders at the national best bid or offer (``NBBO''). On 
September 19, 2001, January 11, 2002, March 1, 2002, March 8, 2002, and 
April 3, 2002, Phlx submitted Amendment Nos. 1,\4\ 2,\5\ 3,\6\ 4,\7\ 
and 5,\8\ respectively. The proposed rule change, as amended by 
Amendment Nos. 1, 2, 3, 4, and 5, was published for comment in the 
Federal Register on April 15, 2002.\9\ The Commission received no 
comments on the amended proposal. This order approves the proposed rule 
change, as amended by Amendment Nos. 1, 2, 3, 4, and 5.
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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, exchange rules concerning automatic quotation and 
execution systems which specify the circumstances, if any, by which 
automatic 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 Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated September 18, 2001 (``Amendment 
No. 1'').
    \5\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated January 
11, 2002 (``Amendment No. 2''). Amendment No. 2 supersedes and 
replaces 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 letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated April 2, 
2002 (``Amendment No. 5'').
    \9\ See Securities Exchange Act Release No. 45713 (April 9, 
2002), 67 FR 18292 (April 15, 2002).
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II. Description of the Proposal

    The Phlx proposes to permit the Exchange to exclude from the 
calculation of the NBBO certain quotes from other markets that are 
deemed not to be reliable.\10\ Upon the request of a specialist, the 
Chairman of the Options Committee or his designee \11\ (or if the 
Chairman of the Options Committee or his designee is unavailable, two 
Floor Officials) would be authorized to determine that quotes in 
specified options or series of options or in respect of specified 
markets are not reliable under any of the following circumstances: 
notification from another market that its quotes are not firm or are 
unreliable; administrative message from OPRA indicating that another 
market's quotes are unreliable; receipt of quotes 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.
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    \10\ Under current Exchange rules, certain AUTO-X eligible 
orders may be automatically executed at the NBBO disseminated by 
another options exchange, provided that the NBBO is not better than 
the specialist's best bid/offer by a predetermined ``step-up 
parameter.'' The enhancement is known as the ``NBBO Step-Up 
Feature.'' The NBBO Step-Up Feature would execute AUTO-X eligible 
orders at the NBBO for certain options designated by the Options 
Committee as eligible for the NBBO Step-Up Feature, called 
``automatic step-up options.'' See Exchange Rule 1080(c)(i). This 
proposal would apply to all situations in which the NBBO Step-Up 
Feature was not engaged. The Commission, in a separate order, is 
approving a related proposed rule change regarding the exclusion of 
certain quotes from the Phlx's calculation of the NBBO when the NBBO 
Step-Up Feature is engaged. See Securities Exchange Act Release No. 
45932 (May 15, 2002) (File No. SR-Phlx-00-93).
    \11\ Such designee must be a member of the Options Committee.
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    The Exchange 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 would be permitted to determine to exclude all options 
quotes from an exchange, where appropriate.\12\
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    \12\ See Amendment No. 3, supra note 6.
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    Phlx also proposes 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.\13\
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    \13\ See Amendment No. 4, supra note 7.
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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 would maintain 
these documents pursuant to the record retention requirements of the 
Act and the rules and regulations thereunder.\14\ 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), would 
be authorized to determine that quotes in options on the Exchange or 
other markets previously deemed not to be reliable are again reliable, 
and such quotations would again be included in the calculation of NBBO 
for such options.
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    \14\ See Amendment No. 5, supra note 8.
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    Such determination would be permitted to be made by way of 
notification from another market that its quotes are firm; 
administrative message from OPRA indicating that another market's 
quotes are no longer unreliable; and/or telephonic or electronic 
inquiry to, and verification from, another market

[[Page 36287]]

that its quotes are firm. AUTOM customers would be duly notified via 
electronic message from AUTOM that such quotes are again included in 
the calculation of NBBO.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended by Amendment Nos. 2, 3, 4, and 5, is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange \15\ and, in particular, 
the requirements of Section 6 of the Act \16\ 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 \17\ 
because it provides objective criteria and well-defined procedures for 
excluding another market's quote from the Phlx's determination of the 
NBBO, which should increase the likelihood that Phlx's NBBO will more 
accurately reflect the actual state of the market at a given time. 
Specifically, the Commission notes that the determination of 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 exclude unreliable quotes is limited to circumstances in 
which the away market has either directly communicated or confirmed 
that its quotes are unreliable. In this way, the discretion afforded to 
Phlx officials to determine that another market's options quotes are 
unreliable is appropriately limited. Moreover, the record keeping 
requirements and other proposed procedures are not unreasonable.
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    \15\ 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).
    \16\ 15 U.S.C. 78f.
    \17\ 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,\18\ that the proposed rule change (SR-Phlx-2001-35), as amended by 
Amendment Nos. 1, 2, 3, 4, and 5, is approved.
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    \18\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12894 Filed 5-22-02; 8:45 am]
BILLING CODE 8010-01-P