[Federal Register Volume 67, Number 100 (Thursday, May 23, 2002)]
[Notices]
[Pages 36287-36289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12896]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45932; File No. SR-Phlx-00-93]


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

May 15, 2002.

I. Introduction

    On September 18, 2001, 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''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ Amendment Nos. 3,\3\ 4,\4\ 5,\5\ 6,\6\ and 7,\7\ 
respectively, to a proposed rule change \8\ relating to providing 
automatic executions for public customer orders at the national best 
bid or offer (``NBBO''). The Commission published for comment the 
proposed rule change, along with Amendment Nos. 1 and 2, in the Federal 
Register on December 14, 2000,\9\ and granted partial accelerated 
approval to those portions of the proposed rule change and Amendment 
Nos. 1 and 2 relating to the automatic execution of eligible orders at 
the NBBO, provided that the NBBO is not better than the specialist's 
best bid or offer (``BBO'') by a predetermined ``step-up parameter.'' 
Amendment Nos. 4, 5, 6, and 7, were published for comment in the 
Federal Register on April 15, 2002.\10\ The Commission received no 
comments on Amendment Nos. 4, 5, 6, and 7. This order approves that 
portion of the proposed rule change not previously granted accelerated 
approved, as amended by Amendment Nos. 4, 5, 6, and 7.
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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 
Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated September 18, 2001 (``Amendment 
No. 3'').
    \4\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated January 
15, 2002 (``Amendment No. 4). Amendment No. 4 superseded and 
replaced Amendment No. 3 in its entirety.
    \5\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated February 
28, 2002 (``Amendment No. 5'').
    \6\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated March 7, 
2002 (``Amendment No. 6'').
    \7\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated April 2, 
2002 (``Amendment No. 7'').
    \8\ 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.
    \9\ See Securities Exchange Act Release No. 43684 (December 6, 
2000), 65 FR 78237 (December 14, 2000) (``Original Filing''). The 
Commission received one comment letter on the Original Filing. 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. 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 Phlx's calculation of the National Best Bid or 
Offer (``NBBO'') 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.
    \10\ See Securities Exchange Act Release No. 45757 (April 9, 
2002), 67 FR 19605 (April 15, 2002).
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II. Description of the Proposal

    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.'' \11\ This enhancement is known as the ``NBBO Step-Up 
Feature.'' The Commission granted accelerated approval to this part of 
the Original Filing. 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 the NBBO 
Step-Up Feature was activated and 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

[[Page 36288]]

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. The Commission did not 
approve this part of the Original Filing and the Phlx subsequently 
filed Amendment Nos. 3, 4, 5, 6, and 7 with the Commission.\12\
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    \11\ For a full discussion of Phlx's proposal, see the Original 
Filing.
    \12\ This proposal would apply to all situations in which the 
NBBO Step-Up Feature was 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 not engaged. See Securities 
Exchange Act Release No. 45931 (May 15, 2002) (File No. SR-Phlx-
2001-35).
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    In Amendment No. 4, the Phlx proposed to limit the factors that the 
Chairman of the Options Committee or his designee \13\ (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 could 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'') indicating that 
another market's quotes are unreliable; 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\ In addition, AUTOM customers 
would be duly notified via electronic message from AUTOM that such 
quotes are excluded from the calculation of NBBO.\16\
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    \13\ Such designee must be a member of the Options Committee.
    \14\ See Amendment No. 4, supra note 3.
    \15\ Id.
    \16\ Id.
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    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 \17\ 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 indicating that another market's 
quotes are no longer unreliable; and/or telephonic or electronic 
inquiry to, and verification from, another market that its quotes are 
firm.\18\ AUTOM customers would be duly notified via electronic message 
from AUTOM that such quotes are again included in the calculation of 
NBBO.\19\
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    \17\ Rule 11Ac1-1 under the Act, 17 CFR 240.11Ac1-1.
    \18\ Id.
    \19\ Id.
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    In Amendment No. 5, the Exchange: (1) Clarified that pursuant to 
the proposed rule change it would be permitted to determine to exclude 
quotes from its calculation of the NBBO on a series-by-series basis or 
class-by-class basis, or to 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 would 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.\20\
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    \20\ See Amendment No. 5, supra note 4.
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    In Amendment No. 6, the Phlx proposed 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.\21\
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    \21\ See Amendment No. 6, supra note 5.
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    In Amendment No. 7, the Phlx 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 would 
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.\22\
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    \22\ See Amendment No. 7, supra note 6.
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III. Discussion

    After careful review, the Commission finds that the portion of the 
proposed rule change not previously granted accelerated approval, as 
amended by Amendment Nos. 4, 5, 6, and 7, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange \23\ and, in particular, 
the requirements of Section 6 of the Act \24\ 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 \25\ 
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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    \23\ 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).
    \24\ 15 U.S.C. 78f.
    \25\ 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,\26\ that the portion of the proposed rule change not previously 
granted accelerated approval (SR-Phlx-00-93), as amended by Amendment 
Nos. 4, 5, 6, and 7, is approved.
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    \26\ Id.


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12896 Filed 5-22-02; 8:45 am]
BILLING CODE 8010-01-P