[Federal Register Volume 67, Number 155 (Monday, August 12, 2002)]
[Notices]
[Pages 52508-52509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20282]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46307; File No. SR-Phlx-2002-43]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to the Increase in the Maximum Guaranteed Size 
for AUTO-X Eligible Orders in Options on the Nasdaq-100 Index Tracking 
Stock (``QQQ'') SM From 250 Contracts to 1,000 Contracts

August 2, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 29, 2002, 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. The proposed rule change has been filed by the 
Exchange as a ``non-controversial'' rule change under Rule 19-
4(f)(6).\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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 Exchange proposes to amend Phlx Rule 1080, which governs the 
Exchange's Automated Options Market (AUTOM) and Automatic Execution 
System (AUTO-X),\4\ to provide that, with respect to options overlying 
the Nasdaq-100 Index Tracking Stock (``QQQ'') SM,\5\ orders 
of up to 1,000 contracts would be eligible for automatic execution via 
AUTO-X.
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    \4\ 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 
certain orders are eligible for AUTOM's automatic execution feature, 
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.
    \5\ The Nasdaq-100, Nasdaq-100 Index 
Nasdaq, The Nasdaq Stock Market, Nasdaq-100 
SharesSM, Nasdaq-100 TrustSM, Nasdaq-100 Index 
Tracking StockSM, and QQQSM are trademarks or 
service marks of The Nasdaq Stock Market, Inc. (``Nasdaq'') and have 
been licensed for use for certain purposes by the Exchange pursuant 
to a License Agreement with Nasdaq. The Nasdaq-100 Index 
(the ``Index'') is determined, composed, and calculated by Nasdaq 
without regard to the Licensee, the Nasdaq-100 TrustSM, 
or the beneficial owners of Nasdaq-100 SharesSM. Nasdaq 
has complete control and sole discretion in determining, comprising, 
or calculating the Index or in modifying in any way its method for 
determining, comprising, or calculating the Index in the future.
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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 increase the maximum 
order size eligibility for AUTO-X in QQQSM options from 250 
to 1,000 contracts \6\ to match the size of orders in the same options 
eligible for AUTO-X on another options exchange.\7\
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    \6\ Currently, the maximum option order size eligible for 
automatic execution via AUTO-X is 250 contracts for all options, 
including QQQSM options. See Phlx Rule 1080(c).
    \7\ Phlx Rule 1080(c) provides that 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 
Commission pursuant to Section 19(b)(3)(A) of the Act. 15 U.S.C. 
78s(b)(3)(A). The Exchange notes that the American Stock Exchange 
LLC (``Amex'') allows automatic executions in QQQSM 
options for a size of up to 2,000 contracts in series in the two 
near-term expiration months, and up to 1,000 contracts in all other 
expiration months. See Amex Rule 933, Commentary .02. See also 
Securities Exchange Act Release No. 45828 (April 25, 2002), 67 FR 
22140 (May 2, 2002) (SR-Amex-2002-30). Because the Amex rule allows 
automatic executions in QQQSM options for up to at least 
1,000 contracts in, all series, the Exchange proposes to match the 
1,000 contract AUTO-X guarantee for QQQSM options in all 
series.
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    Currently, orders are routed through AUTOM from member firms 
directly to the appropriate specialist on the trading floor. Public 
customer market orders and marketable limit orders routed through AUTOM 
that are eligible for AUTO-X are automatically executed at the 
disseminated quotation price on the Exchange and reported back to the 
originating firm.\8\
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    \8\ See Phlx Rule 1080(c).
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    Because AUTO-X affords prompt and efficient automatic executions at 
the displayed price, the Exchange believes that the proposed increase 
in automatic execution levels for eligible orders in QQQSM 
options from 250 to 1,000 contracts should provide the benefits of 
automatic execution to a larger number of customer orders. The Exchange 
further believes that the proposed increase in automatic execution 
levels in QQQSM options should enable the Exchange to remain 
competitive for order flow with other exchanges that trade 
QQQSM options.
    The Exchange notes that there are many safeguards incorporated into 
its rules to ensure the proper handling of AUTO-X orders. First, Phlx 
Rule 1080(f)(iii) states that a specialist is responsible for the 
remainder of an AUTOM order where a partial execution 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.
    Registered Options Traders (``ROTS'') have discretion to 
participate on the Wheel that allocates AUTO-X trades among specialists 
and ROTs.\9\ Consequently, an increase in the maximum AUTO-X order size 
in QQQSM options would not prevent a ROT from declining to 
participate on the Wheel. Because the Wheel currently rotates in two-
lot to ten-lot increments depending upon the size of the order,\10\ no 
single ROT would be allocated the entire 1,000 contracts. The Exchange 
also has procedures that allow specialists to disengage AUTO-X in 
extraordinary circumstances and provide that AUTOM users will be 
notified of such circumstances.\11\
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    \9\ Unlike ROTs, specialists are required to participate on the 
Wheel. See Phlx Rule 1080(g).
    \10\ See Phlx Options Floor Procedure Advice (``OFPA'') F-
24(e)(i).
    \11\ See Phlx OFPA A-13 and Phlx Rule 1080(e).
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    With respect to issues involving financial responsibility, the 
Exchange notes that its rules provide a minimum net capital requirement 
for ROTs.\12\ In addition, a 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

[[Page 52509]]

includes real-time monitoring of positions. Further, the Exchange 
believes that clearing firm procedures address the issue of whether a 
ROT has the financial capability to support the AUTO-X trading of 
orders in QQQSM options as large as 1,000 contracts.
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    \12\ See Phlx Rule 703.
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    The Exchange believes that automatic execution of orders in 
QQQSM options for up to 1,000 contracts should provide AUTOM 
customers with quicker, more efficient executions for a larger number 
of orders, by providing automatic rather than manual executions, 
thereby reducing the amount of orders subject to manual processing. 
Further, increasing the AUTO-X maximum order size in QQQSM 
options 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.
2. Basis
    For the reasons stated above, the Exchange believes that the 
proposed rule change is consistent with Section 6(b) of the Act \13\ in 
general, and in particular, with Section 6(b)(5),\14\ in that 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 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) thereunder \16\ 
because the proposed rule change: (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 the filing, or such shorter time that the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the Exchange has given the 
Commission written notice of its intent to file the proposed rule 
change at least five business days prior to the filing date of the 
proposed rule change.\17\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). 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).
    \17\ The Commission has determined to waive the requirement the 
Phlx provide the Commission with written notice of its intent to 
file the proposed rule change at least five business days prior to 
the filing date.
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    At any time within 60 days of the filing of such 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.
    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission believes waiving the 30-day operative 
date is consistent with the protection of investors and the public 
interest. The Commission also notes that a similar proposal was 
implemented by the Amex.\18\ Acceleration of the operative date for 
this filing will enable the Phlx to compete on an equal basis with 
other exchanges and thus is consistent with Section 6(b)(8) of the 
Act.\19\ For these reasons, the Commission designates the proposal to 
be effective and operative upon filing with the Commission.
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    \18\ 18 See note 7, supra.
    \19\ 19 15 U.S.C. 78f(b)(8).
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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 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-2002-43 and 
should be submitted by September 3, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 20 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20282 Filed 8-9-02; 8:45 am]
BILLING CODE 8010-01-P