[Federal Register Volume 67, Number 158 (Thursday, August 15, 2002)]
[Notices]
[Pages 53374-53376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20682]



[[Page 53374]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46323; File No. SR-Phlx-2002-39]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. To Provide Automatic 
Executions for Eligible Orders at the Exchange's Disseminated Size, 
Subject to a Minimum and Maximum Eligible Size Range

August 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 July 3, 2002, the Philadelphia Stock Exchange, Inc. (``Phlx'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Phlx. 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.
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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 Exchange Rule 1080, Philadelphia Stock 
Exchange Automated Options Market (AUTOM) and Automatic Execution 
System (AUTO-X) \3\ to provide automatic executions for eligible orders 
at the Exchange's disseminated size, subject to a minimum and maximum 
eligible size range to be determined by the specialist, on an issue-by-
issue basis. The Exchange also proposes to delete references to public 
customer orders from the description of AUTO-X set forth in Exchange 
Rule 1080(c) in order to reflect that, in certain issues, orders for 
the proprietary account(s) of broker-dealers may be eligible for 
automatic execution via AUTO-X.
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    \3\ 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 
automatically if the order is 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. An order may also be executed partially 
by AUTO-X and partially manually when the size of an eligible 
inbound market or marketable limit order exceeds the guaranteed 
AUTO-X size.
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    The text of the proposed rule change is set forth below. Deletions 
are in brackets; additions are in italics.

Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)

    Rule 1080. (a)-(b) No change.
    (c) AUTO-X is a feature of AUTOM that automatically executes 
eligible [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 (except if 
executed pursuant to the NBBO Feature in sub-paragraph (i) below) 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, such as pursuant to sub-paragraph 
(iv) below. 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 provided that 
the effectiveness of any such restriction shall be conditioned upon its 
having been approved by the Securities and Exchange Commission pursuant 
to Section 19(b) of the Securities Exchange Act of 1934 and the rules 
and regulations thereunder. Any such restriction on the use of AUTO-X 
approved by the Options Committee will be clearly communicated to 
Exchange membership and AUTOM users through an electronic message sent 
via AUTOM and through an Exchange information circular. Such 
restriction would not take effect until after such communication has 
been made. [Currently, orders up to 250 contracts, subject to the 
approval of the Options Committee, are eligible for AUTO-X.]
    Currently, the Exchange's maximum allowable AUTO-X guarantee is 250 
contracts. For each option, there shall be a minimum guaranteed AUTO-X 
size and a maximum guaranteed AUTO-X size. Such minimum and maximum 
sizes may be for a different number of contracts for customer orders 
than for broker-dealer orders, as determined by the specialist and 
subject to the approval of the Options Committee.
    The Exchange shall provide automatic executions for eligible orders 
up to the Exchange's disseminated size as defined in Exchange Rule 
1082, subject to a minimum guaranteed AUTO-X size and a maximum 
guaranteed AUTO-X size (up to a size of 250 contracts).
     If the Exchange's disseminated size is greater than the 
minimum guaranteed AUTO-X size, and less than the maximum guaranteed 
AUTO-X size, inbound eligible orders shall be automatically executed up 
to Exchange's disseminated size. Remaining contracts shall be executed 
manually by the specialist or placed on the limit order book.
     If the Exchange's disseminated size is less than the 
minimum guaranteed AUTO-X size for that option, inbound eligible orders 
shall be automatically executed up to such minimum guaranteed AUTO-X 
size. Remaining contracts shall be executed manually by the specialist 
or placed on the limit order book. 
     If the Exchange's disseminated size is greater than the 
maximum guaranteed AUTO-X size, inbound eligible orders shall be 
automatically executed up to such maximum guaranteed AUTO-X size. 
Remaining contracts shall be executed manually by the specialist.
    The minimum and maximum guaranteed AUTO-X size applicable to each 
option shall be posted on the Exchange's web site.
    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.
    (i)-(v) 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

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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 codify a change in 
the Exchange's AUTOM and Auto-Quote \4\ system that would allow the 
Exchange to automatically execute eligible orders \5\ at the Exchange's 
disseminated size, as defined in proposed Exchange Rule 1082(a)(ii).\6\
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    \4\ Auto-Quote is the Exchange's electronic options pricing 
system, which enables specialists to automatically monitor and 
instantly update quotations. See Exchange Rule 1080, Commentary 
.01(a).
    \5\ AUTO-X eligible order are orders that do not otherwise 
bypass AUTO-X for manual handling by the specialist in accordance 
with Exchange Rule 1080(c)(iv).
    \6\ See SR-Phlx-2002-15.
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    Currently, the Exchange automatically executes eligible orders at a 
size equal to the AUTO-X guarantee for a given option, regardless of 
the Exchange's disseminated size. The proposed rule change would allow 
the Exchange to provide automatic executions for eligible orders in a 
size equal to the Exchange's disseminated size, subject to a minimum 
guaranteed AUTO-X size and a maximum guaranteed AUTO-X size (which 
cannot exceed the Exchange's floor-wide allowable maximum guaranteed 
AUTO-X size for an option, which is currently 250 contracts), to be 
determined by the specialist and subject to the approval of the Options 
Committee.\7\
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    \7\ The Exchange notes 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. See Exchange Rule 
1080(c).
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    The proposed amended rule would include the following provisions:
    1. If the Exchange's disseminated size is greater than the minimum 
guaranteed AUTO-X size, and less than the maximum guaranteed AUTO-X 
size, inbound eligible orders shall be automatically executed up to the 
Exchange's disseminated size. Remaining contracts shall be executed 
manually by the specialist or placed on the limit order book.

    Example 1:   
Minimum Guaranteed AUTO-X Size = 10
Maximum Guaranteed AUTO-X Size = 50
Disseminated Size = 35
Inbound Order Size = 90
    In this example, the Exchange would automatically execute 35 
contracts (the disseminated size). The specialist would be 
responsible to execute the remaining 55 contracts manually or, in 
the case of a limit order, to place the remaining 55 contracts on 
the limit order book, if the automatic execution has exhausted the 
size at that price.
    2. If the Exchange's disseminated size is less than the minimum 
guaranteed AUTO-X size for that option, inbound eligible orders 
delivered via AUTOM shall be automatically executed up to such minimum 
guaranteed AUTO-X size. Remaining contracts shall be executed manually 
by the specialist or placed on the limit order book.

    Example 2:   
Minimum Guaranteed AUTO-X Size = 10
Maximum Guaranteed AUTO-X Size = 50
Disseminated Size = 6
Inbound Order Size = 20
    In this example, the Exchange would automatically execute 10 
contracts (the minimum guaranteed AUTO-X size) even though its 
disseminated size is for 6 contracts. The specialist would be 
responsible to execute the remaining 10 contracts manually at that 
price or the next best price or, in the case of a limit order, to 
place the remaining 10 contracts on the limit order book, if the 
automatic execution has exhausted the size at that price.

    3. If the Exchange's disseminated size is greater than the maximum 
guaranteed AUTO-X size, inbound eligible orders shall be automatically 
executed up to such maximum guaranteed AUTO-X size. Remaining contracts 
shall be executed manually by the specialist at the disseminated price.

    Example 3:   
Minimum Guaranteed AUTO-X Size = 10
Maximum Guaranteed AUTO-X Size = 50
Disseminated Size = 100
Inbound Order Size = 90
    In this example, the Exchange would automatically execute 50 
contracts (the maximum guaranteed AUTO-X size). The specialist would 
be responsible to execute the remaining 40 contracts manually at 
that same price because the Exchange's rules concerning firm 
quotations \8\ require the Exchange to be firm at that price up to 
the disseminated size of 100 contracts.

    \8\ See Exchange Rule 1082, Firm Quotations.
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    The proposed rule would provide that the minimum guaranteed AUTO-X 
size and maximum guaranteed AUTO-X size for a given option is to be 
determined on an issue-by-issue basis by the specialist and subject to 
the approval of the Options Committee.\9\ In determining whether to 
approve the minimum and maximum guaranteed AUTO-X size for each option, 
the Options Committee may consider, without limitation, the number of 
series and open interest in the option; the volatility of the option; 
the liquidity of the option; historical and projected volume of trading 
in the option; and the projected share of total trading in the option 
that is likely to occur at the Exchange, as well as other relevant 
factors.
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    \9\ The Exchange has stated that the maximum guaranteed AUTO-X 
size for a given option generally would not be changed intra-day. 
Telephone call between Sonia Patton, Division of Market Regulation 
(``Division''), Commission, and Richard Rudolph, Director and 
Counsel, Phlx (August 5, 2002).
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    The proposed rule reflects recent technological advancements and 
changes to the Exchange's Auto-Quote system designed to enable the 
Exchange to eventually disseminate options quotations with actual size. 
The instant proposal is intended to codify the interaction of the new 
Auto-Quote system with AUTO-X, specifically addressing the capability 
of AUTO-X to provide automatic executions for eligible orders at the 
Exchange's actual disseminated size. The Exchange believes that 
providing automatic executions at the Exchange's disseminated size 
should enhance the ability of investors to ascertain the true number of 
contracts available for automatic execution of eligible orders, thus 
contributing to transparency in the markets.
    The Exchange also proposes to delete references to public customer 
orders from the description of AUTO-X set forth in Exchange Rule 
1080(c) in order to reflect that, in certain issues, orders for the 
proprietary account(s) of broker-dealers may be eligible for automatic 
execution via AUTO-X.\10\ Minimum and maximum sizes could be for a 
different number of contracts for broker-dealer orders than for 
customer orders.\11\
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    \10\ See Securities Exchange Act Release No. 45758 (April 15, 
2002), 67 FR 19610 (April 22, 2002) (SR-Phlx-2001-40).
    \11\ Currently, the Exchange is operating an AUTO-X pilot 
program that disengages AUTO-X in an option for 30 seconds when the 
number of contracts executed automatically for the option meets the 
AUTO-X guarantee within a 15 second time frame. See Securities 
Exchange Act Release No. 45862 (May 1, 2002), 67 FR 30990 (May 8, 
2002). The Exchange has stated that this pilot will continue to 
operate and that if there is a different size for customers and 
broker-dealers, the larger of the two will constitute the AUTO-X 
guarantee for purposes of the pilot. Telephone call between Sonia 
Patton, Division, Commission, and Richard Rudolph, Director and 
Counsel, Phlx (August 5, 2002).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \12\ in general, and furthers the 
objectives of Section 6(b) \13\ in particular, in that it is designed 
to perfect the mechanisms of a free and

[[Page 53376]]

open market and the national market system, protect investors and the 
public interest and promote just and equitable principles of trade, by 
establishing the capability of the Exchange to provide automatic 
executions for eligible orders at the disseminated size, subject to 
minimum and maximum guaranteed AUTO-X sizes.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, or,
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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-2002-39 and should be 
submitted by September 5, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20682 Filed 8-14-02; 8:45 am]
BILLING CODE 8010-01-P