[Federal Register Volume 67, Number 158 (Thursday, August 15, 2002)]
[Notices]
[Pages 53376-53379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20767]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46325; File No. SR-Phlx-2002-15]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change, and Amendment 
Nos. 1, 2, 3, 4, and 5 Thereto by the Philadelphia Stock Exchange, Inc. 
To Redefine the Exchange's Disseminated Size for Options Quotations

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 March 5, 2002, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. On April 15, 
2002, the Phlx submitted Amendment No. 1 to the proposed rule 
change.\3\ On June 12, 2002, the Phlx submitted Amendment No. 2 to the 
proposed rule change.\4\ On June 17, 2002, the Phlx submitted Amendment 
No. 3 to the proposed rule change.\5\ On July 31, 2002, the Phlx 
submitted Amendment No. 4 to the proposed rule change.\6\ On August 5, 
2002, the Phlx submitted Amendment No. 5 to the proposed rule 
change.\7\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons. For the reasons 
discussed below, the Commission is

[[Page 53377]]

granting accelerated approval of 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\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated April 12, 2002 
(``Amendment No. 1''). In Amendment No. 1, the Phlx: (1) Amended 
Phlx Rule 1082, Firm Quotations, and Option Floor Procedure Advice 
(``Advice'') F-7, Bids and Offers, to specify that the term 
``disseminated size'' means either (a) the AUTO-X guarantee for the 
quoted option, except that the disseminated size of bids and offers 
on the book shall be ten contracts, or (b) the sum of certain limit 
orders on the limit order book, subject to specific qualifying sizes 
for inclusion in the Exchange's disseminated size; (2) made a 
technical clarification concerning a previously filed Phlx proposal 
to disseminate options quotations with size; (3) added a paragraph 
specifying that specialists may supply their own bids and offers, 
including the size of such bids and offers, through proprietary 
systems called Specialized Quote Feeds (``SQFs''), and explained 
that the disseminated size of any such bid or offer shall be firm; 
and (4) explained that during the roll out period of the new quotes 
with size system, the Exchange will have two systems operating, the 
new Auto-Quote system and the current Auto-Quote system. Once the 
new Auto-Quote system roll out is complete, the Phlx committed to 
deleting references to the current Auto-Quote system.
    \4\ See letter and accompanying Form 19b-4 from Richard S. 
Rudolph, Director and Counsel, Phlx, to Nancy J. Sanow, Assistant 
Director, Division, Commission, dated June 11, 2002 (``Amendment No. 
2''). In Amendment No. 2, the Phlx amended the rule text to reflect 
that, once the Exchange's new Auto-Quote system is deployed, the 
Exchange's disseminated size would be equal to the sum of limit 
orders at the Exchange's disseminated price, or, if there are no 
limit orders at the Exchange's disseminated price, the AUTO-X 
guarantee for the particular option, but such size may be increased 
to reflect the specialist's and trading crowd's sizes. The Exchange 
represented that during the time that the new Auto-Quote system is 
deployed, some options series will continue to reflect the current 
disseminated size of either the AUTO-X guarantee for that option or, 
respecting limit orders on the book at the Exchange's disseminated 
price, a size of 10 contracts. Amendment No. 2 also included a 
proposal to increase the minimum AUTOM order delivery size for 
broker-dealer orders from one contract to ten contracts. Finally, 
the Phlx represented that the proposed rule change would not change 
the functionality of AUTO-X.
    \5\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy J. Sanow, Assistant Director, Division, Commission, 
dated June 14, 2002 (``Amendment No. 3''). In Amendment No. 3, the 
Phlx: (1) deleted the word ``customer'' from the relevant amended 
portion of Advice F-7(a); (2) deleted the phrase ``the AUTO-X 
guarantee for the particular option, but may be for a greater size, 
reflecting'' from Advice F-7(b)(2); (3) clarified that in the 
another order cited in the proposed rule change the Commission 
approved the delivery of off-floor broker-dealer orders via AUTOM, 
and the availability of automatic execution for certain off-floor 
broker-dealer orders via AUTO-X, on a six-month pilot basis; (4) 
clarified that the Exchange's disseminated size would be at least 
the sum of limit orders, and the specialist and crowd would be able 
to determine to disseminate a size greater than the sum of limit 
orders, and made conforming changes to the rule text; and (5) 
represented that, with respect to booked limit orders at the 
Exchange's best/bid offer, the new Auto-Quote system will decrement 
the disseminated size automatically, and that the specialist would 
be responsible to manually decrement the size of limit orders 
represented in the crowd at the Exchange's best/bid offer.
    \6\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Kelly Riley, Senior Special Counsel, Division, Commission, 
dated July 29, 2002 (``Amendment No. 4''). In Amendment No. 4, the 
Phlx: (1) Amended Phlx Rule 1082(a)(ii)(A) and Advice F-7(a) to 
reflect that the current Auto-Quote technology would be scheduled to 
be phased-out by September 2002; and (2) deleted its previous 
proposal to amend Commentary .05 to Phlx 1080 regarding the minimum 
size of off-floor broker-dealer orders delivered via AUTOM.
    \7\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Kelly Riley, Senior Special Counsel, Division, Commission, 
dated August 2, 2002 (``Amendment No. 5''). In Amendment No. 5, the 
Phlx made technical amendments to the text of the proposal in 
response to comments received from Commission staff.
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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 its Rule 1082, Firm Quotations, and 
Advice F-7, Bids and Offers, to re-define the Exchange's disseminated 
size of option quotations.
    Currently, the term ``disseminated size'' is defined in Phlx Rule 
1082 and Advice F-7 to mean the AUTO-X guarantee for the quoted option, 
except that the disseminated size of limit orders on the book is ten 
contracts, regardless of the actual size of such a limit order. The 
proposal provides that, during the deployment of the technology 
necessary for the new disseminated size program, the size of some 
quotations in options series on the Exchange will continue to be 
disseminated with the current disseminated size definition, and the 
size of some options quotations will be disseminated with the newly 
defined disseminated size. The options that will have the size of their 
quotations determined using the current Phlx definition will continue 
to use the Auto-Quote technology that was operating on the Exchange as 
of May 2002 (``current Auto-Quote''). The Phlx anticipates that the 
current Auto-Quote technology will be phased-out by September 2002.
    Under the proposal, respecting options subject to the Auto-Quote 
technology implemented after the effective date of this provision 
(``new Auto-Quote''), the new ``disseminated size'' would be at least 
the sum of limit orders; however, the proposal would permit the 
specialist and crowd to disseminate a size greater than the sum of the 
limit orders.
    The text of the proposed rule change, as amended, appears below. 
New text is in italics; deletions are in brackets.
* * * * *

Firm Quotations

Rule 1082(a)  Definitions
    (i) The term ``disseminated price'' shall mean the bid (or offer) 
price for an options series that is made available by the Exchange and 
displayed by a quotation vendor on a terminal or other display device.
    (ii) The term ``disseminated size'' shall mean, with respect to the 
disseminated price for any quoted options series[,]:
    (A) Respecting options subject to the Auto-Quote technology 
operating as of May, 2002 (``current Auto-Quote'') and scheduled to be 
phased-out by September 2002: the AUTO-X guarantee for the quoted 
option, except that the disseminated size of [bids and offers of] limit 
orders on the book shall be ten (10) contracts[.]; or
    (B) Respecting options subject to the Auto-Quote technology 
implemented after the effective date of this provision (``new Auto-
Quote'') and options subject to a proprietary quoting system provided 
for in Rule 1080.02 (``Specialized Quote Feed''), at least the sum of 
limit orders. The specialist and crowd may determine to disseminate a 
size greater than the sum of limit orders.
    (iii)-(iv) No change.
    (b)-(e) No change.

F-7 Bids and Offers

    All bid and offer prices shall be general ones and shall not be 
specified for acceptance by particular members.
    In the absence of a stated size to any bid or offer voiced or 
displayed on the Options Floor, the person responsible for such bid and 
offer is deemed to be quoting for one contract, except in those 
instances where predetermined volume guarantees are provided for the 
facilitation of specific account types. Floor traders may, however, be 
required to trade more than one contract in connection with provisions 
under Advice A-11.
    The size of any disseminated bid or offer by the Exchange shall be, 
with respect to the disseminated price for any quoted options series, 
equal to:
    (a) Respecting options subject to the Auto-Quote technology 
operating as of May, 2002 (``current Auto-Quote'') and scheduled to be 
phased-out by September 2002: the AUTO-X guarantee for the quoted 
option and shall be firm, except that the disseminated size of [bids 
and offers of] limit orders on the book shall be ten (10) contracts and 
shall be firm, regardless of the actual size of such orders[.]; or
    (b) respecting options subject to the Auto-Quote technology 
implemented after the effective date of this provision (``new Auto-
Quote'') and options subject to a proprietary quoting system provided 
for in Rule 1080.02 (``Specialized Quote Feed'') at least the sum of 
limit orders. The specialist and crowd may determine to disseminate a 
size greater than the sum of limit orders.
* * * * *

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, as 
amended, 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 III 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 add a new definition 
of ``disseminated size'' with respect to options subject to the new 
Auto-Quote technology and options subject to an SQF. For these options, 
the Phlx proposes to define ``disseminated size'' as, with respect to 
the disseminated price, at least the sum of the size(s) of limit 
orders. The proposal would also allow the specialist and crowd to 
determine to disseminate a size greater than the sum of the limit 
orders. Under this proposal, if there are no limit orders at the 
disseminated price, the specialist has the ability to establish a 
specific size for each series quoted by the new Auto-Quote or SQF.\8\
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    \8\ Phlx Rule 1080, Commentary .01(b), provides that the 
specialist may provide its own quotations, based on its own quote 
calculation technology, by separately establishing a specialized 
connection (an SQF) bypassing the Exchange's Auto-Quote system. The 
SQF user provides such quotes in lieu of the Exchange's Auto-Quote 
system.
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    This differs from the current Exchange disseminated quote size 
definition, which is the AUTO-X guarantee for quotes generated by the 
current Auto-Quote or SQF, or ten contracts for quotes that represent 
booked limit orders, regardless of the actual size of such booked limit 
orders. The Phlx proposes to continue to use the current ``disseminated 
size'' definition for options that are subject to the current Auto-
Quote technology.
    The Exchange has represented that a quote disseminated by the 
Exchange's new Auto-Quote (or by SQF) is deemed to be the quote of the 
specialist and all Registered Options Traders (``ROTs'') in the crowd 
unless the ROT has vocalized a different quote in a clear and audible 
manner with sufficient time for the specialist to take action to update 
the quote, if necessary.\9\ Thus, a specialist disseminating a quote 
through the new Auto-Quote or SQF could not cause an ROT to be firm for 
a size greater than a size for which such ROT is willing to be firm. In 
situations in which the Auto-

[[Page 53378]]

Quote or SQF size is greater than the trading interest in the crowd, 
the specialist would be responsible to fill any orders in excess of 
such crowd trading interest.
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    \9\ See Securities Exchange Act Release No. 44543 (July 12, 
2001), 66 FR 37511 (July 18, 2001) (SR-Phlx-2001-26).
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    As proposed, for options using the new Auto-Quote technology or 
SQF, the disseminated size of booked limit orders at the disseminated 
price would be automatically decremented as executions of inbound 
orders or cancellations of limit orders at the disseminated price 
occur.\10\ As inbound orders are executed, customer limit orders at the 
disseminated price would be executed first, in the order in which they 
were received pursuant to existing Exchange rules. The Exchange's 
disseminated size would be decremented by the size of the inbound order 
to be filled. After customer orders at the best bid or offer have been 
executed, if booked broker-dealer limit orders remain to be executed at 
the disseminated price, such orders would be executed and decremented 
in the order in which they were received. The Exchange represents that 
the specialist would be responsible to manually decrement limit orders 
represented in the crowd at the disseminated price.\11\
    When there are no limit orders at the Exchange's disseminated 
price, the Exchange proposes that its disseminated size would be the 
specialist and crowd quotation size established via the new Auto-Quote 
or SQF. In such a situation, the quotation size would not be 
decremented automatically. The specialist would, however, have the 
ability to provide a size for which he and the crowd is firm (unless, 
as set forth above, a particular crowd participant has vocalized a 
different quote) each time such specialist revises the quote.
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    \10\ See Amendment No. 3.
    \11\ Id.
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    The Phlx represents that it is not proposing to change the 
functionality of AUTO-X in the instant proposal. The Exchange's 
disseminated size for options subject to the new Auto-Quote or SQF may 
differ from the AUTO-X guarantee for the quoted option. Regardless of 
the disseminated size, the AUTO-X guarantee for a specific option would 
remain the same. For example, when the Exchange disseminates a quote 
with a size of 200 contracts, and the AUTO-X guarantee for that option 
is 100 contracts, and an inbound market or marketable limit order for 
200 contracts is received, 100 contracts would be executed 
automatically via AUTO-X, and 100 contracts would be due for manual 
execution at the disseminated price by the specialist under the 
Exchange's rules regarding firm quotations.\12\
    Further, the Phlx represents that the proposal would not change the 
method of allocation of contracts in the crowd. Trades executed 
manually would continue to be allocated in accordance with Exchange 
rules. Trades executed automatically via AUTO-X would be allocated by 
the ``Wheel'' in accordance with Advice F-24, as such trades are 
allocated today.
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    \12\ See Phlx Rule 1082, Firm Quotations, and Advice F-7, Bids 
and Offers.
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    Once the Exchange begins to deploy the new Auto-Quote, it will be 
rolled out over a period of approximately four to six weeks. The 
instant proposal includes clarifying amendments that reflect the timing 
of the rollout period. Specifically, the amended proposal would provide 
that for options that remain subject to the current Auto-Quote 
technology, the Exchange's disseminated size would continue to be equal 
to the AUTO-X guarantee for the quoted option or ten contracts if the 
disseminated quote represents limit orders on the book. The Exchange's 
disseminated size for options that are subject to the new Auto-Quote 
technology and options that are subject to an SQF provided for in Phlx 
Rule 1080.02 would be at least the sum of limit orders at the 
disseminated price. The specialist and crowd may determine to 
disseminate a size greater than the sum of the limit orders. If there 
are no limit orders on the book, the Exchange's disseminated size would 
be the specialist and crowd's size at the disseminated price. Upon 
completion of the rollout period, the Exchange represents that it will 
revisit the rule to delete all references to the current Auto-Quote.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\13\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\14\ in particular, in that it 
is designed to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest, and to promote just and 
equitable principles of trade, by expanding and further defining the 
Exchange's disseminated size in its rules.
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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 would 
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 solicited or received with respect to the 
proposed rule change.

III. 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 the filing will also be 
available for inspection and copying at the principal offices of the 
Exchange. All submissions should refer to File No. SR-Phlx-2002-15 and 
should be submitted by September 5, 2002.

IV. Commission Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\15\ In 
particular, the Commission believes the proposed rule change is 
consistent with the section 6(b)(5) of the Act \16\ requirement that 
the rules of an exchange be designed to facilitate transactions in 
securities, promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market

[[Page 53379]]

system, and, in general, to protect investors and the public interest.
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    \15\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposal, which would establish two 
methods by which disseminated size is calculated for options traded on 
the Phlx, is consistent with Rule 11Ac1-1(d) under the Act.\17\ The 
Phlx proposes to maintain its current disseminated size definition for 
options that are subject to the current Auto-Quote technology and to 
establish a new disseminated size definition for options that are 
subject to the new Auto-Quote technology or an SQF. Specifically, for 
options that utilize the new Auto-Quote technology or which are subject 
to an SQF, the disseminated size would be at least the sum of the limit 
orders, unless the specialist and crowd determine to increase such 
size. The Commission believes that the Exchange's proposal to begin to 
disseminate the actual size of the limit orders when such orders 
represent the Exchange's disseminated price should increase 
transparency by providing more accurate quotation information, which is 
consistent with Section 11A of the Act.\18\
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    \17\ 17 CFR 240.11Ac1-1(d).
    \18\ 15 U.S.C. 78k-1. The Commission notes that in Section 
11A(a)(1)(C)(iii) of the Act, Congress found that it is in the 
public interest and appropriate for the protection of investors and 
the maintenance of fair and orderly markets to assure the 
availability of information with respect to quotations for 
securities. 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Commission believes that the proposal is a positive step toward 
deployment of the Exchange's new quotes with size system that will 
disseminate quotations with actual size in all options traded on the 
Phlx in the future.\19\ The Commission believes that disseminating the 
actual size of quotations should enhance the quality of Phlx's 
quotation information that is disseminated to the public by more 
accurately reflecting trading interest on the Phlx.
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    \19\ Telephone conversation between Richard S. Rudolph, Director 
and Counsel, Phlx, and Frank N. Genco, Attorney, Division, 
Commission, on July 2, 2002.
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    The Commission finds good cause, consistent with Section 19(b)(2) 
of the Act,\20\ to approve the proposed rule change prior to the 
thirtieth day after the date of publication of the notice of filing 
thereof in the Federal Register. The Commission notes that the Phlx has 
represented that it is technologically capable of implementing the 
proposal immediately upon approval from the Commission.\21\ The 
Commission believes that accelerated approval of this proposal should 
permit the Phlx to promptly implement the proposed changes, which 
should enhance Phlx's quotation information. Accordingly, the 
Commission finds that there is good cause, consistent with Section 
19(b)(2) of the Act,\22\ to approve the proposal on an accelerated 
basis.
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ Telephone conversation between Richard S. Rudolph, Director 
and Counsel, Phlx, and Frank N. Genco, Attorney, Division, 
Commission, on July 2, 2002.
    \22\ 15 U.S.C. 78s(b)(2).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-Phlx-2002-15) is approved on 
an accelerated basis.
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    \23\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20767 Filed 8-14-02; 8:45 am]
BILLING CODE 8010-01-P