[Federal Register Volume 67, Number 189 (Monday, September 30, 2002)]
[Notices]
[Pages 61370-61372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24697]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46531; File No. SR-Phlx-2002-47]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Increasing the Maximum Guaranteed AUTO-X Size in Options 
on the Nasdaq-100 Index Tracking Stock (``QQQ'') to 2,000 Contracts in 
the First Two Near-Term Expiration Months

September 23, 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 August 29, 2002, the Philadelphia Stock Exchange, Inc. (``Exchange'' 
or ``Phlx'') 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 Phlx. The 
proposed rule change has been filed by the Phlx as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) under the Act.\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\ 17CFR 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 Phlx proposes to amend Phlx Rule 1080 to provide that, with 
respect to options in the QQQs, orders of up to 2,000 contracts in the 
first two near-term expiration months and orders of up to 1,000 
contracts for all other expiration months, would be eligible for 
automatic execution on the Exchange's automatic execution system 
(``AUTO-X''), which is part of the Exchange's Automated Options Market 
(``AUTOM'') System. 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 routed to AUTOM's automatic execution feature, AUTO-X, if they are 
eligible for execution on 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. Currently, orders of up to 1000 contracts in 
QQQ options are eligible for execution through AUTO-X.\4\
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    \4\ See Securities Exchange Act Release No. 46307 (August 2, 
2002), 67 FR 52508 (August 12, 2002) (File No. SR-Phlx-2002-43).
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    Below is the text of the proposed rule change. Proposed new 
language is italicized.
* * * * *

Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM) 
and Automatic Execution System (AUTO-X)

    (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. With 
respect to options on the Nasdaq-100 Index Tracking Stock 
(``QQQ'')\SM\, orders of up to 2,000 contracts in the first two (2) 
near term expiration months, and 1,000 contracts for all other 
expiration months, are eligible for AUTO-X.
    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.
    (c)(i)(A)-(E) No change.
    (d)-(j) No change.
    Commentary. No change.
* * * * *

[[Page 61371]]

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 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 Phlx proposes to increase the maximum order size eligibility 
for AUTO-X in the first two near-term expiration months in QQQ options 
to 2,000 contracts \5\ to match the size of orders in the same options 
eligible for automatic execution on another options exchange.\6\ Under 
the rules of the Exchange, through AUTOM, orders are routed from member 
firms directly to the appropriate specialist on the trading floor. Of 
the public customer market and marketable limit orders routed through 
AUTOM, certain orders are eligible for AUTOM's automatic execution 
feature, AUTO-X. These orders are automatically executed at the 
disseminated quotation price on the Exchange and reported back to the 
originating firm.\7\
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    \5\ Currently, the maximum option order size eligible for 
automatic execution via AUTO-X is 1,000 for QQQ options. Id.
    \6\ Exchange 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 
Securities and Exchange Commission pursuant to Section 19(b)(3)(A) 
of the Securities Exchange Act of 1934.
    \7\ See Phlx Rule 1080(c).
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    The Exchange notes that the American Stock Exchange LLC (``Amex'') 
allows automatic executions in QQQ 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) (File No. SR-Amex-2002-30).
    The Exchange represents that AUTO-X affords prompt and efficient 
automatic executions at the disseminated quotation price on the 
Exchange. Therefore, the Exchange believes that increasing automatic 
execution levels for eligible orders in QQQ options to 2,000 contracts 
for the first two near-term expiration months should provide the 
benefits of automatic execution to a larger number of customer orders. 
Further, the Exchange notes that this increase in automatic execution 
levels in QQQ options should enable the Exchange to remain competitive 
for order flow with other exchanges that trade QQQ options.
    The Exchange notes that there are many safeguards incorporated into 
Exchange rules to ensure the appropriate handling of AUTO-X orders. For 
example, Phlx Rule 1080(f)(iii) states that the specialist is 
responsible for the remainder of an AUTOM order where a partial 
execution has 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.
    The Wheel is a mechanism that allocates AUTO-X trades among 
specialists and Registered Options Traders (``ROTs'').\8\ An ROT has 
discretion to participate on the Wheel to trade any option class to 
which he is assigned. An increase in the maximum AUTO-X order size for 
QQQ options in the first two near-term expiration months does not 
prevent an ROT from declining to participate on the Wheel.\9\ Because 
the Wheel rotates in two-lot to ten-lot increments depending upon the 
size of the order, no single ROT will be allocated the entire 2,000 
contracts in the first two near-term expiration months.
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    \8\ Unlike ROTs, specialists are required to participate on the 
Wheel. See Phlx Rule 1080(g).
    \9\ See Exchange Options Floor Procedure Advice F-24(e)(i).
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    The Exchange also has procedures that permit a specialist to 
disengage AUTO-X in extraordinary circumstances.\10\ AUTOM users are 
notified of such circumstances.
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    \10\ See Phlx Rule1080(e). The Exchange has amended its rules 
relating to the disengagement of AUTO-X in extraordinary 
circumstances pursuant to the Order Instituting Public 
Administrative Proceedings Pursuant to Section 19(h)(1) of the 
Securities Exchange Act of 1934, Making Findings and Imposing 
Remedial Sanctions, Securities Exchange Act Release No. 43268 
(September 11, 2000) (File No. 3-10282). See Securities Exchange Act 
Release No. 45928 (May 15, 2002), 67 FR 36059 (May 22, 2002) (order 
approving File No. SR-Phlx-2001-27).
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    With respect to financial responsibility issues, the Exchange notes 
that it has a minimum net capital requirement respecting ROTs.\11\ 
Furthermore, an 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 includes 
real-time monitoring of positions. The Exchange believes that clearing 
firm procedures address the issue of whether an ROT has the financial 
capability to support trading of QQQ options orders as large as 2,000 
contracts in the first two near-term expiration months.
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    \11\ See Phlx Rule 703.
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    The Exchange believes that the increase in order size eligibility 
for AUTO-X orders in QQQ options should provide customers with quicker 
executions for a larger number of orders by providing automatic rather 
than manual executions, thereby reducing the number of orders subject 
to manual processing. The Exchange also believes that increasing the 
AUTO-X maximum order size in QQQ options should not impose a 
significant burden on the operation or capacity of the AUTOM System and 
will give the Exchange better means of competing with other options 
exchanges for order flow.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act \12\ in general, and furthers the objectives of 
section 6(b)(5) of the Act \13\ in particular, because 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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    \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 Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition that is not necessary in 
furtherance of the purposes of the Act.

[[Page 61372]]

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

    Because the foregoing 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 filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to section 19(b)(3)(A)\14\ of the 
Act and Rule 19b-4(f)(6)\15\ thereunder.\16\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Phlx seeks to have the proposed 
rule change become operative immediately upon filing in order to remain 
competitive with other exchanges with similar rules in effect.\17\
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    \17\ See supra note 6.
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
operative immediately upon filing as of August 29, 2002, to allow the 
Phlx to compete with another options exchange that currently has a 
maximum automatic execution eligibility limit in QQQ options of 2,000 
contracts in the first two near-term expiration months.\18\ At any time 
within 60 days of the filing of the 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.
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    \18\ 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).
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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-2002-47 and 
should be submitted by October 21, 2002.

    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. 02-24697 Filed 9-27-02; 8:45 am]
BILLING CODE 8010-01-P