[Federal Register Volume 67, Number 204 (Tuesday, October 22, 2002)]
[Notices]
[Pages 64951-64954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26783]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46660; File No. SR-Phlx-2002-50]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto by the Philadelphia Stock Exchange, Inc. Relating to Permanent 
Approval of the Pilot Program Providing for Broker-Dealer Access to 
AUTOM

October 15, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on September 18, 2002, the Philadelphia Stock Exchange, Inc. 
(``Exchange'' or ``Phlx'') submitted to 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. On October 2, 2002, Phlx submitted Amendment No. 1 to the 
proposed rule change.\3\ On October 9, 2002, Phlx submitted Amendment 
No. 2 to the proposed rule change.\4\ The proposed rule change, as 
amended, has been filed by the Phlx as a ``non-controversial'' rule 
change under

[[Page 64952]]

Rule 19b-4(f)(6) \5\ under the Act. The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Richard Rudolph, Director and Counsel, Phlx, 
to Jennifer Colihan, Division of Market Regulation (``Division''), 
Commission dated October 1, 2002. In Amendment No. 1, Phlx requested 
that the filing be designated as a non-controversial rule change 
pursuant to section 19(b)(3)(A) of the Act. In addition, the rule 
text was amended to reflect permanent changes to the rule that were 
approved in Securities Exchange Act Release No. 46296 (August 1, 
2002), 67 FR 52506 (August 12, 2002) (SR-Phlx-2002-37). Finally, the 
Exchange represented that since the commencement of the pilot, it 
has not experienced any issues relating to capacity or its ability 
to receive, route, and automatically execute orders for the 
account(s) of broker-dealers via AUTOM.
    \4\ See letter from Richard Rudolph, Director and Counsel, Phlx, 
to Jennifer Colihan, Division, Commission, dated October 9, 2002. In 
Amendment No. 2, the rule text was amended to accurately reflect the 
text that was approved on a pilot basis. See Securities Exchange Act 
Release No. 45758 (April 15, 2002), 67 FR 19610 (April 22, 2002) 
(SR-Phlx-2001-40).
    \5\ 17 CFR 240.19b-4(f)(6). For purposes of calculating the 60-
day period within which the Commission may summarily abrogate the 
proposed rule change under section 19(b)(3)(C) of the Act, the 
Commission considers that period to commence on October 9, 2002, the 
date the Phlx filed Amendment No. 2. See 15 U.S.C. 78s(b)(3)(C).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to adopt, on a permanent basis, Exchange Rules 
1080(b)(i)(C) and 1080(b)(ii), and Commentary .05 to Rule 1080, 
Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X).\6\ The rules had previously been 
approved on a six-month pilot basis (the ``pilot'').\7\ The pilot, 
scheduled to expire on October 15, 2002, permits access to AUTOM, the 
Exchange's electronic options order routing, delivery, execution and 
reporting system, to off-floor broker-dealers, and allows the automatic 
execution of eligible broker-dealer orders on an issue-by-issue basis.
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    \6\ AUTOM is the Exchange's electronic order delivery, routing, 
execution 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.
    \7\ See Securities Exchange Act Release No. 45758 (April 15, 
2002), 67 FR 19610 (April 22, 2002) (SR-Phlx-2001-40).
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    The text of the proposed rule change is available at the Office of 
the Secretary, the Phlx and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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 IV below. 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 purpose of the proposed rule change is to permit off-floor 
broker-dealers, on a permanent basis and subject to certain 
restrictions designed to ensure the maintenance of a fair and orderly 
market, to have electronic access through AUTOM to the specialist's 
limit order book and the Exchange's automatic execution system (``AUTO-
X'').\8\ The Exchange is proposing permanent approval of the proposed 
rule change to remain competitive, and to improve the efficiency with 
which orders for the account(s) of broker-dealers are currently 
executed. The Exchange believes that providing broker-dealers with 
access to the specialist's limit order book and automatic executions 
would promote more efficient and expeditious execution of broker-dealer 
orders than under the prior Exchange practice of re-routing to a Floor 
Broker booth. Under the prior Exchange practice, such orders were 
represented in the crowd by a Floor Broker after such Floor Broker's 
receipt thereof.\9\
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    \8\ The electronic ``limit order book'' is the Exchange's 
automated specialist limit order book, which automatically routes 
all unexecuted AUTOM orders to the book and displays orders real-
time in order of price-time priority. Orders not delivered through 
AUTOM may also be entered onto the limit order book. See Exchange 
Rule 1080, Commentary .02.
    \9\ Prior to the implementation of the pilot, incoming broker-
dealer orders delivered via AUTOM were ineligible for delivery to 
the specialist, such that they were rejected by the system and 
routed either to the appropriate Floor Broker booth or to the point 
of origin of the order. Such orders were either represented by the 
appropriate Floor Broker on the Exchange or rerouted to the 
originating broker or dealer.
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    The Exchange also believes that the proposed rule change is 
consistent with the purposes underlying the Commission mandate to adopt 
new, or amend existing, rules that substantially enhance incentives to 
quote competitively and substantially reduce disincentives for market 
participants to act competitively.\10\ The Exchange believes that 
providing broker-dealers with access to the specialist's limit order 
book and the Exchange's AUTO-X system should eliminate any actual or 
perceived technological advantage the specialist may have respecting 
access to the limit order book.
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    \10\ The Exchange notes that on September 11, 2000, the 
Commission issued an order, which requires the Exchange (as well as 
the other respondent options exchanges, American Stock Exchange LLC, 
Chicago Board Options Exchange, Inc. (``CBOE''), and Pacific 
Exchange, Inc.) to implement certain undertakings. See 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) and Administrative Proceeding File 3-
10282.
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    The proposal would permit certain off-floor broker-dealer limit 
orders to be eligible for entry into AUTOM. Generally, off-floor 
broker-dealer limit orders up to 200 contracts, depending on the 
option, would be eligible for AUTOM order delivery on an issue-by-issue 
basis, subject to the approval of the Options Committee. The Options 
Committee, however, may determine to increase the eligible order 
delivery size, on an issue-by-issue basis. The proposed rule change 
provides that the following types of off-floor broker-dealer limit 
orders are eligible for AUTOM: day, GTC, simple cancel, simple cancel 
to reduce size (cancel leaves), cancel to change price, cancel with 
replacement order. The purpose of this provision is to ensure that off-
floor broker-dealers do not have an actual or perceived disadvantage 
respecting on-floor specialists and registered options traders 
(``ROTs'').
    Proposed Commentary .05 would establish certain conditions and 
restrictions on the use of AUTOM, as explained further below. First, 
the proposed rule states that orders for the account(s) of off-floor 
broker-dealers must be represented on the Exchange floor by a floor 
member. The proposed rule contemplates that such a floor member may be 
a floor broker or the specialist. The Exchange believes that the 
proposed rule change should result in more orders being handled 
electronically (as opposed to the previous practice of causing broker-
dealer orders to be handled manually), thereby enhancing the audit 
trail for broker-dealer orders. Second, the proposed rule provides that 
off-floor broker-dealer orders delivered via AUTOM shall be for a 
minimum size of one (1) contract.
    Third, proposed Commentary .05 states that the restrictions and 
prohibitions concerning electronically generated orders and off-floor 
market makers set forth in Exchange Rules 1080(i) and (j) apply to 
orders entered for the account(s) of off-floor broker-dealers. Exchange 
Rule 1080(i) prohibits members from entering, permitting, or 
facilitating the entry of, orders into AUTOM if those orders are 
created and communicated electronically without manual input (i.e., 
order entry by public customers or associated persons of members must 
involve manual input such as entering the terms of an order into an 
order-entry screen or manually

[[Page 64953]]

selecting a displayed order against which an off-setting order should 
be sent).\11\
    Rule 1080(j) prohibits members from entering, or facilitating the 
entry of, into AUTOM, as principal or agent, limit orders in the same 
options series from off the floor of the Exchange, for the account or 
accounts of the same or related beneficial owners, in such a manner 
that the off-floor member or the beneficial owner(s) effectively is 
operating as a market maker by holding itself out as willing to buy and 
sell such options contract on a regular or continuous basis.\12\
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    \11\ See Securities Exchange Act Release No. 43376 (September 
28, 2000), 65 FR 59488 (October 5, 2000) (SR-Phlx-00-79).
    \12\ See Securities Exchange Act Release No. 43939 (February 7, 
2001), 66 FR 10547 (February 15, 2001) (SR-Phlx-01-05).
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    Fourth, proposed Commentary .05 provides that off-floor broker-
dealer limit orders entered via AUTOM establishing a bid or offer may 
establish priority, and the specialist and crowd may match such a bid 
or offer and be at parity, subject to the yield provisions of Exchange 
Rule 1014. The proposed rule change provides that the specialist and 
any other ROT then in the trading crowd may match an off-floor broker-
dealer's bid or offer. The Exchange believes that allowing a specialist 
or ROT to match an off-floor broker-dealer's order, and thus be on 
parity, would preserve the important affirmative market-making 
obligations of specialists and ROTs.
    Fifth, the proposed rule change provides that off-floor broker-
dealer limit orders that are eligible for execution via AUTO-X entered 
via AUTOM for the account(s) of the same beneficial owner may not be 
entered in options on the same underlying security more frequently than 
every 15 seconds.\13\ The purpose of this provision is to remain 
consistent with recently adopted Exchange rules that include such a 15-
second restriction against orders entered via AUTOM for the account(s) 
of the same beneficial owner in options on the same underlying security 
more frequently than every 15 seconds.\14\
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    \13\ Recently, the Exchange filed proposed amendments to this 
provision that would provide that the Options Committee may, on an 
issue-by-issue basis, determine to permit the entry of such multiple 
orders upon the request of the specialist registered in the issue. 
Such permission shall not exempt Order Entry Firms and Users from 
any other provision in this Rule, including, without limitation, the 
prohibition against unbundling in Phlx Rule 1080(b)(iv); the 
prohibition against the entry of electronically generated orders in 
Phlx Rule 1080(i); and the prohibition against effectively operating 
as a market-maker from off floor in Rule 1080(j). See SR-Phlx-2002-
40.
    \14\ See Exchange Rule 1080(c)(ii).
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    Finally, the proposal also allows off-floor broker-dealer limit 
orders to be executed automatically, on an issue-by-issue basis subject 
to the approval of the Exchange's Options Committee, via AUTO-X, which 
is the automatic execution feature of AUTOM. The Exchange believes that 
this should enable the Phlx to be competitive with other options 
exchanges that allow automatic executions for broker-dealer orders by 
assuring broker-dealers sending their proprietary orders to the 
Exchange that electronic delivery and execution of such orders would 
not be interrupted.
    The proposed rule change allows the AUTO-X guarantee for off-floor 
broker-dealer limit orders to be for a different number of contracts, 
on an issue-by-issue basis, than the AUTO-X guarantee for public 
customer orders, subject to the approval of the Options Committee.\15\ 
In August, 2002, however, the Commission approved proposed changes to 
the rule that require specialists to guarantee automatic executions for 
off-floor broker-dealer orders for a minimum of 10 contracts in Top 120 
options.\16\ The Exchange believes that these provisions are consistent 
with the recently expanded Quote Rule \17\ and recently adopted 
Exchange Rules that allow different firm size guarantees for customers 
than for broker-dealers.\18\
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    \15\ The Exchange believes that this amended provision should 
result in a larger number of AUTO-X eligible orders delivered 
electronically to the Exchange.
    \16\ See Securities Exchange Act Release No. 46296 (August 1, 
2002), 67 FR 52506 (August 12, 2002) (SR-Phlx-2002-37).
    \17\ 17 CFR 240.11Ac1-1.
    \18\ See Exchange Rule 1082.
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    The proposed rule change provides that AUTO-X eligible off-floor 
broker-dealer limit orders may be eligible for automatic execution via 
the Exchange's National Best Bid or Offer (``NBBO'') Step-Up 
Feature.\19\ Engagement of the NBBO Step-Up Feature is not mandatory 
for off-floor broker-dealer orders, but rather may be engaged on an 
issue-by-issue basis (subject to the approval of the Options 
Committee).
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    \19\ The NBBO Step-Up Feature automatically executes eligible 
orders at the NBBO when the Exchange's disseminated quote is 
inferior to the NBBO. For a complete description of the NBBO Step-Up 
Feature, see Securities Exchange Act Release No. 43684 (December 6, 
2000), 65 FR 78237 (December 14, 2000) (partially approving SR-Phlx-
00-93).
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    The Exchange represents that, since the commencement of the pilot, 
it has not experienced any issues relating to capacity or its ability 
to receive, route, and automatically execute orders for the account(s) 
of broker-dealers via AUTOM.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with section 6(b) of the Act \20\ in general, and with 
section 6(b)(5) of the Act \21\ specifically, in that it is designed to 
perfect the mechanism of a free and open market and a national market 
system, protect investors and the public interest and promote just and 
equitable principles of trade by providing off-floor broker-dealers 
increased access to the specialist's limit order book, and automatic 
executions, which should provide incentives for Phlx market 
participants to quote competitively, and which in turn should result in 
competitive pricing and enhanced liquidity on the Exchange 
specifically, and in the options markets in general.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 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, as 
amended, 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

    Because the foregoing proposed rule change, as amended, does not: 
(1) Significantly affect the protection of investors or the public 
interest; (2) impose any significant burden on competition; (3) become 
operative for 30 days after the date of filing or such shorter time as 
the Commission may designate if consistent with the protection of 
investors and the public interest, and the Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change at least five days prior to that date, it has become effective 
pursuant to section 19(b)(3)(A) of the Act \22\ and Rule 19b-4 \23\ 
thereunder.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4.
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    A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally 
does not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \25\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of

[[Page 64954]]

investors and the public interest. The Phlx has requested that the 
Commission waive the 30-day operative delay. In order to allow the 
pilot to continue on an uninterrupted basis, the Commission believes 
waiving the 30-day operative date is consistent with the protection of 
investors and the public interest. \26\ In addition, the Commission 
notes that the Exchange represents that, since the commencement of the 
pilot, it has not experienced any issues relating to capacity or its 
ability to receive, route, and automatically execute orders for the 
account(s) of broker-dealers via AUTOM. For these reasons, the 
Commission designates the proposal to be effective and operative on 
October 15, 2002.
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    \24\ 17 CFR 240.19b-4(f)(6).
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ 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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    At any time within 60 days of the filing of the proposed rule 
change, as amended, 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.\27\
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    \27\ See note supra.
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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-2002-50 and should 
be submitted by November 12, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26783 Filed 10-21-02; 8:45 am]
BILLING CODE 8010-01-P