[Federal Register Volume 67, Number 226 (Friday, November 22, 2002)]
[Notices]
[Pages 70473-70475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29714]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46840; File No. SR-Phlx-2002-59]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. To Extend Its Pilot Program To 
Disengage Its Automatic Execution System (``AUTO-X'') for a Period of 
Thirty Seconds After the Number of Contracts Automatically Executed in 
a Given Option Meets the AUTO-X Minimum Guarantee for That Option

November 15, 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 October 2, 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 and II below, which items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to approve the 
proposal, on an accelerated basis, for an additional six-month pilot, 
to expire on May 30, 2003.
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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 extend, for an additional six months, its 
pilot program effecting a systems change to AUTO-X, the automatic 
execution feature of the Exchange's Automated Options Market System 
(``AUTOM''),\3\ that would disengage AUTO-X for a period of thirty 
seconds after the number of contracts automatically executed in a given 
option meets the AUTO-X minimum guarantee for that option. The pilot 
program was originally approved on a six-month basis for a limited 
number of eligible options,\4\ and subsequently extended for an 
additional six-month period.\5\ Subsequently, the number of options 
eligible for the pilot was expanded to include all Phlx-traded 
options.\6\ The pilot has since been extended twice for additional six-
month periods, the latest extension is scheduled to expire November 30, 
2002.\7\
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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 
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's 
trading floor.
    \4\ See Securities Exchange Act Release No. 43652 (December 1, 
2000), 65 FR 77059 (December 8, 2000) (SR-Phlx-00-96) (``Initial 
Pilot Program'').
    \5\ See Securities Exchange Act Release No. 44362 (May 29, 
2001), 66 FR 30037 (June 4, 2001) (SR-Phlx-2001-56).
    \6\ See Securities Exchange Act Release No. 44760 (August 31, 
2001), 66 FR 47253 (September 11, 2001) (SR-Phlx-2001-79).
    \7\ See Securities Exchange Act Release Nos. 45862 (May 1, 
2002), 67 FR 30990 (May 8, 2002) (SR-Phlx-2002-22) (``Last 
Extension''); and 45090 (November 21, 2001), 66 FR 59834 (November 
30, 2001) (SR-Phlx-2001-100).
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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 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 Phlx proposes to extend the pilot program for an additional 
six-month period. On December 1, 2000, the Initial Pilot Program became 
effective.\8\ The pilot program was then extended several times and is 
currently scheduled to end on November 30, 2002.\9\ The pilot program 
includes the following features:
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    \8\ See supra note 4.
    \9\ See Last Extension, supra note 7.
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    [sbull] Once an automatic execution occurs in an option via AUTO-X, 
the system would begin a ``counting'' program, which would count the 
number of contracts executed automatically for that option, up to the 
maximum guaranteed AUTO-X size,\10\ regardless of the number of 
executions.
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    \10\ Recently, the Exchange filed proposed amendments to 
Exchange Rule 1080(c) to provide automatic executions for eligible 
orders at the Exchange's disseminated size, subject to a minimum and 
maximum AUTO-X eligible size range, on an issue-by-issue basis. See 
SR-Phlx-2002-39 (submitted July 2, 2002), and Amendment No. 1 
thereto (submitted August 23, 2002). Under that proposal, the 
maximum guaranteed AUTO-X size may be for a different number of 
contracts for customer orders than for broker-dealer orders. Upon 
implementation of that proposal, subject to Commission approval, 
when the maximum guaranteed AUTO-X size in an option is for a 
different number of contracts for customer orders than for broker-
dealer orders, AUTO-X would be disengaged when the larger of the two 
maximum guaranteed AUTO-X sizes for the particular option is 
exhausted.
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    [sbull] When the number of contracts executed automatically for 
that option meets the maximum guaranteed AUTO-X size within a fifteen 
second time frame, the system would cease to automatically execute for 
that option, and would drop all AUTO-X eligible orders in that option 
for manual handling by the specialist for a period of thirty seconds to 
enable the specialist to refresh quotes in that option.\11\
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    \11\ Any orders delivered in excess of the minimum AUTO-X 
guarantee will be executed to the guaranteed amount and the excess 
will be dropped to the specialist for manual execution. See Initial 
Pilot Program, supra note 4. The Exchange has represented that, for 
the thirty seconds that AUTO-X is disengaged, the specialist will be 
required to honor the disseminated quote unless the specialist is in 
the process of refreshing his or her quote. The Exchange has further 
represented that, generally, it should not take the specialist the 
full thirty seconds to update his or her quote, and that the 
Exchange will surveil for any potential abuse. Telephone 
conversation between Richard S. Rudolph, Counsel, Phlx, and Sonia 
Patton, Special Counsel, Division of Market Regulation 
(``Division''), Commission, on November 7, 2002.
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    [sbull] Upon the expiration of thirty seconds, automatic executions 
would resume and the ``counting'' program would be set to zero and 
begin counting the number of contracts executed automatically within a 
fifteen second time frame again, up to the maximum guaranteed AUTO-X 
size.
    [sbull] Again, when the number of contracts automatically executed 
meets the maximum guaranteed AUTO-X size within a fifteen second time 
frame, the system would drop all subsequent AUTO-X eligible orders for 
manual handling by the specialist for a period of thirty seconds.
    A significant purpose of this pilot program is to enable the 
Exchange to move towards the dissemination of

[[Page 70474]]

options quotations with size.\12\ As discussed above, the ``counting'' 
feature of the pilot program functions to disengage AUTO-X for a period 
of thirty seconds in a given option once the number of contracts 
automatically executed meets the maximum guaranteed AUTO-X size for 
that option within a fifteen-second time frame. A similar ``counting'' 
mechanism is being utilized as part of the roll-out of a new Auto-Quote 
system that includes an AUTO-X guaranteed size equal to the Exchange's 
disseminated size, subject to a minimum and maximum guaranteed AUTO-X 
size, on an issue-by-issue basis, which is currently pending Commission 
approval.\13\ Thus, the proposed extension of the pilot program should 
allow the Exchange to continue its efforts in the process of deploying 
the new Auto-Quote system.
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    \12\ The Commission recently approved amendments to the 
Exchange's definition of ``disseminated size'' to mean, with respect 
to the disseminated price for any quoted options series, at least 
the sum of limit orders. The specialist and crowd may determine to 
disseminate a size greater than the sum of limit orders. See 
Securities Exchange Act Release No. 46325 (August 8, 2002), 67 FR 
53376 (August 15, 2002) (SR-Phlx-2002-15) (order approving 
amendments to Exchange Rule 1082(a)(ii) and Option Floor Procedure 
Advice F-7).
    \13\ See SR-Phlx-2002-39, and Amendment No. 1 thereto.
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    The Exchange believes that an extension of the pilot program would 
enable specialists to continue to provide fair and orderly markets 
during peak market activity by manually executing orders at correct 
market prices and refreshing quotations to reflect market demand.
    In addition, the Exchange recognizes that Commission staff has 
inquired into the possibility of re-engaging AUTO-X in less than thirty 
seconds once the specialist revises the quote. The Exchange's Financial 
Automation, Legal, and Regulatory staff have begun to review the issue, 
specifically as to whether it is feasible to re-engage AUTO-X for an 
entire issue based upon the revision of a quotation in one single 
series.\14\ Pursuant to this review, the Exchange has determined to 
automate the re-engagement of AUTO-X for an option issue upon the 
revision of a quotation in a single series of such issue, provided that 
the revised quotation occurs in the series that exhausted the AUTO-X 
guarantee. The Exchange believes that, with the ultimate implementation 
of the new Auto-Quote system, the Exchange should, over the proposed 
additional six-month pilot period, be able to more accurately evaluate 
its ability to re-engage AUTO-X in an entire class of options upon the 
revision of a quote in a single option series.
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    \14\ Under Phlx's current pilot program, AUTO-X is programmed to 
re-engage after thirty seconds, regardless of whether the specialist 
has updated its quote prior to that period of time.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act \15\ in general, and with section 6(b)(5) in 
particular,\16\ 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 enabling Exchange specialists to maintain fair and orderly 
markets during periods of peak market activity.
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    \15\ 15 U.S.C. 78f.
    \16\ 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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange did not receive or solicit any written comments on 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Phlx-2002-59 and 
should be submitted by December 13, 2002.

IV. Commission's 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.\17\ In 
particular, the Commission finds that the proposed rule change is 
consistent with section 6(b)(5) of the Act, which requires that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market and a national securities system, and protect 
investors and the public interest.\18\ The Commission believes that an 
extension of the pilot program for an additional six months should 
allow the Exchange to continue its efforts to deploy its new Auto-Quote 
system to prepare for the dissemination of quotes with size. In 
addition, the Commission believes that the proposal should assist 
specialists in maintaining fair and orderly markets during periods of 
peak market activity.
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    \17\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Exchange is attempting to address its 
concern regarding the feasibility of re-engaging AUTO-X for a 
particular issue prior to thirty seconds if the quote has been revised 
by the specialist before that time period. The Exchange has represented 
that it will automate the re-engagement of AUTO-X for an option issue 
once the AUTO-X guarantee in a single series of such issue has been met 
and the quote has been updated prior to the thirty-second period. 
Consequently, the Commission believes that extending the pilot program 
for an additional six months should enable the Phlx to further evaluate 
its ability to re-engage AUTO-X in an entire class of options upon the 
revision of a quote in a single option series.
    The Commission notes that the Exchange has represented that it will 
continue to evaluate the pilot program by reviewing specialists' 
performance, and by monitoring any complaints relating to the pilot 
program.\19\ Furthermore, the Commission notes that the Exchange has 
represented that it will continue to post on its website a list of 
options included in the pilot program, as well as issue a circular to 
this effect to members, member

[[Page 70475]]

organizations, participants, and participant organizations explaining 
the pilot program and the circumstances in which the AUTO-X system will 
not be available for customer orders.\20\
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    \19\ Telephone conversation between Richard S. Rudolph, Counsel, 
Phlx, and Sonia Patton, Special Counsel, and Sapna C. Patel, 
Attorney, Division, Commission, on November 6, 2002.
    \20\ Phlx has also represented that it will include language in 
its circular clarifying that AUTO-X will not be re-engaged until the 
expiration of the thirty second period, even after a quote is 
revised. Telephone conversation between Richard S. Rudolph, Counsel, 
Phlx, and Sonia Patton, Special Counsel, and Sapna C. Patel, 
Attorney, Division, Commission, on November 6, 2002.
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    Accordingly, the Commission finds good cause, pursuant to section 
19(b)(2) of the Act,\21\ for approving the proposed rule change prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. The Commission recognizes that during the last 
six-month extension of the pilot program, the Phlx has received no 
complaints from customers, floor traders, or member firms. The 
Commission believes that granting accelerated approval to extend the 
pilot program for an additional six months will allow Phlx to continue, 
without interruption, the existing operation of its AUTO-X system.
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    \21\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-Phlx-2002-59), is hereby 
approved on an accelerated basis, as a six-month pilot, scheduled to 
expire on May 30, 2003.
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    \22\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-29714 Filed 11-21-02; 8:45 am]
BILLING CODE 8010-01-P