[Federal Register Volume 67, Number 249 (Friday, December 27, 2002)]
[Notices]
[Pages 79222-79227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32794]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47062; File No. SR-Phlx-2002-67]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Regarding Rules 
Implementing the Options Intermarket Linkage Plan

December 20, 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 29, 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, II, 
and III 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.
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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 adopt rules (``rules'') implementing the Plan 
for the Purpose of Creating and Operating an Intermarket Options 
Linkage (``Plan'').\3\ The Exchange previously filed proposed rules 
adopting the Plan on August 16, 2001.\4\ Below is the text of the 
proposed rule change; proposed new text is italicized.
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    \3\ Securities Exchange Act Release Nos. 43086 (July 28, 2000), 
65 FR 48023 (August 4, 2000) (approving the Plan), 43573 (November 
16, 2000), 65 FR 70851 (November 28, 2000) (approving Phlx joining 
the Plan); and 44482 (June 27, 2001), 66 FR 35470 (July 5, 2001) 
(approving amendment to Plan to conform to the requirements of rule 
11Ac1-7 (``Amendment'')).
    \4\ See SR-Phlx-2001-78, which has been withdrawn. The instant 
proposal is intended to replace the previous filing and amendment(s) 
in their entirety.
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Intermarket Linkage

Definitions

    Rule 1083. The following terms shall have the meaning specified in 
this rule solely for the purpose of rules 1083 through 1087:
    (a) ``Aggrieved Party'' means a member of a Participant Exchange 
whose bid or offer was traded-through.
    (b) ``Block Trade'' means a trade on a Participant Exchange that:
    (i) Involves 500 or more contracts and has a premium value of at 
least $150,000;
    (ii) Is effected at a price outside of the NBBO; and
    (iii) Involves either:
    (A) A cross (where a member of the Participant Exchange represents 
all or a portion of both sides of the trade), or
    (B) Any other transaction (i.e., in which such member represents an 
order of block size on one side of the transaction only) that is not 
the result of an execution at the current bid or offer on the 
Participant Exchange.
    Contemporaneous transactions at the same price on a Participant 
Exchange shall be considered a single transaction for the purpose of 
this definition.
    (c) ``Complex Trade'' means the execution of an order in an options 
series in conjunction with the execution of one or more related 
orders(s) in different options series in the same underlying security 
occurring at or near the same time for the equivalent number of 
contracts and for the purpose of executing a particular investment 
strategy.
    (d) ``Crossed Market'' means a quotation in which the Exchange 
disseminates a bid (offer) in a series of an Eligible Option Class at a 
price that is greater than (is less than) the price of the offer (bid) 
for the series then being displayed from another Participant Exchange.
    (e) ``Eligible Market Maker,'' with respect to an Eligible Option 
Class, means a specialist or ROT that:
    (i) Is assigned to, and is providing two-sided quotations in, the 
Eligible Option Class;
    (ii) Is in compliance with the requirements of rule 1087;
    (iii) Is participating in the Exchange's AUTOM system (logged onto 
the Exchange's ``Wheel'') in such Eligible Option Class;
    (iv) Has a clearing arrangement with a clearing firm that is a 
member of the exchange to which such specialist or ROT sends a Linkage 
Order (as defined below).
    (f) ``Eligible Option Class'' means all option series overlying a 
security (as that term is defined in section 3(a)(10) of the Exchange 
Act) or group of securities, including both put options and call 
options, which class is traded on the Exchange and at least one other 
Participant Exchange.
    (g) ``Firm Customer Quote Size'' with respect to a P/A Order means 
the lesser of (a) the number of option contracts that the Participant 
Exchange sending a P/A Order guarantees it will automatically execute 
at its disseminated price in a series of an Eligible Option Class for 
Public Customer orders entered directly for execution in that market; 
or (b) the number of option contracts that the Participant Exchange 
receiving a P/A Order guarantees it will automatically execute at its 
disseminated price in a series of an Eligible Option Class for Public 
Customer orders entered directly for execution in that market. This 
number shall be at least 10.
    (h) ``Firm Principal Quote Size'' means the number of options 
contracts that a Participant Exchange guarantees it will execute at its 
disseminated price for incoming Principal Orders in an Eligible Option 
Class. This number shall be at least 10.
    (i) ``Linkage'' means the systems and data communications network 
that link electronically the Participant Exchanges for the purposes 
specified in the Plan.
    (j) ``Linkage Order'' means an order routed through the Linkage as 
permitted under the Plan. There are three types of Linkage Orders:
    (i) ``Principal Acting as Agent (``P/A'') Order,'' which is an 
order for the principal account of a specialist (or equivalent entity 
on another Participant Exchange that is authorized to represent Public 
Customer orders), reflecting the terms of a related unexecuted Public 
Customer order for which the specialist is acting as agent;
    (ii) ``Principal Order,'' which is an order for the principal 
account of an Eligible Market Maker and is not a P/A Order; and
    (iii) ``Satisfaction Order,'' which is an order, for the principal 
account of a member who initiated a Trade-Through, sent through the 
Linkage to satisfy the liability arising from that Trade-Through.
    (k) ``Locked Market'' means a quotation in which the Exchange 
disseminates a bid (offer) in a series of an Eligible Option Class at a 
price that

[[Page 79223]]

equals the price of the offer (bid) for the series then being displayed 
from another Participant Exchange. 
    (l) ``NBBO'' means the national best bid and offer in an options 
series as calculated by the Exchange. 
    (m) ``Non-Firm'' means, with respect to quotations, that members of 
a Participant Exchange are relieved of their obligation to be firm for 
their quotations pursuant to Rule 11Ac1-1 under the Exchange Act. 
    (n) ``Participant Exchange'' means a registered national securities 
exchange that is a party to the Plan. 
    (o) ``Plan'' means the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage, as such plan may be amended 
from time to time. 
    (p) ``Public Customer'' for purposes of these rules concerning 
Linkage, means a person that is neither a broker or dealer in 
securities nor an affiliate of a broker or dealer in securities. 
    (q) ``Reference Price'' means the limit price attached to a Linkage 
Order by the sending Participant Exchange. Except with respect to a 
Satisfaction Order, the Reference Price is equal to the bid 
disseminated by the receiving Participant Exchange at the time that the 
Linkage Order is transmitted in the case of a Linkage Order to sell and 
the offer disseminated by the receiving Participant Exchange at the 
time that the Linkage Order is transmitted in the case of a Linkage 
Order to buy. With respect to a Satisfaction Order, the Reference Price 
is the price that the member in the sending Participant Exchange is 
entitled to receive in satisfaction of a Trade-Through complaint under 
the Plan. 
    (r) ``Trade-Through'' means a transaction in an options series at a 
price that is inferior to the NBBO. 
    (s) ``Third Participating Market Center Trade-Through'' means a 
Trade-Through in a series of an Eligible Option Class that is effected 
by executing a Linkage Order, and such execution results in a sale 
(purchase) at a price that is inferior to the best bid (offer) being 
disseminated by another Participant Exchange. 
    (t) ``Verifiable Number of Customer Contracts'' means the number of 
Public Customer contracts in the book of a Participant Exchange.

Operation of the Linkage

    Rule 1084. By subscribing to the Plan, the Exchange has agreed to 
comply with, and enforce compliance by its members with, the Plan. In 
this regard, the following shall apply: 
    (a) Pricing. Members may send P/A Orders and Principal Orders 
through the Linkage only if such orders are priced at the NBBO. 
    (b) P/A Orders. 
    (1) Sending of P/A Orders for Sizes No Larger than the Firm 
Customer Quote Size. A specialist may send through the Linkage a P/A 
Order for execution in the automatic execution system of a Participant 
Exchange if the size of such P/A Order is no larger than the Firm 
Customer Quote Size. Except as provided in subparagraph (b)(2)(ii) 
below, a specialist may not break up an order of a Public Customer that 
is larger than the Firm Customer Quote Size into multiple P/A Orders, 
one or more of which is equal to or smaller than the Firm Customer 
Quote Size, so that such orders could be represented as multiple P/A 
Orders through the Linkage. 
    (2) Sending of P/A Orders for Sizes Larger than the Firm Customer 
Quote Size. If the size of a P/A Order is larger than the Firm Customer 
Quote Size, a specialist may send through the Linkage such P/A Order in 
one of two ways: 
    (i) The specialist may send a P/A Order representing the entire 
Public Customer order. If the receiving Participant Exchange's 
disseminated price is equal to or better than the Reference Price when 
the P/A Order arrives at that market, that exchange will execute the P/
A Order at its disseminated price for at least the Firm Customer Quote 
Size. Within 15 seconds of receipt of such order, the receiving 
Participant Exchange will inform the specialist of the amount of the 
order executed and the amount, if any, that was canceled. 
    (ii) Alternatively, the specialist may send an initial P/A Order 
for the Firm Customer Quote Size pursuant to subparagraph (b)(1) above. 
If the Participant Exchange executes the P/A Order and continues to 
disseminate the same price at the NBBO 15 seconds after reporting the 
execution of the initial P/A Order, the specialist may send an 
additional P/A Order to the same Participant Exchange. If sent, such 
additional P/A Order must be for at least the lesser of 100 contracts 
or the entire remainder of the Public Customer order. 
In any situation where a receiving Participant Exchange does not 
execute a P/A Order in full, such exchange is required to move its 
quotation to a price inferior to the Reference Price of the P/A Order.
    (c) Principal Orders.
    (1) Sending of an Initial Principal Order. An Eligible Market Maker 
may send a Principal Order through the Linkage at a price equal to the 
NBBO. Subject to the next paragraph, if the Principal Order is not 
larger than the Firm Principal Quote Size, the receiving Participant 
Exchange will execute the order in its automatic execution system, if 
available, if its disseminated price is equal to or better than the 
price specified in the Principal Order when that order arrives at the 
receiving Participant Exchange. If the Principal Order is larger than 
the Firm Principal Quote Size, the receiving Participant will (a) 
execute the Principal order at its disseminated price for at least the 
Firm Principal Quote Size and (b) within 15 seconds of receipt of such 
order, reply to the sending Participant Exchange, informing such 
Participant Exchange of the amount of the order that was executed and 
the amount, if any, canceled. If the receiving Participant Exchange 
does not execute the Principal Order in full, it will move its quote to 
a price inferior to the Reference Price of the Principal Order.
    (2) Receipt of Multiple Principal Orders. Once the Exchange 
provides an automatic execution of a Principal Order in a series of an 
Eligible Option Class (the ``initial execution''), the Exchange may 
reject any Principal Order(s) in the same Eligible Option Class sent by 
the same Participant Exchange for 15 seconds after the initial 
execution unless: (a) There is a change of price in the Exchange's 
disseminated offer (bid) in the series of the Eligible Option Class in 
which there was the initial execution; and (b) such price continues to 
be the NBBO. After this 15 second period, and until the sooner of (y) 
one minute after the initial execution or (z) a change in the 
Exchange's disseminated bid (offer), the Exchange is not obligated to 
provide an automatic execution for any Principal Orders in the same 
Eligible Option Class received from the Participant Exchange that sent 
the order resulting in the initial execution, and thus may treat any 
such Principal Orders as being greater than the Firm Principal Quote 
Size.
    (d) Responses to Linkage Orders.
    (1) Failure to Receive a Timely Response. A Member who does not 
receive a response to a P Order or a P/A Order within 20 seconds of 
sending the order may reject any response received thereafter 
purporting to report an execution of all or part of that order. The 
Member so rejecting the response shall inform the Participant Exchange 
sending that response of the rejection within 15 seconds of receipt of 
the response.
    (2) Failure to Send a Timely Response. If a Member responds to a P 
Order or P/A Order more than 20 seconds after receipt of that order, 
and the Participant Exchange to whom the Member responded cancels such

[[Page 79224]]

response, the Member shall cancel any trade resulting from such order 
and shall report the cancellation to the Option Price Reporting 
Authority (``OPRA'').
    (e) Receipt of Linkage Orders. The Exchange will provide for the 
execution of P/A Orders and Principal Orders if its disseminated price 
is (i) equal to or better than the Reference Price, and (ii) equal to 
the then-current NBBO. If the size of a P/A Order or Principal Order is 
not larger than the Firm Customer Quote Size or Firm Principal Quote 
size, respectively, the Exchange will provide for the execution of the 
entire order, and shall execute such order in its automatic execution 
system if such order is eligible for automatic execution and that 
system is available. Subject to paragraph (c) above, if the size of a 
P/A Order or Principal Order is larger than the Firm Customer Quote 
Size or Firm Principal Quote Size, respectively, or if the Linkage 
Order received is not eligible to be executed automatically via AUTO-X 
pursuant to Exchange rule 1080(c)(iv), the specialist must address the 
order within 15 seconds to provide an execution for at least the Firm 
Customer Quote Size or Firm Principal Quote Size, respectively. If the 
order is not executed in full, the Exchange will move its disseminated 
quotation to a price inferior to the Reference Price.

Order Protection

    Rule 1085. (a) Avoidance and Satisfaction of Trade-Throughs.
    (1) General Provisions. Absent reasonable justification and during 
normal market conditions, Members should not effect Trade-Throughs. 
Except as provided in paragraph (b) below, if a Member effects a Trade-
Through with respect to the bid or offer of a Participant Exchange in 
an Eligible Option Class and the Exchange receives a Satisfaction Order 
from an Aggrieved Party, either:
    (i) the Member who initiated the Trade-Through shall satisfy, or 
cause to be satisfied, the Aggrieved Party by filling the Satisfaction 
Order in accordance with subparagraph (a)(2) below; or
    (ii) if the Member elects not to do so (and, in the case of Third 
Participating Market Center Trade-Through, the Member obtains the 
agreement of the contra party that received the Linkage Order that 
caused the Trade-Through), then the price of the transaction that 
constituted the Trade-Through shall be corrected to a price at which a 
Trade-Through would not have occurred. If the price of the transaction 
is corrected, the Member correcting the price shall report the 
corrected price to OPRA, notify the Aggrieved Party of the correction 
and cancel the Satisfaction Order.
    (2) Price and Size. The price and size at which the bid or offer 
traded through shall be filled is as follows:
    (i) Price. A Satisfaction Order shall be filled at the reference 
price. However, if the Reference Price is the price of an apparent 
Block Trade that caused the trade-through, and such trade was not, in 
fact, a Block Trade, then the member may cancel the Satisfaction Order. 
In that case, the Member shall inform the Aggrieved Party within three 
minutes of receipt of the Satisfaction Order of the reason for the 
cancellation. Within three minutes of receipt of such cancellation, the 
Aggrieved Party may resend the Satisfaction Order with a Reference 
Price of the bid or offer that was traded through.
    (ii) Size. An Aggrieved Party may send a Satisfaction Order up to 
the size of the Verifiable Number of Customer Contracts that were 
included in the disseminated bid or offer that was traded through, 
subject to the following limitations:
    (A) If the number of contracts to be satisfied exceeds the size of 
the transaction that caused the Trade-Through, the size of the 
Satisfaction Order(s) that must be filled with respect to each 
Participant Exchange(s) shall be limited to the size of the transaction 
that caused the Trade-Through, and the remainder of any Satisfaction 
Order(s) shall be cancelled;
    (B) If the transaction that caused the Trade-Through was for a size 
larger than the Firm Customer Quote Size with respect to any of the 
Participant Exchange(s) traded through, the total number of contracts 
to be filled, with respect to all Satisfaction Orders received, shall 
not exceed the size of the transaction that caused the Trade-Through. 
In that case, the Member shall fill the Satisfaction Orders pro rata 
based on the Verifiable Number of Customer Contracts traded through on 
each Participant Exchange, and shall cancel the remainder of such 
Satisfaction Orders; and
    (C) Notwithstanding paragraphs A and B above, if the transaction 
that caused the Trade-Through occurred during the five minutes prior to 
the regularly-scheduled close of trading in the principal market in 
which the underlying security is traded, the maximum number of 
contracts to be satisfied with respect to any one Participant Exchange 
shall be 10 contracts.
    (3) Rejection of Fills of Satisfaction Orders. Within 30 seconds of 
receipt of notification that another Participant Exchange has filled a 
Member's Satisfaction Order, the member that sent the Satisfaction 
Order may reject such fill, but only to the extent that either: (i) the 
order(s) for the customer contracts underlying the Satisfaction Order 
already have been filled; or (2) the customer orders to buy (sell) the 
contracts underlying the Satisfaction Order were cancelled.
    (4) Protection of Customers. Whenever subparagraph (a)(1) applies, 
if Public Customer orders (or P/A Orders representing Public Customer 
orders) constituted either or both sides of the transaction involved in 
the Trade-Through, each such Public Customer order (or P/A Order) shall 
receive:
    (i) The price that caused the Trade-Through; or
    (ii) The price at which the bid or offer traded through was 
satisfied, if it was satisfied pursuant to subparagraph (a)(1)(i), or 
the adjusted price, if there was an adjustment, pursuant to 
subparagraph (a)(1)(ii),
Whichever price is most beneficial to the Public Customer order. 
Resulting differences in prices shall be the responsibility of the 
Member who initiated the Trade-Through.
    (b) Exceptions to Trade-Through Liability. The provisions of 
paragraph (a) pertaining to the satisfaction of Trade-Throughs shall 
not apply under the following circumstances:
    (1) The Member who initiated the Trade-Through made every 
reasonable effort to avoid the Trade-Through, but was unable to do so 
because of a systems/equipment failure or malfunction;
    (2) The Member trades through the market of a Participant Exchange 
to which such Member had sent a P/A Order or Principal Order, and 
within 20 seconds of sending such order the receiving Participant 
Exchange had neither executed the order in full nor adjusted the 
quotation traded through to a price inferior to the Reference Price of 
the P/A Order or Principal Order;
    (3) The bid or offer traded through was being disseminated from a 
Participant Exchange whose quotes were Non-Firm with respect to such 
Eligible Option Class;
    (4) The Trade-Through was other than a Third Participating Market 
Center Trade-Through and occurred during a period when, with respect to 
the Eligible Option Class, the Exchange's quotes were Non-Firm; 
provided, however, that, unless one of the other conditions of this 
paragraph (b) applies, during any such period: (i) Members shall make 
every reasonable effort to avoid trading through the firm quotes of 
another Participant Exchange; and (ii) it shall not be considered an 
exception to

[[Page 79225]]

paragraph (a) if a Member regularly trades through the firm quotes of 
another Participant Exchange during such period;
    (5) The bid or offer traded through was being disseminated by a 
Participant Exchange during a trading rotation in the Eligible Option 
Class;
    (6) The transaction that caused the Trade-Through occurred during a 
trading rotation;
    (7) The transaction that caused the Trade-Through was the execution 
of a Complex Trade;
    (8) In the case of a Trade-Through other than a Third Participating 
Market Center Trade-Through, a Satisfaction Order with respect to the 
Trade-Through was not received by the Exchange from the Aggrieved Party 
promptly following the Trade-Through and, in any event, (i) except in 
the final five minutes of trading, within three minutes from the time 
the report of the transaction(s) that constituted the Trade-Through was 
disseminated over OPRA, and (ii) in the final five minutes of trading, 
within one minute from the time the report of the transaction(s) that 
constituted the Trade-Through was disseminated over OPRA; or
    (9) In the case of a Third Participating Market Center Trade-
Through, a Satisfaction Order with respect to the Trade-Through was not 
received by the Exchange promptly following the Trade-Through. In 
applying this provision, the Aggrieved Party must send the Exchange a 
Satisfaction Order within three minutes from the time the report of the 
transaction that constituted the Trade-Through was disseminated over 
OPRA. To avoid liability for the Trade-Through, the Member receiving 
such Satisfaction Order must cancel the Satisfaction Order and inform 
the Aggrieved Party of the identity of the Participant Exchange that 
initiated the Trade-Through within three minutes of the receipt of such 
Satisfaction Order (within one minute in the final five minutes of 
trading). The Aggrieved Party then must send the Participant Exchange 
that initiated the Trade-Through a Satisfaction Order within three 
minutes of receipt of the cancellation of the initial Satisfaction 
Order (within one minute in the final five minutes of trading).
    (c) Responsibilities and Rights Following Trade-Through Complaints.
    (1) When a Member receives a Satisfaction Order, that Member shall 
respond as promptly as practicable pursuant to Exchange procedures by 
either:
    (i) Specifying that one of the exceptions to Trade-Through 
liability specified in paragraph (b) above is applicable and 
identifying that particular exception; or
    (ii) Taking the appropriate corrective action pursuant to paragraph 
(a) above.
    (2) If the Member who initiated the Trade-Through fails to respond 
to a Satisfaction Order or otherwise fails to take the corrective 
action required under paragraph (a) within three minutes of receiving 
notice of a Satisfaction Order, and the Exchange determines that:
    (i) There was a Trade-Through; and
    (ii) None of the exceptions to Trade-Through liability specified in 
paragraph (b) above were applicable,
then, subject to the next paragraph, the Member who initiated the 
Trade-Through shall be liable to the Aggrieved Party for the amount of 
the actual loss resulting from non-compliance with paragraph (a) and 
caused by the Trade-Through.
    If either (a) the Aggrieved Party does not establish the actual 
loss within 30 seconds from the time the Aggrieved Party received the 
response to its Satisfaction Order (or, in the event that it did not 
receive a response, within four minutes from the time the Aggrieved 
Party sent the Satisfaction Order), or (b) the Aggrieved Party does not 
notify the Participant Exchange that initiated the Trade-Through of the 
amount of such loss within one minute of establishing the loss, then 
the liability shall be the lesser of the actual loss or the loss caused 
by the Trade-Through that the Aggrieved Party would have suffered had 
that party purchased or sold the option series subject to the Trade-
Through at the ``mitigation price.'' For the purposes of this 
paragraph, the ``mitigation price'' is the highest reported bid (in the 
case where an offer was traded through) or the lowest reported offer 
(in the case where a bid was traded through), in the series in question 
30 seconds from the time the Aggrieved Party received the response to 
its Satisfaction Order (or, in the event that it did not receive a 
response, within four minutes from the time the Aggrieved Party sent 
the Satisfaction Order). If the Participant Exchange receives a 
Satisfaction Order within the final four minutes of trading (on any day 
except the last day of trading prior to the expiration of the series 
which is the subject of the Trade-Through), then the mitigation price 
shall be the price established at the opening of trading in that series 
on the Aggrieved Party's Participant Exchange on the next trading day. 
However, if the price of the opening transaction is below the opening 
bid or above the opening offer as established during the opening 
rotation, then the mitigation price shall be the opening bid (in the 
case where an offer was traded through) or opening offer (in the case 
where a bid was traded through). If the Trade-Through involves a series 
that expires on the day following the day of the Trade-Through and the 
Satisfaction Order is received within the last four minutes of trading, 
the ``mitigation price'' shall be the final bid (in the case where an 
offer was traded through) or offer (in the case where a bid was traded 
through) on the day of the trade that resulted in the Trade-Through.
    (3) A Member that is an Aggrieved Party under the rules of another 
Participant Exchange governing Trade-Through liability must take steps 
to establish and mitigate any loss such Member might incur as a result 
of the Trade-Through of the Member's bid or offer. In addition, the 
Member shall give prompt notice to the other Participant Exchange of 
any such action in accordance with subparagraph (c)(2) above.
    (d) Limitations on Trade-Throughs. Members may not repeatedly trade 
through better prices available on other exchanges, whether or not the 
exchange or exchanges whose quotations are traded through are 
Participant Exchanges, unless one or more of the provisions of 
paragraph (b) above are applicable. In applying this provision:
    (1) The Exchange will consider there to have been a Trade-Through 
if a Member executes a trade at a price inferior to the NBBO even if 
the Exchange does not receive a Satisfaction Order from an Aggrieved 
Party pursuant to subparagraph (a)(1);
    (2) The Exchange will not consider there to have been a Trade-
Through if a Member executes a Block Trade at a price inferior to the 
NBBO if such Member satisfied all Aggrieved Parties pursuant to 
subparagraph (a)(2) following the execution of the Block Trade; and
    (3) The Exchange will not consider there to have been a Trade-
Through if a Member executes a trade at a price inferior to the 
quotation being disseminated by an exchange that is not a Participant 
Exchange if the Member made a good faith effort to trade against the 
superior quotation of the non-Participant Exchange prior to trading 
through that quotation. A ``good faith effort'' to reach a non-
Participant Exchange's quotation requires that a Member at least had 
sent an order that day to the non-Participant Exchange in the class of 
options in which there is a Trade-Through, at a time at which such non-
Participant Exchange was not relieved of its obligation to be firm for 
its quotations pursuant to Rule 11Ac1-

[[Page 79226]]

1 under the Exchange Act, and such non-Participant Exchange neither 
executed that order nor moved its quotation to a price inferior to the 
price of the Member's order within 20 seconds of receipt of that order.

Locked and Crossed Markets

    Rule 1086. (a) Eligible Market Maker Locking or Crossing a Market. 
An Eligible Market Maker that creates a Locked Market or a Crossed 
Market shall unlock (uncross) that market or shall direct a Principal 
Order through the Linkage to trade against the bid or offer that the 
Eligible Market Maker locked (crossed).
    (b) Members Other than an Eligible Market Maker Locking or Crossing 
a Market. A Member other than an Eligible Market Maker that creates a 
Locked Market or a Crossed Market shall unlock (uncross) the market.

Limitation on Principal Order Access

    Rule 1087. A specialist or ROT shall not be permitted to send 
Principal Orders in an Eligible Option Class through the Linkage for a 
given calendar quarter if the specialist or ROT effected less than 80 
percent of its volume in that Eligible Option Class on the Exchange in 
the previous calendar quarter (that is, the specialist or ROT effected 
20 percent or more of its volume by sending Principal Orders through 
the Linkage). This ``80/20'' is represented as follows:
[GRAPHIC] [TIFF OMITTED] TN27DE02.121

    ``X'' equals the total contract volume the specialist or market 
effects in an Eligible Option Class against orders of Public Customers 
on the Exchange during a calendar quarter (a) including contract volume 
effected by executing P/A Orders sent to the Exchange through the 
linkage, but (b) excluding contract volume effected by sending P/A 
Orders through the Linkage for execution on another Participant 
Exchange. ``Y'' equals the total contract volume the specialist or ROT 
effects in such Eligible Option Class by sending Principal Orders 
through the Linkage during that calendar quarter.

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 purpose of the proposed rule change is to adopt rules 
implementing the Plan. The purpose of the Plan is to enable the Plan's 
Participants to act jointly in planning, developing, operating and 
regulating an Intermarket Options Linkage (``Linkage'') so as to 
further the objectives of Congress as set forth in section 11A(a) of 
the Act.\5\ These objectives include, but are not limited to, 
increasing market efficiency, enhancing competition, increasing the 
information available to brokers and dealers and investors, 
facilitating the offsetting of investors' orders and contributing to 
the best execution of such orders. Therefore, the Exchange proposes 
these rules, which if approved by the Commission, should implement the 
Plan on the Exchange and allow the Exchange to participant in the 
Linkage.
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    \5\ 15 U.S.C. 78k-1(a).
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    Capitalized terms used in this filing and not otherwise defined 
herein have the meaning set forth in the proposed rules and if not 
defined therein, as defined in the Plan. The Exchange represents the 
proposed rules are consistent with the amended Plan.
    The proposed rules include the following provisions:
    [sbull] Proposed Phlx rule 1083, Definitions: This proposed rule 
contains definitions unique to the Linkage; all other definitions in 
the Exchange's rules would continue to apply to this chapter. 
Generally, these definitions would incorporate into the Exchange's 
rules the definitions contained in the Plan.
    [sbull] Proposed Phlx rule 1084, Operation of the Linkage: This 
proposed rule incorporates section 7 of the Plan into the Exchange's 
rules. It would establish the conditions pursuant to which market 
makers may enter Linkage orders and imposes obligations on the Exchange 
with respect to how it must process incoming Linkage orders. Pursuant 
to a recent proposed amendment to the Plan, it would provide that a 
member of the Exchange may reject an execution of certain Linkage 
orders received more than 20 seconds after sending the order. This 
would be a reduction from the 30 seconds currently provided for in the 
Plan.
    Proposed Phlx rule 1084 would provide that if a Linkage Order 
received is not eligible to be executed automatically via AUTO-X 
pursuant to Exchange rule 1080(c)(iv),\6\ the Linkage Order would be 
handled as though the size of such order is larger than the Firm 
Customer Quote Size or Firm Principal Quote Size, respectively (i.e., 
the specialist must address the order within 15 seconds to provide an 
execution for at least the Firm Customer Quote Size or Firm Principal 
Quote Size, respectively).
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    \6\ Proposed Exchange rule 1080(c)(iv) provides that an order 
otherwise eligible for AUTO-X would instead be manually handled by 
the specialist in the following circumstances:
    (A) The Exchange's disseminated market is crossed (i.e., 2-1/8 
bid, 2 offer) or locked (i.e., 2 bid, 2 offer), or crosses or locks 
the disseminated market of another options exchange;
    (B) One of the following order types: stop, stop limit, market 
on closing, market on opening, or an all-or-none order where the 
full size of the order cannot be executed;
    (C) The AUTOM System is not open for trading when the order is 
received (which is known as a pre-market order);
    (D) The disseminated market is produced during an opening or 
other rotation;
    (E) When the specialist posts a bid or offer that is better than 
the specialist's own bid or offer;
    (F) If the NBBO Feature is not engaged, and the Exchange's bid 
or offer is not the NBBO;
    (G) When the price of a limit order is not in the appropriate 
minimum trading increment pursuant to rule 1034;
    (H) When the bid price is zero respecting sell orders; and
    (I) When the number of contracts automatically executed within a 
15 second period in an option exceeds the AUTO-X guarantee, a 30 
second period ensues during which subsequent orders are handled 
manually.
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    [sbull] Rule 1085, Order Protection: This proposed rule contains 
the trade-through provisions required under section 8(c) of the Plan. 
First, it would establish a general standard that members should avoid 
trade-throughs (defined in proposed Phlx rule 1083 to be a trade at a 
price inferior to the National Best Bid and Offer (``NBBO'')). If a 
member does effect a trade-through, the member would be responsible for 
satisfying a member of another exchange by way of a ``Satisfaction 
Order.'' Both the satisfaction procedures and the exceptions to the 
satisfaction requirements would incorporate the relevant provision of 
the Plan.
    Finally, the proposed rule would establish potential regulatory 
liability for members who repeatedly trade through other exchanges, 
whether or not the exchanges traded through participate in the Linkage. 
This rule also reflects two pending amendments to the Plan:
    1. As with Proposed Phlx rule 1083, this proposed rule reflects the 
pending amendment to reduce from 30 seconds

[[Page 79227]]

to 20 seconds the time period a member must wait for a response to a 
Linkage order. If the member does not receive the response within 30 
seconds, the member would be permitted to trade through the non-
responding exchange without liability.
    2. In addition, this rule reflects a pending Plan amendment that 
would limit liability for trade-throughs in the last few minutes of a 
trading day to 10 contracts per exchange. The purpose of that amendment 
is to provide protection for small customer orders, but also to limit 
the potential risk to members who may not be able to hedge options 
positions they assume near the close of trading.
    [sbull] Proposed Phlx Rule 1086, Locked and Crossed Markets: This 
proposed rule would implement section 7(a)(i)(C) of the Plan by 
indicating that locked and crossed markets should be avoided and 
providing procedures to unlock and uncross markets that do occur.
    [sbull] Proposed Phlx Rule 1087, Limitation on Principal Order 
Access: This proposed rule would codify the ``80/20 Test'' contained in 
section 8(b)(iii) of the Plan. Specifically, a market maker on the 
Exchange would be restricted from sending Principal Orders (other than 
P/A orders, which reflect unexecuted customer orders) through the 
Linkage if the market maker effects less than 80 percent of specified 
order flow on the Exchange. The Exchange would apply this test on a 
calendar quarter basis.
2. Statutory Basis
    The Exchange believes that the basis under the Act for this 
proposed rule change is the requirement under section 6(b)(5) of the 
Act \7\ that a national securities exchange have rules that are 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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, and, 
in general, to protect investors and the public interest.
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    \7\ 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 or 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 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-2002-67 and 
should be submitted by January 17, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32794 Filed 12-26-02; 8:45 am]
BILLING CODE 8010-01-U