[Federal Register Volume 68, Number 14 (Wednesday, January 22, 2003)]
[Notices]
[Pages 3077-3080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1288]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47166; File No. SR-Phlx-2002-61]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. To Amend Options Floor Procedure Advice A-13 To Include Violations 
for Failure To Obtain Approval To Disengage the NBBO Feature in the 
Exchange's Minor Rule Plan

January 10, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on October 4, 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. On November 7, 2002, the Exchange submitted Amendment No. 1 
to the proposed rule change.\3\ 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 Rick Rudolph, Director and Counsel, Phlx, to 
Jennifer Lewis, Commission, dated November 6, 2002 (``Amendment No. 
1''). In Amendment No. 1, Phlx fixed nonsubstantive typographical 
errors in its rule text, and added a cross-reference to Phlx Rule 
960.2 in the purpose section of its proposal.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to amend Phlx Option Floor Procedure Advice 
(``OFPA'') A-13, Auto Execution Engagement/Disengagement 
Responsibility, to include violations for failure to obtain the 
necessary approvals prior to disengagement of the Exchange's NBBO Step-
Up Feature. The text of the proposed rule change is set forth below. 
Proposed new text is italicized; deleted language is in brackets.
A-13 Auto Execution Engagement/Disengagement Responsibility (EQUITY 
OPTION AND INDEX OPTION ONLY)
    (a) It is the responsibility of the option Specialist to engage the 
Auto Execution (Auto-X) system for an assigned option within three (3) 
minutes of completing the opening or reopening rotation of that option.
    Where extraordinary circumstances occur, a Specialist may be 
provided an exemption from receiving orders through Auto-X and may then 
disengage the system upon approval by two Floor Officials. Five minutes 
subsequent to the disengagement of AUTO-X for extraordinary 
circumstances (and every 15 minutes thereafter as long as AUTO-X is 
disengaged), the requesting Specialist [of] or his/her designee, two 
Floor Officials, and a designated surveillance staff person, shall re-
evaluate the circumstances to determine if the extraordinary 
circumstances still exist. AUTO-X will be re-engaged with either: (i) 
Specialist [of] or his/her designee determines that the conditions 
supporting the extraordinary circumstances no longer exist, at which 
time the Specialist or his/her designee shall inform the Market 
Surveillance staff that the extraordinary circumstances no longer exist 
and that the Specialist is re-engaging AUTO-X; or (ii) when two Floor 
Officials and the designated surveillance staff person determine that 
the conditions supporting the extraordinary circumstances no longer 
exist. In the event extraordinary circumstances exist floor-wide, two 
Exchange Floor Officials and the Chairperson of the Options Committee 
or his/or her designee may determine to disengage the AUTO-X feature 
floor-wide. Five minutes subsequent to a floor-wide disengagement of 
AUTO-X for extraordinary circumstances (and every 15 minutes thereafter 
as long as AUTO-X is disengaged), two Floor Officials, the Chairperson 
of the Options Committee or his/her designee and a designated Market 
Surveillance staff person shall re-evaluate the circumstances to 
determine if the extraordinary circumstances still exist. AUTO-X will 
be re-engaged when either[;]: (1) the Specialist determines that the 
conditions supporting the extraordinary circumstances no longer exist 
for their particular class of options at which time the Specialist or 
his/her designee will inform Market Surveillance staff that the 
extraordinary circumstances no longer exist for their particular class 
of options and that the Specialist is re-engaging AUTO-X; or (2) when 
two Floor Officials, the Chairperson of the Options Committee or his/
her designee and the designated Market Surveillance staff person 
determine that the extraordinary circumstances no longer exist. The 
NBBO feature is always disengaged when AUTO-X is disengaged.
    Extraordinary circumstances include market occurrences and system 
malfunctions that impact a Specialist's ability to accurately price and

[[Page 3078]]

disseminate option quotations in a timely manner. Such occurrences 
include fast market conditions such as volatility, order imbalances, 
volume surges or significant price variances in the underlying 
security; internal system malfunctions including the Exchange's Auto-
Quote system; or malfunctions of external systems such as a specialized 
quote feed, or delays in the dissemination of quotes from the Option 
Price Reporting Authority; or other similar occurrences.
    The Exchange shall document any action taken to disengage AUTO-X 
pursuant to this Rule 1080(e), and shall notify all AUTOM Users of each 
instance in which AUTO-X is disengaged due to extraordinary 
circumstances. Such documentation shall include: identification of the 
option(s) affected by such action (except in a case of floor-wide 
disengagement); the date and time such action was taken and concluded; 
identification of the Floor Officials who approved such action; the 
reasons for which such action was taken; identification of the 
Specialist and the Specialist Unit (or in the case of floor-wide 
disengagement, identification of the Options Committee Chairperson or 
his/her designee); and identification of the Market Surveillance staff 
person monitoring the situation. The Exchange will maintain these 
documents pursuant to the record retention requirement of the 
Securities Exchange Act of 1934 and the rules and regulations 
thereunder.
    (b) AUTO-X on the NBBO. AUTO-X on the NBBO (the ``NBBO Feature'') 
is a feature of AUTOM that automatically executes at the National Best 
Bid or Offer (``NBBO''). The NBBO Feature will execute AUTO-X eligible 
orders at the NBBO for certain options designated by the Options 
Committee as eligible for the NBBO Feature (``automatic step-up 
options''), provided that the NBBO does not differ from the 
specialist's best bid or offer by more than the ``step-up parameter.''
    (i) The ``step-up parameter'' for automatic step-up options shall 
be the minimum trading increment for options in that series established 
pursuant to Exchange Rule 1034, or any greater amount established by 
the Options Committee in respect of specified automatic step-up options 
or series of options.
    (ii) The Chairman of the Options Committee or his designee (or if 
the Chairman of the Options Committee or his designee is unavailable, 
two Floor Officials) may determine to disengage the NBBO Feature for 
orders in certain automatic step-up options after notice to AUTOM users 
in situations in which the Exchange is experiencing communications or 
systems problems; fast markets; or delays in the dissemination of 
quotes because of queues on the Options Price Reporting Authority 
(``OPRA''), which would likely render such quotes stale. Where the NBBO 
Feature is disengaged, such orders shall be executed manually in 
accordance with Exchange rules.
    (iii) In respect of automatic step-up options (1) where the 
specialist's best bid or offer is inferior to the current best bid or 
offer in another market by more than the step-up parameter; or (2) 
where the NBBO for one of the series of automatic step-up options is 
crossed (i.e., 2.10 bid, 2 asked) or locked (i.e., 2 bid, 2 asked); or 
(3) in respect of equity options other than automatic step-up options 
where the specialist's best bid or offer is inferior to the current 
best bid or offer in another market by any amount, such orders shall be 
executed manually in accordance with Exchange rules. There may be 
circumstances in which the specialist's best bid or offer is 
inconsistent with the Exchange's best bid or offer. In such a 
circumstance, such an order shall be executed manually.
    (iv) Where the Chairman of the Options Committee or his designee 
(or if the Chairman of the Options Committee or his designee is 
unavailable, two Floor Officials) determines that quotes in options on 
the Exchange or another market or markets are subject to relief from 
the firm quote requirement set forth in the SEC Quote Rule, as defined 
in Exchange Rule 1082(a)(iii) (the ``Quote Rule''), customer market 
orders will receive an automatic execution at the NBBO based on the 
best bid or offer in markets whose quotes are not subject to relief 
from the firm quote requirement set forth in the Quote Rule. Such 
determination may be made by way of notification from another market 
that its quotes are not firm or are unreliable; administrative message 
from the Option Price Reporting Authority (``OPRA''); quotes received 
from another market designated as ``not firm'' using the appropriate 
indicator; and/or telephonic or electronic inquiry to, and verification 
from, another market that its quotes are not firm. AUTOM customers will 
be duly notified via electronic message from AUTOM that such quotes are 
excluded from the calculation of NBBO. The Exchange may determine to 
exclude quotes from its calculation of NBBO on a series-by-series basis 
or issue-by-issue basis, or may determine to exclude all options quotes 
from an exchange, where appropriate. The Exchange shall maintain a 
record of each instance in which another exchange's quotes are excluded 
from the Exchange's calculation of NBBO, and shall notify such other 
exchange that its quotes have been so excluded. Such documentation 
shall include: identification of the option(s) affected by such action; 
the date and time such action was taken and concluded; identification 
of the other exchange(s) whose quotes were excluded from the Exchange's 
calculation of NBBO; identification of the Chairman of the Options 
Committee, his designee, or two Floor Officials (as applicable) who 
approved such action; the reasons for which such action was taken; and 
identification of the specialist and the specialist unit. The Exchange 
will maintain these documents pursuant to the record retention 
requirements of the Securities Exchange Act of 1934 and the rule and 
regulations thereunder.
    (v) Where the Chairman of the Options Committee or his designee (or 
if the Chairman of the Options Committee or his designee is 
unavailable, two Floor Officials), determines that quotes in options on 
the Exchange or another market or markets previously subject to relief 
from the firm quote requirement set forth in the Quote Rule are no 
longer subject to such relief, such quotations will be included in the 
calculation of NBBO for such options. Such determination may be made by 
way of notification from another market that its quotes are firm; 
administrative message from the Option Price Reporting Authority 
(``OPRA''); and/or telephonic or electronic inquiry to, and 
verification from, another market that its quotes are firm. AUTOM 
customers will be duly notified via electronic message from AUTOM that 
such quotes are again included in the calculation of NBBO.
    Fine Schedule (Implemented on a one-year running basis).
(a) Failure to engage Auto-X:
    1st Occurrence $500.00
    2nd Occurrence $1,000.00
    3rd Occurrence $2,000.00
    4th Occurrence and Thereafter Sanction is discretionary with 
Business Conduct Committee
(b) Failure to receive approval to disengage Auto-X:
    1st Occurrence $250.00
    2nd Occurrence $500.00
    3rd Occurrence $1,000.00
    4th Occurrence and Thereafter Sanction is discretionary with 
Business Conduct Committee
(c) Failure to receive approval to disengage NBBO Feature:
    1st Occurrence $250.00
    2nd Occurrence $500.00
    3rd Occurrence $1,000.00
    4th Occurrence and Thereafter

[[Page 3079]]

Sanction is discretionary with Business Conduct Committee

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 Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend OFPA A-13 to 
include in the Exchange's minor rule violation enforcement and 
reporting plan (``Minor Rule Plan'') \4\ violations for failure to 
receive approval to disengage the National Best Bid/Best Offer 
(``NBBO'') Feature of the Exchange's Automated Options Market System 
(``AUTOM'').\5\ The NBBO Feature automatically executes orders at the 
NBBO for certain options designated by the Phlx's Options Committee as 
eligible for the NBBO Feature (``automatic step-up options''), provided 
that the NBBO does not differ from the specialist's bid or offer by 
more than the ``step up parameter.'' \6\ Currently, engagement and 
disengagement of the NBBO Feature is governed solely by Phlx Rule 
1080(c)(i), and violations are referred to the Business Conduct 
Committee (``BCC'').
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    \4\ The Exchange's Minor Rule Plan, codified in Exchange Rule 
970, includes Floor Procedure Advices with accompanying fine 
schedules. Rule 19d-1(c)(2) under the Act authorizes National 
Securities Exchanges to adopt minor rule violation plans for summary 
discipline and abbreviated reporting. 17 CFR 240.19d-1(c)(2). Rule 
19d-1(c)(2) requires prompt filing with the Commission of any final 
disciplinary action. However, fines for minor rule violations not 
exceeding $2,500 are deemed not final, thereby permitting periodic, 
as opposed to immediate, reporting.
    \5\ 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.
    \6\ For a complete description of the NBBO Feature, see 
Securities Exchange Act Release No. 43684 (December 6, 2000), 65 FR 
78237 (December 14, 2000) (order partially approving SR-Phlx-00-93).
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    With regard to the manner in which a specialist must obtain 
approval to disengage the NBBO Feature, Phlx Rule 1080(c)(i) provides 
that the Chairman of the Options Committee or his designee (or if the 
Chairman of the Options Committee or his designee is unavailable, two 
Floor Officials) may determine to disengage the NBBO Feature for orders 
in certain automatic step-up options after notice to AUTOM users in 
certain situations set forth in the Rule. There is, however, no current 
corresponding OFPA providing a fine schedule for violations of the 
section of the Rule requiring approval to disengage the NBBO Feature. 
Thus, violations of Rule 1080(c)(i) currently are investigated by the 
Exchange's Market Surveillance Department (``Market Surveillance''), 
and referred by the Exchange's Enforcement Department (``Enforcement'') 
to the BCC.
    After receiving a referral from Enforcement, the BCC considers the 
matter and may determine to issue a statement of charges.\7\ This 
action is reportable on a member's Form U-4 or member organization's 
Form BD because it is a disciplinary action. By adopting a fine 
schedule under the Minor Rule Plan, the Exchange can issue fines for 
relatively minor infractions without the need for formal disciplinary 
action.
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    \7\ See Phlx Rule 960.3. The BCC could also determine that a 
less formal sanction, such as a letter of caution, is appropriate.
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    Accordingly, the Exchange proposes to amend OFPA A-13 to restate 
from Phlx Rule 1080(c)(i) the conditions for using the NBBO Feature, 
including the requirement to obtain approval to disengage the NBBO 
Feature, and to include a fine schedule for failure to obtain such 
approval. Specifically, the proposed fine schedule is as follows: first 
occurrence, $250; second occurrence, $500; third occurrence, $1,000; 
fourth occurrence and thereafter, sanction discretionary with the BCC. 
The proposed fine schedule would be implemented on a one-year running 
basis. The BCC also would have discretion concerning sanctions for any 
violations should they be deemed egregious by Enforcement and referred 
directly to the BCC pursuant to Exchange Rule 960.2.
    The Exchange believes it is appropriate to include in its Minor 
Rule Plan violations of the approval requirement for disengagement of 
the NBBO Feature. The Exchange's Minor Rule Plan is designed to provide 
a prompt response to a violation of Exchange rules when a meaningful 
sanction is needed, but initiation of a disciplinary proceeding 
pursuant to Phlx Rule 960.2 is not suitable because such a proceeding 
would be more costly and time consuming than would be warranted given 
the nature of the violation.\8\ Therefore, inclusion in the Minor Rule 
Plan of violations of the NBBO Feature disengagement approval 
requirement should make the Exchange's disciplinary system more 
efficient. If the Exchange determines that a violation of Phlx Rule 
1080(c)(i) or OFPA A-13, as amended, is not minor in nature, the 
Exchange may initiate full disciplinary proceedings in accordance with 
Phlx Rule 960.2.
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    \8\ Phlx Rule 960.2 governs the initiation of disciplinary 
proceedings by the Exchange for violations within the disciplinary 
jurisdiction of the Exchange.
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2. Statutory Basis
    The Phlx believes the proposed rule change is consistent with 
section 6 of the Act,\9\ in general, and with section 6(b)(5) of the 
Act,\10\ in particular, in that it is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanisms of a free and open market and a national market system, and 
to protect investors and the public interest, by including violations 
of the approval requirement for disengagement of the NBBO Feature in 
its Minor Rule Plan, thus providing for the more efficient operation of 
its disciplinary system. In addition, the Exchange believes the 
proposal is consistent with section 6(b)(6) of the Act,\11\ which 
requires that the rules of an exchange provide that its members be 
appropriately disciplined for violation of exchange rules, the Act, and 
the rules and regulations thereunder, by expulsion, suspension, 
limitation of activities, functions, and operations, fine, censure, 
being suspended or barred from being associated with a member, or any 
other fitting sanction.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(6).
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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.

[[Page 3080]]

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

    Written comments were neither solicited nor 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 of 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, as amended, 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-2002-61 and should be submitted by February 12, 2003.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1288 Filed 1-21-03; 8:45 am]
BILLING CODE 8010-01-P