[Federal Register Volume 68, Number 73 (Wednesday, April 16, 2003)]
[Notices]
[Pages 18717-18721]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9317]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47657; File No. SR-PHLX-2002-86]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the Philadelphia Stock Exchange, Inc. Relating to the 
Automatic Execution of Booked Customer Limit Orders

April 10, 2003.
    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 December 20, 2002, the Philadelphia Stock Exchange, Inc. (``PHLX'' 
or ``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
items I, II, and III below, which items have been prepared by the 
Exchange. On February 27, 2003, the Exchange filed Amendment No. 1 to 
the proposed rule change.\3\ On March 28, 2003, the Exchange filed 
Amendment No. 2 to the proposed rule change.\4\ On April 9, 2003, the 
Exchange filed Amendment No. 3 to the proposed rule change.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule

[[Page 18718]]

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 S. Rudolph, Director and Counsel, 
Phlx to Deborah Lassman Flynn, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated February 26, 
2003 (``Amendment No. 1''). In Amendment No. 1, the Phlx replaces in 
its entirety the original proposed rule change.
    \4\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx to Deborah Lassman Flynn, Assistant Director, Division, 
Commission, dated March 27, 2003 (``Amendment No. 2''). In Amendment 
No. 2, the Phlx replaces in its entirety Amendment No. 1.
    \5\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx to Deborah Lassman Flynn, Assistant Director, Division, 
Commission, dated April 9, 2003 (``Amendment No. 3''). In Amendment 
No. 3, the Phlx incorporates changes to the text of the Exchange 
rule 1080 that have been made in separate proposed rule change 
filings since the time the current proposed rule change was 
submitted.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PHLX proposes to amend PHLX rule 1080, Philadelphia Stock 
Exchange Automated Options Market (``AUTOM'') and Automatic Execution 
System (``AUTO-X''),\6\ to provide for the automatic execution of 
eligible inbound customer and off-floor broker-dealer limit orders \7\ 
against booked customer limit orders at the Exchange's disseminated 
price. Specifically, the Exchange is proposing to amend PHLX rule 
1080(g) to reflect that the contra-side of an eligible inbound customer 
or off-floor broker-dealer limit order executed via AUTO-X may be a 
booked customer limit order. The text of the proposed rule change is 
set forth below. Proposed new language is in italics; proposed 
deletions are in brackets.
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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. See Phlx rule 1080.
    \7\ In April of 2002, the Commission approved, on a six-month 
pilot basis, the Exchange's proposal to allow off-floor broker-
dealers to submit proprietary limit orders directly onto the limit 
order book via AUTOM (the ``pilot''). See Securities Exchange Act 
Release No. 45758 (April 15, 2002), 67 FR 19610 (April 22, 2002) 
(SR-Phlx-2001-40). In the pilot, the Exchange defined ``off-floor 
broker-dealer'' as (a) a broker-dealer that delivers orders from 
``upstairs'' for the proprietary account(s) of such broker-dealer, 
or (b) a market maker located on an exchange or trading floor other 
than the Exchange's trading floor who elects to deliver orders via 
AUTOM for the proprietary account(s) of such broker-dealer. The 
Commission approved the pilot on a permanent basis in October 2002. 
See Securities Exchange Act Release No. 46660 (October 15, 2002), 67 
FR 64951 (October 22, 2002) (SR-Phlx-2002-50).
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* * * * *
Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)
Rule 1080. (a) No change
    (b) (i)(A)--(B) No change.
    (C) Off-floor broker-dealer limit orders, up to the minimum number 
of contracts permitted by the Exchange, subject to the restrictions on 
order entry set forth in Commentary .05 of this rule. Generally, orders 
up to 1,000 contracts, depending on the option, are eligible for AUTOM 
order delivery on an issue-by-issue basis, subject to the approval of 
the Options Committee. The Options Committee may determine to increase 
the eligible order delivery size to an amount greater than 1,000 
contracts, on an issue-by-issue basis. The following types of broker-
dealer limit orders are eligible for AUTOM: day, GTC, Immediate or 
Cancel (``IOC''), simple cancel, simple cancel to reduce size (cancel 
leaves), cancel to change price, cancel with replacement order. For 
purposes of this rule 1080, the term ``off-floor broker-dealer'' means 
either: (1) A broker-dealer that delivers orders from off the floor of 
the Exchange for the proprietary account(s) of such broker-dealer; or 
(2) a market maker located on an exchange or trading floor other than 
the Exchange's trading floor who elects to deliver orders via AUTOM for 
the proprietary account(s) of such market maker.
    (ii) The Exchange's Options Committee may determine to accept 
additional types of orders as well as to discontinue accepting certain 
types of orders.
    (A) In accordance with this sub-paragraph (ii), the Options 
Committee has determined to allow a customer limit order to be 
submitted in conjunction with a proprietary contra-side order via 
AUTOM; these orders must be labeled with a ``K'' (for the customer 
limit order) and ``L'' (for the proprietary order which is an 
immediate-or-cancel order that is not eligible for automatic execution) 
indicator, respectively. The customer limit order labeled ``K'' may be 
executed by the specialist or crowd, except that it may not be executed 
against the proprietary order labeled ``L'' until the customer limit 
order labeled ``K'' has been exposed to the trading crowd for not less 
than 30 seconds.
    (iii) No change.
    (c) AUTO-X.--AUTO-X is a feature of AUTOM that automatically 
executes eligible market and marketable limit orders up to the number 
of contracts permitted by the Exchange for certain strike prices and 
expiration months in equity options and index options, unless the 
Options Committee determines otherwise. AUTO-X automatically executes 
eligible orders using the Exchange disseminated quotation (except if 
executed pursuant to the NBBO Feature in sub-paragraph (i) below) and 
then automatically routes execution reports to the originating member 
organization. AUTOM orders not eligible for AUTO-X are executed 
manually in accordance with Exchange rules. Manual execution may also 
occur when AUTO-X is not engaged, such as pursuant to sub-paragraph 
(iv) below. An order may also be executed partially by AUTO-X and 
partially manually.
    The Options Committee may for any period restrict the use of AUTO-X 
on the Exchange in any option or series provided that the effectiveness 
of any such restriction shall be conditioned upon its having been 
approved by the Securities and Exchange Commission pursuant to section 
19(b) of the Securities Exchange Act of 1934 and the rules and 
regulations thereunder. Any such restriction on the use of AUTO-X 
approved by the Options Committee will be clearly communicated to 
Exchange membership and AUTOM users through an electronic message sent 
via AUTOM and through an Exchange information circular. Such 
restriction would not take effect until after such communication has 
been made.
    Currently, the Exchange's maximum allowable AUTO-X guarantee is 250 
contracts. With respect to options on the Nasdaq-100 Index Tracking 
Stock (``QQQ'')\SM\, orders of up to 2,000 contracts in the first two 
(2) near term expiration months, and 1,000 contracts for all other 
expiration months, are eligible for AUTO-X.
    For each option, there shall be a minimum guaranteed AUTO-X size 
and a maximum guaranteed AUTO-X size, as determined by the specialist 
and subject to the approval of the Options Committee.
    The Exchange shall provide automatic executions for eligible 
customer and broker-dealer orders up to the Exchange's disseminated 
size as defined in Exchange rule 1082 (except with respect to orders 
eligible for ``Book Match'' as described in rule 1080(g)(ii) below), 
subject to a minimum guaranteed AUTO-X size and a maximum guaranteed 
AUTO-X size (up to a size of 250 contracts).
    [sbull] If the Exchange's disseminated size is greater than the 
minimum guaranteed AUTO-X size, and less than the maximum guaranteed 
AUTO-X size, inbound eligible orders shall be automatically executed up 
to Exchange's disseminated size. Remaining contracts shall be executed 
manually by the specialist or placed on the limit order book.
    [sbull] If the Exchange's disseminated size is less than the 
minimum guaranteed AUTO-X size for that option, inbound eligible orders 
shall be automatically executed up to such minimum guaranteed AUTO-X 
size. Remaining contracts shall be executed manually by the specialist 
or placed on the limit order book.
    [sbull] If the Exchange's disseminated size is greater than the 
maximum guaranteed

[[Page 18719]]

AUTO-X size, inbound eligible orders shall be automatically executed up 
to such maximum guaranteed AUTO-X size. Remaining contracts shall be 
executed manually by the specialist.
    The minimum and maximum guaranteed AUTO-X size applicable to each 
option shall be posted on the Exchange's Web site.
    The Options Committee may, in its discretion, increase the size of 
orders in one or more classes of multiply-traded equity options 
eligible for AUTO-X to the extent necessary to match the size of orders 
in the same options eligible for entry into the automated execution 
system of any other options exchange, provided that the effectiveness 
of any such increase shall be conditioned upon its having been filed 
with the Securities and Exchange Commission pursuant to section 
19(b)(3)(A) of the Securities Exchange Act of 1934.
    (c)(i)-(iii) No change.
    (iv) (A)-(D) No change.
    (E) when the specialist posts a bid or offer that is better than 
the specialist's own bid or offer (except with respect to orders 
eligible for ``Book Match'' as described in rule 1080(g)(ii) below);
    (F)-(I) No change.
    (v) No change.
    (d)-(f) No change.
    (g) [The Wheel-]AUTO-X Contra-Party Participation--The contra-side 
to automatically executed orders may be: (i) a Wheel Participant; or 
(ii) a booked customer limit order.
    (i) The Wheel--Contra-party participation for AUTO-X automatic 
execution shall rotate among Wheel Participants (which are specialists 
and ROTs signed-up on the Wheel for that listed option) in each option 
in accordance with procedures established by the Exchange. The Wheel 
will be activated each trading day within three minutes following the 
completion of the opening rotation for that listed option. An ROT must 
be present in his Wheel assignment area to participate in Wheel 
executions. Specialists on the Options Floor are required to 
participate on the Wheel in assigned issues.
    No two associated or dually affiliated ROTs may be on the Wheel for 
the same option at the same time. Regardless of an ROT's total assigned 
issues, and ROT may only sign-on the Wheel in one assignment area at 
any given time. In order to be placed on the Wheel for an entire trade 
day, the respective ROT must sign-on, in person on the trading floor 
for that listed option.
    AUTO-X participation shall be assigned to Wheel Participants on a 
routine basis, beginning at a random place on the rotational Wheel each 
day, from those participants signed-on in that listed option. The Wheel 
shall rotate and assign contracts in accordance with procedures 
established by the Exchange.
    (ii) Book Match--For purposes of this sub-paragraph, the contra-
side to automatically executed inbound eligible customer and off-floor 
broker-dealer orders shall be a customer limit order on the book where: 
(A) The Exchange's disseminated size includes a customer limit order on 
the book; and (B) the disseminated price is the National Best Bid or 
Offer. This feature is called Book Match. The inbound eligible order 
shall not be automatically executed prior to the expiration of a 10-
second timer; the specialist may execute such order prior to the 
expiration of 10 seconds.
    (h)-(j) No change.
    Commentary:
    .01-.05. No change.
* * * * *

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 proposal is to increase automated options order 
handling by enabling the Exchange to automatically execute eligible 
inbound customer and off-floor broker-dealer limit orders delivered via 
AUTOM against customer limit orders on the specialist's limit order 
book.\8\ The proposal represents the first phase (``Phase I'') of the 
Exchange's ``Book Match'' system, which the Exchange anticipates will 
eventually automatically match all eligible inbound order types against 
orders resting on the limit order book (``booked limit orders'').\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 Phlx rule 
1080, Commentary .02.
    \9\ The Exchange notes that it was required by the Commission to 
commit to the automatic execution of eligible inbound orders against 
specialist and Registered Options Trader (``ROT'') limit orders 
entered onto the limit order book through an electronic interface 
system known as ``ROT Access'' under the Order Instituting Public 
Administrative Proceedings Pursuant to section 19(h)(1) of the 
Securities Exchange Act of 1934, Making Findings and Imposing 
Remedial Sanctions. See Securities Exchange Act Release No. 43268 
(September 11, 2000), Administrative Proceeding File 3-10282 (the 
``Order''). See also Securities Exchange Act Release No. 46763 
(November 1, 2002), 67 FR 68898 (November 13, 2002) (SR-Phlx-2002-
04). The Exchange has committed to roll out the system for the 
automatic execution of orders placed on the limit order book through 
ROT Access beginning in January 2004. The instant proposal 
represents the first phase in the eventual rollout of that system.
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    Currently, the Exchange's AUTOM System and its automatic execution 
feature, AUTO-X, do not automatically execute otherwise eligible 
inbound orders if all or part of the Exchange's disseminated size at 
the disseminated price consists of a booked limit order. In that 
situation, inbound orders that would otherwise be eligible for 
automatic execution are matched manually by the specialist.\10\
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    \10\ Phlx rule 1080(c)(iv) sets forth the various situations in 
which orders otherwise eligible for automatic execution via AUTO-X 
are handled manually by the specialist, including this situation, 
where there is a booked limit order. See Securities Exchange Act 
Release No. 45927 (May 15, 2002), 67 FR 36289 (May 23, 2002) (SR-
Phlx-2001-24).
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    The Exchange proposes, pursuant to PHLX rule 1080(g)(ii), that when 
the Exchange's disseminated price is equal to the National Best Bid or 
Offer (``NBBO''), and all or part of the Exchange's disseminated size 
at the NBBO disseminated price includes a customer limit order on the 
book, eligible inbound customer and off-floor broker-dealer limit 
orders would be automatically executed against booked customer limit 
orders at the NBBO, up to the size of the booked customer limit orders 
at the NBBO.\11\ If the inbound customer or off-floor broker-dealer 
limit order is for a greater size than the Exchange's disseminated 
size, the remaining portion of the order would be executed manually or 
placed on the limit order book by the specialist.
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    \11\ The disseminated price consisting of a booked limit order 
at which the eligible inbound order would be executed must be the 
NBBO. For instance, if the Phlx bid is the National Best Bid, but 
the Phlx offer is not the National Best Offer, an inbound buy order 
would not be subject to Book Match, but would instead be handled 
manually.
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    The proposal would further provide that inbound eligible customer 
or off-floor broker-dealer limit orders would be subject to a 10-second 
timer before execution. The specialist may, however, determine that the 
booked customer limit order was in the process of being

[[Page 18720]]

traded and may execute the inbound order prior to the expiration of the 
10-second timer. The Exchange states that the purpose of the timer is 
to enable the specialist to ascertain whether a member of the trading 
crowd is in the process of executing the booked customer limit order 
(thus providing the opportunity for the booked customer limit order to 
be executed at a better price). In that situation, if the specialist 
determines that the booked customer limit order is in the process of 
being executed in the crowd, the specialist would be able to execute 
the inbound order.\12\ Today, because the inbound order is not eligible 
for automatic execution against a booked limit order and is handled 
manually by the specialist, there is an opportunity to ascertain this. 
Under the proposal, if the specialist determines that the booked 
customer limit order is not in the process of being executed in the 
crowd, the inbound order would be matched with the booked customer 
limit order and automatically executed after 10 seconds.
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    \12\ See rule 11Ac1-1(c)(3)(ii)(B) under the Act provides that 
no responsible broker or dealer shall be obligated to execute a 
transaction for any subject security if, at the time the order 
sought to be executed is presented, such responsible broker or 
dealer is in the process of effecting a transaction in such subject 
security, and, immediately after the completion of such transaction, 
such responsible broker or dealer communicates to its exchange or 
association pursuant to paragraph (c)(1) of this section, a revised 
bid or offer; provided, however, that such responsible broker or 
dealer shall nonetheless be obligated to execute any such order in 
such subject security as provided in paragraph (c)(2) of this 
section at its revised bid or offer in any amount up to its 
published quotation size or revised quotation size.
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    Another purpose of the timer is to allow the specialist to seek 
price improvement on behalf of the booked customer limit order, both in 
the crowd and on away markets. Once a customer limit order is booked, a 
fiduciary responsibility devolves upon the specialist to execute such 
an order at the best price available, subject to the customer's limit 
price, when the order becomes marketable. In order to enable the 
specialist to carry out that fiduciary responsibility, the Exchange 
believes the specialist should be given a period of time (i.e., 10 
seconds) to determine whether there is a better price available at 
which to execute the booked customer limit order.

a. Off-Floor Broker-Dealer Limit Orders Delivered by the Same Broker-
Dealer that Delivered the Customer Limit Order on the Book

    The Exchange believes that the Book Match proposal could create an 
opportunity for off-floor member organizations to internalize orders 
(i.e., submit a proprietary order as contra-side to their customers' 
limit orders on the book) without providing the specialist and trading 
crowd with a sufficient time period to determine to execute the 
customer limit order.
    In order to address this potential issue, the Exchange proposes to 
establish by rule that member organizations that seek to submit a 
related proprietary contra-side order (i.e., their own order or that of 
an affiliate) via AUTOM in conjunction with a customer limit order they 
deliver to the limit order book, would be required to designate such 
orders with a special indicator (``K'' for the customer limit order, 
and ``L'' for the proprietary order). Such orders would not be eligible 
for AUTO-X or Book Match, and the customer limit order labeled ``K'' 
must be exposed to the crowd for a period of 30 seconds before it is 
eligible to be executed against the proprietary order labeled ``L.'' 
The proposal would provide that the customer limit order on the book 
may be executed by the specialist or crowd prior to the expiration of 
30 seconds.
    The Exchange believes that these new order types, to be delivered 
via AUTOM in the unique situation where a broker-dealer submits a 
customer limit order onto the book with an accompanying proprietary 
contra-side order, combined with the 30-second crowd exposure 
requirement for the customer limit order, should provide the specialist 
and trading crowd with a sufficient time frame within which to 
determine to execute the customer limit order on the book, thus 
maintaining fairness and orderliness in the Exchange's markets.

b. Linkage Orders

    The Exchange further believes that the Book Match function will 
enable the Exchange to promptly execute orders delivered to the 
Exchange pursuant to the Plan for the Purpose of Creating and Operating 
an Intermarket Options Linkage (the ``Plan'') \13\ and PHLX rules 1083-
1087 adopted to implement the Plan,\14\ by matching eligible inbound 
linkage orders in a timely fashion. The Exchange represents that its 
systems are capable of recognizing inbound Linkage Principal Acting as 
Agent Orders (``P/A Orders'') \15\ and Principal Orders (``P 
Orders''),\16\ and that Book Match would execute eligible linkage 
orders at the Firm Customer Quote Size \17\ in the case of P/A Orders, 
and at the Firm Principal Quote Size \18\ in the case of P Orders.
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    \13\ See Securities Exchange Act Release Nos. 44482 (June 27, 
2001), 66 FR 35470 (July 5, 2001); 43573 (November 16, 2000), 65 FR 
70851 (November 28, 2000) (Notice of Phlx Joining the Plan); and 
43086 (July 28, 2000), 65 FR 48023 (August 4, 2000) (Approval of the 
Plan).
    \14\ See Securities Exchange Act Release No. 47296 (January 31, 
2003), 68 FR 6528 (February 7, 2003) (SR-Phlx-2002-67).
    \15\ Phlx rule 1083(j)(i) defines a ``P/A Order'' as an order 
for the principal account of a specialist (or equivalent entity on 
another 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.
    \16\ Phlx rule 1083(j)(ii) defines a ``P Order'' as an order for 
the principal account of an eligible market maker and is not a P/A 
Order.
    \17\ ``Firm Customer Quote Size'' with respect to a P/A Order 
means the lesser of (a) the number of option contracts that the 
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 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. See Phlx rule 1083(g).
    \18\ ``Firm Principal Quote Size'' means the number of options 
contracts that an 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. See Phlx rule 
1083(h).
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c. Yielding Requirements

    The Exchange is proposing to match both inbound marketable customer 
and off-floor broker-dealer limit orders with customer limit orders on 
the book at the NBBO. In the case of inbound non-marketable limit 
orders, the Exchange's rules concerning the establishment of a bid or 
offer, and yielding requirements in parity situations would apply. 
Currently, PHLX rule 1080, Commentary .05(ii) 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 
set forth in PHLX rule 1014, which require ``controlled accounts''\19\ 
to yield priority to customer orders when bidding or offering at the 
same price for the same series.
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    \19\ Phlx rule 1014(g)(i)(A) provides that an account type is 
either a controlled account or a customer account. A controlled 
account includes any account controlled by or under common control 
with a broker-dealer (specialist accounts of Phlx option 
specialists, however, are not subject to yielding requirements 
placed upon controlled accounts by this rule). Customer accounts are 
all other accounts.
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    Orders of controlled accounts must yield priority to customer 
orders (except that PHLX ROTs closing in-person are not currently 
required to yield priority to orders of customer accounts). Off-floor 
broker-dealer accounts, a subset of ``controlled accounts,'' must yield 
priority to customer orders at the same

[[Page 18721]]

price. Therefore, if an off-floor broker-dealer limit order is placed 
on the limit order book, followed by a customer limit order placed on 
the limit order book at the same price, the off-floor broker-dealer 
limit order must yield priority to the customer limit order, even 
though the customer limit order was placed on the limit order book 
after the off-floor broker-dealer order.
    Orders of controlled accounts currently are not required to yield 
priority to other controlled account orders, except that when both an 
order of a PHLX ROT closing in-person and some other order of a 
controlled account are established in the crowd at the same price, and 
then a customer order is established at that price, the order of the 
controlled account must yield to the customer order while the order of 
the PHLX ROT closing in-person does not have to so yield.\20\
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    \20\ The Exchange notes that it has filed proposed amendments to 
its rules, including proposed new rules concerning the allocation of 
trades on the Exchange's Options Floor, pursuant to an order issued 
by the Commission in relation to settling In the Matter of Certain 
Activities of Options Exchanges, which requires the Exchange (as 
well as other options exchanges) to implement certain undertakings. 
See the ``Order,'' supra note 9. One such undertaking is to adopt 
new, or amend existing, rules to include any practice or procedure, 
not currently authorized by rule, whereby market makers determine by 
agreement the spreads or option prices at which they will trade any 
option, or the allocation of orders in that option. Specifically, 
the Order required that by March 12, 2001, draft proposed rules must 
be filed and the Exchange must take all reasonable steps to promptly 
stop any such practice or procedure that has not been filed or is 
not already authorized by rule. See section IV.B.j. of the Order. 
Among the proposed amendments are the elimination of the exception 
to the yielding requirements for specialist accounts of option 
specialists, and the elimination of the exception to the yielding 
requirement for ROTs closing in person. Therefore, under that 
proposal, controlled accounts would be required to yield priority to 
customer accounts without exception. See Securities Exchange Act 
Release No. 47499 (March 13, 2003), 68 FR 14459 (March 25, 2003) 
(SR-Phlx-2001-39).
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2. Statutory Basis
    For these reasons, the Exchange believes that its proposal is 
consistent with section 6(b) of the Act \21\ in general, and section 
6(b)(5) \22\ in particular in that it is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanism of a free and open market and protect investors and the 
public interest by providing a system that should result in a greater 
number of automatic executions for customer and broker-dealer orders on 
the Exchange, and by providing the specialist with the opportunity to 
determine if a booked customer limit order has already traded, and to 
seek the best price available for the customer, at the time an eligible 
inbound order is received.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 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 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 self-regulatory organization 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-2002-86 and should be submitted by May 7, 2003.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9317 Filed 4-15-03; 8:45 am]
BILLING CODE 8010-01-P