[Federal Register Volume 68, Number 110 (Monday, June 9, 2003)]
[Notices]
[Pages 34458-34460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14370]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47955; File No. SR-Phlx-2003-29]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendments 
No. 1 and 2 Thereto by the Philadelphia Stock Exchange, Inc. for a Six-
Month Extension of its Pilot Systems Change to its Automatic Execution 
Feature (AUTO-X)

May 30, 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 April 18, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Item I below, which was prepared by the Phlx. On May 5, 2003, the 
Exchange filed Amendment No. 1 to the proposed rule change.\3\ On May 
30, 2003, the Exchange filed Amendment No. 2 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons and to 
approve the proposal, on an accelerated basis, as amended, for an 
additional six-month period, to expire on November 30, 2003.
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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 Marc McKayle, Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated May 2, 2003. 
(``Amendment No. 1''). In Amendment No. 1 the Exchange, among other 
things, clarifies that it proposes to replace the phrase ``AUTO-X 
guarantee'' with the phrase ``specified disengagement size.'' The 
Exchange also represents that, if the quotation in the option series 
that exhausts the specified disengagement size is revised (either by 
Auto-Quote or manually by the specialist) prior to the expiration of 
the 30-second period during which AUTO-X is disengaged, AUTO-X will 
be re-engaged for that option upon such revision. If the quotation 
in such an option series is not revised during the 30 second period 
during which AUTO-X is disengaged, the responsible broker or dealer 
is firm for the disseminated price, up to the disseminated size, 
pursuant to Exchange Rule 1082. In such a circumstance, AUTO-X is 
reengaged automatically after 30 seconds. The Exchange currently 
engages in surveillance for occurrences in which responsible brokers 
or dealers do not comply with the Firm Quotation requirements of 
Exchange Rule 1082, including during the 30-second AUTO-X 
disengagement period that is the subject of this proposed rule 
change.
    \4\ See letter from Richard S. Rudolph, Director and Counsel, 
PHLX, to Marc McKayle, Special Counsel, Division, Commission, dated 
May 29, 2003 (``Amendment No. 2''). In Amendment No. 2, the Exchange 
adds Commentary .07 to Phlx Rule 1080 to clarify that ``[t]he 
specified disengagement size set forth in Rule 1080(c)(iv)(I) is 
subject to the approval of the Options Committee and shall not be 
for a number of contracts that is fewer than the highest quotation 
size for any series in the given option.'' Further, Commentary .07 
states that ``[t]he specified disengagement size for each option 
shall be posted on the Exchange's web site.''
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to extend, for an additional six months, its 
pilot program effecting a system change to the Exchange's Automated 
Options Market (``AUTOM'') System,\5\ whereby AUTO-X is disengaged for 
a period of 30 seconds after the number of contracts automatically 
executed in a given option meets the specified disengagement size for 
the option (the ``pilot''). As explained further below, the Exchange 
also proposes to amend the pilot by replacing the phrase ``AUTO-X 
guarantee'' with the phrase ``specified disengagement size.'' \6\ The 
text of the proposed rule change, as amended, is as follows:
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    \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\ See Amendment No. 1, note 3 supra.
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    Proposed new language is italicized; proposed deletions are in 
[brackets].

Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)

Rule 1080

    (a)-(b) No change.
    (c) (i)-(iii) No change.
    (iv) (A)-(H) No change.
    (I) When the number of contracts automatically executed within a 15 
second period in an option (subject to a pilot program until [May] 
November 30, 200[2]3) exceeds the [AUTO-X guarantee] specified 
disengagement size, a 30 second period ensues during which subsequent 
orders are handled manually.
    (v) No change.
    (d)--(j) No change.
* * * Commentary:
    .01--.05 No change.
    .06 RESERVED
    .07 The specified disengagement size set forth in Rule 
1080(c)(iv)(I) is subject to the approval of the Options Committee and 
shall not be for a number of contracts that is fewer than the highest 
quotation size for any series in the given option. The specified 
disengagement size for each option shall be posted on the Exchange's 
Web site.

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 III below. The Phlx has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 34459]]

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 extend the pilot for 
an additional six-month period. The pilot was originally approved on a 
six-month basis for a limited number of eligible options \7\ and 
extended for an additional six-month period.\8\ Subsequently, the 
number of options eligible for the pilot was expanded to include all 
Phlx-traded options.\9\ In December 2001, the pilot was extended again 
for an additional six-month period;\10\ and extended again in May 
2002.\11\ The current pilot was extended in November 2002, and is 
scheduled to expire on May 31, 2003.\12\
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    \7\ See Securities Exchange Act Release No. 43652 (December 1, 
2000), 65 FR 77059 (December 8, 2000) (SR-Phlx-00-96).
    \8\ See Securities Exchange Act Release No. 44362 (May 29, 
2001), 66 FR 30037 (June 4, 2001) (SR-Phlx-2001-56
    \9\ See Securities Exchange Act Release No. 44760 (August 31, 
2001), 66 FR 47253 (September 11, 2001) (SR-Phlx-2001-79).
    \10\ See Securities Exchange Act Release No. 45090 (November 21, 
2001), 66 FR 59834 (November 30, 2001) (SR-Phlx-2001-100).
    \11\ See Securities Exchange Act Release No. 45862 (May 1, 
2002), 67 FR 30990 (May 8, 2002) (SR-Phlx-2002-22).
    \12\ See Securities Exchange Act Release No. 46840 (November 15, 
2002), 67 FR 70473 (November 22, 2002) (SR-Phlx-2002-59) (``Previous 
Pilot Extension'').
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    The pilot currently includes the following features:
    [sbull] Once an automatic execution occurs via AUTO-X in an option, 
the system begins a ``counting'' program, which counts the number of 
contracts executed automatically for that option up to a certain 
size,\13\ which causes AUTO-X to become disengaged for that option.
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    \13\ Currently, the rule refers to this size as the ``AUTO-X 
guarantee.'' Under this proposal, the size would be referred to as 
the ``specified disengagement size.'' In November 2002, the 
Commission approved amendments to Exchange Rule 1080(c) to provide 
automatic executions for eligible orders at the Exchange's 
disseminated size, subject to a minimum and maximum AUTO-X eligible 
size range, on an issue-by-issue basis. See Securities Exchange Act 
Release No. 46886 (November 22, 2002), 67 FR 72015 (December 3, 
2002) (SR-Phlx-2002-39). That proposal provided that the maximum 
guaranteed AUTO-X size may be for a different number of contracts 
for customer orders than for broker-dealer orders. The previous 
pilot extension set forth that when the maximum guaranteed AUTO-X 
size in an option is for a different number of contracts for 
customer orders than for broker-dealer orders, AUTO-X would be 
disengaged when the larger of the two maximum guaranteed AUTO-X 
sizes for the particular option is exhausted.
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    [sbull] When the number of contracts executed automatically for 
that option exhausts the maximum guaranteed AUTO-X size for the 
specific option within a 15 second time frame, the system ceases to 
automatically execute for that option, and drops all AUTO-X eligible 
orders in that option for manual handling by the specialist for a 
period of 30 seconds in order to enable the specialist to refresh 
quotes in that option.
    [sbull] Upon the expiration of 30 seconds, automatic executions 
resume, the ``counting'' program is set to zero and it begins counting 
the number of contracts executed automatically within a 15 second time 
frame again, up to the specified disengagement size.
    [sbull] Again, when the number of contracts automatically exceeds 
the specified disengagement size within a 15 second time frame, the 
system drops all subsequent AUTO-X eligible orders for manual handling 
by the specialist for a period of 30 seconds. The system then continues 
to reset the ``counting'' program and drop to manual, etc.
    Since the most recent extension of the pilot, the Exchange has 
undertaken to provide automatic executions for eligible inbound orders 
(for the account(s) of both customers and broker-dealers) at the 
Exchange's disseminated price, up to the disseminated size, subject to 
a maximum guaranteed AUTO-X size of 250 contracts.\14\ Thus, the 
current AUTO-X guarantee for eligible orders on the Exchange is the 
disseminated size for the given series, instead of a pre-determined 
``maximum guaranteed AUTO-X size'' for the given option. The ``maximum 
guaranteed AUTO-X size'' is no longer the appropriate term, because the 
Exchange's current guaranteed AUTO-X size for eligible orders is equal 
to the disseminated size, which may be for a different number of 
contracts each time the quote in a given series is revised; there is no 
longer a pre-determined ``maximum guaranteed AUTO-X size'' (other than 
the Exchange's maximum allowable AUTO-X size of 250 contracts for all 
options other than options on the Nasdaq-100 Index Tracking Stock 
(``QQQ''SM),\15\ which have a maximum guaranteed AUTO-X size 
of 2,000 contracts in the first two near term expiration months, and 
1,000 contracts for all other expiration months).\16\
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    \14\ See Securities Exchange Act Release No. 47646 (April 8, 
2003), 68 FR 17976 (April 14, 2003) (SR-Phlx-2003-18).
    \15\ The Nasdaq-1008[reg], Nasdaq-100 Index[reg], Nasdaq[reg], 
The Nasdaq Stock Market[reg], Nasdaq-100 SharesSM, 
Nasdaq-100 TrustSM, Nasdaq-100 Index Tracking 
StockSM, and QQQSM are trademarks or service 
marks of The Nasdaq Stock Market, Inc. (``Nasdaq'') and have been 
licensed for use for certain purposes by the Exchange pursuant to a 
License Agreement with Nasdaq. The Nasdaq-100 Index[reg] (the 
``Index'' is determined, composed, and calculated by Nasdaq without 
regard to the Licensee, the Nasdaq-100 TrustSM, or the 
beneficial owners of Nasdaq-100 SharesSM. Nasdaq has 
complete control and sole discretion in determining, comprising, or 
calculating the Index or in modifying in any way its method for 
determining, comprising, or calculating the Index in the future.
    \16\ See Securities Exchange Act Release No. 46531 (September 
23, 2002), 67 FR 61370 (September 30, 2002) (SR-Phlx-2002-47).
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    Accordingly, the Exchange has filed this proposed rule change to 
accommodate intervening changes in the function of AUTO-X; the pilot 
has not been changed, only the terminology used to describe the number 
of contracts executed within 15 seconds that would result in the 
temporary disengagement of AUTO-X.
    In order to account for the recent changes to the AUTO-X function 
(i.e., automatic executions up to the Exchange's disseminated size, 
rather than up to a pre-set maximum guaranteed size determined by the 
specialist), the instant pilot renewal includes the term ``specified 
disengagement size.''\17\ The specified disengagement size shall not be 
for a number of contracts that is fewer than the highest quotation size 
for any series in the given option.\18\
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    \17\ See Amendment No. 2, note 4 supra.
    \18\ Id.
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    One significant purpose of the pilot is to enable the Exchange to 
continue to move towards the dissemination of options quotations with 
actual size.\19\ As discussed above, the ``counting'' feature of the 
pilot functions to disengage AUTO-X for a period of 30 seconds in

[[Page 34460]]

a given option once the number of contracts automatically executed 
exhausts the specified disengagement size for that option within a 15-
second time frame.
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    \19\ In August 2002, the Commission approved amendments to the 
Exchange's definition of ``disseminated size'' to mean, with respect 
to the disseminated price for any quoted options series: (a) 
respecting options subject to the Auto-Quote technology operating as 
of May, 2002 (``current Auto-Quote'') and scheduled to be phased-out 
by September 2002, the AUTO-X guarantee for the quoted option, 
except that the disseminated size of limit orders on the book shall 
be ten (10) contracts; or (b) respecting options subject to the 
Auto-Quote technology implemented after the effective date of this 
provision (``new Auto-Quote'') and options subject to a proprietary 
quoting system provided for in Rule 1080.02 (``Specialized Quote 
Feed''), at least the sum of limit orders. The specialist and crowd 
may determine to disseminate a size greater than the sum of limit 
orders. See Securities Exchange Act Release No. 463425 (August 8, 
2002), 67 FR 53376 (August 15, 2002) (SR-Phlx-2002-15) (Order 
approving amendments to Exchange Rule 1082(a)(ii) and Option Floor 
Procedure Advice F-7). The ``current Auto-Quote'' described in that 
Order has been phased out as of the time of the instant proposal. 
The ``new Auto-Quote'' is currently fully deployed. The Exchange 
recently filed a proposed rule change amending the rule to (i) 
reflect the full deployment of the ``new Auto-Quote'' and (ii) to 
add the specialist's size to the sum of the size of limit orders at 
the disseminated price to the Exchange's definition of 
``disseminated size'' in Exchange Rule 1082. See SR-Phlx-2003-23. 
The Exchange expects to continue to amend its definition of 
``disseminated size'' to reflect actual size as supporting systems 
become available.
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    The Exchange believes that this has enabled specialists in such 
options to continue to provide fair and orderly markets during peak 
market activity by manually executing orders at correct market prices 
and refreshing quotations to reflect market demand.
    Finally, the Exchange represents that, \20\ if the quotation in the 
option series that exhausts the specified disengagement size is revised 
(either by Auto-Quote or manually by the specialist) prior to the 
expiration of the 30-second period during which AUTO-X is disengaged, 
AUTO-X will automatically re-engage for that option upon such revision. 
If the quotation in such an option series is not revised during the 30 
second period during which AUTO-X is disengaged, the responsible broker 
or dealer is firm for the disseminated price, up to the disseminated 
size, pursuant to Exchange Rule 1082. In such a circumstance, AUTO-X is 
reengaged automatically after 30 seconds. The Exchange currently 
engages in surveillance for occurrences in which responsible brokers or 
dealers do not comply with the Firm Quotation requirements of Exchange 
Rule 1082, including during the 30-second AUTO-X disengagement period 
that is the subject of this proposed rule change.\21\
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    \20\ See Amendment No. 1, note 3 supra.
    \21\ The Commission notes that the Exchange has represented that 
it will issue a circular to its members, member organizations, 
participants, and participant organizations explaining the pilot 
program and the circumstances in which the AUTO-X system will not be 
available for customer orders. Telephone conversation between 
Richard S. Rudolph, Counsel, Phlx and Marc McKayle, Special Counsel, 
Division, Commission, on May 13, 2003.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\22\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\23\ in particular, in that it is designed to 
perfect the mechanisms of a free and open market and the national 
market system, protect investors and the public interest and promote 
just and equitable principles of trade by enabling the Exchange to 
prepare for the dissemination of option quotes with actual size, and by 
enabling Exchange specialists.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    No written comments were either solicited or received.

III. 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-2003-29 and should be submitted by June 30, 2003.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\24\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act, which requires that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market and a national securities system, and protect 
investors and the public interest.\25\
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    \24\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the extension of the pilot should 
assist specialists in maintaining fair and orderly markets during 
periods of peak market activity. In this regard, the Commission notes 
that since the previous extension of the pilot, in response to 
Commission concerns, the Exchange has automated the re-engaging of 
AUTO-X for a particular option issue prior to thirty seconds, if the 
specialist has revised the quote before that time period. The 
Commission believes that an extension of the pilot program for an 
additional six months should allow the Exchange to continue its efforts 
to deploy its new Auto-Quote system to prepare for the dissemination of 
quotes with actual size.
    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\26\ for approving the proposed rule change prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. The Commission recognizes that, according to the 
Phlx, no complaints from customers, floor traders, or member firms have 
been received during the entire period of the pilot program. The 
Commission believes that granting accelerated approval to extend the 
pilot program for an additional six months will allow Phlx to continue, 
without interruption, the existing operation of its AUTO-X system.
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    \26\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-Phlx-2003-29), as amended, 
is hereby approved on an accelerated basis, as a six-month pilot, 
scheduled to expire on November 30, 2003.
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    \27\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14370 Filed 6-6-03; 8:45 am]
BILLING CODE 8010-01-P