[Federal Register Volume 68, Number 112 (Wednesday, June 11, 2003)]
[Notices]
[Pages 35049-35050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14644]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47977; File No. SR-Phlx-2003-37]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. to Delete the 
Prohibition Against the Delivery of Electronically Generated Orders Via 
AUTOM

June 4, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 19, 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 
Items I, II, and III, below, which Items have been prepared by the 
Phlx. 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 Exchange proposes to delete Phlx Rule 1080(i), which prohibits 
the delivery of electronically generated orders delivered via AUTOM.\3\ 
The text of the proposed rule change is available at the Office of the 
Secretary, Phlx and at the Commission.
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    \3\ AUTOM is the Exchange's electronic option 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.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the 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 enable the Exchange 
to compete for order flow by allowing electronically generated orders 
to be delivered via AUTOM.
    In September 2000, the Exchange adopted Phlx Rule 1080(i), which 
restricts the entry of certain options orders that are created and 
communicated electronically, without manual input, into AUTOM.\4\ At 
the time, the Exchange represented that allowing electronically 
generated and communicated customer orders to be routed directly to 
AUTOM and AUTO-X would give customers with such electronic systems a 
significant advantage over Exchange specialists and Registered Options 
Traders (``ROTs''), who are responsible for the maintenance of fair and 
orderly markets on the Exchange, and who provide liquidity on the 
Exchange.
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    \4\ See Securities Exchange Act Release No. 43376 (September 28, 
2000), 65 FR 59488 (October 5, 2000) (SR-Phlx-00-79).
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    Since the time the Exchange adopted Phlx Rule 1080(i), the Exchange 
has modified its AUTOM and AUTO-X system in several significant 
respects. For example, in September and October 2002, the Exchange 
incorporated a new software program into its Auto-Quote \5\ system that 
enables the Exchange to disseminate a firm quotation size of at least 
the sum of limit orders at the Exchange's disseminated price.\6\ The 
Exchange has also expanded the eligible order types \7\ and delivery 
sizes \8\ eligible for AUTOM delivery and automatic execution via AUTO-
X.
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    \5\ Auto-Quote is the Exchange's electronic options pricing 
system, which enables specialists to automatically monitor and 
instantly update quotations. Specialists may submit their own 
quotations by establishing a specialized connection by-passing the 
Exchange's Auto-Quote system, which is known as a Specialized Quote 
Feed (``SQF'').
    \6\ See Securities Exchange Act Release No. 46325 (August 8, 
2002), 67 FR 53376 (August 15, 2002), (SR-Phlx-2002-15).
    \7\ In October 2002, the Commission permanently approved an 
Exchange pilot that allowed orders for the account(s) of broker-
dealers to be delivered via AUTOM, and to be eligible for automatic 
execution via AUTO-X. See Securities Exchange Act Release No. 46660 
(October 15, 2002), 67 FR 64951 (October 22, 2002) (SR-Phlx-2002-
50). The Exchange then adopted rules providing for automatic 
executions for eligible orders at the Exchange's disseminated size, 
subject to a minimum and maximum eligible size range to be 
determined by the specialist, 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). Most recently, the 
Exchange adopted rules providing an equal firm quotation size and 
equal AUTO-X guaranteed size for both customer and broker-dealer 
orders. See Securities Exchange Act Release No. 47646 (April 8, 
2003), 68 FR 17976 (April 14, 2003) (SR-Phlx-2003-18).
    \8\ In March 2003, the Exchange adopted rules to increase the 
eligible AUTOM order delivery size for off-floor broker dealer 
orders from 200 contracts to 1,000 contracts for all options. At the 
same time, the Exchange determined to allow the delivery Immediate 
or Cancel orders via AUTOM. See Securities Exchange Act Release No. 
47543 (March 20, 2003), 68 FR 14737 (March 26, 2003) (SR-Phlx-2003-
11).
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    Based on the significant changes to the Exchange's AUTOM System 
since the time the Exchange adopted Phlx Rule 1080(i), the Exchange 
believes that it has developed systems that have narrowed the gap with 
respect to any actual or perceived advantage an off-floor customer or 
broker-dealer could have over a specialist or ROT in sending 
electronically generated orders to the Exchange via AUTOM. The Exchange 
represents that it will continue to surveil for, and enforce, 
compliance with other rules that help specialists and ROTs in managing 
their risk while making markets on the Exchange.\9\
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    \9\ For example, the Exchange will continue to surveil for, and 
enforce, compliance with Phlx Rule 1080(c)(ii), which sets forth the 
obligations of an Exchange Order Entry Firm, defined as a member 
organization of the Exchange that is able to route orders to AUTOM, 
and a User, defined as any person or firm that obtains access to 
AUTO-X through an Order Entry Firm. Specifically, the rule requires 
Order Entry Firms to comply with all applicable Exchange options 
trading rules and procedures; provide written notice to all Users 
regarding the proper use of AUTO-X; and neither enter nor permit the 
entry of multiple orders in call options and/or put options in the 
same option issue within any 15-second period for an account or 
accounts of the same beneficial owner.

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[[Page 35050]]

    Accordingly, the Exchange is proposing to delete the prohibition 
against the delivery of electronically generated orders via AUTOM in 
order to attract additional order flow. The Exchange expects to monitor 
the effects of the deletion of this prohibition in order to readily 
ascertain its effects on the risk management activities of on-floor 
members and member organizations. In the event that the Exchange 
determines that such effects are detrimental to the risk management 
activities of on-floor members and member organizations, the Exchange 
expects to take appropriate action, including the filing of appropriate 
rules and/or systems changes, in order to address such a situation.
    The Exchange believes that allowing the delivery of electronically 
generated orders in an increasingly competitive marketplace, given the 
Exchange's technological advances since the time Phlx Rule 1080(i) was 
adopted, and continued surveillance and enforcement of compliance with 
rules concerning AUTOM Order Entry Firms and Users, should enable the 
Exchange to compete for an additional type of order flow.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \10\ in general, and furthers the objectives of section 
6(b)(5) of the Act \11\ in particular, in that it is designed to 
facilitate transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, as well as to protect investors and the public interest by 
enhancing efficiency by allowing the delivery via AUTOM of 
electronically generated orders.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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. 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 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-2003-37 and 
should be submitted by July 2, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-14644 Filed 6-10-03; 8:45 am]
BILLING CODE 8010-01-P