[Federal Register Volume 68, Number 152 (Thursday, August 7, 2003)]
[Notices]
[Pages 47131-47137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20127]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48266; File No. SR-Phlx-2003-56]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Relating to a Pilot Program to Deploy 
the Options Floor Broker Management System

July 31, 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 July 31, 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 and II 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 and to approve the 
proposal, on an accelerated basis. The pilot will expire on August 29, 
2003.
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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 effect a pilot program to deploy a new 
component of the Exchange's Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)\3\ by adopting new Phlx Rules 
1063(e) and 1080, Commentary .06 relating to the Exchange's Options 
Floor Broker Management System (the ``System'') on a pilot basis 
beginning not later than July 31, 2003, extending through full 
deployment of the System not later than August 29, 2003 (``the 
pilot'').
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    \3\ 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.
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    In order to have enforceable rules in place concerning the System, 
and to ensure that Floor Brokers using the System during the month-long 
deployment would not be in violation of current Exchange rules 
concerning ticket marking requirements, the Exchange proposes that the 
following rule text, which would apply to Floor Brokers using the 
System during the pilot, become effective on a pilot basis, to expire 
on August 29, 2003.\4\
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    \4\ The Exchange has filed for permanent approval of the 
proposed rules. See SR-Phlx-2003-40 and Amendment No. 1 thereto. The 
Exchange acknowledges that SR-Phlx-2003-40 and Amendment No. 1 
thereto will be subject to publication of a Notice in the Federal 
Register and subject to public comment, which may result in 
amendments to the proposed rules.
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    The text of the proposed rule change is set forth below. New text 
is in italics; deletions are in brackets.
* * * * *

Obligations And Restrictions Applicable To Specialists And Registered 
Options Traders

    Rule 1014.
    (a)-(f) No change.
    (g) Equity Option and Index Option Priority and Parity
    (i)(A) Exchange Rules 119 and 120 direct members in the 
establishment of priority of orders on the floor. In addition, equity 
option and index option orders of controlled accounts are required to 
yield priority to customer

[[Page 47132]]

orders when competing at the same price, as described below.
    For the purpose of paragraph (g) of this Rule, ``Initiating Order'' 
means an incoming contra-side order. ``Remainder of the Order'' means 
the portion of an Initiating Order that remains following the 
allocation of contracts to customers that are on parity, in accordance 
with this Rule 1014(g)(i). The remainder of the Order shall be 
allocated pursuant to this Rule 1014. 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. 
Customer accounts are all other accounts.
    Orders of controlled accounts must yield priority to customer 
orders. Orders of controlled accounts are not required to yield 
priority to other controlled account orders.
    Orders of controlled accounts, other than ROTs and Specialists 
market making in-person, must be (1) verbally communicated as for a 
controlled account when placed on the floor and when represented to the 
trading crowd and (2) recorded as for a controlled account by 
appropriately circling the ``yield'' field on the floor ticket of any 
such order (except market maker tickets) or, in the case of trades 
involving a Floor Broker, by making the appropriate notation the 
Options Floor Broker Management System.
    (ii)-(v) No change.
    (vi) In order to facilitate timely tape reporting of executed 
trades, it is the duty of the persons identified below to allocate, 
match and time stamp manually executed trades as well as to submit the 
matched trade to the appropriate person at the respective specialist 
post immediately upon execution:
    (i)-(iv) No change.
    The person responsible for trade allocation (the ``Allocating 
Participant'') shall, for each trade allocated by such Allocating 
Participant, circle his or her badge identification number on the trade 
tickets, identifying himself or herself as the Allocating Participant 
in the particular trade. If the Allocating Participant is not a 
participant in the trade to be allocated, he/she shall identify 
himself/herself by initiating the trade tickets. In the case of a trade 
in which a Floor Broker is the Allocating Participant, such Floor 
Broker shall allocate the trade using the Options Floor Broker 
Management System.

Execution Guarantees

    Rule 1015. (a) (i)--(v) No change.
    (vi) Floor Brokers must make reasonable efforts to ascertain 
whether each order entrusted to them is for the account of a customer 
or a broker-dealer. If it is ascertained that the order is for the 
account of a broker-dealer, the responsible Floor Broker must advise 
the crowd of that fact prior to bidding/offering on behalf of the order 
or executing the order. The [responsible floor agent] Floor Broker or 
his employees must [legibly mark the floor ticket as ``B/D''] make the 
appropriate notation on the Options Floor Broker Management System when 
it has been determined that the order is for an account of a broker/
dealer.
    (vii) No change.
    (b) No change.

General Comparison and Clearance Rule

    Rule 1051. (a) A member or member organization initiating an 
options transaction, whether acting as principal or agent, must report 
or ensure that the transaction is reported within 90 seconds of the 
execution to the tape, except that, when an order represented by a 
Floor Broker is executed against a limit order on the book, the 
specialist must report or ensure that the portion of the transaction 
represented by such specialist is reported to the tape. Transactions 
not reported within 90 seconds after execution shall be designated as 
late. A pattern or practice of late reporting without exceptional 
circumstances may be considered conduct inconsistent with just and 
equitable principles of trade.
    (b) No change.

Responsibilities of Floor Brokers

    Rule 1063. (a)-(d) No change.
    (e) Options Floor Broker Management System. In order to create an 
electronic audit trail for options orders represented by Floor Brokers 
on the Exchange's Options Floor, a Floor Broker or such Floor Broker's 
employees shall, contemporaneously upon receipt of an order and prior 
to the representation of such an order in the trading crowd, record all 
options orders represented by such Floor Broker onto the electronic 
Options Floor Broker Management System (as described in Rule 1080, 
Commentary .06). The following specific information with respect to 
orders represented by a Floor Broker shall be recorded by such Floor 
Broker or such Floor Broker's employees: (i) The order type (i.e., 
customer, firm, broker-dealer); (ii) the option symbol; (iii) buy, 
sell, or cancel; (iv) call, put, complex (i.e., spread, straddle), or 
contingency order as described in Rule 1066; (v) number of contracts; 
(vi) limit price or market order or, in the case of a complex order, 
net debit or credit, if applicable; (vii) whether the transaction is to 
open or close a position. Upon the execution of such an order, the 
Floor Broker shall enter the time of execution of the trade. Floor 
Brokers or their employees shall enter clearing information onto the 
Options Floor Broker Management System no later than five minutes after 
the execution of a trade. In the event of a malfunction in the Options 
Floor Broker Management System, Floor Brokers shall record the required 
information on trade tickets, and shall not represent an order for 
execution which has not been time stamped with the time of entry on the 
trading floor. Such trade tickets shall be time stamped upon the 
execution of such an order.

Crossing, Facilitation and Solicited Orders

    Rule 1064. (a) No change.
    (b) Facilitation Orders. A Floor Broker holding an options order 
for a public customer and a contra side order may cross such orders in 
accordance with paragraph (a) above or may execute such orders as a 
facilitation cross in the following manner:
    (i) [A legible ``F'' must be recorded on the floor ticket.] The 
Floor Broker or his employees must enter the appropriate notation onto 
the Options Floor Broker Management System for the public customer's 
order, together with all of the terms of the order, including any 
contingency involving other options or the underlying or related 
securities.
    (ii)-(iii)
    (c)(i)-(ii) No change.
    (iii) [``Solicited'' shall be written clearly and legibly on the 
order ticket of the solicited order] The Floor Broker or his employees 
must note on the Options Floor Broker Management System that the trade 
involves a solicited order.
    (d) No change.

Commentary:

    No change.

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

    Rule 1080. (a)-(j) No change.

Commentary:

    .01-.05 No change.
    .06 Options Floor Broker Management System. The Options Floor 
Broker Management System is a component of AUTOM designed to enable 
Floor Brokers and/or their employees to enter, route and report 
transactions stemming from options orders received on the Exchange. The 
Options Floor Broker Management System also is designed to

[[Page 47133]]

establish an electronic audit trail for options orders represented and 
executed by Floor Brokers on the Exchange, such that the audit trail 
provides an accurate, time-sequenced record of electronic and other 
orders, quotations and transactions on the Exchange, beginning with the 
receipt of an order by the Exchange, and further documenting the life 
of the order through the process of execution, partial execution, or 
cancellation of that order. The Exchange will begin deployment of the 
Options Floor Broker Management System on July 31, 2003, with floor-
wide deployment to be completed not later than August 29, 2003.
    Proposed Amendments to Option Floor Procedure Advices:
A-11 Responsibility to Fill Customer Orders
    (a)(i)-(v) No change.
    (vi) Floor Brokers must make reasonable efforts to ascertain 
whether each order entrusted to them is for the account of a customer 
or a broker-dealer. If it is ascertained that the order is for the 
account of a broker-dealer, the responsible Floor Broker must advise 
the crowd of that fact prior to bidding/offering on behalf of the order 
or executing the order. The [responsible floor agent] Floor Broker or 
his employees must [legibly mark the floor ticket as ``B/D''] make the 
appropriate notation on the Options Floor Broker Management System when 
it has been determined that the order is for an account of a broker/
dealer.
    (vii) No change.
    (b) No change.
    FINE SCHEDULE No change.
    B-6 Priority of Options Orders for Equity Options and Index Options 
by Account Type (EQUITY OPTION AND INDEX OPTION ONLY)
    (No change to first two introductory paragraphs.)
Section A
    No change.
Section B
    Orders of controlled accounts, other than ROTs and Specialists 
market making in-person, must be (1) verbally communicated as for a 
controlled account when placed on the floor and when represented to the 
trading crowd and (2) recorded as for a controlled account by 
appropriately circling the ``yield'' field on the floor ticket of any 
such order (except market maker tickets) or, in the case of trades 
involving a Floor Broker, by making the appropriate notation on the 
Options Floor Broker Management System.
    In any instance where an order is misrepresented in this fashion 
due to factors which give rise to the concern that it was the result of 
anything other than an inadvertent error, the Exchange may determine to 
bypass the fine schedule below and refer the incident to the Business 
Conduct Committee for possible disciplinary proceedings in accordance 
with those procedures set forth under the Exchange's Disciplinary Rule 
960.
Section C-E No change
    FINE SCHEDULE No change.
B-8 Use of Floor Brokers by an ROT While on the Floor
    (a) When an ROT who is on the floor gives an order to a Floor 
Broker for execution, the ROT must initial and time stamp the order 
ticket. The Floor Broker or his employees must [and] indicate on [it] 
the Options Floor Broker Management System whether such order is 
opening or closing.
    (b) If such order opens or increases a position in the account of 
an ROT, the ROT must be aware of the terms of the trade, initial and 
time stamp the order and retain a copy of the ticket.
    FINE SCHEDULE No change.
B-11 Crossing, Facilitation and Solicited Orders
    (a) No change.
    (b) Facilitation Orders--A Floor Broker holding an options order 
for a public customer and a contra-side order may cross such orders in 
accordance with paragraph (a) above or may execute such orders as a 
facilitation cross in the following manner:
    (i) [A legible ``F'' must be recorded on the floor ticket]. The 
Floor Broker or his employees must enter the appropriate notation onto 
the Options Floor Broker Management System for the public customer's 
order, together with all of the terms of the order, including any 
contingency involving other options or the underlying or related 
securities.
    (ii)-(iii)
    (c) (i)-(ii) No change.
    (iii) [``Solicited'' shall be written clearly and legibly on the 
order ticket of the solicited order.] The Floor Broker or his employees 
must note on the Options Floor Broker Management System that the trade 
involves a solicited order.
    (d) No change.
    FINE SCHEDULE No change.
C-2 [Clocking Tickets for Time of Entry on the Floor
    A Floor Broker shall not represent an order for execution which has 
not been time stamped with the time of entry on the trading floor. It 
is the responsibility of the introducing Floor Brokerage unit to time 
stamp an order when it is received.]
    Options Floor Broker Management System
    Options Floor Broker Management System. In order to create an 
electronic audit trail for options orders represented by Floor Brokers 
on the Exchange's Options Floor, a Floor Broker or such Floor Broker's 
employees shall, contemporaneously upon receipt of an order and prior 
to the representation of such an order in the trading crowd, record all 
options orders represented by such Floor Broker onto the electronic 
Options Floor Broker Management System (as described in Rule 1080, 
Commentary .06). The following specific information with respect to 
orders represented by a Floor Broker shall be recorded by such Floor 
Broker or such Floor Broker's employees: (i) The order type (i.e., 
customer, firm, broker-dealer); (ii) the option symbol; (iii) buy, 
sell, or cancel; (iv) call, put, complex (i.e., spread, straddle), or 
contingency order as described in Rule 1066; (v) number of contracts; 
(vi) limit price or market order or, in the case of a complex order, 
net debit or credit, if applicable; (vii) whether the transaction is to 
open or close a position. Upon the execution of such an order, the 
Floor Broker shall enter the time of execution of the trade. Floor 
Brokers or their employees shall enter clearing information onto the 
Options Floor Broker Management System no later than five minutes after 
the execution of a trade. In the event of a malfunction in the Options 
Floor Broker Management System, Floor Brokers shall record the required 
information on trade tickets, and shall not represent an order for 
execution which has not been time stamped with the time of entry on the 
trading floor. Such trade tickets shall be time stamped upon the 
execution of such an order.
    FINE SCHEDULE No change.
C-3 Handling Orders of Phlx ROTs and Other Registered Options Market 
Makers
    (a) No change
    (b) Upon receipt of an options order on the Phlx for any account of 
a person registered as an options market maker on another national 
securities exchange, the Floor Broker or his employees must [legibly 
mark the letter ``N'' on the order ticket] so indicate on the Options 
Floor Broker Management System and must ensure that the order is 
represented in the trading crowd as a ``BD'' order for the purposes of 
the Exchange's [public customer order guarantee rule (i.e., the Ten-Up 
Rule)] yielding requirements. A

[[Page 47134]]

Floor Broker must make reasonable efforts to inquire which orders 
placed with him for execution on the Phlx qualify as [''N''] such 
orders.
    (c) Before executing an opening transaction on behalf of a Phlx 
ROT, the Floor Broker or his employees must ascertain that the ROT is 
aware of the terms of the trade and assure that the floor ticket has 
been initialed and time-stamped by the ROT and that the order is 
appropriately entered on the Options Floor Broker Management System. 
The Floor Broker must [mark a ``P'' on the floor ticket of] note on the 
Options Floor Broker Management System any opening off-floor order to 
be cleared into a Phlx market maker account, as indicated by a Phlx ROT 
seeking market maker margin treatment for such order pursuant to Rule 
1014, Commentary .01 and Advice B-4, and comply with the requirements 
of Advice B-12 respecting multiply traded options.
    (d) No change.
    FINE SCHEDULE No change.
F-1 Use of Identification Letters and Numbers
    All Specialists, ROTs, and Floor Brokers must use the complete 
alpha/numeric identification assigned by the Exchange. All Floor 
Brokers or their employees must [put] indicate their complete alpha/
numeric identifiers on [every ticket which they broker] the Options 
Floor Broker Management System for each order they receive and 
represent in the trading crowd.
    FINE SCHEDULE No change.
F-2 Allocation, Time Stamping, Matching and Access to Matched Trades
    (a) No change.
    The person responsible for trade allocation (the ``Allocating 
Participant'') shall, for each trade allocated by such Allocating 
Participant, circle his or her badge identification number on the trade 
tickets, identifying himself or herself as the Allocating Participant 
in the particular trade. If the Allocating Participant is not a 
participant in the trade to be allocated, he/she shall identify 
himself/herself/ by initialing the trade tickets. In the case of a 
trade in which a Floor Broker is the Allocating Participant, such Floor 
Broker shall allocate the trade using the Options Floor Broker 
Management System.
    (b) A member or member organization initiating an options 
transaction, whether acting as principal or agent, must report or 
ensure that the transaction is reported within 90 seconds of the 
execution to the tape, except that, when an order represented by a 
Floor Broker is executed against a limit order on the book, the 
specialist must report or ensure that the portion of the transaction 
represented by such specialist is reported to the tape. Transactions 
not reported within 90 seconds after execution shall be designated as 
late. A pattern or practice of late reporting without exceptional 
circumstances may be considered conduct inconsistent with just and 
equitable principles of trade.
    (c) Execution times must be recorded on the reverse side of one or 
more of the tickets to a matched trade.
    (d) Once a trade has been matched and submitted for reporting at 
the post, the respective Specialist Unit must preserve the matched 
tickets for a period of not less than three years.
    (e) Member access to tickets comprising a matched trade is 
available to any participant of that trade, as well as the respective 
Specialist and any Floor Official acting in his capacity as a Floor 
Official. Requests to review trade matches must be made with the 
Specialist Unit.
    FINE SCHEDULE No change.
F-4 Orders Executed as Spreads, Straddles, Combinations or Synthetics 
and Other Order Ticket Marking Requirements
    (a) Sp, St, Comb, Syn--Members executing spread, straddle or 
combination orders in reliance upon the ``spread priority rule,'' Rule 
1033(d), or synthetic option (buy-write, synthetic put and synthetic 
call) orders, must mark the tickets as ``sp'' for spreads, ``st'' for 
straddles, ``comb'' for combinations and ``syn'' for synthetics. In the 
case of trades involving a Floor Broker, such Floor Broker or his 
employees must make the appropriate notation on the Options Floor 
Broker Management System.
    (b) Additional Marking Requirements--The following is a list of 
requirements to mark order tickets or, in the case of trades involving 
a Floor Broker, for such Floor Broker or his employees to make the 
appropriate notations on the Options Floor Broker Management System, 
including a description and reference to the Rule or Advice requiring 
such mark or notation:

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Circling ``yield''...................  yielding/11(a)(1)............  Advice B-6
Acronym..............................  identification letter/s.
ROT initial/ time stamp..............  on-floor brokered orders.....  Advice B-8, C-3
SS...................................  sold sale....................  Advice F-3
F....................................  facilitation.................  Advice B-11
BD...................................  non-member BD................  Advice A-11
B/X..................................  bid-exempt...................  Rule 1072
N....................................  non-Phlx ROTs................  Advice C-3
P....................................  off-floor/market maker margin  Rule 1014, Comm. 01
P/A..................................  principal acting as agent....  Rule 1015
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    FINE SCHEDULE 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 proposed rule change is to deploy the System 
incrementally, beginning not later than July 31, 2003, and ending at 
the time of floor-wide deployment, which would occur not later than 
August 29, 2003 (the ``Rollout'').

[[Page 47135]]

The Options Floor Broker Management System

    Proposed Phlx Rule 1080, Commentary .06 would provide a general 
description of the System as a component of AUTOM designed to enable 
Floor Brokers and/or their employees to enter, route and report 
transactions stemming from option orders received on the Exchange. 
Floor Brokers or their employees would access the System through an 
electronic Exchange-provided handheld device on which they would have 
the ability to enter the required information as set forth in proposed 
Phlx Rule 1063(e), either from their respective posts on the options 
trading floor or in the trading crowd. The System will replace the 
Exchange's current Floor Broker Order Entry System (``FBOE''),\5\ as 
part of a roll-out of the new System floor-wide. The proposed rule 
would also include a rollout schedule for the System, setting forth 
that the Exchange will begin deployment of the Options Floor Broker 
Management System on July 31, 2003, with floor-wide deployment to be 
completed not later than August 29, 2003.
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    \5\ See Securities Exchange Act Release No. 41524 (June 14, 
1999), 64 FR 33127 (June 21, 1999) (SR-Phlx-99-11). The FBOE, a 
component of AUTOM, currently provides a means for (but does not 
require) Floor Brokers to route eligible orders to the specialist's 
post, consistent with the order delivery criteria of the AUTOM 
System set forth in Phlx Rule 1080(b). The new System (which Floor 
Brokers would be required to use under the instant proposal) would 
include the same functionality as the FBOE, in addition to providing 
an electronic audit trail for non-electronic orders received by 
Floor Brokers by way of the entry of the required information in 
proposed Phlx Rule 1063(e).
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    Proposed Phlx Rule 1063(e) would include a description of the 
purpose of the System, which, as stated above, is to create an 
electronic audit trail for option orders represented by Floor Brokers 
on the Exchange Options Floor. The proposed rule also sets forth the 
requirement that a Floor Broker or such Floor Broker's employees must, 
contemporaneously upon receipt of an order and prior to the 
representation of such an order in the crowd, record the required 
information regarding all option orders represented by such Floor 
Broker onto the System.\6\ The Exchange believes that the requirement 
that Floor Brokers or their employees enter order information onto the 
System contemporaneously upon receipt preserves the integrity of the 
electronic audit trail.\7\
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    \6\ The Exchange recognizes the need for effective and proactive 
surveillance for activities such as trading ahead and front-running. 
It currently conducts automated surveillance for such activities and 
will incorporate a review of order entry into the System as part of 
such surveillance. The Exchange also intends to implement 
supplementary surveillance and examination programs related to the 
requirement to enter order information into the System promptly 
after this requirement is instituted, which are designed to address, 
among other things, trading ahead and front-running.
    \7\ Currently, OFPA C-2 requires Floor Brokers to time stamp an 
order ticket when it is received, and provides that a Floor Broker 
shall not represent an order for execution in the crowd that is not 
time stamped with the time of entry on the trading floor. While this 
current OFPA is intended to capture the time of receipt of the order 
on the trade ticket, it does not currently create an electronic 
audit trail for non-electronic options orders represented and 
executed by Floor Brokers on the Exchange as required by the Order. 
The Exchange is proposing herein to amend OFPA C-2 to convert the 
time stamping requirement to the requirement to enter order 
information onto the System concurrently upon receipt by the Floor 
Broker, which immediately captures the information, including the 
time of entry, into the electronic audit trail. Once an order is 
entered into the System, AUTOM is able to track the life of such an 
order through its execution or partial execution, cancellation or 
partial cancellation, and report to the consolidated tape, as well 
as any changes made concerning the size of the order or its limit 
price, if applicable.
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    Additionally, the proposed rule would provide that upon the 
execution of such an order, the Floor Broker shall enter the time of 
execution of the trade.\8\
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    \8\ Once the Floor Broker executes an order using the System, 
the time of execution would be automatically recorded into the 
electronic audit trail.
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    Proposed Phlx Rule 1063(e) would require Floor Brokers or their 
employees to record the following specific information onto the System 
upon receipt of an order: (i) The order type (i.e., customer, firm, 
broker-dealer); (ii) the option symbol; (iii) buy, sell, or cancel; 
(iv) call, put, complex (i.e., spread, straddle), or contingency order 
as described in Phlx Rule 1066; (v) number of contracts; (vi) limit 
price or market order or, in the case of a complex order, net debit or 
credit, if applicable; and (vii) whether the transaction is to open or 
close a position. These enumerated elements of an order are currently 
written on trade tickets; the proposed new rule would simply require 
them to be entered onto the System.
    Upon entry of the order into the System, the System would 
automatically record the time of entry, and would assign an 
identification code that is particular to that order for purposes of 
the electronic audit trail.

Clearing Information

    Proposed Phlx Rule 1063(e) would also require Floor Brokers or 
their employees to enter clearing information onto the System no later 
than five minutes after the execution of a trade. Such clearing 
information would include the account number(s) of each contra-side 
participant to the Floor Broker's trade in the crowd and the number of 
contracts bought or sold, which would be immediately reported via AUTOM 
to the clearing firm of each crowd participant involved in the trade. 
Once the clearing information is reported, crowd participants involved 
in the trade would receive a position update, enabling them to know 
their respective positions on a real-time basis and to make 
appropriate, informed and timely hedging and transactional decisions. 
The purpose of this provision is to assist both Floor Brokers and crowd 
participants involved in a trade to better manage their risk by knowing 
their account status on a real-time basis. Thus, the Exchange believes 
that the five-minute reporting requirement for clearing information to 
be entered onto the System should enable crowd participants to better 
manage their risk.

System Malfunctions

    Proposed Phlx Rule 1063 would provide that, in the event of a 
malfunction in the Options Floor Broker Management System, Floor 
Brokers shall record the required information on trade tickets, and 
shall not represent an order for execution which has not been time 
stamped with the time of entry on the trading floor. Such trade tickets 
shall be time stamped upon the execution of such an order. This 
reflects the current practice of recording information concerning 
orders represented and executed by Options Floor Brokers onto trade 
tickets, and using time stamps to record the time of receipt of an 
order, and the time of execution.

Trade Reporting

    Currently, Exchange members or member organizations that initiate 
an options transaction are required to report the execution of such 
trades within 90 seconds of the execution.\9\ Trades are currently 
reported by Exchange personnel known as Data Entry Terminal (``DET'') 
Operators. DET Operators are situated at various locations on the 
Exchange floor, at the specialist's post. Once a trade is executed, the 
person who initiated the trade is required to submit the trade 
ticket(s) to the DET Operator, who reports the transaction by typing 
and entering the trade information into the DET, which in turn reports 
the trade to

[[Page 47136]]

the Options Price Reporting Authority (``OPRA'').
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    \9\ Phlx Rule 1051 and OFPA F-2 currently provide that a member 
or member organization initiating an options transaction, whether 
acting as principal or agent, must report or ensure that the 
transaction is reported within 90 seconds of the execution to the 
tape. Transactions not reported within 90 seconds after execution 
shall be designated as late.
---------------------------------------------------------------------------

    The System includes a feature that would report transactions 
executed in the trading crowd by the Floor Broker automatically upon 
execution. Once a trade involving a Floor Broker is executed in the 
trading crowd, such a Floor Broker would simply indicate on the System 
that the order was executed, which would automatically generate an 
electronic report. The Exchange believes that this feature should 
enhance the ability of Floor Brokers to comply with the 90-second trade 
reporting requirement. Further, such reporting activity would be 
captured in the electronic audit trail, thus facilitating electronic 
surveillance for compliance with the reporting requirement.
    The Exchange is proposing amendments to Phlx Rule 1051 and OFPA F-2 
in order to address the situation in which a Floor Broker who initiates 
a transaction executes all or a portion of the transaction against a 
contra-side limit order on the specialist's limit order book.\10\ 
Currently, in such a situation, the specialist manually executes the 
booked limit order on the AUTOM System against the order represented by 
the Floor Broker. Upon such manual execution, the transaction is 
reported automatically by AUTOM.
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    \10\ 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.
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    The proposed amendment would provide that, when an order 
represented by a Floor Broker is executed against a limit order on the 
book, the specialist must report or ensure that the portion of the 
transaction represented by such specialist is reported to the tape. The 
purpose of this provision is to address the situation in which an order 
represented by a Floor Broker executes a booked limit order is executed 
by the specialist, in which case AUTOM automatically reports the 
execution of the booked limit order. Thus, the Floor Broker in this 
situation would not be required to report that portion of the 
transaction on the System, despite the fact that the Floor Broker 
involved may have in fact ``initiated'' the transaction. If the booked 
limit order represents the entire contra-side to the order represented 
by the Floor Broker, the specialist would be required to report the 
entire transaction. If the booked limit order represents a portion of 
the transaction, the specialist would be required to report that 
portion of the transaction, while the Floor Broker initiating the 
transaction would be responsible for reporting the remaining portion of 
the transaction he or she initiated.

Ticket Marking Requirements and the System

    Currently, various Exchange rules require Floor Brokers to mark 
trade tickets with certain notations, depending on the type of trade 
and the crowd participants involved. The Exchange is proposing to amend 
the rules concerning the ticket marking requirements so that Floor 
Brokers would be required to enter similar notations onto the System.
    Specifically, the Exchange proposes the following amendments to the 
current Phlx rules and OFPAs concerning ticket marking requirements in 
order to make such rules and OFPAs applicable to the System:
    [sbull] Phlx Rule 1015, Execution Guarantees, and corresponding 
OFPA A-11, Responsibility to Fill Customer Orders, would be amended to 
require a Floor Broker or his employees to make the appropriate 
notation on the System when it has been determined that the order is 
for an account of a broker/dealer.
    [sbull] Phlx Rule 1064 and corresponding OFPA B-11, Crossing, 
Facilitation and Solicited Orders, would be amended to require that 
Floor Brokers who wish to execute orders as a facilitation cross (or 
their employees) to enter the appropriate indication onto the System 
for the public customer's order, together with all of the terms of the 
order, including any contingency involving other options or the 
underlying or related securities. The sections of the Rule and OFPA 
concerning solicited orders would require a Floor Broker or his 
employees to indicate on the System that the trade involves a solicited 
order.
    [sbull] Phlx Rule 1014(g)(i)(A) and corresponding OFPA B-6, 
Priority of Options Orders for Equity Options and Index Options by 
Account Type, would be amended to require Floor Brokers representing 
controlled accounts \11\ to indicate on the System that such accounts 
must yield to customer orders in parity situations.
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    \11\ Phlx Rule 1014(g)(i)(A) defines a ``controlled account'' as 
any account controlled by or under common control with a broker-
dealer. Customer accounts are all other accounts.
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    [sbull] Phlx OFPA B-8, Use of Floor Brokers by an ROT While on the 
Floor, would be amended to require a Floor Broker or his employees to 
indicate on the System whether an order for an ROT that is represented 
by the Floor Broker is opening or closing, in order to remain 
consistent with the requirements of proposed Phlx Rule 1063(e) and 
proposed OFPA C-2.
    [sbull] Phlx OFPA C-2, Clocking Tickets for Time of Entry on the 
Floor, which currently requires an introducing Floor Brokerage unit to 
time stamp an order when it is received, would be re-titled and amended 
to include the requirements concerning the System included in proposed 
Phlx Rule 1063(e).
    [sbull] Phlx OFPA C-3, Handling Orders of Phlx ROTs and Other 
Registered Options Market Makers, would be amended to require, in the 
situation in which a Floor Broker represents an order for a market 
maker on another national securities exchange, such Floor Broker or his 
employees must so indicate on the Options Floor Broker Management 
System and must ensure that the order is represented in the trading 
crowd as a ``BD'' order for the purposes of the Exchange's yielding 
requirements.
    [sbull] Phlx OFPA F-1, Use of Identification Letters and Numbers, 
would be amended to require all Floor Brokers or their employees to 
indicate their complete alpha/numeric identifiers on the System for 
each order they receive and represent in the crowd.
    [sbull] Phlx OFPA F-4, Orders Executed as Spreads, Straddles, 
Combinations or Synthetics and Other Order Ticket Marking Requirements, 
would be amended to require that, in the case of trades involving a 
Floor Broker, such Floor Broker or his employees must make the 
appropriate notation concerning such order types on the Options Floor 
Broker Management System.
    The Rollout will be conducted on a firm-by-firm basis, beginning 
with the installation of a device at the respective Floor Broker firm's 
booth on the options floor (``Booth Device''), on which such Floor 
Broker (or his/her employee) may enter the required information 
concerning the orders they represent.\12\ In addition, the Exchange 
would issue a handheld device to each individual Floor Broker in such a 
firm who represents an order in the crowd (``Handheld Device''), on 
which he/she would have the ability to enter the required information. 
As stated above, the Rollout would be complete on a

[[Page 47137]]

floor-wide basis on or before August 29, 2003.
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    \12\ Such information would include: (i) The order type (i.e., 
customer, firm, broker-dealer); the option symbol; (iii) buy, sell, 
or cancel; (iv) call, put, complex (i.e., spread, straddle), or 
contingency order as described in Phlx Rule 1066; (v) number of 
contracts; (vi) limit price or market order or, in the case of a 
complex order, net debit or credit, if applicable; (vii) whether the 
transaction is to open or close a position.
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Market Surveillance

    During the approximately month-long Rollout, Floor Brokers for whom 
the Booth Device and the respective Handheld Devices have been 
installed will use the System to record information concerning orders 
they represent on the Exchange floor, while those Floor Brokers 
awaiting installation will continue to use the current System, which 
includes, without limitation, the requirement that order information is 
to be written on trade tickets and time-stamped upon receipt of the 
order \13\ and the requirement to time-stamp tickets upon 
execution.\14\
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    \13\ See Exchange Option Floor Procedure Advice (``OFPA'') C-2.
    \14\ See OFPA F-2.
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    The Exchange represents that, during the Rollout, it will continue 
to surveil for, and enforce compliance with, existing rules regarding 
orders represented by Floor Brokers. For those Floor Brokers for whom 
the System has been deployed, an order entered through the System must 
include the information required in the rules set forth in the instant 
proposal. For those Floor Brokers for whom the System has not been 
deployed, the Exchange will continue to surveil for, and enforce 
compliance with, rules concerning current practices regarding orders 
represented by Floor Brokers using written tickets and time-stamps to 
record information necessary to reflect the handling of such orders.
    The Exchange believes that the System will enable Floor Brokers to 
handle orders they represent more efficiently, and will further enable 
the Exchange to comply with the audit trail requirement for non-
electronic orders required under the Order.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \15\ in general, and furthers the objectives of section 
6(b)(5) of the Act \16\ 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 
requiring Floor Brokers to enter certain information onto the System 
regarding orders they represent, thus providing an electronic audit 
trail for orders they represent on the Exchange.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 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 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-2003-56 and 
should be submitted by August 28, 2003.

IV. Commission's Findings and Order Granting Accelerated Approval

    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.\17\ 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.\18\
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    \17\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of the publication of 
notice thereof in the Federal Register. The Commission believes that 
granting accelerated approval to the proposed rule change on a pilot 
basis will allow the Exchange to have enforceable rules governing use 
of the Exchange's new System in effect during the Rollout, and will 
help ensure that members are properly trained and familiar with the 
rules prior to full deployment of the System.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Phlx-2003-56) is approved on 
an accelerated basis and is effective on a pilot basis until August 29, 
2003.
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    \19\ 15 U.S.C. 78f(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20127 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P