[Federal Register Volume 68, Number 152 (Thursday, August 7, 2003)]
[Notices]
[Pages 47137-47143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20128]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48265; File No. SR-Phlx-2003-40]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to 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 June 2, 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. On July 28, 2003, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supercedes the original filing 
in its entirety.

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[[Page 47138]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Phlx Rule 1063, Responsibilities of 
Floor Brokers, and Phlx Rule 1080, Philadelphia Stock Exchange 
Automated Options Market (AUTOM) and Automatic Execution System (AUTO-
X)\4\ by adopting new Phlx Rules 1063(e) and 1080, Commentary .06 
relating to the Exchange's Options Floor Broker Management System (the 
``System'') for equity options and index options. The Exchange further 
proposes to amend various Exchange Rules and Options Floor Procedure 
Advices (``OFPAs'') that currently include order ticket marking 
requirements to require Floor Brokers to make similar notations in the 
System. Finally, the Exchange proposes to amend Phlx Rule 1051, General 
Comparison and Clearance Rule, and corresponding OFPA F-2, to 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.
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    \4\ 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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    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 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

[[Page 47139]]

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 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

[[Page 47140]]

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 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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[[Page 47141]]

    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 establish rules that 
require Floor Brokers that receive non-electronic (non-AUTOM) equity 
option and index option orders for representation in the trading crowd 
to record certain information (described more fully below) into the 
System to create an electronic options order audit trail for such non-
electronic orders.\5\
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    \5\ In September, 2000, the Commission directed that the 
respondent options exchanges design and implement a consolidated 
options audit trail system (``COATS''), and to incorporate into the 
audit trail all non-electronic orders such that the audit trail 
provides an accurate, time-sequenced record of electronic and other 
orders, quotations and transactions on such respondent exchange. See 
Order Instituting Public Administrative Proceedings Pursuant to 
Section 19(h)(1) of the Securities Exchange Act of 1934, Making 
Findings and Imposing Sanctions, Securities Exchange Act Release No. 
43268 (September 11, 2000) and Administrative Proceeding File 3-
10282 (the ``Order''). The instant proposal is intended to enable 
the Exchange to comply with the Commission's mandate under the 
Order.
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    The various proposed changes also reflect the new requirements that 
Floor Brokers make the appropriate notations on the System respecting 
orders they represent, as described below.
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''),\6\ 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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    \6\ 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.\7\ 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.\8\
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    \7\ 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.
    \8\ 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.\9\
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    \9\ 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

[[Page 47142]]

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.\10\ 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 the Options Price Reporting Authority (``OPRA'').
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    \10\ 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.
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    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.\11\ 
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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    \11\ 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 \12\ to indicate on the system that such accounts 
must yield to customer orders in parity situations.
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    \12\ 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

[[Page 47143]]

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.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \14\ 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 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, 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-2003-40 and should be submitted by August 28, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20128 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P