[Federal Register Volume 68, Number 175 (Wednesday, September 10, 2003)]
[Notices]
[Pages 53415-53417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22981]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48430; File No. SR-Phlx-2003-52]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change, and Amendment No. 1 thereto, by 
the Philadelphia Stock Exchange, Inc. Relating to a System Change to a 
Pilot Program to Disengage AUTO-X the Automatic Execution Feature of 
the Exchange's Automated Options Market (AUTOM)

September 3, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on July 14, 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 August 26, 2003, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the

[[Page 53416]]

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\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Marc McKayle, Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated August 25, 2003 
(``Amendment No. 1''). In Amendment No. 1, the Exchange amended the 
proposed rule change to clarify that the specified disengagement 
size would continue to be subject to the approval of the Options 
Committee and would be posted on the Exchange's Web site for each 
option.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1080, Philadelphia Stock 
Exchange Automated Options Market (``AUTOM'') and Automatic Execution 
System (``AUTO-X''),\4\ to reflect a systems change to its pilot 
program concerning AUTO-X, whereby AUTO-X is disengaged for a period of 
30 seconds after the number of contracts automatically executed in a 
given option meets the specified disengagement size for the option (the 
``pilot''). The text of the proposed rule change is set forth below. 
Brackets indicate deletions.
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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. See Phlx Rule 1080.
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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 Reserved.
    .07 The specified disengagement size set forth in Rule 
1080(c)(iv)(I) is subject to the approval of the Options Committee [and 
shall not be for a number of contracts that is fewer than the highest 
quotation size for any series in the given option]. The specified 
disengagement size for each option shall be posted on the Exchange's 
Web site.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Phlx included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item 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 amend Phlx Rule 1080, 
Commentary .07, to reflect a systems change to the pilot.\5\ The pilot 
was originally approved on a six-month basis for a limited number of 
eligible options \6\ and extended for an additional six-month 
period.\7\ Subsequently, the number of options eligible for the pilot 
was expanded to include all Phlx-traded options.\8\ In December 2001, 
the pilot was extended again for an additional six-month period; \9\ 
and extended again in May 2002,\10\ November, 2002,\11\ and, most 
recently, in May 2003.\12\
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    \5\ See Amendment No. 1, supra note 3.
    \6\ See Securities Exchange Act Release No. 43652 (December 1, 
2000), 65 FR 77059 (December 8, 2000) (SR-Phlx-00-96).
    \7\ See Securities Exchange Act Release No. 44362 (May 29, 
2001), 66 FR 30037 (June 4, 2001) (SR-Phlx-2001-56).
    \8\ See Securities Exchange Act Release No. 44760 (August 31, 
2001), 66 FR 47253 (September 11, 2001) (SR-Phlx-2001-79).
    \9\ See Securities Exchange Act Release No. 45090 (November 21, 
2001), 66 FR 59834 (November 30, 2001) (SR-Phlx-2001-100).
    \10\ See Securities Exchange Act Release No. 45862 (May 1, 
2002), 67 FR 30990 (May 8, 2002) (SR-Phlx-2002-22).
    \11\ See Securities Exchange Act Release No. 46840 (November 15, 
2002), 67 FR 70473 (November 22, 2002) (SR-Phlx-2002-59).
    \12\ See Securities Exchange Act Release No. 47955 (May 30, 
2003), 68 FR 34458 (June 9, 2003) (SR-Phlx-2003-29).
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    The pilot currently includes the following features:
    [sbull] Once an automatic execution occurs via AUTO-X in an option, 
the system begins a ``counting'' program, which counts the number of 
contracts executed automatically for that option up to a certain 
size,\13\ which causes AUTO-X to become disengaged for that option.
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    \13\ Phlx Rule 1080(c)(iv)(I) provides that when the number of 
contracts automatically executed within a 15 second period in an 
option exceeds the specified disengagement size, a 30 second period 
ensues during which subsequent orders are handled manually. The 
specified disengagement size is determined by the specialist and 
subject to the approval of the Exchange's Options Committee. The 
specified disengagement size for each option is listed on the 
Exchange's Web site.
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    [sbull] When the number of contracts executed automatically for 
that option exhausts the specified disengagement size for the specific 
option within a 15 second time frame, the system ceases to 
automatically execute for that option, and drops all AUTO-X eligible 
orders in that option for manual handling by the specialist for a 
period of 30 seconds in order to enable the specialist to refresh 
quotes in that option.
    [sbull] Upon the expiration of 30 seconds, automatic executions 
resume, the ``counting'' program is set to zero and it begins counting 
the number of contracts executed automatically within a 15 second time 
frame again, up to the specified disengagement size.
    Again, when the number of contracts automatically executed exhausts 
the specified disengagement size within a 15 second time frame, the 
system drops all subsequent AUTO-X eligible orders for manual handling 
by the specialist for a period of 30 seconds. The system then continues 
to reset the ``counting'' program and drop to manual, etc.
    In April 2003, the Commission approved a proposal by the Exchange 
to provide automatic executions for eligible inbound orders (for the 
account(s) of both customers and broker-dealers) at the Exchange's 
disseminated price, up to the disseminated size, replacing the previous 
Exchange rule that allowed a pre-set ``AUTO-X guarantee'' size, in 
which eligible orders would be automatically executed up to that AUTO-X 
guarantee, regardless of the Exchange's disseminated size.\14\ 
Previously, if the Exchange's disseminated size in a particular series 
was greater than the AUTO-X guarantee, eligible orders delivered via 
AUTOM for a size greater than the AUTO-X guarantee would be 
automatically executed at the AUTO-X guaranteed size, and the remainder 
of the order would be executed manually by the specialist at the 
disseminated price, up to the remaining disseminated size, in 
accordance with the Exchange's rules regarding firm quotations.\15\
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    \14\ See Securities Exchange Act Release No. 47646 (April 8, 
2003), 68 FR 17976 (April 14, 2003) (SR-Phlx-2003-18).
    \15\ See Phlx Rule 1082.
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    Because the Exchange currently guarantees automatic executions for 
eligible orders up to the Exchange's disseminated size, the most recent 
pilot extension included Commentary .07 to Rule 1080, prohibiting 
specialists from setting the specified disengagement size to a number 
of contracts that is fewer than their largest disseminated size.
    The Exchange has developed a new system that will automatically 
execute eligible orders up to the disseminated size in a given series 
regardless of the specified disengagement size. Thus, if the 
disseminated size exceeds the specified disengagement size for the 
series, and an eligible order is delivered for a number of contracts 
that is greater than the specified disengagement size, the order will 
be executed up to the disseminated size, followed by an

[[Page 53417]]

AUTO-X disengagement period of 30 seconds (if the specialist revises 
the quote in the series prior to the expiration of 30 seconds, AUTO-X 
will be automatically re-engaged). Because of the new system, it is no 
longer necessary to require that the specified disengagement size be 
greater than the largest disseminated size for any series in a given 
option. Therefore, the proposal would delete from Commentary .07 to 
Phlx Rule 1080 the provision that the specified disengagement size 
shall not be for a number of contracts that is fewer than the highest 
quotation size for any series in the given option.\16\
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    \16\ See Amendment No. 1, supra note 3.
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    The Exchange believes that the new system should enable specialists 
to continue to fulfill their obligations to make fair and orderly 
markets during periods of peak market activity, while simultaneously 
enabling them to meet the requirement to provide automatic executions 
up to the disseminated size, regardless of whether the specified 
disengagement size is for a number of contracts that is less than the 
disseminated size.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act,\17\ in general, and furthers the objectives of section 
6(b)(5) of the Act,\18\ in particular, in that it that it is designed 
to perfect the mechanisms of a free and open market and the national 
market system, protect investors and the public interest and promote 
just and equitable principles of trade by providing automatic 
executions for eligible orders up to the Exchange's disseminated size, 
while continuing to enable Exchange specialists to maintain fair and 
orderly markets during periods of peak market activity.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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

    The proposed rule change has become effective pursuant to section 
19(b)(3)(A) of the Act,\19\ and Rule 19b-4(f)(5) thereunder.\20\ The 
proposal effects a change in an existing order-entry or trading system 
of a self-regulatory organization that (i) does not significantly 
affect the protection of investors or the public interest; (ii) does 
not impose any significant burden on competition; and (iii) does not 
have the effect of limiting the access to or availability of the system 
pursuant to Rule. At any time within 60 days of the filing of such 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest or for the protection of investors, 
or otherwise in furtherance of the purposes of the Act.\21\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(5).
    \21\ For the purposes of calculating the 60-day abrogation 
period, the Commission considers the period to have commenced on 
August 26, 2003, the date Phlx filed Amendment No. 1.
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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-2003-52 and should be submitted by October 1, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-22981 Filed 9-9-03; 8:45 am]
BILLING CODE 8010-01-P