[Federal Register Volume 68, Number 193 (Monday, October 6, 2003)]
[Notices]
[Pages 57724-57726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-25262]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48563; File No. SR-Phlx-2003-30]


Self-Regulatory Organizations; Notice of Filing and Order 
Accelerating Approval of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Implementing a Pilot Program Relating to the Book Sweep 
Function of the Exchange's Automated Options Market System

September 29, 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 23, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Phlx. On August 
19, 2003, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ On September 12, 2003, the Exchange filed Amendment No. 2 to 
the proposed rule change.\4\ On September 17, 2003, the Exchange filed 
Amendment No. 3 to the proposed rule change.\5\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons, and is approving the proposal on an 
accelerated basis.
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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 Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated August 18, 2003 (``Amendment No. 1''). 
Amendment No. 1 replaced the original Form 19b-4 in its entirety.
    \4\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated September 11, 2003 (``Amendment No. 
2''). In Amendment No. 2, Phlx amended the text of the proposed rule 
change to specify when the Book Sweep function would be engaged or 
disengaged.
    \5\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated September 16, 2003 (``Amendment No. 
3''). In Amendment No. 3, Phlx proposed to implement the Book Sweep 
function on a six-month pilot basis.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt new Rule 1080(c)(iii) concerning a 
new feature of the Exchange's Automated Options Market (``AUTOM'') 
System,\6\ designed to automatically execute limit orders on the book 
when the Exchange's electronic options pricing system, Auto-Quote, or a 
specialist's quote sent to the Exchange via specialized quote feed 
(``SQF''), locks or crosses a limit order on the book. This feature is 
called ``Book Sweep.'' Below is the text of the proposed rule change. 
Proposed new language is italicized.
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    \6\ 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 Exchange Rule 1080.
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* * * * *
    Rule 1080. (a)-(b) No change.
    (c)(i)-(ii) No change.
    (iii) Book Sweep. Book Sweep is a feature of AUTOM which, when 
engaged, does the following: when the bid or offer generated by the 
Exchange's Auto-Quote system (or by a proprietary quoting system 
provided for in Commentary .02 of this Rule called ``Specialized Quote 
Feed'' or ``SQF'') matches or crosses the Exchange's best bid or offer 
in a particular series as established by an order on the limit order 
book, orders on the limit order book in that series will be 
automatically executed and allocated among crowd participants signed 
onto the Wheel. If Book Sweep is not engaged at the time the Auto-Quote 
or SQF bid or offer matches or crosses the Exchange's best bid or offer 
represented by a limit order on the book, the specialist may manually 
initiate the Book Sweep feature. Book Sweep shall be engaged when AUTO-
X is engaged, and shall be disengaged when AUTO-X is disengaged in 
accordance with Rule 1080(c)(iv) and Rule 1080(e). Eligible orders on 
the limit order book will be automatically executed up to the size 
associated with the quote that matches or crosses such limit orders.
    (iv)-(v) No change.
    (d)-(j) No change.
Commentary
    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, 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. 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 further automate 
options order handling by adopting a new rule reflecting a system 
enhancement to the Exchange's AUTOM system, called Book Sweep, that 
would allow certain orders resting on the limit order book \7\ to be 
automatically executed in the situation where the bid or offer 
generated by the Exchange's Auto-Quote \8\ system (or by a proprietary 
quoting system called ``Specialized Quote Feed'' or ``SQF'') \9\ locks 
(i.e., 2 bid, 2 offer) or crosses (i.e., 2.10 bid, 2 offer) the 
Exchange's best bid or offer in a particular series as established by 
an order on the limit order book. Orders executed by the Book Sweep 
feature would be allocated among crowd participants participating on 
the Wheel.\10\
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    \7\ 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 Exchange 
Rule 1080, Commentary .02.
    \8\ Auto-Quote is the Exchange's electronic options pricing 
system, which enables specialists to automatically monitor and 
instantly update quotations. See Exchange Rule 1080, Commentary 
.01(a).
    \9\ See Exchange Rule 1080, Commentary .01(b)(i).
    \10\ The ``Wheel'' is a feature of AUTOM that allocates contra-
party participation respecting automatically executed trades among 
the specialist and Registered Options Traders (``ROTs'') signed onto 
the Wheel for that listed option. See Exchange Rule 1080(g). See 
also Option Floor Procedure Advice (``OFPA'') F-24.
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    The Book Sweep feature should provide for more timely and efficient 
execution of marketable limit orders on the book. Currently, when the 
Auto-Quote or SQF bid or offer locks or crosses a booked order, the 
specialist handles the execution manually after being alerted by the 
system that one or more limit orders on the book are marketable and due 
an execution. This situation can occur for several series in the same 
option, requiring multiple executions of booked limit orders in each 
such series to be carried out by the specialist, which can be a time-
consuming and burdensome process.
    Book Sweep Size. Book Sweep would function by automatically 
executing a

[[Page 57725]]

number of contracts not to exceed the size associated with the 
quotation that locks or crosses a limit order on the book. The purpose 
of this provision is to make automatic executions in the Book Sweep 
function consistent with the Exchange's rules relating to AUTO-X, the 
automatic execution feature of AUTOM. The Exchange no longer has an 
artificial ``AUTO-X guarantee'' applicable to an option. Instead, the 
Exchange currently provides automatic executions for eligible orders 
\11\ delivered via AUTOM at the Exchange's disseminated price, up to 
the disseminated size, for both customer and broker-dealer orders.\12\ 
Because the Exchange's disseminated size (and thus its guaranteed AUTO-
X size) is fluid, in order to achieve consistency, the Exchange 
proposes that the number of contracts to be executed via Book Sweep be 
equal to the size associated with the quote that locks or crosses the 
limit order on the book.\13\
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    \11\ For a list of circumstances in which orders otherwise 
eligible for AUTO-X are instead manually handled by the specialist, 
see Exchange Rule 1080(c)(iv). See also Securities Exchange Act 
Release No. 45927 (May 15, 2002), 67 FR 36289 (May 23, 2002) (SR-
Phlx-2001-24).
    \12\ See Securities Exchange Act Release No. 47646 (April 8, 
2003), 68 FR 17976 (April 14, 2003) (SR-Phlx-2003-18).
    \13\ The Exchange notes that the Chicago Board Options Exchange 
(``CBOE'') currently has rules and systems in place regarding its 
``Trigger'' mechanism, which includes a functionality similar to 
that set forth in the instant proposal. See CBOE Rule 6.8(d)(v). See 
also Securities Exchange Act Release No. 44462 (June 21, 2001), 66 
FR 34495 (June 28, 2001) (SR-CBOE-00-22) (Order approving the CBOE 
Autoquote Triggered EBook Execution). The Exchange notes that, by 
rule, the CBOE ``Trigger'' function will not automatically execute a 
number of contracts in excess of the RAES guaranteed size. While the 
instant proposal is based in part on the CBOE ``Trigger,'' it is 
distinguished from that function in that an order executed via Book 
Sweep would be executed for a number of contracts up to the size 
associated with the quote that locks or crosses a booked limit 
order.
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    When a quote generated by Auto-Quote or SQF locks or crosses a 
limit order on the book, there are three possible scenarios that may 
occur. First, if such a quote is for a number of contracts that is 
equal to the size associated with the limit order on the book, the 
entire limit order would be executed. For example, if a limit order is 
resting on the book with a size of 200 contracts, and the size 
associated with the quote that locks or crosses such a limit order is 
200 contracts, the entire limit order on the book would be executed, 
and Auto-Quote or SQF would refresh the quote (including the size 
associated with such a quote).
    The second possible scenario is that the size associated with a 
quote that locks or crosses a limit order on the book could be for a 
greater number of contracts than the size associated with the booked 
limit order. In such a situation, the entire size of the limit order 
would be executed. For example, if a limit order is resting on the book 
with a size of 200 contracts, and size associated with the quote that 
locks or crosses such a limit order is 300 contracts, the entire limit 
order would be executed. Following the execution, Auto-Quote or SQF 
would refresh the quote (including the size associated with such a 
quote).
    Finally, the third possible scenario is that the size associated 
with the quote that locks or crosses a limit order on the book would be 
for fewer contracts than the size associated with the booked limit 
order. In this situation, the limit order would be partially executed 
automatically at the size associated with the quote that locks or 
crosses the limit order,\14\ and Auto-Quote or SQF would refresh the 
quotation. For example, if a limit order is resting on the book with a 
size of 200 contracts, and the size associated with the quote that 
locks or crosses such a limit order is 100 contracts, Book Sweep would 
generate an automatic execution for 100 contracts, leaving 100 
contracts resting on the limit order book, and Auto-Quote or SQF would 
refresh the quote. If the refreshed quote locks or crosses the 
remaining contracts in the limit order resting on the book, Book Sweep 
would initiate an automatic execution for the size associated with the 
refreshed quote. If the refreshed bid or offer is for a price that is 
inferior to the remaining contracts in the limit order on the book, 
such that the limit order represents the Exchange's best bid or offer, 
the price and size of the limit order would be disseminated by the 
Exchange. If the refreshed bid or offer is for a price that is superior 
to the price of the remaining limit order, the Exchange would 
disseminate the refreshed bid or offer, and the remaining limit order 
would rest on the limit order book until it becomes due for execution 
or is cancelled.
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    \14\ Under Exchange Rule 1082(b) all quotations made available 
by the Exchange and displayed by quotation vendors shall be firm for 
customer and broker-dealer orders at the disseminated price in an 
amount up to the disseminated size. See also Rule 11Ac1-1 under the 
Act, 17 CFR 240.11Ac1-1.
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    Manual Book Sweep. Book Sweep would be engaged when AUTO-X is 
engaged, and would be disengaged when AUTO-X is disengaged.\15\ 
However, the Exchange proposes to allow specialists to engage Book 
Sweep manually when orders are received when AUTO-X is disengaged, and 
Auto-Quote or SQF matches or crosses the Exchange's best bid or offer 
in a particular series as established by an order on the limit order 
book. The purpose of this provision is to enable the specialist to 
execute limit orders on the book that are due for execution more 
efficiently by manually initiating Book Sweep (rather than executing 
such orders individually), thus providing more efficient executions and 
ensuring that the specialist may maintain a fair and orderly market 
when such orders become due for execution.
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    \15\ Exchange Rule 1080(c)(iv) provides that an order otherwise 
eligible for AUTO-X will instead be manually handled by the 
specialist in the following situations:
    (A) The Exchange's disseminated market is crossed (i.e., 2\1/8\ 
bid, 2 offer), or crosses the disseminated market of another options 
exchange;
    (B) One of the following order types: Stop, stop limit, market 
on closing, market on opening, or an all-or-none order where the 
full size of the order cannot be executed;
    (C) The AUTOM System is not open for trading when the order is 
received (which is known as a pre-market order);
    (D) The disseminated market is produced during an opening or 
other rotation;
    (E) When the specialist posts a bid or offer that is better than 
the specialist's own bid or offer;
    (F) If the NBBO Feature, described in Exchange Rule 1080(c)(i), 
is not engaged, and the Exchange's bid or offer is not the NBBO;
    (G) When the price of a limit order is not in the appropriate 
minimum trading increment pursuant to Exchange Rule 1034;
    (H) When the bid price is zero respecting sell orders; and
    (I) When the number of contracts automatically executed within a 
15 second period in an option (subject to a pilot program until 
November 30, 2003) exceeds the specified disengagement size, a 30 
second period ensues during which subsequent orders are handled 
manually.
    The Exchange notes that Rule 1080(c)(iv) was adopted to address 
the requirement in the 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'') that the 
Exchange adopt new, or amend existing, rules concerning automatic 
quotation and execution systems which specify the circumstances, if 
any, under which automated execution systems be disengaged or 
operated in any manner other than the normal manner.
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    The Exchange expects to deploy Book Sweep as supporting systems 
become available, on an issue-by-issue basis over a period to be 
determined.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \16\ in general and furthers the objectives of Section 
6(b)(5) \17\ in particular, in that it is designed to perfect the 
mechanisms of a free and open market and a national market system, and 
to protect investors and the public interest. The Exchange believes 
that Book Sweep should help provide

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faster executions for investors, while reducing the burden on the 
Exchange's specialists with respect to the manual execution of booked 
orders.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 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 proposal 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 Phlx. All submissions 
should refer to File No. SR-Phlx-2003-30 and should be submitted by 
October 27, 2003.

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

    After careful review, 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, 
and, in particular, the requirements of Section 6 of the Act.\18\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act, which requires that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, as well as to remove impediments to and perfect 
the mechanism of a free and open market, and, in general, to protect 
investors and the public interest.\19\ The Commission believes that the 
proposed rule change, as amended, should help to facilitate the more 
efficient execution of orders when Auto-Quote or SQF locks or crosses 
the Exchange's best bid or offer in a series, as established by an 
order on the limit order book. Moreover, the Exchange proposes to 
implement the Book Sweep function as a six-month pilot program, which 
will enable the Exchange and the Commission to evaluate its operation 
before the function is permanently approved.
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    \18\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Commission further finds good cause for approving the proposed 
rule change prior to the 30th day after the date of publication of 
notice thereof in the Federal Register. The Commission notes that the 
Exchange's proposed Book Sweep system is similar to functions that the 
Commission has previously approved for use on other exchanges,\20\ and 
would be implemented on a pilot basis. Therefore, the Commission 
believes that it is appropriate to grant accelerated approval to the 
proposal.
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    \20\ See Securities Exchange Act Release No. 44468 (June 21, 
2001), 66 FR 34505 (June 28, 2001) (SR-PCX-00-03) (Order approving 
PCX ``Auto-Ex Book'' system), and Securities Exchange Act Release 
No. 44462 (June 21, 2001), 66 FR 34495 (June 28, 2001) (SR-CBOE-00-
22) (Order approving CBOE Autoquote Triggered EBook Execution 
system).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-Phlx-2003-30) is hereby 
approved on an accelerated basis, as a pilot program scheduled to 
expire on March 31, 2004.
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    \21\ 15 U.S.C. 78s(b)(2).

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-25262 Filed 10-3-03; 8:45 am]
BILLING CODE 8010-01-P