[Federal Register Volume 68, Number 235 (Monday, December 8, 2003)]
[Notices]
[Pages 68442-68444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30357]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48851; File No. SR-Phlx-2003-77]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Relating to the Renewal of a Pilot 
Program To Disengage the Automatic Execution Feature (AUTO-X) of the 
Exchange's Automated Options Market (AUTOM)

November 26, 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 November 19, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Phlx. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons, and granting 
accelerated approval to the proposal for a pilot period of one year.
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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 Phlx proposes to extend, for a one-year period, 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 class of options meets the specified disengagement size for the 
option (the ``Pilot'').\3\ The Exchange also proposes to amend Exchange 
Rule 1080, Philadelphia Stock Exchange Automated Options Market (AUTOM) 
and Automatic Execution System (AUTO-X),\4\ to reflect a systems change 
to the Pilot that was previously filed for immediate effectiveness with 
the Commission.\5\ The text of the proposed rule change is set forth 
below. Brackets indicate deletions; indicates new text.
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    \3\ Pursuant to a telephone conversation between Richard S. 
Rudolph, Director and Counsel, Phlx, and Marc McKayle, Special 
Counsel, Division of Market Regulation (``Division''), Commission on 
November 25, 2003, the sentence was changed to clarify that the 
Pilot relates to option classes.
    \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 Exchange Rule 1080.
    \5\ See Securities Exchange Act Release No. 48430 (September 3, 
2003), 68 FR 53415 (September 10, 2003) (SR-Phlx-2003-52).
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Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Implementation System (AUTO-X)
    Rule 1080. (a)-(b) No change.
    (c) (i)-(iii) No change.
    (iv) (A)-(H) No change.
    (I) when the number of contracts automatically executed within a 15 
second period in an option (subject to a Pilot program until November 
30, 200[3]4) exceeds the specified disengagement size, a 30 second 
period ensues during which subsequent orders are handled manually. If 
the Exchange's disseminated size exceeds the specified disengagement 
size and an eligible order is delivered for a number of contracts that 
is greater than the specified disengagement size, such an order will be 
automatically executed up to the disseminated size, followed by an 
AUTO-X disengagement period of 30 seconds. If the specialist revises 
the quotation in such an option prior to the expiration of such 30-
second period, eligible orders in such an option shall again be 
executed automatically.
    (v) No change.
    (d)-(j) No change.
    Commentary:
    .01-.07 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 the 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 III 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 extend the Pilot for 
a one-year period, and to amend Exchange Rule 1080(c)(iv)(I) to reflect 
a systems change to the Pilot, as more fully

[[Page 68443]]

described below. 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 May 2003.\12\ In September 2003, the Exchange 
filed a proposed rule change reflecting a system change to the Pilot, 
which is described more fully below.\13\ The instant proposed rule 
change would codify the functionality of the system change in Exchange 
Rule 1080(c)(iv)(I), and would extend the Pilot for an additional one-
year period.
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    \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).
    \13\ See supra note 5.
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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,\14\ which causes AUTO-X to become disengaged for that option.
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    \14\ Exchange 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.\15\ 
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.\16\
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    \15\ See Securities Exchange Act Release No. 47646 (April 8, 
2003), 68 FR 17976 (April 14, 2003) (SR-Phlx-2003-18).
    \16\ See Exchange Rule 1082.
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    Because the Exchange currently guarantees automatic executions for 
eligible orders up to the Exchange's disseminated size, the Exchange 
has developed a new system that automatically executes 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 AUTO-X disengagement period of 30 
seconds.\17\ If the specialist revises the quote in the series prior to 
the expiration of 30 seconds, AUTO-X will be automatically re-engaged. 
The instant proposal would amend Rule 1080(c)(iv)(I) to reflect this 
enhancement to the system.
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    \17\ If either a market order or a limit order is larger than 
the disseminated size, the remaining unexecuted portion of the order 
would be manually handled by the specialist in accordance with 
Exchange Rules. Telephone conversation between Richard S. Rudolph, 
Director and Counsel, Phlx, and Marc McKayle, Special Counsel, 
Division, Commission on November 26, 2003.
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    The Exchange believes that the 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,\18\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\19\ 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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    \18\ 15 U.S.C. 78f(b).
    \19\ 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

[[Page 68444]]

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-2003-77 and 
should be submitted by December 29, 2003.

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

    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.\20\ 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.\21\
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    \20\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the extension of the Pilot should 
assist specialists in maintaining fair and orderly markets during 
periods of peak market activity. In that regard, the Commission notes 
that in response to Commission staff concerns the Exchange modified its 
system to provide that if the disseminated size exceeds the specified 
disengagement size and an eligible order is delivered for a number of 
contracts that is greater than the specified disengagement size, such 
an order will be automatically executed up to the disseminated size. 
The Commission believes that an extension of the Pilot program for a 
one-year period should allow the Exchange to continue its efforts to 
deploy more fully automate its systems.
    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\22\ for approving the proposed rule change prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. The Commission recognizes that, according to the 
Phlx, no complaints from customers, floor traders, or member firms have 
been received during the entire period of the Pilot program.\23\ The 
Commission believes that granting accelerated approval to extend the 
Pilot program for one additional year will allow Phlx to continue, 
without interruption, the existing operation of its AUTO-X system.
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    \22\ 15 U.S.C. 78s(b)(2).
    \23\ Pursuant to telephone conversation between Richard S. 
Rudolph, Director and Counsel, Phlx, and Marc McKayle, Special 
Counsel, Division, Commission on November 24, 2003.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
\24\ that the proposed rule change (SR-Phlx-2003-77) is hereby approved 
on an accelerated basis, as a one-year Pilot, scheduled to expire on 
November 30, 2004.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30357 Filed 12-5-03; 8:45 am]
BILLING CODE 8010-01-P