[Federal Register Volume 69, Number 26 (Monday, February 9, 2004)]
[Notices]
[Pages 6010-6013]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2647]



[[Page 6010]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49151; File No. SR-Phlx-2004-01]


Self-Regulatory Organizations; Notice of Filing and Amendments 
No. 1 and 2 Thereto and Order Granting Accelerated Approval of Proposed 
Rule Change by the Philadelphia Stock Exchange, Inc. Relating to the 
Automatic Execution of Registered Options Trader (``ROT'') Limit Orders 
on the Limit Order Book

January 29, 2004.
    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 January 6, 2004, 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. On January 15, 2004, the 
Exchange filed Amendment No. 1.\3\ On January 28, 2004, the Exchange 
filed Amendment No. 2.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, and Amendments No. 1 and 
2, from interested persons, and granting accelerated approval to the 
proposal, as amended.
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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, 
Legal Department, Phlx to Deborah Lassman Flynn, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
January 15, 2004 (``Amendment No. 1''). In Amendment No. 1, the 
Exchange proposes to amend the rule text to clarify that if Phlx XL 
is not deployed for any reason, the Exchange would implement a 
functionality whereby eligible incoming orders and quotations would 
automatically execute against quotations of specialists and 
Streaming Quote Traders (``SQTs'') and orders of Registered Options 
Traders (``ROTs'') within 30 days of the date of the determination 
not to deploy.
    \4\ See letter from Richard S. Rudolph, Director and Counsel, 
Legal Department, Phlx to Deborah Lassman Flynn, Assistant Director, 
Division, Commission, dated January 28, 2004 (``Amendment No. 2''). 
In Amendment No. 2, the Exchange proposes to amend the rule text to 
clarify that Phlx XL, if approved, would be deployed not later than 
10 days after Commission approval.
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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 Exchange Rule 1080, Commentary .04, to 
modify the timing of the deployment of a feature of its Automated 
Options Market (AUTOM) \5\ system in light of the Exchange's proposal 
to introduce its new electronic trading platform for options, to be 
known as ``Phlx XL.'' \6\ The text of the proposed rule change is set 
forth below.
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    \5\ 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.
    \6\ See File No. SR-Phlx-2003-59 and Amendments No. 1 and 2 
thereto, which describes the proposed functionality and rule changes 
associated with Phlx XL, and is currently pending with the 
Commission (``Phlx XL Proposal'').
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    Brackets indicate deletions; italics indicate new text.

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

Rule 1080.

    (a)-(j) No change.
    Commentary:
    .01-.03 No change.
    .04 * * *
    [The Exchange shall modify its AUTO-X system not later than 
January, 2004, so that it shall automatically execute eligible incoming 
orders against Phlx Price Improving ROT and specialist price improving 
orders and orders matching such price-improving orders entered via 
electronic interface with AUTOM resting on the limit order book. The 
Exchange will deploy the modified system over a 15-month period.]
    Not later than ten days following approval by the Securities and 
Exchange Commission of the rules applicable to the Exchange's 
electronic trading platform, Phlx XL, the Exchange will commence the 
initial deployment of Phlx XL by allowing specialists and ROTs who are 
Streaming Quote Traders (``SQTs,'' as defined in the Phlx XL rules) to 
submit electronic quotations in Streaming Quote Options (as defined in 
the Phlx XL rules), and ROTs who are not SQTs to submit limit orders 
onto the limit order book via electronic interface with AUTOM or 
manually through a Floor Broker or the Specialist. Eligible incoming 
orders and quotations will automatically execute against quotations of 
specialists and SQTs and orders of ROTs in accordance with the 
functionality of the Phlx XL system, as set forth in the Phlx XL rules.
    Over a period following the commencement of operation of the Phlx 
XL system, the Exchange expects to gradually increase the number of 
Streaming Quote Options eligible to be traded via Phlx XL. If the Phlx 
XL system is in operation on April 30, 2005, but less than all of the 
options traded on the Exchange are Streaming Quote Options, then the 
Exchange shall, as of April 30, 2005, ensure that the AUTOM system 
automatically executes eligible incoming orders in options that are not 
then Streaming Quote Options against Phlx Price Improving ROT and 
specialist price improving orders and orders matching such price-
improving orders entered via the electronic interface with AUTOM 
described in this Commentary .04 and that are resting on the limit 
order book.
    If the Exchange for any reason determines not to deploy Phlx XL, or 
if, following the initial deployment of the Phlx XL system, the 
deployment of Phlx XL is terminated for any reason, then the Exchange 
shall, within 30 days of such determination not to deploy Phlx XL or 
termination, ensure that the AUTOM system (or any successor thereto) 
automatically executes eligible incoming option orders against Phlx 
Price Improving ROT and specialist price improving orders and orders 
matching such price-improving orders entered via the electronic 
interface with AUTOM described in this Commentary .04 and that are 
resting on the limit order book. In such event, the Exchange shall, at 
the time of such termination, identify to the Commission and to members 
and member organizations the options subject to such automatic 
execution, and shall cause all options to be subject to automatic 
execution by April 30, 2005.
    .05-.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 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 amend Exchange Rule 
1080, Commentary .04, to reflect the proposed

[[Page 6011]]

deployment of the Exchange's proposed new options trading platform, 
Phlx XL.
a. Background
    In November 2002, the Commission approved proposed amendments to 
Exchange Rules 1080 and 1014 adopting a feature of AUTOM known as ``ROT 
Access'' to: (i) allow ROTs and specialists to enter price improving 
limit orders via electronic interface with AUTOM, subject to certain 
contingencies, and (ii) set forth special crowd priority, parity and 
trade allocation rules that would only apply to price-improving ROT and 
specialist price improving orders entered via electronic interface with 
AUTOM.\7\
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    \7\ See Securities Exchange Act Release No. 46763 (November 1, 
2002), 67 FR 68898 (November 11, 2002) (``ROT Access Proposal''). 
According to Phlx, the ROT Access Proposal was submitted as a 
temporary solution in response to 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''), 
which requires, among other things, that the respondent exchanges, 
including the Phlx, adopt new, or amend existing, rules concerning 
its automated quotation systems which substantially enhance 
incentives to quote competitively and substantially reduce 
disincentives for market participants to act competitively (the 
``Competitive Quoting Undertaking'').
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b. The Modified System
    Currently, under ROT Access, inbound orders eligible for execution 
against price-improving ROT limit orders entered via the electronic 
interface and orders matching such price-improving limit orders are 
manually executed by the specialist. The Exchange represented in its 
rules relating to ROT Access that the Exchange would modify its AUTO-X 
system not later than January 2004, so that it would automatically 
execute eligible incoming orders against Phlx Price Improving ROT and 
specialist price improving orders and orders matching such price-
improving orders entered via electronic interface with AUTOM resting on 
the limit order book (the ``Modified System''). Pursuant to Commentary 
.04 to Phlx Rule 1080, the Exchange would deploy the Modified System 
over a 15-month period.
    Since the adoption of that provision, the Exchange has commenced 
the technological development of, and filed for Commission approval of 
rules relating to, its electronic trading platform, ``Phlx XL,'' on a 
six-month pilot basis.\8\ The Exchange represents to the Commission 
that: (i) Phlx XL, which would allow ROTs to stream competitive 
proprietary option quotations into the Exchange's system in certain 
options designated by the Options Committee as ``Streaming Quote 
Options,'' would represent the Exchange's permanent response to the 
Competitive Quoting Undertaking, and (ii) ROT limit orders placed 
electronically onto the limit order book via the electronic interface 
in Streaming Quote Options would be executed automatically, thus 
obviating the need for the Modified System for Streaming Quote Options 
(i.e., those options traded on Phlx XL).
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    \8\ See Phlx XL Proposal, supra note 6.
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c. ROT Access and Phlx XL
    Currently, ROTs are permitted by rule to enter electronic price 
improving limit orders (and orders matching such limit orders entered 
electronically by the specialist or other ROTs in the trading crowd) 
onto the limit order book via electronic interface with AUTOM, and are 
entitled to receive a special allocation in trades stemming from such 
price improving limit orders. Such price-improving limit orders must be 
for at least the lesser of the AUTO-X guarantee for the option 
(currently defined as the Exchange's disseminated size) or 20 
contracts. Under the Phlx XL Proposal, ROTs would continue to be 
permitted under Exchange Rule 1080(b)(i)(B) and Commentary .04 to that 
rule to place certain limit orders on the limit order book 
electronically.
    Under the Phlx XL Proposal, the requirement that such limit orders 
be price-improving orders would be deleted. Instead, ROTs would be 
permitted to place limit orders, including Good-Till-Cancelled 
(``GTC'') orders, on the limit order book, regardless of whether such 
an order improves the then-prevailing Exchange market. This would apply 
to ROT limit orders entered onto the limit order book electronically in 
both Streaming Quote Options trading on Phlx XL, and in non-Streaming 
Quote Options that are not traded on Phlx XL. ROTs entering limit 
orders on the book in both Streaming Quote Options and non-Streaming 
Quote Options would be required to submit such orders with a size of at 
least 10 contracts. Respecting non-Streaming Quote Options (not traded 
on Phlx XL), inbound orders eligible for execution against such limit 
orders would be executed and allocated manually by the specialist, as 
they are today.
    Respecting Streaming Quote Options, inbound AUTOM orders or 
electronic quotations eligible for execution against ROT orders entered 
into AUTOM via electronic interface by ROTs who elect not to stream 
proprietary quotations in such options would be automatically executed 
and would be allocated automatically pursuant to proposed Exchange 
rules relating to Streaming Quote Options.\9\
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    \9\ Id.
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d. The Phlx XL Rollout and the Competitive Quoting Undertaking
    Because the Exchange believes that Phlx XL will ultimately be 
deployed for all options traded on the Exchange floor-wide, the 
Exchange does not believe it is necessary or prudent to invest the 
resources required to deploy the Modified System described in current 
Rule 1080, Commentary .04, unless the Phlx XL trading platform ceases 
to be used by the Exchange for any reason (which the Exchange does not 
contemplate), or if the Exchange ultimately determines not to deploy 
the Phlx XL platform for all options. Because Phlx XL provides for the 
automatic execution of eligible incoming orders against ROT limit 
orders, the Exchange believes that it can satisfy the requirement of 
the Competitive Quoting Undertaking as it relates to the automatic 
execution of ROT limit orders upon the deployment of Phlx XL and as the 
Exchange successively introduces additional options to trade on that 
platform.
    Contingent upon Commission approval of the proposed rules relating 
to Phlx XL, and the completion of system development, the Exchange 
would commence deployment of Phlx XL beginning with approximately 10 
options, pursuant to the deployment schedule set forth in the Phlx XL 
Proposal.\10\ The Exchange has not yet determined a floor-wide 
deployment date.
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    \10\ Id.
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    The Exchange, following the initial deployment of Phlx XL, would 
not be automatically executing inbound orders against ROT limit orders 
in options that are not traded on Phlx XL (thus not providing such 
automatic executions in all options). To ensure that the Exchange is in 
compliance with the Competitive Quoting Undertaking, the Exchange has 
filed this proposal.
    The proposed rule provides that the Exchange would commence the 
automatic execution of ROT limit orders on the limit order book in 
options traded on Phlx XL within 10 days of the Commission's approval 
of the system, subject to the various extenuating circumstances 
described below.\11\
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    \11\ The automatic execution of eligible orders against ROT 
limit orders on the limit order book is a proposed functionality of 
Phlx XL. Thus, such automatic execution would be effective for those 
options traded on Phlx XL upon deployment of the Phlx XL platform.

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[[Page 6012]]

i. If Phlx XL Is Not Deployed or Is Terminated for Any Reason
    If the Exchange determines not to deploy Phlx XL or if the 
deployment of Phlx XL is terminated for any reason (which is not 
contemplated by the Exchange), then the Exchange would, within 30 days 
of such determination or termination, ensure that the AUTOM system 
automatically executes eligible incoming option orders against Phlx 
Price Improving ROT and specialist price improving orders and orders 
matching such price-improving orders entered via the electronic 
interface with AUTOM, consistent with the Modified System. The Exchange 
would identify the options subject to such automatic execution, and 
would cause all options to be subject to automatic execution by April 
30, 2005.
ii. If Phlx XL Is Deployed For Less Than All Options
    The proposed rule would further provide that, if the Phlx XL system 
is in operation on April 30, 2005, but less than all of the options 
traded on the Exchange are Streaming Quote Options (thus traded on Phlx 
XL), then the Exchange would, as of April 30, 2005, ensure that the 
AUTOM system automatically executes eligible incoming orders in options 
that are not then Streaming Quote Options against Phlx Price Improving 
ROT and specialist price improving orders, consistent with the original 
proposal for the Modified System.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act,\12\ in general, and furthers the objectives of section 
6(b)(5) of the Act,\13\ in particular, in 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 enabling the Exchange to 
continue the development and deployment of Phlx XL while continuing to 
enhance the automatic execution of ROT limit orders on the limit order 
book which, as interpreted by Commission staff, forms a part of the 
requirements of the Competitive Quoting Undertaking.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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, 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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-Phlx-2004-01. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review comments more efficiently, comments should be sent 
in hard copy or by e-mail, but not by both methods. 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-2004-01 and should be 
submitted by March 1, 2004.

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.\14\ 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.\15\
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    \14\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that this proposed rule change should 
assist the Exchange by allowing it to focus its resources on the 
development and deployment Phlx XL, which, if approved by the 
Commission, will be its new electronic trading platform for options and 
its permanent response to the Competitive Quoting Undertaking. The 
instant proposal should help Phlx to avoid the duplication of 
technological efforts by allowing the Exchange to fulfill its 
Competitive Quoting Undertaking with the deployment of Phlx XL, which 
would occur within 10 days of Commission approval of the system. Thus, 
Phlx will be able to avoid altering the Modified System for compliance 
purposes while simultaneously developing a successor system, which 
would also be designed to fulfill the undertaking. The Exchange 
represents that Phlx XL would be designed to automatically execute 
eligible incoming option orders against orders placed electronically on 
the Exchange's limit order book by ROTs. The Exchange also represents 
that if the Phlx XL is either never deployed or deployed and 
subsequently terminated for any reason the Exchange would ensure that 
the AUTOM system, or any successor system, would include the 
functionality to automatically execute eligible incoming option orders 
against Phlx Price Improving ROTs' and specialists' price improving 
orders and orders matching such price-improving orders entered via the 
electronic interface with AUTOM within 30 days of the determination not 
to deploy or termination of Phlx XL. In addition, the Exchange would 
insure that the AUTOM system would provide the automatic execution 
functionality described above by April 30, 2005, if Phlx XL were not 
operable for all options traded on the Exchange by that date.
    The Commission believes this proposed rule change, as amended, 
should allow Phlx to maximize the use of its resources in its efforts 
to comply with the Competitive Quoting Undertaking in a timely fashion 
as set forth in the Order. Further, the Commission notes that Phlx had 
previously committed to modify its Automatic Execution System (AUTO-X) 
no later than January 2004, and deploy the system over a 15-month 
period.\16\ In the instant proposal, Phlx maintains its commitment to 
cause all options to be

[[Page 6013]]

subject to automatic execution by April 30, 2005 (i.e., 15 months from 
January 2004), thus, the ultimate timetable that ROT Limit Orders in 
all options on the Exchange would be subject to automatic execution 
would be unchanged. Accordingly, the Commission finds good cause, 
pursuant to section 19(b)(2) of the Act,\17\ for approving the proposed 
rule change, as amended, prior to the 30th day after the date of 
publication of notice thereof in the Federal Register.
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    \16\ See ROT Access Proposal, supra note 7.
    \17\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-Phlx-2004-01), as amended, 
is hereby approved on an accelerated basis.

    \18\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-2647 Filed 2-6-04; 8:45 am]
BILLING CODE 8010-01-P