[Federal Register Volume 69, Number 60 (Monday, March 29, 2004)]
[Notices]
[Pages 16327-16331]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6816]



[[Page 16327]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49435; File No. SR-Phlx-2003-68]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the Philadelphia Stock 
Exchange, Inc. Relating to Options Transactions Resulting From Obvious 
Errors

March 17, 2004.
    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 September 29, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
November 25, 2003, Phlx filed Amendment No. 1 to the proposed rule 
change.\3\ On January 15, 2004, Phlx filed Amendment No. 2 to the 
proposed rule change.\4\ 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\ See Letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated November 24, 2003 
(``Amendment No. 1''). Amendment No. 1 replaced the original 
proposed rule change in its entirety.
    \4\ See Letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Susie Cho, Special Counsel, Division, Commission, dated 
January 14, 2004 (``Amendment No. 2''). In Amendment No. 2, Phlx 
amended the proposed rule change by: (1) Clarifying that proposed 
Phlx Rule 1092(c)(ii)(A) does not apply to a verifiable disruption 
or malfunction of an execution, dissemination, or communication 
system of a Specialized Quote Feed user; (2) clarifying that the 
term ``primary market,'' used in proposed Phlx Rule 1092(c)(ii)(D), 
means, in respect of an underlying stock or exchange-traded fund 
share, the principal market in which the underlying stock or 
exchange-traded fund share is traded; (3) amending proposed Phlx 
Rule 1092(e)(ii) to provide that, in the case of an obvious error 
determination, where at least one party to the transaction in which 
an obvious error occurred is not a specialist or ROT on the 
Exchange, two Floor Officials will nullify the transaction, unless 
both parties agree to adjust the price of the transaction within 30 
minutes of being notified by Market Surveillance of the obvious 
error; (4) amending proposed Phlx Rule 1092(f) to require that a 
request for review of Floor Official rulings under proposed Phlx 
Rule 1092 must be in writing; and (5) amending the paragraph 
numbering contained in Commentaries .02 and .03 of proposed Phlx 
Rule 1092.
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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 Phlx Rule 1092, which would 
permit the Exchange to nullify or adjust a transaction resulting from 
an obvious error. The Exchange further proposes to amend Phlx Rule 124 
(Disputes) to provide that Phlx Rule 124(a) would not apply to options 
transactions that are the result of an obvious error (as defined in 
proposed Phlx Rule 1092). Options transactions that are the result of 
an obvious error would be subject to the provisions and procedures set 
forth in proposed Phlx Rule 1092. Below is the text of the proposed 
rule change. Proposed new language is italicized.
* * * * *

Obvious Errors \5\
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    \5\ The text of the proposed rule reflects a few technical 
corrections from the text contained in Amendment No. 2. Telephone 
conversation between Richard S. Rudolph, Director and Counsel, Phlx, 
and Frank N. Genco, Attorney, Division, Commission on February 12, 
2004.
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    Rule 1092. The Exchange shall either nullify a transaction or 
adjust the execution price of a transaction that results in an Obvious 
Error as provided in this Rule. (a) Definition of Obvious Error. For 
purposes of this Rule only, an Obvious Error will be deemed to have 
occurred when:
    (i) If the Theoretical Price of the option is less than $3.00:
    (A) during regular market conditions (including rotations), the 
execution price of a transaction is higher or lower than the 
Theoretical Price for the series by an amount of 35 cents or more; or,
    (B) during unusual market conditions (i.e., the Exchange has 
declared an unusual market condition status for the option in 
question), the execution price of a transaction is higher or lower than 
the Theoretical Price for the series by an amount of 50 cents or more.
    (ii) If the Theoretical Price of the option is $3.00 or more:
    (A) during regular market conditions (including rotations), the 
execution price of a transaction is higher or lower than the 
Theoretical Price for the series by an amount equal to at least two 
times the maximum bid/ask spread allowed for the series, so long as 
such amount is 50 cents or more; or
    (B) during unusual market conditions i.e., the Exchange has 
declared an unusual market condition status for the option in 
question), the execution price of a transaction is higher or lower than 
the Theoretical Price for the series by an amount equal to at least 
three times the maximum bid/ask spread allowed for the series, so long 
as such amount is 50 cents or more.
    (b) Definition of Theoretical Price. For purposes of this Rule 
only, the Theoretical Price of an option is:
    (i) if the series is traded on at least one other options exchange, 
the last bid or offer, just prior to the transaction, on the exchange 
that has the most total volume in that option over the most recent 60 
calendar days; or
    (ii) if there are no quotes for comparison purposes, as determined 
by two Floor Officials and designated personnel in the Exchange's 
Market Surveillance Department.
    (c) Absent Mutual Agreement as provided in Rule 1092(c)(iii) below, 
parties to a trade may have a trade nullified or its price adjusted if:
    (i) any such party makes a documented request within the time 
specified in Rule 1092(e)(i); and
    (ii) one of the conditions below is met:
    (A) The trade resulted from a verifiable disruption or malfunction 
of an Exchange execution, dissemination, or communication system that 
caused a quote/order to trade in excess of its disseminated size (e.g. 
a quote/order that is frozen, because of an Exchange system error, and 
repeatedly traded) in which case trades in excess of the disseminated 
size may be nullified; or
    (B) The trade resulted from a verifiable disruption or malfunction 
of an Exchange dissemination or communication system that prevented a 
member from updating or canceling a quote/order for which the member is 
responsible where there is Exchange documentation providing that the 
member sought to update or cancel the quote/order; or
    (C) The trade resulted from an erroneous print disseminated by the 
underlying market which is later cancelled or corrected by the 
underlying market where such erroneous print resulted in a trade higher 
or lower than the average trade in the underlying security during the 
time period encompassing two minutes before and after the erroneous 
print, by an amount at least five times greater than the average quote 
width for such underlying security during the time period encompassing 
two minutes before and after the erroneous print. For purposes of this 
Rule, the average trade in the underlying security shall be determined 
by adding the prices of each trade during the four minute time period 
referenced above (excluding the trade in question) and dividing by the 
number of trades during such time period (excluding the trade in 
question); or
    (D) The trade resulted from an erroneous quote in the Primary 
Market

[[Page 16328]]

for the underlying security that has a width of at least $1.00 and that 
width is at least five times greater than the average quote width for 
such underlying security during the time period encompassing two 
minutes before and after the dissemination of such quote. For the 
purposes of this rule, the average quote width shall be determined by 
adding the quote widths of each separate quote during the four minute 
time period referenced above (excluding the quote in question) and 
dividing by the number of quotes during such time period (excluding the 
quote in question); or
    (E) The trade resulted in an execution price in a series quoted no 
bid and at least one strike price below (for calls) or above (for puts) 
in the same class were quoted no bid at the time of the erroneous 
execution.
    (F) The trade is automatically executed at a price where the 
specialist or ROT sells $0.10 or more below parity. Parity describes an 
option contract's total premium when that premium is equal to its 
intrinsic value. Parity for calls is measured by reference to the offer 
price of the underlying security in the Primary Market at the time of 
the transaction minus the strike price for the call. Parity for puts is 
measured by the strike price of an underlying security minus its bid 
price in the Primary Market at the time of the transaction.
    (iii) Mutual Agreement. The determination as to whether a trade was 
automatically executed at an erroneous price may be made by mutual 
agreement of the affected parties to a particular transaction. A trade 
may be nullified or adjusted on the terms that all parties to a 
particular transaction agree. In the absence of mutual agreement by the 
parties, a particular trade may only be nullified or adjusted when the 
transaction results from an Obvious Error as provided in this Rule.
    (d) Adjustments. Where the execution price of a transaction 
executed as the result of an Obvious Error is adjusted, the adjusted 
price will be:
    (i) the Theoretical Price of the option in the case where the 
erroneous price is displayed in the market and subsequently executed 
against quotes or orders that did not exist on the Exchange at the time 
the erroneous price was entered; or
    (ii) the last bid or offer, just prior to the transaction, on the 
exchange that was disseminating the National Best Bid or Offer for the 
series at the time of the transaction that was the result of an Obvious 
Error in the case where an erroneous price executes against quotes or 
orders already existing on the Exchange at the time the erroneous price 
was entered.
    (e) Obvious Error Procedure. Market Surveillance shall administer 
the application of this Rule as follows:
    (i) Notification. If a specialist or Registered Options Trader 
(``ROT'') on the Exchange believes that he/she participated in a 
transaction that was the result of an Obvious Error, he/she must notify 
Market Surveillance within five minutes of the transaction. If a member 
or member organization that initiated the order from off the floor of 
the Exchange believes a transaction on the Exchange was the result of 
an Obvious Error, such member or member organization must notify Market 
Surveillance within fifteen minutes of the execution. Absent unusual 
circumstances, Market Surveillance will not grant relief under this 
Rule unless notification is made within the prescribed time period.
    (ii) Adjust or Bust. A Floor Official will determine whether there 
is an Obvious Error as defined in this Rule. If it is determined that 
an Obvious Error has occurred: (A) where each party to the transaction 
is either a specialist or ROT on the Exchange, the execution price of 
the transaction will be adjusted by one Floor Official, unless both 
parties agree to nullify the transaction within ten minutes of being 
notified by Market Surveillance of the Obvious Error; or (B) where at 
least one party to the transaction in which an Obvious Error occurred 
is not a specialist or ROT on the Exchange, two Floor Officials will 
nullify the transaction, unless both parties agree to adjust the price 
of the transaction within 30 minutes of being notified by Market 
Surveillance of the Obvious Error. Upon final Floor Official action, 
Market Surveillance, in conjunction with the AUTOM Help Desk, where 
appropriate, shall promptly notify both parties to the trade.
    (f) Request for Review. If a party affected by a determination made 
under this Rule so requests within the time permitted, a Review Panel 
of Floor Officials will review decisions made under this Rule in 
accordance with Exchange Rule 124(d). A request for review under this 
paragraph must be made within thirty minutes after a party receives 
verbal notification of a final determination by the Floor Official(s) 
under this Rule, except that if such notification is made after 3:30 
p.m. Eastern Time, either party has until 9:30 a.m. Eastern Time on the 
next trading day to request a review. Such a request for review must be 
in writing or otherwise documented. The Review Panel shall review the 
facts and render a decision on the day of the transaction, or the next 
trade day in the case where a request is properly made after 3:30 p.m. 
on the day of the transaction or where the request is properly made the 
next trade day.
    Commentary.
    .01. For purposes of paragraph (a) of this Rule, the maximum bid/
ask spread shall be the maximum bid/ask spread allowed pursuant to 
Exchange Rule 1014(c)(i)(A), unless a wider spread has been allowed by 
the Exchange for the option because of unusual market conditions.
    .02. The Theoretical Price will be determined under paragraph 
(b)(i) of this Rule as follows: (i) the bid price from the exchange 
providing the most total volume in the option over the most recent 60 
calendar days will be used with respect to an erroneous bid price 
entered on the Exchange, and (ii) the offer price from the exchange 
providing the most total volume in the option over the most recent 60 
calendar days will be used with respect to an erroneous offer price 
entered on the Exchange.
    .03. The price to which a transaction is adjusted under paragraph 
(d)(ii) of this Rule will be determined as follows: (i) The bid price 
from the exchange disseminating the National Best Bid for the series at 
the time of the transaction that was the result of an obvious error 
will be used with respect to an erroneous offer price entered on the 
Exchange, and (ii) the offer price from the exchange disseminating the 
National Best Offer for the series at the time of the transaction that 
was the result of an obvious error will be used with respect to an 
erroneous bid price entered on the Exchange. If there are no quotes for 
comparison purposes, the adjustment price will be determined by two 
Floor Officials and Market Surveillance.

Disputes

    Rule 124. (a) Disputes occurring on and relating to the trading 
floor, if not settled by agreement between the members interested, 
shall be settled, if practicable, by vote of the members knowing of the 
transaction in question; if not so settled, they shall be settled by a 
Floor Official summoned to the trading crowd.
    In issuing decisions for the resolution of trading disputes, Floor 
Officials may institute the course of action deemed to be most fair to 
all parties under the circumstances at the time. A Floor Official may 
direct the execution of an order on the floor, or adjust the 
transaction terms or participants to an executed order on the floor. 
However, two Option Floor Officials may nullify a transaction if they 
determine the

[[Page 16329]]

transaction to have been in violation of Rules 1014 (Obligations and 
Restrictions Applicable to Specialist and ROTs), 1015 (Quotation 
Guarantees), 1017 (Priority and Parity at Openings in Options), 1033 
(Bids and Offers) or 1080 (AUTOM). Two Equity Floor Officials may 
nullify a transaction if they determine the transaction to have been in 
violation of Rules 110 (Bids and Offers--Precedence), 111 (Bids and 
Offers--Binding), 118 (Bids and Offers Outside Best Bid and Offer), 119 
(Precedence of Highest Bid), 120 (Precedence of Offers at Same Price), 
126 (Crossing), 203 (Agreement of Specialists), 218 (Customer Order 
Receives Priority), 229 (PACE System), 232 (Handling Orders When the 
Primary Market is Not Open for Free Trading), or 455 (Short Sales). 
This Rule 124(a) shall not apply to options transactions that are the 
result of an Obvious Error (as defined in Rule 1092). Options 
transactions that are the result of an Obvious Error shall be subject 
to the provisions and procedures set forth in Rule 1092.
    (b)-(d) 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. The Exchange 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 adopt Exchange Rule 
1092, which would allow the Exchange to either nullify or adjust a 
transaction in circumstances where a member or its customer has made an 
error and the terms of the trade execution are obviously not correct. 
The Exchange believes that it is inconsistent with just and equitable 
principles of trade to allow one market participant to receive a 
windfall at the expense of another market participant that made an 
obvious error; on the other hand, the Exchange does not believe that 
market participants should be permitted to reconsider poor trading 
decisions. Accordingly, the Exchange represents that the proposed rule 
includes objective criteria for determining when a transaction is 
clearly the result of an obvious error; under what circumstances a 
trade will be adjusted or nullified; and to what price a trade would be 
adjusted if appropriate.

a. Notification

    Under proposed Phlx Rule 1092(e), when a member or member 
organization believes it has participated in a transaction that was the 
result of an obvious error, it must notify the Exchange's Market 
Surveillance Department (``Market Surveillance'') within a specified 
time of the execution in order to allow the transaction to be nullified 
or adjusted. Exchange specialists and Registered Options Traders 
(``ROTs''), who are located on the floor of the Exchange and 
continuously monitor their transactions, would be required to notify 
Market Surveillance within five minutes of the transaction. Off-floor 
members and member organizations, many of which handle customer orders 
on multiple exchanges simultaneously, and which may need to contact 
customers for instruction, would be required to notify Market 
Surveillance within 15 minutes of the transaction.
    The purpose of the notification requirement is to provide 
reasonably prompt notice to Market Surveillance and to participants in 
a transaction subject to proposed Phlx Rule 1092 that such transaction 
may have been the result of an obvious error and that the process set 
forth in the proposed rule change has begun, and ultimately a decision 
concerning the transaction will be made.

b. Theoretical Price

    Once Market Surveillance has been timely notified of a 
participant's belief that he or she has participated in a transaction 
that was the result of an obvious error, Market Surveillance would be 
required to determine the ``Theoretical Price'' of the option series in 
question, against which the price at which the trade was executed would 
be compared to determine if there was indeed an obvious error. For 
purposes of proposed Phlx Rule 1092 only, if the series is traded on at 
least one other options exchange, the Theoretical Price is the last bid 
or offer just prior to the trade found on the exchange that has the 
most total volume in that option over the most recent 60 calendar days. 
If there are no quotes for comparison purposes, the Theoretical Price 
would be determined by two Floor Officials and designated personnel in 
the Exchange's Market Surveillance Department.
    Proposed Phlx Rule 1092, Commentary .02 provides that the 
Theoretical Price would be: (1) The bid price from the exchange 
providing the most total volume in the option over the most recent 60 
calendar days with respect to an erroneous bid price entered on the 
Exchange; and (ii) the offer price from the exchange providing the most 
total volume in the option over the most recent 60 calendar days with 
respect to an erroneous offer price entered on the Exchange.
    The purpose of the Theoretical Price is to establish an objective 
price against which transactions that may have been the result of an 
obvious error may be measured to determine whether nullification or 
adjustment of the transaction is warranted under the proposed rule.

c. Definition of Obvious Error

    Proposed Phlx Rule 1092(a) would define ``obvious error'' based on 
the Theoretical Price of the option and market conditions. 
Specifically, if the Theoretical Price of the option is less than 
$3.00, during regular market conditions (including rotations), and the 
execution price of a transaction is higher or lower than the 
Theoretical Price for the series by an amount of 35 cents or more, such 
an execution price would be considered an obvious error and, if 
notification of the obvious error is made in accordance with the 
requirements set forth above, the transaction would be subject to 
nullification or adjustment.
    During unusual market conditions (i.e., the Exchange has declared 
an unusual market condition status for the option in question), if the 
execution price of a transaction is higher or lower than the 
Theoretical Price for the series by an amount of 50 cents or more, such 
an execution price would be considered an obvious error and, if 
notification of the obvious error is made in accordance with the 
requirements set forth above, the transaction would be subject to 
nullification or adjustment.
    If the Theoretical Price of the option is $3.00 or more, during 
regular market conditions (including rotations), if the execution price 
of a transaction is higher or lower than the Theoretical Price for the 
series by an amount equal to at least two times the maximum bid/ask 
spread allowed for the series, so long as such amount is 50 cents or 
more, such an execution price would be considered an obvious error and, 
if notification of the obvious error is made in accordance with the 
requirements set

[[Page 16330]]

forth above, the transaction would be subject to nullification or 
adjustment.
    During unusual market conditions (i.e., the exchange has declared 
an unusual market condition status for the option in question), if the 
Theoretical Price of the option is $3.00 or more, and the execution 
price of a transaction is higher or lower than the Theoretical Price 
for the series by an amount equal to at least three times the maximum 
bid/ask spread allowed for the series, so long as such amount is 50 
cents or more, such an execution price would be considered an obvious 
error and, if notification of the obvious error is made in accordance 
with the requirements set forth above, the transaction would be subject 
to nullification or adjustment.

d. Trade Adjustment and Nullification

    Proposed Phlx Rule 1092(c) would allow a Floor Official(s) to 
adjust or nullify a transaction in the following circumstances:

 Verifiable System Disruption or Malfunction

    The trade resulted from a verifiable disruption or malfunction of 
an Exchange's execution, dissemination, or communication system that 
caused a quote/order to trade in excess of its disseminated size (e.g., 
a quote/order that is frozen, because of an Exchange system error, and 
repeatedly traded) in which case trades in excess of the disseminated 
size may be nullified; or the trade resulted from a verifiable 
disruption or malfunction of an Exchange dissemination or communication 
system that prevented a member from updating or canceling a quote/order 
for which the member is responsible where there is Exchange 
documentation providing that the member sought to update or cancel the 
quote/order.

 Erroneous Print in Underlying Market Which is Later 
Cancelled or Corrected

    The trade resulted from an erroneous print disseminated by the 
underlying market which is later cancelled or corrected by the 
underlying market where such erroneous print resulted in a trade higher 
or lower than the average trade in the underlying security during the 
time period encompassing two minutes before and after the erroneous 
print, by an amount at least five times greater than the average quote 
width for such underlying security during the time period encompassing 
two minutes before and after the erroneous print. For purposes of 
proposed Phlx Rule 1092, the average trade in the underlying security 
would be determined by adding the prices of each trade during the four 
minute time period referenced above (excluding the trade in question) 
and dividing by the number of trades during such time period (excluding 
the trade in question).

 Erroneous Quote in Underlying Market

    The trade resulted from an erroneous quote in the primary market 
\6\ for the underlying security that has a width of at least $1.00 and 
that width is at least five times greater than the average quote width 
for such underlying security during the time period encompassing two 
minutes before and after the dissemination of such quote. For purposes 
of proposed Phlx Rule 1092, the average quote width would be determined 
by adding the quote widths of each separate quote during the four 
minute time period referenced above (excluding the quote in question) 
and dividing by the number of quotes during such time period (excluding 
the quote in question).
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    \6\ Phlx represents that the term ``primary market,'' as used in 
proposed Phlx Rule 1092(c)(ii)(D) and (F), means, in respect of an 
underlying stock or exchange-traded fund share, the principal market 
in which the underlying stock or exchange-traded fund share is 
traded. See Amendment No. 2, supra note 4; see also Phlx Rule 
1000(a)(31).

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 Series Quoted No Bid

    The trade resulted in an execution price in a series quoted no bid, 
and at least one strike price below (for calls) or above (for puts) in 
the same class were quoted no bid at the time of the erroneous 
execution.

 $0.10 or More Below Parity

    The trade is automatically executed at a price where the specialist 
or ROT sells $0.10 or more below parity. Parity describes an option 
contract's total premium when that premium is equal to its intrinsic 
value. Parity for calls is measured by reference to the offer price of 
the underlying security in the primary market at the time of the 
transaction minus the strike price for the call. Parity for puts is 
measured by the strike price of an underlying security minus its bid 
price in the primary market at the time of the transaction.
    In addition to the circumstances described above, the determination 
as to whether a trade was automatically executed at an erroneous price 
may be made by mutual agreement of the affected parties to a particular 
transaction. The trade may be nullified or adjusted on terms to which 
all parties to a particular transaction agree. In the absence of mutual 
agreement by the parties, a particular trade may only be nullified or 
adjusted when the transaction results from an obvious error as provided 
in proposed Phlx Rule 1092.

e. Procedure

    If it is determined that a transaction is the result of an obvious 
error, Market Surveillance would take one of the following actions: (i) 
Where each party to the transaction is either a specialist or ROT on 
the Exchange, the execution price of the transaction would be adjusted 
by one Floor Official, unless both parties agree to nullify the 
transaction within ten minutes of being notified by Market Surveillance 
of the obvious error; or (ii) where at least one party to the 
transaction in which an obvious error occurred is not a specialist or 
ROT on the Exchange, two Floor Officials would nullify the transaction 
unless both parties agree to adjust the price of the transaction within 
30 minutes of being notified by Market Surveillance of the obvious 
error. Upon final Floor Official action, Market Surveillance, in 
conjunction with the AUTOM Help Desk, where appropriate, would promptly 
notify both parties to the transaction. The purpose of this procedure 
is to provide Exchange staff and Floor Officials with a consistent, 
established course of action to be taken when a transaction has 
resulted from an obvious error, and to ensure prompt notification of an 
adjustment or nullification of such a transaction.
    Where an adjustment is made to a transaction price, proposed Phlx 
Rule 1092, Commentary .03 would provide that the bid price from the 
exchange disseminating the national best bid for the series at the time 
of the transaction that was the result of an obvious error would be 
used with respect to an erroneous offer price entered on the Exchange, 
and the offer price from the exchange disseminating the national best 
offer for the series at the time of the transaction that was the result 
of an obvious error would be used with respect to an erroneous bid 
price entered on the Exchange. If there are no quotes for comparison 
purposes, the adjustment price would be determined by two Floor 
Officials and Market Surveillance.

f. Review

    If a party affected by a determination made under proposed Phlx 
Rule 1092 so requests within the time permitted, a Review Panel of at 
least three Floor Officials would review Floor Official rulings made 
under this Rule in accordance with Phlx Rule 124(d).\7\ A

[[Page 16331]]

request for review under this paragraph must be made within thirty 
minutes after a party receives verbal notification of a final 
determination by the Floor Official(s) under Phlx Rule 1092, except 
that if such notification is made after 3:30 p.m. Eastern Time, either 
party has until 9:30 a.m. Eastern Time on the next trading day to 
request a review. The Review Panel shall review the facts and render a 
decision on the day of the transaction, or the next trade day in the 
case where a request is properly made after 3:30 p.m. on the day of the 
transaction or where the request is properly made the next trade day.
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    \7\ Phlx Rule 124 (Disputes) governs situations where trading 
disputes cannot be settled by agreement between the members 
interested. Phlx Rule 124(d) sets forth procedures to be followed 
for the appeal of Floor Official rulings.
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    As stated above, proposed Phlx Rule 1092 would allow Exchange Floor 
Officials to nullify certain transactions based on the stated objective 
criteria set forth in the proposed Rule. Current Phlx Rule 124(a) 
allows Exchange Floor Officials to nullify transactions in certain 
cases in which any of the specifically enumerated Exchange Rules listed 
in Phlx Rule 124(a) have been violated.\8\ In order to provide clarity 
as to the application of each rule, the Exchange is proposing to amend 
Phlx Rule 124(a) to state that Phlx Rule 124(a) would not apply to 
options transactions that are the result of an obvious error (as 
defined in Phlx Rule 1092). Options transactions that are the result of 
an obvious error would be subject to the provisions and procedures set 
forth in Phlx Rule 1092.
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    \8\ Under Phlx Rule 124(a), two Option Floor Officials may 
nullify a transaction if they determine the transaction to have been 
in violation of Phlx Rules 1014 (Obligations and Restrictions 
Applicable to Specialist and ROTs), 1015 (Quotation Guarantees), 
1017 (Priority and Parity at Openings in Options), 1033 (Bids and 
Offers), or 1080 (AUTOM). Two Equity Floor Officials may nullify a 
transaction if they determine the transaction to have been in 
violation of Phlx Rules 110 (Bids and Offers--Precedence), 111 (Bids 
and Offers--Binding), 118 (Bids and Offers Outside Best Bid and 
Offer), 119 (Precedence of Highest Bid), 120 (Precedence of Offers 
at Same Price), 126 (Crossing), 203 (Agreement of Specialists), 218 
(Customer Order Receives Priority), 229 (PACE System), 232 (Handling 
Orders When the Primary Market is Not Open for Free Trading), or 455 
(Short Sales).
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g. Conclusion

    The proposed rule change is intended to address the situation in 
which the price of an executed trade indicates that an obvious error 
exists, suggesting that it is unrealistic to expect that the parties to 
the transaction have come to a meeting of the minds regarding the terms 
of the transaction. The proposed rule change contemplates that the 
determination of whether such an obvious error has occurred should be 
based on objective criteria, and subject to specific objective 
procedures, including making an appeal process available to the parties 
to such transactions.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and Section 6(b)(5),\10\ in particular, 
in that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Exchange believes that the proposed rule change 
will provide objective means for both on and off-floor participants on 
the Exchange to adjust or nullify transactions that result from an 
obvious error, and objective procedures and a process to be followed 
when a transaction results from an obvious error.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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 Exchange 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 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-2003-68. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in 
hardcopy 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 the filing will also be available for 
inspection and copying at the principal offices of the Exchange. All 
comments should be submitted by April 19, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6816 Filed 3-26-04; 8:45 am]
BILLING CODE 8010-01-P