[Federal Register Volume 69, Number 61 (Tuesday, March 30, 2004)]
[Notices]
[Pages 16629-16631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7080]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49459; File No. SR-Phlx-2004-21]


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

March 23, 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 March 17, 2004, 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 Phlx. The Phlx 
filed the proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ and 
Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 a pilot program concerning a feature of 
the Exchange's Automated Options Market (``AUTOM'') System,\5\ designed 
to automatically execute limit orders on the book when the specialist's 
quotation locks or crosses a limit order on the book, thus rendering 
such limit order marketable. This feature, governed by Exchange Rule 
1080(c)(iii), is called ``Book Sweep.'' Book Sweep is currently 
operating as a six-month pilot.\6\
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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 features. 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.
    \6\ In September, 2003, the Commission approved the Exchange's 
Book Sweep proposal on a six-month pilot basis. See Securities 
Exchange Act Release No. 48563 (September 29, 2003), 68 FR 57724 
(October 6, 2003) (SR-Phlx-2003-30).
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    The pilot is scheduled to expire on March 31, 2004. The Exchange 
notes that it has submitted a proposed rule change requesting permanent 
approval of the Book Sweep feature.\7\ The instant proposal is intended 
to extend the pilot from April 1, 2004 until the earlier of July 1, 
2004 or such time as the Commission approves the Book Sweep feature on 
a permanent basis.
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    \7\ See Securities Exchange Act Release No. 49365 (March 4, 
2004), 69 FR 11690 (March 11, 2004) (SR-Phlx-2004-18).
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    The text of the proposed rule change is available at the principal 
offices of the Phlx and at the Commission. The proposed rule change 
does not alter the text of the pilot language in Rule 1080(c)(iii).

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

    In its filing with the Commission, the Phlx included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Phlx has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to continue to further 
automate options order handling by extending a current pilot 
enhancement to the Exchange's AUTOM system, called Book Sweep, that 
allows certain orders resting on the limit order book \8\ to be 
automatically executed in the situation where the bid or offer 
generated by the Exchange's Auto-

[[Page 16630]]

Quote \9\ system (or by a proprietary quoting system called 
``Specialized Quote Feed'' or ``SQF'')\10\ locks (i.e., $1.00 bid, 
$1.00 offer) or crosses (i.e., $1.05 bid, $1.00 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 are 
allocated among crowd participants participating on the Wheel.\11\
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    \8\ 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.
    \9\ 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).
    \10\ See Exchange Rule 1080, Commentary .01(b)(i).
    \11\ 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 Exchange believes that the Book Sweep feature provides for more 
timely and efficient executions of marketable limit orders on the limit 
order book. Prior to the deployment of Book Sweep, when the Auto-Quote 
or SQF bid or offer locked or crossed a booked order, the specialist 
handled the execution manually after being alerted by the system that 
one or more limit orders on the book have become marketable and are due 
an execution. This situation could occur for several series in the same 
option, which prior to the deployment of Book Sweep required multiple 
executions of booked limit orders in each such series to be carried out 
by the specialist. Book Sweep automates the execution of such orders.
Book Sweep Size
    Book Sweep automatically executes a 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 \12\ delivered via AUTOM at 
the Exchange's disseminated price, up to the disseminated size, for 
both customer and broker-dealer orders.\13\ Because the Exchange's 
disseminated size (and thus its guaranteed AUTO-X size) is dependent on 
the size displayed when an order is received, and thus is fluid, in 
order to achieve consistency, the number of contracts to be executed 
via Book Sweep is equal to the size associated with the quote that 
locks or crosses the limit order on the book.
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    \12\ 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).
    \13\ See Securities Exchange Act Release No. 47646 (April 8, 
2003), 68 FR 17976 (April 14, 2003) (SR-Phlx-2003-18).
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    When a quotation 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 quotation 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 quotation 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 thereafter refresh the quotation (including 
the size associated with such a quotation).
    The second possible scenario is that the size associated with a 
quotation 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 quotation 
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 thereafter refresh the quotation (including the size 
associated with such a quotation).
    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 another 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\ Exchange Rule 1082(b) provides that 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

[[Page 16631]]

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., 2.10 
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 (except with respect to orders 
eligible for ``Book Match'' as described in Rule 1080(g));
    (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 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, 2004) exceeds the specified disengagement size, a 30 
second period ensues during which subsequent orders are handled 
manually.
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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) of the Act \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 helps provide 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 solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \18\ and 
Rule 19b-4(f)(6) thereunder. \19\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the five-day 
pre-filing notice requirement and the 30-day operative delay. The 
Commission believes waiving the five-day pre-filing notice and the 30-
day operative delay is consistent with the protection of investors and 
the public interest. Such waivers will allow the Book Sweep feature to 
operate without interruption until the earlier of July 1, 2004 or 
Commission approval of the Book Sweep feature on a permanent basis. For 
these reasons, the Commission designates the proposal to be effective 
and operative upon filing with the Commission.\20\
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    \20\ For purposes only of waiving the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-2004-21. 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 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-2004-21 and should be 
submitted by April 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-7080 Filed 3-29-04; 8:45 am]
BILLING CODE 8010-01-P