[Federal Register Volume 69, Number 97 (Wednesday, May 19, 2004)]
[Notices]
[Pages 28973-28974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11311]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49697; File No. SR-Phlx-2004-18]


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

May 13, 2004.

I. Introduction

    On March 1, 2004, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ to make permanent a pilot program relating to a current 
enhancement to the Exchange's Automated Options Market (``AUTOM'') 
System,\3\ which is designed to automatically execute limit orders on 
the book when the bid or offer generated by the Exchange's Auto-Quote 
\4\ system (or by a proprietary quoting system called ``Specialized 
Quote Feed'' or ``SQF'') \5\ locks or crosses a limit order on the 
book, thus rendering such limit order marketable. The proposed rule 
change was published for comment in the Federal Register on March 11, 
2004.\6\ The Commission received no comments on the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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.
    \4\ 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).
    \5\ See Exchange Rule 1080, Commentary .01(b)(i).
    \6\ See Securities Exchange Act Release No. 49365 (March 4, 
2004), 69 FR 11690.
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II. Description

    On September 29, 2003, the Commission approved a six-month pilot 
enhancement to the Exchange's AUTOM system, called Book Sweep.\7\ The 
Book Sweep pilot was subsequently extended until the earlier of July 1, 
2004 or such time as the Commission approves the Book Sweep feature on 
a permanent basis.\8\ The Exchange now seeks permanent approval of the 
Book Sweep pilot.
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    \7\ See Securities Exchange Act Release No. 48563 (September 29, 
2003), 68 FR 57724 (October 6, 2003) (SR-Phlx-2003-30).
    \8\ See Securities Exchange Act Release No. 49459 (March 23, 
2004), 69 FR 16629 (March 30, 2004) (SR-Phlx-2004-21).
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    Book Sweep allows certain orders resting on the limit order book 
\9\ to be automatically executed when the bid or offer generated by the 
Exchange's Auto-Quote system (or by the SQF) 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.\10\ If 
Book Sweep is not engaged at the time the Auto-Quote or SQF bid or 
offer matches or crosses the Exchange's best bid or offer as 
represented by a limit order on the book,\11\ the specialist may 
manually engage Book Sweep so that certain orders in the limit order 
book can be automatically executed. 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

[[Page 28974]]

become marketable and are due an execution.
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    \9\ 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.
    \10\ The ``Wheel'' is a feature of AUTOM that allocates contra-
party participation respecting automatically executed trades among 
the specialist and registered options traders signed onto the Wheel 
for that listed option. See Exchange Rule 1080(g). See also Option 
Floor Procedure Advice F-24.
    \11\ Book Sweep would be engaged when AUTO-X is engaged, and 
would be disengaged when AUTO-X is disengaged. See Exchange Rule 
1080(c)(iii).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, the requirements of section 6 of the Act.\12\ 
Specifically, the Commission finds that the proposal is consistent with 
section 6(b)(5) of the Act, which requires that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, as well as to remove impediments to and perfect 
the mechanism of a free and open market, and, in general, to protect 
investors and the public interest.\13\
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    \12\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that permanent approval of Book Sweep, which 
has been operating on a pilot basis for over six months, should help 
facilitate the more efficient execution of orders when Auto-Quote or 
SQF locks or crosses the Exchange's best bid or offer in a series, as 
established by an order on the limit order book. The Commission notes 
that the Exchange's Book Sweep system is similar to systems that the 
Commission has previously approved for use on other exchanges.\14\ In 
addition, the Commission notes that the proposed rule change does not 
alter Phlx members' duty to comply with the Commission's rule relating 
to the firmness of quotations.\15\ The trading crowd, as the 
responsible broker or dealer, would continue to be required to honor 
its disseminated quote.
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    \14\ See, e.g., Securities Exchange Act Release No. 44462 (June 
21, 2001), 66 FR 34495 (June 28, 2001) (SR-CBOE-00-22) (Order 
approving CBOE Autoquote Triggered EBook Execution system).
    \15\ 17 CFR 240.11Ac1-1.
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-Phlx-2004-18) be, and it 
hereby is, approved on a permanent basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11311 Filed 5-18-04; 8:45 am]
BILLING CODE 8010-01-P