[Federal Register Volume 69, Number 110 (Tuesday, June 8, 2004)]
[Notices]
[Pages 32090-32092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12903]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49785; File No. SR-Phlx-2003-68]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Amendment Nos. 1 
and 2, and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 3 Thereto Relating to Options Transactions Resulting From 
Obvious Errors

May 28, 2004.
    On September 29, 2003, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt new Phlx Rule 1092, 
which would permit the Exchange to nullify or adjust a transaction 
resulting from an obvious error. 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 proposed 
rule change, as amended, was published for comment in the Federal 
Register on March 29, 2004.\5\ The Commission received no comments on 
the proposal. On May 26, 2004, Phlx filed Amendment No. 3 to the 
proposed rule change.\6\
---------------------------------------------------------------------------

    \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.
    \4\ See Letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Susie Cho, Special Counsel, Division, Commission, dated 
January 14, 2004.
    \5\ See Securities Exchange Act Release No. 49435 (March 17, 
2004), 69 FR 16327.
    \6\ See Letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Susie Cho, Special Counsel, Division, Commission, dated May 
25, 2004 (``Amendment No. 3''). In Amendment No. 3, the Exchange 
revised the rule text to clarify that an obvious error as defined in 
paragraph (a) of Phlx Rule 1092 is also covered under paragraph (c) 
of Phlx Rule 1092.
---------------------------------------------------------------------------

    This order approves Phlx's proposed rule change, as amended, 
publishes notice of Amendment No. 3 to the proposed rule change, and 
grants accelerated approval to Amendment No. 3.

I. Description of the Proposal

    The Exchange proposes to adopt Phlx Rule 1092, which would allow 
the Exchange to either nullify or adjust an options transaction 
resulting from an obvious error. Phlx Rule 1092(a) would define an 
``obvious error'' transaction price, which would be based on the 
``Theoretical Price'' of the option. The definition of ``Theoretical 
Price'' would be set forth in Phlx Rule 1092(b).
    Absent the mutual agreement of the parties to a trade, Phlx Rule 
1092(c) would permit a Floor Official(s) to adjust or nullify a 
transaction in the following circumstances: (1) The trade resulted from 
a verifiable Exchange system disruption or malfunction that caused a 
quote/order to trade in excess of its disseminated size (in which case 
trades in excess of the disseminated size would be nullified); (2) the 
trade resulted from a verifiable Exchange system disruption or 
malfunction that prevented a member from updating or canceling a quote/
order; (3) the trade resulted from an erroneous print in the underlying 
market which is later cancelled or corrected; (4) the trade resulted 
from an erroneous quote in the underlying market; (5) the trade 
resulted in an execution price in a series quoted no bid (in which case 
the trade would be nullified); (6) the trade is automatically executed 
at a price where the specialist or ROT sells $0.10 or more below 
parity; or (7) the trade occurred at a price that is deemed to be an 
obvious error as defined in Phlx Rule

[[Page 32091]]

1092(a). 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 proposed rule change also sets forth the procedures the 
Exchange's Market Surveillance Department (``Market Surveillance'') 
must follow when it is determined that a transaction is the result of 
an obvious error, including standards for adjusting or nullifying 
trades, and how an affected party may request a review of obvious error 
determinations. Phlx Rule 1092(d) would provide criteria for 
determining the adjusted price of an obvious error trade. Under 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 Market Surveillance within a specified time of the 
execution in order to allow the transaction to be nullified or 
adjusted. 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. Phlx 
Rule 1092(f) would set forth the procedures for seeking review of an 
obvious error determination made by a Floor Official.
    Finally, the Exchange proposes 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.

II. Discussion

    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 \7\ and, in 
particular, the requirements of Section 6(b) of the Act \8\ and the 
rules and regulations thereunder. The Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) \9\ of the Act, 
which requires that the rules of an exchange be 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.
---------------------------------------------------------------------------

    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission considers that in most circumstances trades that are 
executed between parties should be honored. On rare occasions, the 
price of the executed trade indicates an ``obvious error'' may exist, 
suggesting that it is unrealistic to expect that the parties to the 
trade had come to a meeting of the minds regarding the terms of the 
transaction. In the Commission's view, the determination of whether an 
``obvious error'' has occurred, and the adjustment or nullification of 
a transaction because an obvious error is considered to exist, should 
be based on specific and objective criteria and subject to specific and 
objective procedures. The Commission believes that Phlx's proposed 
obvious error rule establishes specific and objective criteria for 
determining when a trade is an ``obvious error.'' Moreover, the 
Commission believes that the Exchange's proposal establishes specific 
and objective procedures governing the adjustment or nullification of a 
trade that resulted from an ``obvious error.'' Finally, the Commission 
notes that the Exchange's proposed obvious error rule for options is 
similar to the rules of other exchanges that Commission has previously 
approved with respect to the adjustment or nullification of 
transactions resulting from obvious error.\10\
---------------------------------------------------------------------------

    \10\ See, e.g., Securities Exchange Act Release No. 48827 
(November 24, 2003), 68 FR 67498 (December 2, 2003) (File No. SR-
CBOE-2001-04).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Act,\11\ the Commission may not 
approve any proposed rule change, or amendment thereto, prior to the 
30th day after the date of publication of notice of the filing thereof, 
unless the Commission finds good cause for so doing and publishes its 
reasons for so finding. The Commission hereby finds good cause for 
approving Amendment No. 3 to the proposal, prior to the 30th day after 
publishing notice of Amendment No. 3 in the Federal Register. The 
revisions made to the proposal in Phlx's Amendment No. 3 merely clarify 
the operation of the proposed obvious error rule. The Commission 
further believes that accelerating approval of Amendment No. 3 would 
expedite the implementation of the obvious error rule. Accordingly, 
pursuant to Section 19(b)(2) of the Act,\12\ the Commission finds good 
cause to approve Amendment No. 4 prior to the thirtieth day after 
notice of the Amendment is published in the Federal Register.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether the proposed 
amendment is consistent with the Act. Comments may be submitted by any 
of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Phlx-2003-68 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. All submissions should refer to File Number 
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, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of Phlx. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-Phlx-

[[Page 32092]]

2003-68 and should be submitted on or before June 29, 2004.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\13\, that the proposed rule change (File No. SR-Phlx-2003-68), as 
amended, be, and hereby is, approved, and that Amendment No. 3 to the 
proposed rule change be, and hereby is, approved on an accelerated 
basis.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-12903 Filed 6-7-04; 8:45 am]
BILLING CODE 8010-01-P