[Federal Register Volume 69, Number 233 (Monday, December 6, 2004)]
[Notices]
[Pages 70494-70496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3470]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50752; File No. SR-Phlx-2004-71]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Philadelphia Stock Exchange, Inc. Relating to the 
Extension Through April 30, 2005, of a Pilot Program To Disengage the 
Automatic Execution Feature (AUTO-X) of the Exchange's Automated 
Options Market (AUTOM)

November 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 November 3, 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. On November 24, 2004, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons, 
and granting accelerated approval to the proposal to extend the pilot 
period through April 30, 2005.
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    \1\ 5 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange proposes to modify the 
proposed rule change to correct a typographical error in the 
proposed rule text.
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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, through April 30, 2005, its pilot 
program concerning AUTO-X, whereby AUTO-X is disengaged for a period of 
30 seconds after the number of contracts automatically executed in a 
given class of non-Streaming Quote Options,\4\ meets the specified 
disengagement size for the option (the ``pilot''). The pilot expires 
November 30, 2004.
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    \4\ In a telephone conversation between Richard Rudolph, 
Director and Counsel, Phlx, and Kim Allen, Attorney, Division of 
Market Regulation (``Division''), Commission, on November 23, 2004, 
the Exchange clarified that the pilot applies only to option classes 
known as non-Streaming Quote Options, defined in Phlx Rule 1014, 
Commentary .05 as those classes not eligible to be traded by 
Streaming Quote Traders pursuant to Phlx Rule 1014(b)(ii)(A).
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    The text of amended Exchange Rule 1080 is set forth below. Brackets 
indicate deletions; italics indicate additions.

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

Rule 1080.

    (a)-(b) No change.
    (c)(i)-(iii) No change.
    (iv) (A)-(H) No change.
    (I) respecting non-Streaming Quote Options, when the number of 
contracts automatically executed within a 15 second period in an option 
(subject to a Pilot program [until November 30, 2004] through April 30, 
2005) exceeds the specified disengagement size, a 30 second period 
ensues during which subsequent orders are handled manually. If the 
Exchange's disseminated size exceeds the specified disengagement size 
and an eligible order is delivered for a number of contracts that is 
greater than the specified disengagement size, such an order will be 
automatically executed up to the disseminated size, followed by an 
AUTO-X disengagement period of 30 seconds. If the specialist revises 
the quotation in such an option prior to the expiration of such 30-
second period, eligible orders in such an option shall again be 
executed automatically.
    The Exchange's systems are designed and programmed to identify the 
conditions that cause inbound orders to be ineligible for automatic 
execution. Once it is established that inbound orders are ineligible 
for automatic execution, Exchange staff has the ability to determine 
which of the above conditions occurred.
    (d)-(k) No change.
    Commentary:
    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 extend the pilot 
through April 30, 2005, which is the date that the Exchange plans to 
have rolled out all options in the Exchange's electronic options 
trading platform, Phlx XL.\5\ When that roll out is complete there will 
no longer be any need to continue this pilot program because pursuant 
to Phlx Rule 1082, with respect to Streaming Quote Options (``SQO''), 
if the Exchange's disseminated size in a particular series in a SQO is 
exhausted, the Exchange shall disseminate the next best available 
quotation.\6\ If no specialist or ``Streaming Quote Trader'' has 
revised their quotation immediately

[[Page 70495]]

following the exhaustion of the Exchange's disseminated size, the 
Exchange shall automatically disseminate the specialist's most recent 
disseminated price prior to the time of such exhaustion with a size of 
one contract.\7\
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    \5\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
    \6\ Pursuant to a telephone conversation between Richard 
Rudolph, Director and Counsel, Phlx, and Kim Allen, Attorney, 
Division, Commission, on November 23, 2004, the Exchange clarified 
that there will be no non-Streaming Quote Options when the roll out 
for options in Phlx XL is completed.
    \7\ See Phlx Rule 1082(a)(ii)(C)(2).
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    The pilot was originally approved on a six-month basis for a 
limited number of eligible options \8\ and extended for an additional 
six-month period.\9\ Subsequently, the number of options eligible for 
the pilot was expanded to include all Phlx-traded options.\10\ In 
December 2001, the pilot was extended again for an additional six-month 
period; \11\ and was extended again in May 2002,\12\November 2002,\13\ 
May 2003,\14\ and November 2003 (for a one-year period).\15\ The 
instant proposed rule change would extend the pilot through April 30, 
2005.
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    \8\ See Securities Exchange Act Release No. 43652 (December 1, 
2000), 65 FR 77059 (December 8, 2000) (SR-Phlx-00-96).
    \9\ See Securities Exchange Act Release No. 44362 (May 29, 
2001), 66 FR 30037 (June 4, 2001) (SR-Phlx-2001-56).
    \10\ See Securities Exchange Act Release No. 44760 (August 31, 
2001), 66 FR 47253 (September 11, 2001) (SR-Phlx-2001-79).
    \11\ See Securities Exchange Act Release No. 45090 (November 21, 
2001), 66 FR 59834 (November 30, 2001) (SR-Phlx-2001-100).
    \12\ See Securities Exchange Act Release No. 45862 (May 1, 
2002), 67 FR 30990 (May 8, 2002) (SR-Phlx-2002-22).
    \13\ See Securities Exchange Act Release No. 46840 (November 15, 
2002), 67 FR 70473 (November 22, 2002) (SR-Phlx-2002-59).
    \14\ See Securities Exchange Act Release No. 47955 (May 30, 
2003), 68 FR 34458 (June 9, 2003) (SR-Phlx-2003-29).
    \15\ See Securities Exchange Act Release No. 48851 (November 26, 
2003), 68 FR 68442 (December 8, 2003) (SR-Phlx-2003-77).
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    The pilot currently includes the following features:
     Once an automatic execution occurs via AUTO-X in an 
option, the system begins a ``counting'' program, which counts the 
number of contracts executed automatically for that option up to a 
certain size,\16\ which such size causes AUTO-X to become disengaged 
for that option.
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    \16\ Exchange Rule 1080(c)(iv)(I) provides that, when the number 
of contracts automatically executed within a 15-second period in an 
option exceeds the ``specified disengagement size,'' a 30-second 
period ensues during which subsequent orders are handled manually. 
The specified disengagement size is determined by the specialist and 
subject to the approval of the Exchange's Options Committee. The 
specified disengagement size for each option is listed on the 
Exchange's Web site.
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     When the number of contracts executed automatically for 
that option exhausts the specified disengagement size for the specific 
option within a 15-second time frame, the system ceases to 
automatically execute for that option, and drops all AUTO-X eligible 
orders in that option for manual handling by the specialist for a 
period of 30 seconds to enable the specialist to refresh quotes in that 
option.
     Upon the expiration of 30 seconds, automatic executions 
resume, the ``counting'' program is set to zero, and it begins counting 
the number of contracts executed automatically within a 15 second time 
frame again, up to the specified disengagement size.
    Again, when the number of contracts automatically executed exhausts 
the specified disengagement size within a 15-second time frame, the 
system drops all subsequent AUTO-X eligible orders for manual handling 
by the specialist for a period of 30 seconds. The system then continues 
to reset the ``counting'' program and drop to manual, etc. If the 
disseminated size exceeds the specified disengagement size, and an 
eligible order is delivered for a number of contracts that is greater 
than the specified disengagement size, the order will be automatically 
executed up to the disseminated size, followed by an AUTO-X 
disengagement period of 30 seconds. If the specialist revises the quote 
in such an option prior to the expiration of the 30-second period, 
AUTO-X will be automatically re-engaged.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \18\ in particular, in that it is designed to 
perfect the mechanisms of a free and open market and a national market 
system, protect investors and the public interest and promote just and 
equitable principles of trade by providing automatic executions for 
eligible orders up to the Exchange's disseminated size, while 
continuing to enable Exchange specialists to maintain fair and orderly 
markets during periods of peak market activity.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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 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-2004-71 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-2004-71. 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 Room, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
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-2004-71 and should be submitted on or before December 27, 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

[[Page 70496]]

applicable to a national securities exchange.\19\ 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 to protect investors and 
the public interest.\20\
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    \19\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the extension of the pilot should 
assist specialists in maintaining fair and orderly markets during 
periods of peak market activity. The Commission believes that an 
extension of the pilot program through April 30, 2005 should allow the 
Exchange to continue its efforts to deploy its fully automated Phlx XL 
system. Moreover, according to the Phlx, no complaints from customers, 
floor traders, or member firms have been received during the entire 
period of the pilot program.\21\
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    \21\ Telephone conversation between Richard Rudolph, Director 
and Counsel, Phlx, and Kim Allen, Attorney, Division, Commission, on 
November 23, 2004.
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    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\22\ for approving the proposed rule change prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. The Commission believes that granting accelerated 
approval to extend the pilot program through April 30, 2005 raises no 
new issues of regulatory concern and should allow Phlx to continue, 
without interruption, the existing operation of its AUTO-X system.
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    \22\ 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,\23\ that the proposed rule change (SR-Phlx-2004-71) is hereby 
approved on an accelerated basis, as a pilot, scheduled to expire on 
April 30, 2005.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3470 Filed 12-3-04; 8:45 am]
BILLING CODE 8010-01-P