[Federal Register Volume 69, Number 249 (Wednesday, December 29, 2004)]
[Notices]
[Pages 78086-78089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28479]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50911; File No. SR-Phlx-2004-89]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Philadelphia Stock Exchange, Inc. Relating to Changes to Its 
Automated Options Market (AUTOM) System

December 22, 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 December 14, 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 December 17, 2004, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The Exchange filed the proposal, as amended, 
as a ``non-controversial'' proposed rule change pursuant to section 
19(b)(3)(A)(iii) of the Act \4\ and Rule 19b-4(f)(6) thereunder.\5\ 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 Form 19b-4 dated December 17, 2004 (``Amendment No. 
1''). Amendment No. 1 replaces the original filing in its entirety.
    \4\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \5\ 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 amend Exchange Rule 1080(c)(iii), to reflect 
changes to the Exchange's Book Sweep function, and Exchange Rule 
1080(c)(iv), which sets forth various situations in which orders 
received over the Philadelphia Stock Exchange Automated Options Market 
(``AUTOM'') System \6\ that would otherwise be eligible for automatic 
execution are instead handled manually by the specialist, to reflect 
that All-or-None (``AON'') Orders would now be eligible for automatic 
execution.
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    \6\ 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's trading floor. Orders delivered through AUTOM may be 
executed manually, or certain orders are eligible for AUTOM's 
automatic execution features, AUTO-X, Book Sweep and Book Match. 
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 limit order book on the Exchange trading 
floor. See Exchange Rule 1080.
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    Below is the text of the proposed rule change. Proposed additions 
are italicized; proposed deletions are [bracketed].
* * * * *

Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM) 
and Automatic Execution System (AUTO-X)

    (a)-(b) No change.
    (c) AUTO-X. * * *
    (i)-(ii) No change.
    (iii) Quotations Interacting With Limit Orders on the Book. [Book 
Sweep. Book Sweep is a feature of AUTOM which, when engaged, does the 
following:]
    (A) Respecting non-Streaming Quote Options, when [the] a bid or 
offer that is: (1) Generated by the Exchange's Auto-Quote system (or by 
a proprietary quoting system provided for in Commentary .0[2]1(b) of 
this Rule called ``Specialized Quote Feed'' or ``SQF''); and (2) priced 
at the National Best Bid or Offer (``NBBO''), and therefore would 
result in an execution at the NBBO (a ``Book Sweep Quote''), matches or 
crosses the Exchange's best bid or offer in a particular series as 
established by

[[Page 78087]]

an order on the limit order book, orders on the limit order book in 
that series will be automatically executed and allocated among crowd 
participants signed onto the Wheel. This feature of AUTOM is known as 
``Book Sweep.'' If Book Sweep is not engaged at the time the [Auto-
Quote or SQF bid or offer] Book Sweep Quote matches or crosses the 
Exchange's best bid or offer represented by a limit order on the book, 
the specialist may manually initiated the Book Sweep feature. Book 
Sweep shall be engaged when AUTO-X is engaged, and shall be disengaged 
when AUTO-X is disengaged in accordance with Rule 1080(c)(iv) and Rule 
1080(e). Eligible orders on the limit order book will be automatically 
executed up to the size associated with the quote that matches or 
crosses such limit orders.
    (B) Respecting Streaming Quote Options, when [the] any bid or offer 
generated by the Exchange's Auto-Quote system, SQF, or by an SQT (as 
defined in Rule 1014(b)(ii)) matches or crosses the Exchange's best bid 
or offer in a particular series as established by an order on the limit 
order book, orders on the limit order book in that series will be 
automatically executed and automatically allocated in accordance with 
Exchange rules. If Book Sweep is not engaged at the time the Auto-
Quote, SQF, or SQT bid or offer matches or crosses the Exchange's best 
bid or offer represented by a limit order on the book, the specialist 
or SQT may manually initiate the Book Sweep feature.
    (iv) Except as otherwise provided in this Rule, in the following 
circumstances, an order otherwise eligible for [AUTO-X] automatic 
execution will instead be manually handled by the specialist:
    (A) the Exchange's disseminated market is crossed (i.e., 2\1/8\ 
bid, 2 offer), or crosses the disseminated market of another options 
exchange;
    (B) [all-or-none order;
    (C)] the AUTOM System is not open for trading when the order is 
received (which is known as a pre-market order);
    ([D]C) the disseminated market is produced during an opening or 
other rotation;
    ([E]D) 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 Sweep'' as described in Rule 1080(c)(iii) above, 
and ``Book Match'' as described in Rule 1080(g)(ii) below);
    ([F]E) if the Exchange's bid or offer is not the NBBO;
    ([G]F) when the price of a limit order is not in the appropriate 
minimum trading increment pursuant to Rule 1034;
    ([H]G) when the bid price is zero respecting sell orders; and
    ([I]H) 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 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 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 amend Exchange Rules 
1080(c)(iii) and (iv) to reflect system changes to AUTOM that are 
intended to increase the number of orders that are handled and executed 
automatically on the Exchange. The purpose of Amendment No. 1 to the 
proposed rule change is to clarify the description of the functionality 
of the Book Sweep feature.
Book Sweep Functionality
    The Exchange proposes to amend Exchange Rule 1080(c)(iii) to 
reflect an additional automated execution functionality of its ``Book 
Sweep'' feature of AUTOM. Book Sweep is a feature of AUTOM that 
automatically executes inbound quotations against limit orders resting 
on the limit order book under certain circumstances. The Book Sweep 
feature automates this process when Book Sweep is engaged, and the 
Exchange's disseminated price is a limit order on the limit order book 
priced at the National Best Bid or Offer (``NBBO'').
    Currently, respecting options that are not traded on the Exchange's 
electronic trading platform for options, Phlx XL\7\ (referred to as 
``non-Streaming Quote Options''), when a quote in a particular option 
series that is generated by the Exchange's Auto-Quote feature of the 
AUTOM system \8\ or by a proprietary quoting system called 
``Specialized Quote Feed'' or ``SQF'' \9\ matches or crosses a limit 
order resting on the limit order book when the price of such limit 
order is the NBBO, the limit order is automatically executed and 
allocated on the Exchange's ``Wheel.'' \10\
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    \7\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
    \8\ See Exchange Rule 1080, Commentary .01(a).
    \9\ See Exchange Rule 1080, Commentary .01(b)(i).
    \10\ See Exchange Rule 1080(g) and Option Floor Procedure 
Advices and Order and Decorum Regulations F-24.
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    The proposed amendments to Exchange Rule 1080(c)(iii)(A) would 
clarify that, respecting non-Streaming Quote Options, when a bid or 
offer that is: (1) Generated by the Exchange's Auto-Quote system or 
SQF; and (2) priced at the NBBO, and therefore would result in an 
execution at the NBBO (a ``Book Sweep Quote''), matches or crosses the 
Exchange's best bid or offer in a particular series as established by 
an order on the limit order book, orders on the limit order book in 
that series will be automatically executed and allocated among crowd 
participants signed onto the Wheel.
    Current Exchange Rule 1080(c)(iv)(E), which is proposed to be 
redesignated as Exchange Rule 1080(c)(iv)(D), provides that orders 
otherwise eligible for automatic execution are instead handled manually 
by the specialist when the specialist posts a bid or offer that is 
better than the specialist's own bid or offer (i.e., a limit order on 
the book). The Exchange believes that the purpose of

[[Page 78088]]

the rule is to allow the specialist to handle the booked limit order 
manually, and to seek the best execution on behalf of the limit order, 
when the quotation that matches or crosses the limit order price is not 
qualified as a ``Book Sweep Quote.'' The proposed rule change to 
current Exchange Rule 1080(c)(iv)(E) would clarify that orders eligible 
for Book Sweep would not be handled manually.
    Currently, respecting Streaming Quote Options traded on Phlx XL (in 
which the specialist and a category of market-making Exchange 
participant known as a Streaming Quote Trader (``SQT'') \11\ submit 
independent, proprietary electronic quotations), when a contra-side 
quotation that is not submitted with a message that indicates that the 
sender intends to sweep the book matches or crosses the price of a 
limit order resting on the limit order book, the specialist must 
execute and allocate the order manually to the participant that 
submitted the particular electronic quote. The proposal would provide 
that, when any electronic contra-side quotation matches with a limit 
order on the limit order book at the NBBO (i.e., regardless of whether 
the quote is submitted with a message that indicates that the sender 
intends to sweep the book), the AUTOM System will automatically execute 
and allocate the resulting trade.\12\ The Exchange believes that this 
enhanced automated functionality should increase the number of 
automatic executions of transactions in Streaming Quote Options, and 
should assist SQTs that submit electronic proprietary quotations in 
Streaming Quote Options by automatically executing transactions as 
contra-side to the limit order book in situations where the SQTs' 
quoting and trading systems do not include features that enable such 
SQTs to submit quotes with an indication that the sender intends to 
sweep the book.
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    \11\ See Exchange Rule 1014(b)(ii)(A).
    \12\ See Exchange Rule 1014(g)(vii) for a description of the 
allocation algorithm applicable to trades in Streaming Quote Options 
that are automatically executed.
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    In order to correct a typographical error in the current rule text, 
the Exchange proposes to amend Exchange Rule 1080(c)(iii)(A) to reflect 
that the Exchange Rule that describes SQF is Commentary .01(b) to 
Exchange Rule 1080.

Automatic Execution of AON Orders

    Currently, under the Exchange Rule 1080(c)(iv)(B), AON Orders \13\ 
are not eligible for automatic execution and are instead handled 
manually by the specialist. The Exchange proposes to amend the rule to 
delete this provision. Therefore, when the Exchange's disseminated 
price is the NBBO, AON Orders, when they become due for execution when 
their price and size can be executed in full, would be executed and 
allocated automatically by the AUTOM System. Under this proposed system 
enhancement, AON Orders, if eligible for execution based on the price 
and size of the inbound contra-side quote or order, would be executed 
in order of priority based on the time the AON Order was received. If 
the inbound quote or order at the disseminated price is not of 
sufficient size to execute the resting AON Order in full, such resting 
AON Order would not be executed, and would remain on the limit order 
book until it is eligible for execution based on the price and size of 
the inbound quote or order, or canceled. The Exchange represents that 
this system change is intended to automate more executions on the 
Exchange.
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    \13\ An AON Order is a market or limit order which is to be 
executed in its entirety or not at all. See Exchange Rule 
1066(c)(4).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \14\ in general, and furthers the objectives of section 
6(b)(5) of the Act \15\ in particular, in that it is designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts and, in general, to protect investors and the 
public interest, by adopting changes to the AUTOM System that result in 
a greater number of orders that are handled and executed automatically.
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    \14\ 15 U.S.C. 78f(b)
    \15\ 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule 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 if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission, the proposed rule change has become effective 
pursuant to section 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) 
thereunder.\17\ At any time within 60 days of the filing of such 
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 purposed of the Act.\18\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers that period 
to commence on December 17, 2004, the date the Exchange filed 
Amendment No. 1 to the proposed rule change. See 15 U.S.C. 
78s(b)(3)(C).
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    The Exchange requests that the Commission waive the five business 
days pre-filing requirement and the 30-day operative delay under Rule 
19b-4(f)(6)(iii).\19\
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    \19\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that the waiver of the five business days 
pre-filing requirement and the 30-day operative delay under Rule 19b-
4(f)(6)(iii) is consistent with the protection of investors and the 
public interest, because the proposed rule change will increase the 
number of orders that are handled and executed automatically on the 
Exchange and should facilitate more efficient and immediate 
executions.\20\ Accordingly, the Commission designates that the 
proposal shall become operative as of the date of this notice.
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    \20\ For purposes only of waiving the operative delay 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. Comments may be submitted by any of 
the following methods:

[[Page 78089]]

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-2004-89 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-2004-89. 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 submissions, 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 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-2004-89 
and should be submitted on or before January 19, 2005.

    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. 04-28479 Filed 12-28-04; 8:45 am]
BILLING CODE 8010-01-M