[Federal Register Volume 70, Number 50 (Wednesday, March 16, 2005)]
[Notices]
[Pages 12935-12938]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1131]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51352; File No. SR-Phlx-2005-03]


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

March 9, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 10, 2005, 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 Exchange. On March 
9, 2005, 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, 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 March 8, 2005 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange clarified the proposed new 
functionality of the AUTOM System. Amendment No. 1 replaced the 
original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend certain Exchange rules relating to 
system changes to the Philadelphia Stock Exchange Automated Options 
Market (``AUTOM'') System.\4\ The text of the proposed rule change is 
included below. Italics indicate new text; brackets indicate deletions.
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    \4\ 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, 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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Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM) 
and Automatic Execution System (AUTO-X)

    (a)-(b) No change.
    (c) AUTO-X.
* * * * *
    (i)-(iii) No change.
    (iv) Except as otherwise provided in this Rule, in the following 
circumstances, an order otherwise eligible for automatic execution will 
instead be manually handled by the specialist:
    (A) The Exchange's disseminated market is crossed (i.e., 2[-1/8].10 
bid, 2 offer), or crosses the disseminated market of another options 
exchange;
    (B) The AUTOM System is not open for trading when the order is 
received (which is known as a pre-market order);
    (C) The disseminated market is produced during an opening or other 
rotation;
    (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);
    (E) If the Exchange's bid or offer is not the NBBO;

[[Page 12936]]

    (F) When the price of a limit order is not in the appropriate 
minimum trading increment pursuant to Rule 1034; and
    (G[) When the bid price is zero respecting sell orders; and
    (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.
    (v) In situations in which the Exchange receives a market order 
that is not eligible for automatic execution because of any of the 
conditions described in Rule 1080(c)(iv), such market order, if not 
already executed manually by the specialist, will nonetheless be 
executed automatically when: (A) a limit order resting on the limit 
order book or a quotation that was not priced at the NBBO at the time 
such market order was received, becomes priced at the NBBO; or (B) an 
inbound limit order or quotation priced at or better than the NBBO is 
received before the specialist has manually executed such market order. 
In each case, the AUTOM System will automatically execute the market 
order against such resting limit order or quotation, or against such 
inbound limit order or quotation, at or better than the NBBO price.
    (vi) When the Exchange's disseminated quotation is not the NBBO 
(and, pursuant to Rule 1080(c)(iv)(E), inbound orders otherwise 
eligible for automatic execution are instead handled manually by the 
specialist):
    (A) (1) Marketable public customer limit orders will be exposed to 
the trading crowd and to participants in Phlx XL for a period of three 
seconds following receipt. At the end of the three-second exposure 
period: (a) If the Exchange's disseminated price is not the NBBO, any 
unexecuted contracts remaining in such an order will be automatically 
sent as a P/A Order through the Intermarket Option Linkage to any other 
exchange whose disseminated price is the NBBO, subject to the 
provisions contained in Rules 1083-1087; or (b) if the Exchange's 
disseminated price is the NBBO, any unexecuted contracts remaining in 
such an order will be automatically executed up to the Exchange's 
disseminated size. Any remaining contracts will be sent as P/A Order(s) 
to the exchange(s) displaying the NBBO.
    (2) For each option in which a specialist is assigned, such 
specialist shall submit to the Exchange prior written instructions for 
the routing of any P/A orders the specialist may send through AUTOM to 
the Intermarket Option Linkage in accordance with Rules 1083-1087. The 
Exchange's AUTOM System will route P/A Orders on the basis of these 
written instructions.
    (B) Marketable limit orders for the proprietary account(s) of a 
broker-dealer, or any account in which a broker-dealer or an associated 
person of a broker-dealer has any direct or indirect interest, will be 
automatically cancelled, and a message indicating the cancellation will 
be automatically sent to the sender of the order.
    (d)-(h) No change.
    (i) [RESERVED] Zero-bid option series. The AUTOM System will 
convert market orders to sell a particular option series that are 
received when the bid price in such option series is zero, to limit 
orders to sell with a limit price of $.05. Such orders will be 
automatically placed on the limit order book in price-time priority.
    (j)-(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 Exchange 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 Exchange 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 establish rules to 
reflect system changes to AUTOM that are intended to increase the 
number of orders that are handled and executed automatically on the 
Exchange.
Automatic Sending of P/A Orders
    The Exchange proposes to adopt new rules for the automated handling 
of inbound limit orders when the Exchange's disseminated price is not 
the National Best Bid or Offer (``NBBO''). Currently, Exchange Rule 
1080(g)(ii)(B) states that inbound marketable orders will be 
automatically executed against a limit order on the book or specialist, 
Remote Streaming Quote Trader (``RSQT'') \5\ and/or Streaming Quote 
Trader (``SQT'') \6\ electronic quotes at the disseminated price where: 
(1) The Exchange's disseminated size includes limit orders on the book 
and/or electronic quotes at the disseminated price; and (2) the 
disseminated price is the NBBO. This feature is called Book Match. Book 
Match will not automatically execute inbound orders against limit 
orders resting on the limit order book under the circumstances listed 
in Exchange Rule 1080(c)(iv). Specifically, Exchange Rule 
1080(c)(iv)(E) provides that orders otherwise eligible for automatic 
execution are handled manually by the specialist when the Exchange's 
bid or offer is not the NBBO. The specialist is currently responsible 
for handling an order manually when it would otherwise be eligible for 
automatic execution and, with respect to customer limit orders received 
when the Exchange's best bid or offer is not the NBBO, may send via the 
Intermarket Option Linkage (``Linkage''), a Principal Acting as Agent 
(``P/A'') Order \7\

[[Page 12937]]

pursuant to the Plan for the Purpose of Creating and Operating an 
Intermarket Option Linkage (``Linkage Plan'') \8\ to the options 
exchange disseminating the NBBO.
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    \5\ An RSQT is an Exchange Registered Options Trader (``ROT'') 
that is a member or member organization of the Exchange with no 
physical trading floor presence who has received permission from the 
Exchange to generate and submit option quotations electronically 
through AUTOM in eligible options in which such RSQT has been 
assigned. An RSQT may only submit such quotations electronically 
from off the floor of the Exchange. An RSQT may only trade in a 
market making capacity in classes of options in which he is 
assigned. See Exchange Rule 1014(b)(ii)(B).
    \6\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically 
through AUTOM in eligible options to which such SQT is assigned. See 
Exchange Rule 1014(b)(ii)(A).
    \7\ A P/A Order is an order for the principal account of a 
specialist (or equivalent entity on another Participant Exchange 
that is authorized to represent Public Customer orders), reflecting 
the terms of a related unexecuted Public Customer order for which 
the specialist is acting as agent. See Exchange Rule 1083(k)(i).
    \8\ See Securities Exchange Act Release Nos. 44482 (June 27, 
2001), 66 FR 35470 (July 5, 2001) (Amendment to Linkage Plan to 
Conform to the Requirements of Securities Exchange Act Rule 11Ac1-7; 
43573 (November 16, 2000), 65 FR 70851 (November 28, 2000) (Notice 
of Phlx Joining the Linkage Plan); and 43086 (July 28, 2000), 65 FR 
48023 (August 4, 2000) (Approval of the Linkage Plan).
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    Proposed Exchange Rule 1080(c)(vi)(A)(1) would address the manner 
in which the AUTOM System handles inbound marketable public customer 
limit orders when the Exchange's disseminated price is not the NBBO. 
Specifically, proposed Exchange Rule 1080(c)(vi)(A)(1)(a) would provide 
that, when the Exchange's disseminated quotation is not the NBBO (and, 
pursuant to Exchange Rule 1080(c)(iv)(E), inbound orders otherwise 
eligible for automatic execution are instead handled manually by the 
specialist), marketable public customer limit orders would be exposed 
to the trading crowd and to participants in Phlx XL for a period of 
three seconds following receipt. At the end of the three-second 
exposure period, if the Exchange's disseminated price is not the NBBO, 
any unexecuted contracts remaining in such an order would be 
automatically sent as a P/A Order through the Linkage to any other 
exchange whose disseminated price is the NBBO, subject to the 
provisions contained in Exchange Rules 1083-1087, which generally 
govern the handling of orders sent and received via the Linkage.
    Proposed Exchange Rule 1080(c)(vi)(A)(1)(b) would address the 
situation where, at the end of the three-second period, the Exchange's 
disseminated price is the NBBO. In such a circumstance, any unexecuted 
contracts remaining in the marketable public customer limit order would 
be automatically executed \9\ up to the Exchange's disseminated size. 
Any remaining contracts would be sent as P/A Order(s) to the 
exchange(s) displaying the NBBO. If the marketable public customer 
limit order is canceled during the three-second period, no P/A Order 
would be sent, nor would the marketable public customer limit order be 
executed. The Exchange believes that the three-second exposure period 
should provide Exchange specialists and ROTs sufficient opportunity to 
execute such orders at a price that is at or better than the NBBO 
during the three-second period following receipt of the marketable 
public customer limit order. The Exchange further believes that this 
change to the AUTOM System should result in more automated handling of 
inbound marketable public customer limit orders, and should help 
achieve the best execution of customer orders on the Exchange and 
through the Linkage.
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    \9\ The Exchange notes that another options exchange handles 
inbound customer orders received when the exchange is not 
disseminating the NBBO in a similar fashion, including the situation 
in which that exchange's disseminated price is the NBBO at the end 
of the three-second period. See Boston Options Exchange Rules, 
Chapter V, Section 16(b)(iii)(2)(b) and (c).
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    The specialist is required to act with due diligence with regard to 
the interests of orders entrusted to him/her and fulfill other duties 
of an agent, including, but not limited to, ensuring that such orders, 
regardless of their size or source, receive proper representation and 
timely execution in accordance with the terms of the orders and the 
rules of the Exchange. To enable the specialist to carry out his/her 
agency responsibilities with respect to P/A Orders submitted through 
the Linkage, the Exchange, pursuant to proposed Exchange Rule 
1080(c)(vi)(A)(2), would require that a specialist submit prior written 
instructions to the Exchange regarding the routing of any P/A Orders 
that the specialist would send through the Linkage. The AUTOM System 
would route P/A Orders on behalf of the specialist according to these 
instructions three seconds after receipt of the marketable public 
customer limit order if such order is not executed or is partially 
executed during the three-second period and the Exchange's disseminated 
price at the end of the three-second period is not the NBBO. In the 
case of a partial execution during the three-second period, the P/A 
Order that is routed to the market disseminating the NBBO would be for 
the size that is equal to the number of contracts remaining in the 
order. Each execution received from an away exchange would result in 
the automatic generation of a trade execution on the Exchange between 
the original marketable public customer limit order and the specialist.
    The Exchange believes that the specialist's instructions should 
ensure that such specialist is ultimately responsible for decisions 
regarding the routing of P/A Orders and exercises appropriate 
discretion over such orders. While the AUTOM System may carry out the 
mechanics of routing such orders, the specialist assigned in the 
particular issue that is the subject of a P/A Order would be 
responsible for providing the Exchange with instructions on how and 
where to route a P/A Order. The Exchange believes that the proposed 
rule requiring the specialist to provide routing instructions to the 
Exchange should ensure that P/A Orders will be handled in accordance 
with the Linkage Plan.
Broker-Dealer Orders
    Marketable limit orders for the proprietary account(s) of a broker-
dealer (or any account in which a broker-dealer or an associated person 
of a broker-dealer has any direct or indirect interest) received when 
the Exchange's disseminated quotation is not the NBBO would be 
automatically cancelled by the AUTOM System. A message indicating the 
cancellation would be automatically sent to the sender of the order.
    The purpose of this proposal is to avoid trading through a better 
away market when the Exchange's disseminated price is not the NBBO. 
Unlike marketable public customer limit orders, which enable the 
specialist to generate and forward a P/A Order to the exchange 
disseminating the NBBO through the Linkage, an order for the 
proprietary account of a broker-dealer (or any account in which a 
broker-dealer or an associated person of a broker-dealer has any direct 
or indirect interest) does not enable the specialist to generate a P 
Order on behalf of the broker-dealer. The cancellation of such an order 
when the Exchange's disseminated price is not the NBBO, and the message 
to the sender of such an order that the order has been cancelled, 
should enable the sender to decide to route a new order to the exchange 
disseminating the NBBO.
Market Orders to Sell When the Exchange's Bid Price is Zero
    Exchange Rule 1080(c)(iv)(G) currently provides that sell orders 
received in a particular series in which the disseminated bid price is 
zero \10\ are handled manually by the specialist. The proposal would 
delete Exchange Rule 1080(c)(iv)(G) and adopt new Exchange Rule 1080(i) 
concerning the automated handling of market orders to sell when the bid 
price is zero. Under the proposal, the AUTOM system would automatically 
convert market orders to sell when the bid price is zero to limit 
orders to sell with a limit price of $.05. Such market orders to sell, 
as well as

[[Page 12938]]

limit orders to sell, would be placed on the limit order book in price-
time priority. The purpose of this provision is to establish the time 
priority of market orders to sell when the bid price in the particular 
series is zero (and thus no execution could occur). In the event that 
the bid price in the particular series becomes $.05 or greater, thus 
establishing a bid price that makes the booked limit orders to sell 
marketable, such orders to sell at the $.05 limit price or better would 
be executed in the order in which they were received (i.e., price-time 
priority). The Exchange believes that this proposed rule should reduce 
the manual handling of such orders and automate the processing of 
market orders to sell when the Exchange's bid price is zero.
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    \10\ A bid price of zero typically occurs in situations where 
there is no intrinsic value in the series quoted (i.e., where an 
option series is out-of-the-money by a relatively large amount and 
such series is close to expiration).
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Market Orders Received That Are Not Eligible for Automatic Execution
    Proposed Exchange Rule 1080(c)(v) would address the situation in 
which the Exchange receives a market order that is not eligible for 
automatic execution because of any of the conditions described in 
Exchange Rule 1080(c)(iv). The proposed rule would provide that such 
market order, if not already executed manually by the specialist, would 
nonetheless be executed automatically in two situations.
    In one situation, such a market order, if not already executed 
manually by the specialist, would be automatically executed against a 
limit order resting on the limit order book or a quotation that was not 
priced at the NBBO at the time such market order was received, if the 
resting limit order or quotation becomes priced at the NBBO. 
Alternatively, the AUTOM System would automatically execute a market 
order that is being handled manually by the specialist when an inbound 
limit order or quotation priced at or better than the NBBO is received 
before the specialist has manually executed such market order.
    The Exchange believes that this proposed change to the AUTOM System 
would eliminate the need for the specialist to match the market order 
manually against quotes or limit orders if an execution is possible at 
the NBBO while the specialist is handling the market order. The 
Exchange believes that proposed Exchange Rule 1080(c)(v) should result 
in more timely executions, and enhance the specialist's ability to 
provide the best execution on behalf of market orders entrusted to him/
her, by automating the process currently carried out by the specialist.
Rule Change To Reflect Decimalization
    As a housekeeping matter, the Exchange proposes to amend Exchange 
Rule 1080(c)(iv)(A) to reflect decimal pricing in the parenthetical 
example of a crossed market.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \11\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \12\ 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 implementing changes to the AUTOM 
System that result in a greater number of orders that are handled and 
executed automatically.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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:

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-2005-03 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-2005-03. 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. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2005-03 and should be submitted on or before April 
6, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1131 Filed 3-15-05; 8:45 am]
BILLING CODE 8010-01-P