[Federal Register Volume 70, Number 75 (Wednesday, April 20, 2005)]
[Notices]
[Pages 20613-20614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1860]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51544; File No. SR-Phlx-2005-03]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval to 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

April 14, 2005.

I. Introduction

    On January 10, 2005, 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 reflect system changes to the 
Exchange's Automated Options Market (AUTOM) and Automatic Execution 
System (AUTO-X) that are intended to increase the number of orders that 
are handled and executed automatically. On March 9, 2005, the Exchange 
filed Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change, as amended, was published for comment in the Federal Register 
on March 16, 2005.\4\ The Commission received no comments on the 
proposal. This order approves the proposed rule change, as amended, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ See Securities Exchange Act Release No. 51352 (March 9, 
2005), 70 FR 12935.
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II. Description of the Proposal

    The Exchange proposes to amend Exchange Rule 1080, Philadelphia 
Stock Exchange Automated Options Market (AUTOM) and Automatic Execution 
System (AUTO-X), to reflect system changes to AUTOM that are intended 
to increase the number of orders that are handled and executed 
electronically on the Exchange and to specify when orders that are not 
executed automatically on the Exchange would be routed through the 
Intermarket Option Linkage (``Linkage'').\5\
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    \5\ See Plan for the Purpose of Creating and Operating an 
Intermarket Option Linkage (``Linkage Plan''), 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)(v) provides that if the Exchange 
receives a market order that is not eligible for automatic execution 
when any of the conditions described in Exchange Rule 1080(c)(iv) 
exist, such market order, if not already executed manually by the 
specialist, would be executed automatically in two situations. First, 
if a market order has not already been executed manually by the 
specialist, it would be automatically executed against a limit order on 
the limit order book or a quotation that becomes the national best bid 
or offer (``NBBO'') while the market order is pending. Second, a market 
order that is being handled manually by the specialist would be 
automatically executed against an inbound limit order or quotation 
priced at or better than the NBBO.
    Under proposed Exchange rule 1080(c)(vi), when the Exchange's 
disseminated quotation is not the NBBO, 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 this three second exposure period, if the Exchange's disseminated 
price is still not the NBBO, any unexecuted contracts remaining in such 
an order would be automatically sent as Principal Acting as Agent (``P/
A'') Order \6\ through the Linkage to an exchange whose disseminated 
price is the NBBO. If at the end of the three-second exposure period 
the Exchange's disseminated price is the NBBO, any unexecuted contracts 
remaining in the marketable public customer limit order would be 
automatically executed on the Exchange up to the Exchange's 
disseminated size. Any remaining contracts then 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 and the marketable public customer limit 
order would not be executed.
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    \6\ 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).
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    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.\7\ the AUTOM System would route P/A Orders on behalf of 
the specialist according to these instructions three second 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.
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    \7\ The Exchange stated that this requirement enables the 
specialist to carry out his or her agency responsibilities with 
respect to P/A Orders submitted through the Linkage.
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    Under proposed Exchange Rule 1080(c)(vi)(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) 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.
    Proposed Exchange Rule 1080(i) would automate the handling of 
market orders to sell when the disseminated bid price is zero. 
Currently, Exchange Rule 1080(c)(vi)(G) provides that such orders are 
handled manually by the specialist. Under the proposed rule change, 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 limit orders to sell, would be 
placed on the limit order book in price-time priority. 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).

[[Page 20614]]

    The Exchange also proposed a technical change to an example noted 
in Exchange Rule 1080(c)(iv)(A) to reflect decimal pricing.

III. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change, as 
amended, and finds that it is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\8\ In particular, the Commission finds that the 
proposed rule change is consistent with section 6(b)(5) of the Act,\9\ 
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, in general, protect investors and the public 
interest.
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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal automating the execution 
of certain market orders that currently are handled manually by the 
specialist will provide more efficient and immediate executions.\10\ In 
addition, the Commission believes that the three-second order exposure 
feature for inbound limit orders when the Exchange's disseminated price 
is not the NBBO, along with the automatic execution of unexecuted 
contracts up to the Exchange's disseminated size when the Exchange's 
disseminated price becomes the NBBO and the automatic routing through 
Linkage of unexecuted contracts when the Exchange's disseminated price 
is not the NBBO, will provide an effective means for avoiding trade-
throughs. The Commission further believes that it is consistent with 
the Act for the Exchange to cancel automatically broker-dealer 
marketable limit orders in instances where the Exchange's disseminated 
quote is not the NBBO.
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    \10\ The Commission notes that the proposed rule change does not 
alter the Exchange's rules on priority or trade allocation. 
According to the Exchange, orders that are executed automatically on 
the Phlx are allocated to participants on parity in accordance with 
the allocation algorithm set forth in Exchange Rule 1014(g)(vii). 
Telephone conversation between Richard S. Rudolph, Vice President 
and Counsel, Exchange, and Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, on April 11, 2005.
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    Finally, the Commission believes that the automated handling of 
market orders to sell when the bid price is zero should also provide 
more efficient executions of such orders.
    The Exchange has requested accelerated approval of the proposed 
rule change. The Commission notes that a portion of the proposed rule 
change is similar to rules previously approved by the Commission for 
another exchange.\11\ The Commission also notes that the Exchange's 
proposed rule change was subject to the full comment period, with no 
comments received, and accelerated approval of the proposed rule 
change, by increasing the automation of order handling, should help 
facilitate more efficient and immediate executions of transactions on 
the Exchange.
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    \11\ See Securities Exchange Act Release No. 49068 (January 13, 
2004) 69 FR 2775 (January 20, 2004)(SR-BSE-2002-15).
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    Accordingly, the Commission finds good cause, pursuant to section 
19(b)(2) of the Act \12\ for approving the proposed rule change, as 
amended, prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register.
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    \12\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Phlx 005-03), as amended, 
be, and hereby is, approved on an accelerated basis.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1860 Filed 4-19-05; 8:45 am]
BILLING CODE 8010-01-P