[Federal Register Volume 70, Number 143 (Wednesday, July 27, 2005)]
[Notices]
[Pages 43493-43495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3977]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52082; File No. SR-Phlx-2005-45]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Relating to the Automatic 
Execution of Option Transactions During Crossed Markets

July 20, 2005.
    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 July 12, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Phlx. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to provide for automatic executions when the 
Exchange's disseminated market is crossed by one minimum trading 
increment (i.e., $1.05 bid, $1.00 offer or $3.10 bid, $3.00 offer), and 
the Exchange's disseminated price is the National Best Bid/Offer 
(``NBBO''). Additionally, as a housekeeping matter, the proposed rule 
change would delete Phlx Rule 1080(c)(iv)(G), a reference to an 
obsolete pilot program relating to the disengagement of AUTO-X.
    The text of the proposed rule change is set forth below. Brackets 
indicate deletions; underlining indicates new text.

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) 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 by more than one 
minimum trading increment (as defined in Exchange Rule 1034) (i.e., 
2.10 bid, 2 offer), or crosses the disseminated market of another 
options exchange by more than one minimum trading increment;
    (B)-(D) No change.
    (E) if the Exchange's bid or offer is not the NBBO; and
    (F) When the price of a limit order is not in the appropriate 
minimum trading increment pursuant to Rule 1034. [; and
    (G) 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.

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 increase the 
automated handling and execution of option orders on the Exchange by 
establishing that orders are eligible for automatic execution during 
crossed markets when

[[Page 43494]]

such markets are crossed by one minimum trading increment.\3\
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    \3\ Exchange Rule 1034, Minimum Increments, currently provides 
that all options on stocks, index options, and Exchange Traded 
Options quoting in decimals at $3.00 or higher shall have a minimum 
increment of $.10, and all options on stocks and index options 
quoting in decimals under $3.00 shall have a minimum increment of 
$.05.
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    Currently, Exchange Rule 1080(c)(iv)(A) states that an order 
otherwise eligible for automatic execution will instead be manually 
handled by the specialist when the Exchange's disseminated market is 
crossed or crosses the disseminated market of another options 
exchange.\4\ The proposed rule change would limit the specialist's 
manual handling of orders during crossed markets to situations where 
the market is crossed by more than one minimum trading increment (i.e., 
2.10 bid, 2 offer). The proposed rule would provide that an order 
otherwise eligible for automatic execution would instead be handled 
manually by the specialist when the Exchange's disseminated market is 
crossed by more than one minimum trading increment, or crosses the 
disseminated market of another options exchange by more than one 
minimum trading increment.
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    \4\ Eligible orders are currently executed automatically on the 
Exchange during locked markets (i.e., 2 bid, 2 offer). See 
Securities Exchange Act Release No. 47359 (February 12, 2003), 68 FR 
8322 (February 20, 2003) (SR-Phlx-2003-03).
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    Thus, the effect of the proposal is that orders would be eligible 
for automatic execution when the Exchange's disseminated market is 
crossed or crosses another exchange's market by just one minimum 
trading increment (and where the Exchange's disseminated market is the 
NBBO).\5\
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    \5\ Orders otherwise eligible for automatic execution will 
instead be handled manually by the specialist when the Exchange's 
disseminated market is not the NBBO. See Exchange Rule 
1080(c)(iv)(E). Therefore, for an order to be eligible for automatic 
execution during a crossed market, the Exchange's disseminated 
market must be the NBBO.
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    The Exchange believes that establishing a limitation of one minimum 
trading increment as the amount by which a market may be crossed in 
order to provide automatic executions during crossed markets should 
provide Exchange specialists and Registered Options Traders (``ROTs'') 
with sufficient ability to manage their market risk during times of 
crossed markets. The Exchange believes that a market that is crossed by 
an amount greater than one minimum trading increment is an indication 
that one or more options market(s) or market makers may be experiencing 
quotation system issues that do not reflect current market conditions, 
and thus orders on the Exchange would be handled manually by the 
specialist in such circumstances.
    On the other hand, the Exchange believes that markets that are 
crossed by only one single minimum trading increment in today's 
increasingly electronic marketplace reflect the number and speed of 
electronic quotations and the number of market makers submitting such 
quotations, and therefore do not necessarily indicate system errors 
that may result in unusual risk to market makers.
    Finally, as a housekeeping matter, the Exchange proposes to delete 
Phlx Rule 1080(c)(iv)(G), a reference to an expired pilot program 
relating to the disengagement of AUTO-X for ``non-Streaming Quote 
Options.'' \6\ There are no longer any non-Streaming Quote Options 
traded on the Exchange; therefore Phlx Rule 1080(c)(iv)(G) is no longer 
applicable.
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    \6\ A ``non-Streaming Quote Option'' was previously defined as 
an option that is not traded on the Exchange's electronic trading 
platform for options, ``Phlx XL.'' See Securities Exchange Act 
Release No. 50100 (July 27, 2004), 69 FR 46612 (August 3, 2004) (SR-
Phlx-2003-59). All options traded on the Exchange are now traded on 
Phlx XL.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \8\ in particular, in that it is designed to perfect 
the mechanisms of a free and open market and the national market 
system, protect investors and the public interest and promote just and 
equitable principles of trade, by establishing conditions under which 
the Exchange will provide automatic executions during times of crossed 
markets, thus increasing the number of orders that are handled 
electronically on the Exchange.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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

    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 self-regulatory organization consents, the Commission will:
    (A) By order approve such 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-2005-45 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-45. 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 Phlx. All

[[Page 43495]]

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-2005-45 and should be 
submitted on or before August 17, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3977 Filed 7-26-05; 8:45 am]
BILLING CODE 8010-01-P