[Federal Register Volume 65, Number 194 (Thursday, October 5, 2000)]
[Notices]
[Pages 59488-59490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25593]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43376; File No. SR-Phlx-00-79]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to the Prohibition on the Entry of Certain 
Electronically Generated Orders into the Exchange's AUTOM System

September 28, 2000.
    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 September 15, 2000, 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 
Exchange. The Commission is publishing this notice to solicit comment 
on the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

---------------------------------------------------------------------------

[[Page 59489]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to amend Exchange Rule 1080, Philadelphia Stock 
Exchange Automated Options Market (``AUTOM'') and Automatic Execution 
System (``AUTO-X''), by adopting paragraph (i), which would restrict 
the entry of certain options orders that are created and communicated 
electronically, without manual input, into the Exchange's AUTOM system. 
The text of the proposed rule change is available at the Office of the 
Secretary, the Exchange, and at the Commission.

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 Phlx proposes to adopt new section (i) to its Rule 1080, 
governing the entry of certain options orders that are created and 
communicated electronically, without manual input, into AUTOM.\3\ 
Proposed Phlx Rule 1080(i) would provide that members may not enter nor 
permit or facilitate the entry of orders into AUTOM if those orders are 
created and communicated electronically without manual input and if 
such orders are eligible for execution via AUTO-X \4\ at the time they 
are received. To be permitted under the Rule, order entry by public 
customers or associated persons of members must involve manual input, 
such as entering the terms of an order into an order-entry screen or 
manually selecting a displayed order against which an off-setting order 
should be sent. The proposed rule states that members are not 
prohibited from electronically communicating to the Exchange orders 
manually entered by customers into front-end communications systems, 
such as Internet gateways and online networks.
---------------------------------------------------------------------------

    \3\ AUTOM is the Exchange's electronic order delivery 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 feature, 
AUTO-X. 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 unit on the Exchange 
trading floor.
    \4\ AUTO-X is the automatic execution feature of the AUTOM 
system.
---------------------------------------------------------------------------

    The proposed rule clarifies that an order is eligible for execution 
via AUTO-X if: (1) Its size is equal to or less than the maximum AUTO-X 
order size for the particular series; (2) the order is marketable at 
the time it is received; and (3) the order either has no contingency or 
has a contingency that is accepted for execution by the AUTOM system. 
As defined in the proposed rule, a marketable order is a market order 
or a limit order where the specified price to sell is below or at the 
current bid, or the specified price to buy is above or at the current 
offer.
    The Exchange believes that the proposed rule change will permit 
specialists and Registered Options Traders (``ROTs'') to compete more 
effectively with customers who are equipped with electronic systems. 
The Phlx represents that its business model depends on specialists and 
ROTs to maintain fair and orderly markets and depends on specialists 
and market makers for competition and liquidity. Public customer orders 
on the Phlx are provided with certain benefits pursuant to various 
rules of the Exchange, including Phlx Rule 1080 (Philadelphia Stock 
Exchange Automated Options Market (AUTOM) and Automatic Execution 
System (AUTO-X), Phlx Rule 1014 (Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders), Phlx Rule 
1015 (Quotation Guarantees), and Options Floor Procedure Advice A-11 
(Responsibility to Make Ten-Up Markets). Allowing electronically 
generated and communicated customer orders to be routed directly to 
AUTOM and AUTO-X would give customers with such electronic systems a 
significant advantage over specialists and ROTs. The Exchange believes 
that this could undercut its business model, which is dependent on 
specialists and ROTs for competition and liquidity. The Phlx notes that 
under the proposed rule change, computer generated orders can still be 
sent for execution on the Exchange; however, they may not be sent for 
execution through AUTOM and AUTO-X.
    Currently, Phlx member firms and customers who are not located on 
the trading floor may send option orders to the trading floor in 
various ways. First, a member firm representative or a customer may 
telephone an order to a Floor Broker member firm booth on the trading 
floor. From that point the order may be taken manually to the proper 
specialist post and trading crowd and represented; alternatively, it 
may be sent electronically from the Floor Broker booth via the 
Exchange's Floor Broker Order Entry System. A member firm may also send 
an order to the Exchange through its interface with AUTOM. Eligible 
orders sent through AUTOM may be: (1) Placed on the limit order book; 
(2) automatically executed via AUTO-X; or (3) executed manually by the 
specialist and the trading crowd.
    Under the proposed rule change, electronically generated and 
communicated orders that are eligible for execution via AUTO-X at the 
time they are received would be ineligible for routing through AUTOM. 
These orders could, however, be sent to the trading floor for execution 
as otherwise described above, i.e., by telephone or through a member 
firm's proprietary order routing system.
2. Statutory Basis
    The Phlx believes that the restriction of the entry of certain 
options orders that are created and communicated electronically, 
without manual input, into AUTOM will ensure that Exchange specialists 
maintain fair and orderly markets and will enable them to continue to 
provide competition and liquidity in the options markets. The Phlx 
therefore represents that the proposed rule change is consistent with 
Section 6(b) of the Act \5\ in general and furthers the objectives of 
Section 6(b)(5) \6\ in particular in that it is designed to perfect the 
mechanisms of a free and open market and a national market system and 
to protect investors and the public interest.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any 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 comments on the 
proposed rule change.

[[Page 59490]]

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \7\ and Rule 19b-4(f)(6) \8\ thereunder because 
the proposal: (1) Does not significantly affect the protection of 
investors or the public interest; (2) does not impose any significant 
burden on competition; and (3) does not become operative prior to 30 
days after the date of filing or such shorter time as the Commission 
may designate if consistent with the protection of investors and the 
public interest. In addition, the Exchange provided the Commission with 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing the proposed rule change 
as required by Rule 19b-4(f)(6).\9\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
    \9\ Id.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \10\ normally 
does not become operative prior to 30 days after the date of filing. 
Rule 19b-4(f)(6)(iii),\11\ however, permits the Commission to designate 
such shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission designate such shorter time period so that the proposed rule 
change may become operative immediately upon filing. The immediate 
effectiveness would allow the Exchange to promptly implement the rule 
change concurrently with new Chicago Board Options Exchange to promptly 
implement the rule change concurrently with new Chicago Board Options 
Exchange, Inc. (``CBOE'') Rule 6.8A. CBOE Rule 6.8A restricts the entry 
of certain options orders that are created and communicated 
electronically, without manual input, into the CBOE's Order Routing 
System.\12\
---------------------------------------------------------------------------

    \10\ Id.
    \11\ 17 CFR 240.19b-4(f)(6)(iii).
    \12\ See Securities Exchange Act Release No. 43285 (September 
12, 2000), 65 FR 56972 (September 20, 2000) (order approving CBOE 
Rule 6.8A, File No. SR-CBOE-00-01).
---------------------------------------------------------------------------

    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
operative immediately upon filing for the following reasons. 
Specifically, the Commission previously approved similar proposals by 
two other exchanges.\13\ The Commission notes that the proposed rule 
change concerns issues that have previously been the subject of a full 
comment period pursuant to Section 19(b) of the Act,\14\ and the 
Commission does not believe that the proposed rule change raises any 
new regulatory issues.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 43285 (September 
12, 2000), 65 FR 56972 (September 20, 2000) (order approving CBOE 
Rule 6.8A, File No. SR-CBOE-00-01) and Securities Exchange Act 
Release No. 42455 (February 24, 2000), 65 FR 11401 (March 2, 2000) 
(order approving International Stock Exchange LLC Rule 717(f)).
    \14\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    Based on the above reasons, the Commission believes it is 
consistent with the protection of investors and the public interest 
that the proposed rule change become operative immediately upon the 
date of filing, September 15, 2000. 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 purposes of 
the Act.\15\
---------------------------------------------------------------------------

    \15\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered its impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Phlx-00-79 and 
should be submitted by October 26, 2000.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-25593 Filed 10-4-00; 8:45 am]
BILLING CODE 8010-01-M