[Federal Register Volume 65, Number 205 (Monday, October 23, 2000)]
[Notices]
[Pages 63281-63282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27134]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43436; File No. SR-PHLX-00-83]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. To Distribute Quality of Execution Reports to 
Specialists and Order Flow Providers

October 11, 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 5, 2000, 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. 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 reports regarding the quality of 
execution of option orders in connection with its new payment for order 
flow fee.\3\ The text of the proposed rule change is available at the 
principal offices of the Phlx.
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    \3\ See Securities Exchange Act Release No. 43177 (Aug. 18, 
2000), 65 FR 51889 (Aug. 25, 2000).
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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 the statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In view of recent developments in options trading, including the 
Phlx's new payment for order flow fee, the Phlx has determined to 
provide Phlx specialists and order flow providers with sufficient 
information for them to determine whether order flow providers are 
receiving the best execution of their customers' orders at the Phlx.\4\ 
Specifically, the Exchange intends to distribute detailed daily and 
summary monthly Quality of Execution Reports to order flow providers 
and specialist units with respect to all orders delivered through the 
Phlx's Automated Options Market (``AUTOM'') System.\5\ The Phlx 
represents that Quality of Execution Reports will reflect all orders 
that are entered electronically through AUTOM and are executed either 
by AUTO-X \6\ or by a specialist with the assistance of X.Station.\7\ 
Quality of Execution Reports are designed to provide statistical data 
so that firms may analyze whether the orders they directed to the Phlx 
received the best execution. The Exchange initially intends for the 
Quality of Execution Reports to list the national best bid or offer 
(``NBBO'') that prevailed at the time AUTOM received each order and to 
identify the execution price, the execution volume, and the speed of 
execution for each order.\8\ Initially, the report will also identify 
trades that may have been executed outside of the NBBO and will show 
what action, if any, was taken to adjust the price. For trades that 
were not executed at the NBBO, the information will be reported on an 
intraday basis to the Exchange's Surveillance Department staff, who 
will assist members involved in the trade in deciding whether a price

[[Page 63282]]

adjustment is called for under the circumstances.\9\
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    \4\ The Phlx has imposed a payment for order flow fee on certain 
designated transactions of Phlx specialists and registered options 
traders. The funds are made available to Phlx specialists, who may 
use the funds to pay order flow providers for their options order 
flow. In publishing the Phlx's proposed rule change, the Commission 
stated its concerns that brokers who are paid to send their 
customers' orders to one exchange have a conflict of interest that 
may reduce their commitment to the duty they owe the customers to 
obtain the best execution available. See Securities Exchange Act 
Release No. 43177 (Aug. 18, 2000), 65 FR 51889 (Aug. 25, 2000).
    \5\ AUTOM is the Phlx's electronic order routing, delivery, 
execution, and reporting system for equity and index options. See 
Phlx Rule 1080.
    \6\ AUTO-X, the automatic execution feature of AUTOM, 
automatically executes public customer market and marketable limit 
orders for certain strike prices and expiration months in equity and 
index options. See Phlx Rule 1080.
    \7\ The X.Station is an electronic order book on the Phlx 
options floor. See Securities Exchange Act Release No. 42006 (Oct. 
13, 1999), 64 FR 57180 (Oct. 22, 1999).
    \8\ The Phlx expects that this report may be revised to 
accommodate any suggested revisions of specialist units, order flow 
providers, Phlx staff, or others in order to enhance the report's 
effectiveness.
    \9\ According to the Phlx, reasons for executions at a price 
other than the NBBO may include crossed or locked markets, ``fast 
market'' conditions where AUTO-X is disengaged, and other unusual 
market conditions.
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    The Exchange intends to provide a system enhancement to its AUTOM 
system that should allow AUTO-X eligible orders to be automatically 
executed at the NBBO.\10\ Orders executed at the NBBO through this new 
program will also be incorporated into the daily and monthly reports 
described above.
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    \10\ On August 29, 2000, the Exchange submitted a proposed rule 
change relating to a proposed enhancement to AUTO-X that would 
provide AUTO-X eligible orders, as described in Phlx Rule 1080(c), 
to be automatically executed at the NBBO. See SR-Phlx-00-82.
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    In the light of recent developments in options trading, the Phlx 
believes that it has become imperative to provide best execution data 
to its specialist units and order flow providers in order to show that 
Phlx members are providing their customers the best execution of their 
orders. The Phlx represents that the Quality of Execution Reports 
should provide members with greater assurance that they have acted in a 
manner consistent with the fulfillment of their fiduciary obligations 
of best execution. Moreover, the Phlx believes that once members and 
order flow providers have access to the information, the Phlx may be 
able to garner additional order flow because customers will see that 
they are receiving the best price for the orders that they send to the 
Phlx. Accordingly, the Exchange believes that the proposed rule change 
is consistent with the Act, specifically section 6(b)(5) thereof,\11\ 
in that it is designed to promote just and equitable principles of 
trade, as well as to protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b)(5)
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx 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 with respect 
to the proposed rule change.

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

    The Phlx represents that the Quality of Execution Reports will 
reflect all market orders and marketable limit orders that are entered 
through AUTOM, as described in Phlx Rule 1080. Because the Phlx has 
designated this proposed rule change as constituting a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of existing Exchange rules and 
procedures, it has become effective pursuant to section 19(b)(3)(A)(i) 
of the Act \12\ and Rule 19b-4(f)(1) thereunder.\13\ At any time within 
60 days of the filing of this proposed rule change, the Commission may 
summarily abrogate the 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 the furtherance of the purposes 
of the Act.
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    \12\ 15 U.S.C. 78s(b)(A)(i).
    \13\ 17 CFR 240.19b-4(f)(1).
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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. 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 in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal office of the 
Phlx. All submissions should refer to File No. SR-Phlx-00-83 and should 
be submitted by November 13, 2000.

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. 00-27134 Filed 10-20-00; 8:45 am]
BILLING CODE 8010-01-M