[Federal Register Volume 68, Number 97 (Tuesday, May 20, 2003)]
[Notices]
[Pages 27610-27613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: R3-9034]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47646; File No. SR-Phlx-2003-18]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Philadelphia Stock Exchange, Inc. Relating to Equal Firm Quotation 
Size and AUTO-X Guarantees for Customer and Broker-Dealer Orders

April 8, 2003.

    Editorial Note: Due to numerous footnote errors, this document 
is being reprinted in its entirety. It was originally printed in the 
Federal Register on Monday, April 14, 2003 at 68 FR 17976-17979.

    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 March 20, 2003, the Philadelphia Stock Exchange, Inc. (``Exchange'' 
or ``Phlx'') 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 
proposed rule change has been filed by the Phlx as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) under the Act.\3\ On 
April 7, 2003, the Phlx filed Amendment No. 1 to the proposed rule 
change.\4\ 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\ 17 CFR 240.19b-4(f)(6).
    \4\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Deborah Lassman Flynn, Assistant Director, Division of 
Market Regulation, Commission, dated April 4, 2003 (``Amendment No. 
1''). In Amendment No. 1, Phlx deleted certain proposed language 
stating that ``[t]he minimum guaranteed AUTO-X size is 1 contract, 
and the current maximum AUTO-X size is 250 contracts, except for QQQ 
options''; retained current language that the minimum and maximum 
guaranteed AUTO-X sizes for each option will be posted in the Phlx's 
website; and retained current language that there be a minimum 
guaranteed AUTO-X size and maximum guaranteed AUTO-X size, as 
determined by the specialist and subject to approval of the Options 
Committee.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to implement an options program to be firm for, 
and to automatically execute eligible orders against, the Exchange's 
disseminated size for both customer and broker-dealer orders. 
Specifically, the Exchange proposes to amend Exchange Rule 1082, Firm 
Quotations, to provide that all Phlx options quotations would be firm 
for all incoming customer and broker-dealer orders for their full 
disseminated size.
    The Exchange further proposes to amend Exchange Rule 1080, 
Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X),\5\ to provide automatic executions 
for eligible customer and off-floor broker-dealer orders up to the 
Exchange's disseminated size, subject to a maximum guaranteed AUTO-X 
size of 250 contracts. Options on the Nasdaq-100 Index Tracking Stock 
(``QQQ''<SUP>SM</SUP>) \6\ would continue to have a maximum guaranteed 
AUTO-X size of 2,000 contracts in the first two near term expiration 
months, and 1,000 contracts for all other expiration months.\7\
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    \5\ 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 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. See Exchange Rule 1080.
    \6\ The Nasdaq-100[reg], Nasdaq-100 Index[reg], Nasdaq[reg], The 
Nasdaq Stock Market[reg], Nasdaq-100 Shares<SUP>SM</SUP>, Nasdaq-100 
Trust<SUP>SM</SUP>, Nasdaq-100 Index Tracking Stock<SUP>SM</SUP>, 
and QQQ<SUP>SM</SUP> are trademarks or service marks of Nasdaq and 
have been licensed for use for certain purposes by the Philadelphia 
Stock Exchange pursuant to a License Agreement with Nasdaq. The 
Nasdaq-100 Index[reg] (the Index) is determined, composed, and 
calculated by Nasdaq without regard to the Licensee, the Nasdaq-100 
Trust<SUP>SM</SUP>, or the beneficial owners of Nasdaq-100 
Shares<SUP>SM</SUP>. Nasdaq has complete control and sole discretion 
in determining, comprising, or calculating the Index or in modifying 
in any way its method for determining, comprising, or calculating 
the Index in the future.
    \7\ See Securities Exchange Act Release No. 46531 (September 23, 
2002), 67 FR 61370 (September 30, 2002) (SR-Phlx-2002-47).
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    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

Firm Quotations

Rule 1082. (a) No change.
    (b) Except as provided in paragraph (c) of this Rule, all 
quotations made available by the Exchange and displayed by quotation 
vendors shall be firm for customer and broker-dealer orders at the 
disseminated price in an amount up to the disseminated size. 
Responsible brokers or dealers bidding (or offering) at the 
disseminated price shall be collectively required to execute orders 
presented to them at such price up to the disseminated size in 
accordance with Rule 1015, or, if the responsible broker or dealer is 
representing (as agent) a limit order, such responsible broker or 
dealer shall be responsible (as agent) up to the size of such limit 
order, but may be responsible as principal for all or a portion of the 
excess of the disseminated size over the size of such limit order to 
the extent provided in Rule 1015.
    (c) No change.
    (d) [In accordance with paragraph (d)(l)(ii) of the SEC Quote Rule, 
the quotation size for a disseminated price with respect to an order 
for the account of a broker or dealer (``broker-dealer order'') shall 
be one (1) contract (``quotation size''), and all quotations made 
available by the Exchange and displayed by quotation vendors shall be 
firm for broker-dealer orders at the disseminated price in an amount up 
to the quotation size. The quotation size for broker-dealer orders 
provided in this paragraph (d) shall be periodically published by the 
Exchange. Responsible brokers or dealers bidding (or offering) at the 
disseminated price shall be collectively required to execute broker-
dealer orders at such price up to the quotation size. (e)] If 
responsible brokers or dealers receive an order to buy or sell a listed 
option at the disseminated price

[[Page 27611]]

in an amount greater than the disseminated size [(for customer orders) 
or the quotation size (for broker-dealer orders)], such responsible 
broker or dealer shall, within thirty (30) seconds of receipt of the 
order, (i) execute the entire order at the disseminated price (or 
better), or (ii) execute that portion of the order equal to the 
disseminated size [(in the case of a customer order) or the quotation 
size (in the case of a broker-dealer order)] at the disseminated price 
(or better), and revise its bid or offer.

Commentary:

    .01. For purposes of this Rule 1082, the term ``broker-dealer 
orders'' includes orders for the account(s) of market makers on another 
exchange and Registered Options Traders (``ROTs'') on the Exchange.
* * * * *

Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)

Rule 1080. (a)-(b) No change.
    (c) AUTO-X.--AUTO-X is a feature of AUTOM that automatically 
executes eligible market and marketable limit orders up to the number 
of contracts permitted by the Exchange for certain strike prices and 
expiration months in equity options and index options, unless the 
Options Committee determines otherwise. AUTO-X automatically executes 
eligible orders using the Exchange disseminated quotation (except if 
executed pursuant to the NBBO Feature in sub-paragraph (i) below) and 
then automatically routes execution reports to the originating member 
organization. AUTOM orders not eligible for AUTO-X are executed 
manually in accordance with Exchange rules. Manual execution may also 
occur when AUTO-X is not engaged, such as pursuant to sub-paragraph 
(iv) below. An order may also be executed partially by AUTO-X and 
partially manually.
    The Options Committee may for any period restrict the use of AUTO-X 
on the Exchange in any option or series provided that the effectiveness 
of any such restriction shall be conditioned upon its having been 
approved by the Securities and Exchange Commission pursuant to Section 
19(b) of the Securities Exchange Act of 1934 and the rules and 
regulations thereunder. Any such restriction on the use of AUTO-X 
approved by the Options Committee will be clearly communicated to 
Exchange membership and AUTOM users through an electronic message sent 
via AUTOM and through an Exchange information circular. Such 
restriction would not take effect until after such communication has 
been made.
    Currently, the Exchange's maximum allowable AUTO-X guarantee is 250 
contracts. With respect to options on the Nasdaq-100 Index Tracking 
Stock (``QQQ'')<SUP>SM</SUP>, orders of up to 2,000 contracts in the 
first two (2) near term expiration months, and 1,000 contracts for all 
other expiration months, are eligible for AUTO-X.
    For each option, there shall be a minimum guaranteed AUTO-X size 
and a maximum guaranteed AUTO-X size. Such minimum and maximum sizes 
may be for a different number of contracts for customer orders than for 
broker-dealer orders], as determined by the specialist and subject to 
the approval of the Options Committee.
    The Exchange shall provide automatic executions for eligible 
customer and broker-dealer orders up to the Exchange's disseminated 
size as defined in Exchange Rule 1082, subject to a minimum guaranteed 
AUTO-X size and a maximum guaranteed AUTO-X size (up to a size of 250 
contracts).
    [sbull] If the Exchange's disseminated size is greater than the 
minimum guaranteed AUTO-X size, and less than the maximum guaranteed 
AUTO-X size, inbound eligible orders shall be automatically executed up 
to Exchange's disseminated size. Remaining contracts shall be executed 
manually by the specialist or placed on the limit order book.
    [sbull] If the Exchange's disseminated size is less than the 
minimum guaranteed AUTO-X size for that option, inbound eligible orders 
shall be automatically executed up to such minimum guaranteed AUTO-X 
size. Remaining contracts shall be executed manually by the specialist 
or placed on the limit order book.
    [sbull] If the Exchange's disseminated size is greater than the 
maximum guaranteed AUTO-X size, inbound eligible orders shall be 
automatically executed up to such maximum guaranteed AUTO-X size. 
Remaining contracts shall be executed manually by the specialist.
    The minimum and maximum guaranteed AUTO-X size applicable to each 
option shall be posted on the Exchange's Web site.
    The Options Committee may, in its discretion, increase the size of 
orders in one or more classes of multiply-traded equity options 
eligible for AUTO-X to the extent necessary to match the size of orders 
in the same options eligible for entry into the automated execution 
system of any other options exchange, provided that the effectiveness 
of any such increase shall be conditioned upon its having been filed 
with the Securities and Exchange Commission pursuant to Section 
19(b)(3)(A) of the Securities Exchange Act of 1934.
    (i)-(v) No change.
    (d)-(j) No change.
Commentary
    01-.04 No change.
    .05 Off-floor broker-dealer limit orders delivered through AUTOM 
must be represented on the Exchange Floor by a floor member. Off-floor 
broker-dealer orders delivered via AUTOM shall be for a minimum size of 
one (1) contract. Off-floor broker-dealer limit orders are subject to 
the following other provisions:
    (i)-(iii) No Change
    (iv) [(a) The minimum guaranteed AUTO-X size shall be at least 10 
contracts for off-floor broker-dealer limit orders in the 120 most 
actively traded equity options (the ``Top 120 Options''). A Top 120 
Option is defined as one of the 120 most actively traded equity options 
in terms of the total number of contracts that were traded nationally 
for a specified month based on volume reflected by The Options Clearing 
Corporation (``OCC'').
    (b) With respect to all other options, off-floor broker-dealer 
limit orders may be eligible for automatic execution via AUTO-X on an 
issue-by-issue basis, subject to the approval of the Options Committee.
    (c) The AUTO-X guarantee for off-floor broker-dealer limit orders 
may be for a different number of contracts, on an issue-by-issue basis, 
than the AUTO-X guarantee for public customer orders, subject to the 
approval of the Options Committee. (v)] Off-floor broker-dealer AUTO-X 
eligible limit orders may be eligible for the Exchange's National Best 
Bid or Offer (``NBBO'') Step-Up Feature on an issue-by-issue basis, 
subject to the approval of the Options Committee.
* * * * *

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.

[[Page 27612]]

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

1. Purpose
    The Phlx proposes to require that all Phlx quotations would be firm 
for all incoming customer and broker-dealer orders for their full 
disseminated size, thus eliminating any distinction between customer 
orders and broker-dealer orders respecting firm quotation size. The 
Phlx also proposes to provide that all Phlx guaranteed AUTO-X sizes 
would be the same for both customer and broker-dealer orders.
a. Firm Quotation Size
    Currently, Exchange Rule 1082(b) requires that all quotations made 
available by the Exchange and displayed by quotation vendors shall be 
firm for customer orders at the disseminated price in an amount up to 
the disseminated size. Exchange Rule 1082(d) sets forth a different 
``quotation size'' of one contract applicable to broker-dealer orders, 
which is distinguished from the ``disseminated size'' for which 
responsible brokers or dealers are firm for customer orders.\8\ The 
Exchange proposes to amend Exchange Rule 1082(b) to require that all 
quotations made available by the Exchange and displayed by quotation 
vendors shall be firm for customer orders and broker-dealer orders at 
the disseminated price in an amount up to the disseminated size, thus 
eliminating any distinction between customer orders and broker-dealer 
orders with respect to the size for which Exchange option quotations 
are firm.
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    \8\ Rule 11Ac1-1(d)(1)(ii) under the Act provides that an 
exchange or association may establish by rule and periodically 
publish a quotation size, which shall not be for less than one 
contract, for which responsible brokers or dealers who are members 
of such exchange or association are obligated under paragraph (c)(2) 
of this section to execute an order to buy or sell a listed option 
for the account of a broker or dealer that is in an amount different 
from the quotation size for which it is obligated to execute an 
order for the account of a customer. 17 CFR 240.11Ac1-1(d)(1)(ii).
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    The Exchange would also delete any references to ``quotation size'' 
and ``broker-dealer'' from Exchange Rule 1082(e). This would be to 
require all quotations made available by the Exchange and displayed by 
quotation vendors to be firm at the disseminated price in an amount up 
to the disseminated size for both customers and broker-dealers. The 
Phlx represents that the purpose of this provision is to provide both 
customers and broker-dealers with full access to the entire 
disseminated size of the Exchange's quotations. Thus, the Exchange 
proposes to eliminate any distinction between the size for which its 
quotes are firm, whether for customers or broker-dealers, including 
market makers on other exchanges and Registered Options Traders 
(``ROTs'').
b. Automatic Executions at the Disseminated Size for Eligible Customer 
and Broker-Dealer Orders
    In November 2002, the Commission approved an Exchange proposal to 
provide automatic executions for eligible orders at the Exchange's 
disseminated size, subject to a minimum and maximum eligible size range 
to be determined by the specialist and subject to approval of the 
Options Committee, on an issue-by-issue basis.\9\ The Exchange now 
proposes to amend Exchange Rule 1080(c) by deleting the provision that 
such minimum and maximum sizes may be for a different number of 
contracts for customer orders than for broker-dealer orders. 
Corresponding sections of the Commentary to Exchange Rule 1080 
concerning AUTO-X eligibility and different guaranteed AUTO-X sizes for 
customers and broker-dealers would also be deleted. This would result 
in automatic executions for both eligible customer orders and eligible 
broker-dealer orders at the Exchange's disseminated size.
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    \9\ See Securities Exchange Act Release No. 46886 (November 22, 
2002), 67 FR 72015 (December 3, 2002) (SR-Phlx-2002-39).
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    The Exchange proposes to eliminate the distinction among customer 
orders and broker-dealer orders respecting AUTO-X guarantees. In order 
to ensure that customer and broker-dealer orders receive the same AUTO-
X size guarantee, the Phlx proposes to delete the current provisions in 
Exchange Rule 1080, Commentary .05 requiring a minimum guaranteed AUTO-
X size of ten contracts for off-floor broker-dealer orders in Top 120 
options. Additionally, the current Commentary includes a provision 
that, with respect to all other options, off-floor broker-dealer limit 
orders may be eligible for automatic execution via AUTO-X on an issue-
by-issue basis, subject to the approval of the Options Committee. The 
Exchange proposes to delete this provision in order to enable all 
eligible broker-dealer orders to be treated the same as eligible 
customer orders with respect to the Exchange's guaranteed AUTO-X size.
    Finally, the Exchange proposes to delete from the Commentary the 
provision that the AUTO-X guarantee for off-floor broker-dealer limit 
orders may be for a different number of contracts, on an issue-by-issue 
basis, than the AUTO-X guarantee for public customer orders, subject to 
the approval of the Options Committee.
c. Conclusion
    The Exchange believes that this proposed ``one size fits all'' 
approach, as set forth in subsections a. and b. above, should enable 
the Exchange to compete for broker-dealer orders by ensuring that there 
would be no distinction between broker-dealer and customer orders with 
respect to: (i) the size for which the Exchange is firm at its 
disseminated price; and (ii) the Exchange's guaranteed AUTO-X size. 
Furthermore, the Exchange believes that the proposal should enhance the 
transparency of its markets and result in a larger number of orders 
automatically executed.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \10\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \11\ in particular, 
because it is designed to promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and protect investors and the public interest by requiring 
Exchange specialists and ROTs to be firm for up to the Exchange's 
disseminated size for all orders, and providing automatic executions at 
the same guaranteed size for all eligible orders.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 that is not necessary in 
furtherance of the purposes of the Act.

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

    Because the foregoing proposed rule change: (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 for 30 days from the date of filing, 
or such

[[Page 27613]]

shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) \12\ of the 
Act and Rule 19b-4(f)(6) \13\ thereunder.\14\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Phlx seeks to have the proposed 
rule change become operative immediately upon filing so that the 
Exchange may remain competitive with other exchanges with similar rules 
in effect.
    The Commission, consistent with the protection of investors and the 
public interest, has determined to waive the 30-day operative date and 
make the proposed rule change operative immediately upon filing, in 
order to allow the Phlx to compete for broker-dealer orders by removing 
any distinction between broker-dealer and customer orders with respect 
to the size for which the Exchange is firm at its disseminated price 
and the Exchange's guaranteed AUTO-X size.\15\ At any time within 60 
days of the filing of the 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.
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    \15\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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, as amended, 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 such 
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-2003-18 and should be submitted by May 5, 2003.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.

[FR Doc. 03-9034 Filed 4-11-03; 8:45 am]


    Editorial Note: Due to numerous footnote errors, this document 
is being reprinted in its entirety. It was originally printed in the 
Federal Register on Monday, April 14, 2003 at 68 FR 17976-17979.

[FR Doc. R3-9034 Filed 5-19-03; 8:45 am]
BILLING CODE 1505-01-D