[Federal Register Volume 66, Number 107 (Monday, June 4, 2001)]
[Notices]
[Pages 30037-30039]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13955]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44362; File No. SR-Phlx-2001-56]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. To Extend Its Pilot Program to 
Disengage Its Automatic Execution System (``AUTO-X'') for a Period of 
Thirty Seconds After the Number of Contracts Automatically Executed in 
a Given Option Meets the AUTO-X Minimum Guarantee for That Option

May 29, 2001.
    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 May 17, 2001, 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 and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to approve the 
proposal on an accelerated basis, for a six-month pilot, scheduled to 
end on May 31, 2001.
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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 extend, for an additional six months, its 
pilot program effecting a systems change to AUTO-X, the automatic 
execution feature of the Exchange's Automated Options Market System 
(``AUTOM''),\3\ that would

[[Page 30038]]

disengage AUTO-X for a period of thirty seconds after the number of 
contracts automatically executed in a given option meets the AUTO-X 
minimum guarantee for that option. The Exchange also proposes to expand 
the number of options eligible for inclusion in the pilot from the 
current amount of up to thirty options to an amount not to exceed 100 
options, subject to the approval of the Options Committee. The pilot 
program was originally approved on a six-month pilot basis, and will 
expire on May 31, 2001.\4\
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    \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 
floors. 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's 
trading floor.
    \4\ See Securities Exchange Act Release No. 43652 (December 1, 
2000), 65 FR 77059 (December 8, 2000) (SR-Phlx-00-96) (``Initial 
Pilot Program''). One comment letter was received regarding the 
Commission's approval of the Initial Pilot Program. See letter from 
George Brunelle, Brunelle & Hadjikow, to Jonathan G. Katz, 
Secretary, Commission, dated January 3, 2001.
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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 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 III 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 extend the pilot program for an additional 
six-month period, and proposes to expand the number of options eligible 
for inclusion in the pilot program to an amount not to exceed 100 
options, subject to the approval of the Options Committee.
    On December 1, 2000, the Phlx's pilot program became effective.\5\ 
The pilot program includes the following features:
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    \5\ See supra note 4.
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    <bullet> Once an automatic execution occurs via AUTO-X in an 
option, the system would begin a ``counting'' program, which would 
count the number of contracts executed automatically for that option, 
up to the AUTO-X guarantee, regardless of the number of executions.
    <bullet> When the number of contracts executed automatically for 
that option meets the AUTO-X guarantee within a fifteen second time 
frame, the system would cease to automatically execute for that option, 
and would drop all AUTO-X eligible orders in that option for manual 
handling by the specialist for a period of thirty seconds to enable the 
specialist to refresh quotes in that option.\6\
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    \6\ Any orders delivered in excess of the minimum AUTO-X 
guarantee will be executed to the guaranteed amount and the excess 
will be dropped to the specialist for manual execution. See Initial 
Pilot Program, supra note 4.
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    <bullet> Upon the expiration of thirty seconds, automatic 
executions would resume and the ``counting'' program would be set to 
zero and begin counting the number of contracts executed automatically 
within a fifteen second time frame again, up to the AUTO-X guarantee.
    <bullet> Again, when the number of contracts automatically executed 
meets the AUTO-X guarantee within a fifteen second time frame, the 
system would drop all subsequent AUTO-X eligible orders for manual 
handling by the specialist for a period of thirty seconds.
    A significant purpose of this pilot program is to enable the 
Exchange to move towards the dissemination of options quotations with 
size.\7\ The ``counting'' feature of the pilot program functions to 
disengage AUTO-X for a period of thirty seconds in a given option once 
the number of contracts automatically executed meets the AUTO-X 
guarantee for that option within a fifteen-second time frame. A similar 
``counting'' mechanism is expected to be utilized upon the 
implementation of the systems necessary for the dissemination of 
options quotations with size. Thus, the proposed extension of the pilot 
program should allow the Exchange to continue its efforts in the 
process of moving towards the implementation of quotations with size.
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    \7\ Currently, the size of any disseminated bid or offer by the 
Exchange is equal to the AUTO-X guarantee for the quoted option, 
except that the disseminated size of bids and offers of limit orders 
on the book is ten contracts and shall be firm regardless of the 
actual size of such orders. See Exchange Options Floor Procedure 
Advice F-7. The Exchange has established this rule setting forth the 
size for which its quotes are firm, and periodically publishes that 
size in accordance with recently amended Rule 11Ac1-1 under the Act 
(the ``Quote Rule''). See Securities Exchange Act Release No. 44145 
(April 2, 2001), 66 FR 18662 (April 10, 2001) File No. SR-Phlx-01-
37). The Initial Pilot Program is designed, in part, to enable the 
Exchange to roll out the system designed to decrement the 
disseminated size of Exchange quotes once such system is deployed.
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    The Exchange believes that an extension of the pilot program would 
enable specialists in the options included in the pilot program to 
continue to provide fair and orderly markets during peak market 
activity by manually executing orders at correct market prices and 
refreshing quotations to reflect market demand.
    The Exchange further proposes to expand the number of options 
eligible for inclusion in the pilot program to an amount not to exceed 
100 options to further enable the Exchange to prepare for, and 
ascertain the readiness of its systems for, the eventual floor-wide 
dissemination of options quotations with size.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act \8\ in general, and with section 6(b)(5) in 
paticular,\9\ in that it is designed to perfect the mechanism of a free 
and open market and a national market system, protect investors and the 
public interest and promote just and equitable principles of trade by 
enabling Exchange specialists to maintain fair and orderly markets 
during periods of peak market activity.
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    \8\ 15 U.S.C. 78f(b)
    \9\ 15 USC 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

    The Exchange did not receive or solicit any written comments on the 
proposed rule change.

III. 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, N.W., Washington, D.C. 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

[[Page 30039]]

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 the File No. SR-Phlx-2001-56 and should be 
submitted by June 25, 2001.

IV. Summary of Comment Regarding the Initial Pilot Program

    The Commission received one comment letter regarding the Initial 
Pilot Program.\10\ The commenter suggested that the Initial Pilot 
Program lacked appropriate safeguards to ensure time priority of 
customer orders when they are transferred from AUTO-X to a specialist. 
More specifically, the commenter was concerned that orders would not be 
executed immediately and therefore, would not receive the best price. 
In addition, the commenter compared the disengagement of AUTO-X to a 
trading halt without advance published notice. Finally, the commenter 
claimed that that the pilot program would result in a loss of 
predictability and reliability of quoted Phlx prices and would allow 
specialists to circumvent the Quote Rule, thereby hindering market 
efficiency.
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    \10\ See supra note 4.
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V. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\11\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act, 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 protect 
investors and the public interest.\12\ The Commission believes that 
extension of the Initial Pilot Program should help the Exchange to 
prepare for disseminating its options quotes with size. In addition, 
the Commission believes that the proposal may assist specialists in 
maintaining fair and orderly markets during periods of peak market 
activity.
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    \11\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that during the six months of the Initial 
Pilot Program, the Phlx has received no complaints from customers, 
floor traders, or member firms. The Commission finds that the Phlx has 
adequately responded to concerns raised in the commenter's letter.\13\ 
The Exchange noted that Phlx Rule 1080(c) provides the Phlx's Options 
Committee discretion to restrict the use of AUTO-X in any options 
series. The Exchange also clarified that orders will not be executed at 
an inferior price simply because they are not routed to the specialist 
for manual handling; the orders will be handled in a manner consistent 
with the Exchange's rules on priority, parity, and precedence and in 
compliance with the SEC's Quote Rule and Phlx Rule 1082 (``Firm 
Quotations'').
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    \13\ See letter from Richard S. Rudolph, Counsel, Phlx, to 
Jonathan G. Katz, Secretary, Commission, Phlx, dated May 21, 2001.
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    Consequently, the Commission believes that extending the Initial 
Pilot Program for an additional six months in a limited number of 
options should enable the Phlx to further evaluate the effect of 
disengaging AUTO-X under certain circumstances. The Commission finds 
that increasing the number of options included in the pilot program to 
an amount not to exceed 100 options is reasonable because no problems 
were reported during the six months of the Initial Pilot Program.
    The Commission notes that the Exchange has represented that it will 
continue to evaluate the pilot program by reviewing specialists' 
performance in the selected options, and by monitoring any complaints 
relating to the pilot program.\14\ Furthermore, the Commission notes 
that the Exchange has represented that it will continue to post on its 
website a list of options included in the pilot program, as well as 
issue a circular to this effect to members, member organizations, 
participants, and participant organizations explaining the pilot 
program and the circumstances in which the AUTO-X system will not be 
available for customer orders.\15\
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    \14\ Telephone conversation between Richard S. Rudolph, Counsel, 
Phlx, and Sapna C. Patel, Attorney, Division of Market Regulation 
(``Division''), Commission, on May 24, 2001.
    \15\ Id. Phlx also represented that it would include language in 
its circular clarifying that Auto-X will not be re-engaged until the 
expiration of the 30 second period, even after a quote is revised. 
Telephone conservation between Richard S. Rudolph, Counsel, Phlx, 
and Sonia Patton, Attorney, Division, Commission, on May 29, 2001.
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    Finally, the Commission finds good cause, pursuant to section 
19(b)(2) of the Act,\16\ for approving the proposed rule change prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. The Commission believes that granting accelerated 
approval to extend the Initial Pilot Program for six months will allow 
Phlx to continue, without interruption, the existing operation of its 
AUTO-X system.
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    \16\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-Phlx-2001-56) is hereby 
approved on an accelerated basis, as a six-month pilot, scheduled to 
expire on November 30, 2001.
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    \17\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13955 Filed 6-1-01; 8:45 am]
BILLING CODE 8010-01-M