[Federal Register: November 22, 2002 (Volume 67, Number 226)]
[Notices]
[Page 70473-70475]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no02-127]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46840; File No. SR-Phlx-2002-59]
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
November 15, 2002.
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 October 2, 2002, 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 an additional six-month pilot,
to expire on May 30, 2003.
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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 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 pilot
program was originally approved on a six-month basis for a limited
number of eligible options,\4\ and subsequently extended for an
additional six-month period.\5\ Subsequently, the number of options
eligible for the pilot was expanded to include all Phlx-traded
options.\6\ The pilot has since been extended twice for additional six-
month periods, the latest extension is scheduled to expire November 30,
2002.\7\
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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
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'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'').
\5\ See Securities Exchange Act Release No. 44362 (May 29,
2001), 66 FR 30037 (June 4, 2001) (SR-Phlx-2001-56).
\6\ See Securities Exchange Act Release No. 44760 (August 31,
2001), 66 FR 47253 (September 11, 2001) (SR-Phlx-2001-79).
\7\ See Securities Exchange Act Release Nos. 45862 (May 1,
2002), 67 FR 30990 (May 8, 2002) (SR-Phlx-2002-22) (``Last
Extension''); and 45090 (November 21, 2001), 66 FR 59834 (November
30, 2001) (SR-Phlx-2001-100).
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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. On December 1, 2000, the Initial Pilot Program became
effective.\8\ The pilot program was then extended several times and is
currently scheduled to end on November 30, 2002.\9\ The pilot program
includes the following features:
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\8\ See supra note 4.
\9\ See Last Extension, supra note 7.
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[sbull] Once an automatic execution occurs in an option via AUTO-X,
the system would begin a ``counting'' program, which would count the
number of contracts executed automatically for that option, up to the
maximum guaranteed AUTO-X size,\10\ regardless of the number of
executions.
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\10\ Recently, the Exchange filed proposed amendments to
Exchange Rule 1080(c) to provide automatic executions for eligible
orders at the Exchange's disseminated size, subject to a minimum and
maximum AUTO-X eligible size range, on an issue-by-issue basis. See
SR-Phlx-2002-39 (submitted July 2, 2002), and Amendment No. 1
thereto (submitted August 23, 2002). Under that proposal, the
maximum guaranteed AUTO-X size may be for a different number of
contracts for customer orders than for broker-dealer orders. Upon
implementation of that proposal, subject to Commission approval,
when the maximum guaranteed AUTO-X size in an option is for a
different number of contracts for customer orders than for broker-
dealer orders, AUTO-X would be disengaged when the larger of the two
maximum guaranteed AUTO-X sizes for the particular option is
exhausted.
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[sbull] When the number of contracts executed automatically for
that option meets the maximum guaranteed AUTO-X size 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.\11\
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\11\ 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. The Exchange has represented that, for
the thirty seconds that AUTO-X is disengaged, the specialist will be
required to honor the disseminated quote unless the specialist is in
the process of refreshing his or her quote. The Exchange has further
represented that, generally, it should not take the specialist the
full thirty seconds to update his or her quote, and that the
Exchange will surveil for any potential abuse. Telephone
conversation between Richard S. Rudolph, Counsel, Phlx, and Sonia
Patton, Special Counsel, Division of Market Regulation
(``Division''), Commission, on November 7, 2002.
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[sbull] 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 maximum guaranteed AUTO-X
size.
[sbull] Again, when the number of contracts automatically executed
meets the maximum guaranteed AUTO-X size 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
[[Page 70474]]
options quotations with size.\12\ As discussed above, 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 maximum guaranteed AUTO-X size for
that option within a fifteen-second time frame. A similar ``counting''
mechanism is being utilized as part of the roll-out of a new Auto-Quote
system that includes an AUTO-X guaranteed size equal to the Exchange's
disseminated size, subject to a minimum and maximum guaranteed AUTO-X
size, on an issue-by-issue basis, which is currently pending Commission
approval.\13\ Thus, the proposed extension of the pilot program should
allow the Exchange to continue its efforts in the process of deploying
the new Auto-Quote system.
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\12\ The Commission recently approved amendments to the
Exchange's definition of ``disseminated size'' to mean, with respect
to the disseminated price for any quoted options series, at least
the sum of limit orders. The specialist and crowd may determine to
disseminate a size greater than the sum of limit orders. See
Securities Exchange Act Release No. 46325 (August 8, 2002), 67 FR
53376 (August 15, 2002) (SR-Phlx-2002-15) (order approving
amendments to Exchange Rule 1082(a)(ii) and Option Floor Procedure
Advice F-7).
\13\ See SR-Phlx-2002-39, and Amendment No. 1 thereto.
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The Exchange believes that an extension of the pilot program would
enable specialists 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.
In addition, the Exchange recognizes that Commission staff has
inquired into the possibility of re-engaging AUTO-X in less than thirty
seconds once the specialist revises the quote. The Exchange's Financial
Automation, Legal, and Regulatory staff have begun to review the issue,
specifically as to whether it is feasible to re-engage AUTO-X for an
entire issue based upon the revision of a quotation in one single
series.\14\ Pursuant to this review, the Exchange has determined to
automate the re-engagement of AUTO-X for an option issue upon the
revision of a quotation in a single series of such issue, provided that
the revised quotation occurs in the series that exhausted the AUTO-X
guarantee. The Exchange believes that, with the ultimate implementation
of the new Auto-Quote system, the Exchange should, over the proposed
additional six-month pilot period, be able to more accurately evaluate
its ability to re-engage AUTO-X in an entire class of options upon the
revision of a quote in a single option series.
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\14\ Under Phlx's current pilot program, AUTO-X is programmed to
re-engage after thirty seconds, regardless of whether the specialist
has updated its quote prior to that period of time.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6 of the Act \15\ in general, and with section 6(b)(5) in
particular,\16\ 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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\15\ 15 U.S.C. 78f.
\16\ 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
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, 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-2002-59 and
should be submitted by December 13, 2002.
IV. 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.\17\ 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.\18\ The Commission believes that an
extension of the pilot program for an additional six months should
allow the Exchange to continue its efforts to deploy its new Auto-Quote
system to prepare for the dissemination of quotes with size. In
addition, the Commission believes that the proposal should assist
specialists in maintaining fair and orderly markets during periods of
peak market activity.
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\17\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\18\ 15 U.S.C. 78f(b)(5).
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The Commission notes that the Exchange is attempting to address its
concern regarding the feasibility of re-engaging AUTO-X for a
particular issue prior to thirty seconds if the quote has been revised
by the specialist before that time period. The Exchange has represented
that it will automate the re-engagement of AUTO-X for an option issue
once the AUTO-X guarantee in a single series of such issue has been met
and the quote has been updated prior to the thirty-second period.
Consequently, the Commission believes that extending the pilot program
for an additional six months should enable the Phlx to further evaluate
its ability to re-engage AUTO-X in an entire class of options upon the
revision of a quote in a single option series.
The Commission notes that the Exchange has represented that it will
continue to evaluate the pilot program by reviewing specialists'
performance, and by monitoring any complaints relating to the pilot
program.\19\ 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
[[Page 70475]]
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.\20\
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\19\ Telephone conversation between Richard S. Rudolph, Counsel,
Phlx, and Sonia Patton, Special Counsel, and Sapna C. Patel,
Attorney, Division, Commission, on November 6, 2002.
\20\ Phlx has also represented that it will include language in
its circular clarifying that AUTO-X will not be re-engaged until the
expiration of the thirty second period, even after a quote is
revised. Telephone conversation between Richard S. Rudolph, Counsel,
Phlx, and Sonia Patton, Special Counsel, and Sapna C. Patel,
Attorney, Division, Commission, on November 6, 2002.
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Accordingly, the Commission finds good cause, pursuant to section
19(b)(2) of the Act,\21\ 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 recognizes that during the last
six-month extension of the pilot program, the Phlx has received no
complaints from customers, floor traders, or member firms. The
Commission believes that granting accelerated approval to extend the
pilot program for an additional six months will allow Phlx to continue,
without interruption, the existing operation of its AUTO-X system.
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\21\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\22\ that the proposed rule change (SR-Phlx-2002-59), is hereby
approved on an accelerated basis, as a six-month pilot, scheduled to
expire on May 30, 2003.
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\22\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-29714 Filed 11-21-02; 8:45 am]
BILLING CODE 8010-01-P