[Federal Register: December 3, 2002 (Volume 67, Number 232)]
[Notices]
[Page 72015-72017]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03de02-135]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46886; File No. SR-Phlx-2002-39]
Self-Regulatory Organizations; Order Granting Approval of
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval to Amendment Nos. 1 and 2 to the Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Providing Automatic
Executions for Eligible Orders at the Exchange's Disseminated Size,
Subject to a Minimum and Maximum Eligible Size Range
November 22, 2002.
I. Introduction
On July 3, 2002, the Philadelphia Stock Exchange, Inc. (``Phlx'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 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, on an issue-by-issue basis. Notice
of the proposed rule change was published for comment in the Federal
Register on August 15, 2002.\3\ The Commission received no comments on
the proposal. On August 26, 2002, the Exchange filed Amendment No. 1 to
the proposed rule change.\4\ On November 20, 2002, the Exchange filed
Amendment No. 2 to the proposed rule change.\5\ The Commission
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is approving the proposed rule change, and is publishing notice of, and
granting accelerated approval to, Amendment Nos. 1 and 2 to the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 46323 (August 8, 2002),
67 FR 53374.
\4\ See letter from Richard S. Rudolph, Director and Counsel,
Phlx, to Sonia Patton, Special Counsel, Division of Market
Regulation (``Division''), Commission, dated August 23, 2002
(``Amendment No. 1''). In Amendment No. 1, the Phlx (i) requested
accelerated approval of the proposed rule change; (ii) explained how
its current pilot, regarding the disengagement of its automatic
execution system (``AUTO-X'') once the AUTO-X guarantee for a
particular option has been exhausted within a fifteen second time
frame, will interact with this proposal; (iii) stated that, although
AUTO-X guarantees sizes are subject to approval by the Phlx's
Options Committee, that the Committee has delegated this
responsibility to two Phlx Floor Officials; and (iv) discussed how
the proposed rule will work when the disseminated size is greater
than the maximum guaranteed AUTO-X size and how options contracts
will be allocated.
\5\ See letter from Richard S. Rudolph, Director and Counsel,
Phlx, to Nancy Sanow, Assistant Director, Division, Commission,
dated November 20, 2002 (``Amendment No. 2''). In Amendment No. 2,
the Phlx amended the proposed rule text to reflect a change to
Exchange Rule 1080(c) that was made to the rule subsequent to the
filing of the proposed rule change on July 3, 2002. Amendment No. 2
reflects the fact that the allowable AUTO-X guarantee for options on
the Nasdaq-100 Index Tracking Stock (``QQQ'') is now a maximum of
2000 contracts for the first two near term expiration months and
1000 contracts for all other expiration months.
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II. Description of the Proposal
The Exchange proposes to codify a change in its AUTOM and Auto-
Quote \6\ systems that would permit the automatic execution of eligible
orders \7\ at the Phlx's disseminated size, as defined in Exchange Rule
1082(a)(ii).\8\ Currently, the Exchange automatically executes eligible
orders at a size equal to the AUTO-X guarantee for a given option,
regardless of the Exchange's disseminated size. The proposed rule
change would allow the Exchange to provide automatic executions for
eligible orders at a size equal to the Exchange's disseminated size,
subject to minimum and maximum guaranteed AUTO-X sizes (which the
Exchange represents cannot exceed the Exchange's floor-wide allowable
maximum guaranteed AUTO-X size for an option, which currently is 250
contracts),\9\ to be determined by the specialist and subject to the
approval of the Options Committee.\10\
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\6\ Auto-Quote is the Exchange's electronic options pricing
system, which enables specialists to automatically monitor and
instantly update quotations. See Exchange Rule 1080, Commentary
.01(a).
\7\ AUTO-X eligible orders are orders that do not otherwise
bypass AUTO-X for manual handling by the specialist in accordance
with Exchange Rule 1080(c)(iv).
\8\ See Securities Exchange Act Release No. 46325 (August 8,
2002), 67 FR 53376 (August 15, 2002) (notice of filing and order
granting accelerated approval File No. SR-Phlx-2002-15).
\9\ In Amendment No. 2, the Exchange noted that the QQQ options
are permitted to have an AUTO-X guaranteed size of up to 2000
contracts for the first two near term expiration months and 1000
contracts for all other expiration months. See Securities Exchange
Act Release Nos. 46307 (August 2, 2002), 67 FR 52508 (August 12,
2002) (notice of filing and immediate effectiveness of File No. SR-
Phlx-2002-43, increasing the AUTO-X guarantee for QQQ options up to
1000 contracts); 34531 (September 23, 2002) (notice of filing and
immediate effectiveness of File No. SR-Phlx-2002-47, increasing the
AUTO-X guarantee for QQQ options up to 2000 contracts for the first
two near term expiration months and to 1000 contracts for all other
expiration months). Thus, under the proposed rule change, automatic
executions for eligible orders in QQQ options up to the Exchange's
disseminated size could be set at a maximum of 2000 contracts for
the first two near term expiration months and 1000 contracts for all
other expiration months.
\10\ The Exchange represented that 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 Commission
pursuant to Section 19(b)(3)(A) of the Act. See Exchange Rule
1080(c). In Amendment No. 1, the Exchange noted that, because it
would be cumbersome and impractical for the Options Committee to
meet and vote to approve a change to the guaranteed AUTO-X size for
an option each time a specialist determines to make such a change,
the Options Committee has delegated its authority to approve such
changes to two Exchange Floor Officials, who would indicate their
approval by signing the appropriate form and submitting the form to
Market Surveillance.
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The proposed amendments to Phlx Rule 1080(c) would include the
following provisions:
1. 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 would be automatically executed up to the
Exchange's disseminated size. Remaining contracts would be executed
manually by the specialist or placed on the limit order book.
Example 1:
Minimum Guaranteed AUTO-X Size=10
Maximum Guaranteed AUTO-X Size=50
Disseminated Size=35
Inbound Order Size=90
In this example, the Exchange would automatically execute 35
contracts (the disseminated size). The specialist would be required to
execute the remaining 55 contracts manually or, in the case of a limit
order, to place the remaining 55 contracts on the limit order book, if
the automatic execution has exhausted the size at that price.
2. If the Exchange's disseminated size is less than the minimum
guaranteed AUTO-X size for that option, inbound eligible orders
delivered via AUTOM would be automatically executed up to such minimum
guaranteed AUTO-X size. Remaining contracts would be executed manually
by the specialist or placed on the limit order book.
Example 2:
Minimum Guaranteed AUTO-X Size=10
Maximum Guaranteed AUTO-X Size=50
Disseminated Size=6
Inbound Order Size=20
In this example, the Exchange would automatically execute 10
contracts (the minimum guaranteed AUTO-X size) even though its
disseminated size is for 6 contracts. The specialist would be required
to execute the remaining 10 contracts manually at that price or the
next best price or, in the case of a limit order, to place the
remaining 10 contracts on the limit order book, if the automatic
execution has exhausted the size at that price.
3. If the Exchange's disseminated size is greater than the maximum
guaranteed AUTO-X size, inbound eligible orders would be automatically
executed up to such maximum guaranteed AUTO-X size. Remaining contracts
would be executed manually by the specialist at the disseminated price.
Example 3:
Minimum Guaranteed AUTO-X Size=10
Maximum Guaranteed AUTO-X Size=50
Disseminated Size=100
Inbound Order Size=90
In this example, the Exchange would automatically execute 50
contracts (the maximum guaranteed AUTO-X size). The specialist would be
required to execute the remaining 40 contracts manually at that same
price because the Exchange's rules concerning firm quotations \11\
require the Exchange to be firm at that price up to the disseminated
size of 100 contracts.
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\11\ See Exchange Rule 1082, Firm Quotations.
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The Exchange represents that the proposed rule change would provide
that the minimum and maximum guaranteed AUTO-X sizes for a given option
is to be determined on an issue-by-issue basis by the specialist and
subject to the approval of the Options Committee.\12\ In determining
whether to approve the minimum and maximum guaranteed AUTO-X size for
each option, the Options Committee may consider, without limitation,
the number of series and open interest in the option; the volatility of
the option; the liquidity of the option; historical and projected
volume of trading in the option; and the projected share of total
trading in the option that is likely to occur at the Exchange, as well
as other relevant factors.
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\12\ The Exchange has stated that the maximum guaranteed AUTO-X
size for a given option generally would not be changed intra-day.
Telephone call between Sonia Patton, Division, Commission, and
Richard Rudolph, Director and Counsel, Phlx (August 5, 2002).
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The Exchange also proposes to delete references to public customer
orders from the description of AUTO-X set forth in Exchange Rule
1080(c) in order to reflect that, in certain issues, orders for the
proprietary account(s) of broker-dealers may be eligible for automatic
execution via AUTO-X.\13\ Minimum and maximum sizes could be for a
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different number of contracts for broker-dealer orders than for
customer orders.\14\ In addition, the Exchange represents that
contracts that are automatically executed would be allocated
automatically on the Exchange's ``Wheel.''\15\ The Exchange notes that
contracts executed manually would be allocated by the specialist in the
same manner as all orders received via AUTOM that are manually executed
by the specialist in accordance with Phlx rules.\16\
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\13\ See Securities Exchange Act Release No. 45758 (April 15,
2002), 67 FR 19610 (April 22, 2002) (File No. SR-Phlx-2001-40).
\14\ Currently, the Exchange is operating an AUTO-X pilot
program that disengages AUTO-X in an option for 30 seconds when the
number of contracts executed automatically for the option meets the
AUTO-X guarantee within a 15 second time frame. See Securities
Exchange Act Release No. 45862 (May 1, 2002), 67 FR 30990 (May 8,
2002). The Exchange has stated that this pilot will continue to
operate and that if there is a different size for customers and
broker-dealers, the larger of the two sizes will constitute the
AUTO-X guarantee for purposes of the pilot. This is based on the
fact that, as a business practice, the Exchange wants to provide
automatic executions for the largest size possible. Telephone call
between Sonia Patton, Division, Commission, and Richard Rudolph,
Director and Counsel, Phlx (August 5, 2002). See also Amendment No.
1, supra note 4.
\15\ See Phlx Rule 1080(g) and Option Floor Procedure Advice
(``OFPA'') F-24.
\16\ In a separate rule proposal, the Exchange has proposed
amendments to OFPA F-2, OFPA F-12, and Exchange Rule 1014(g)
regarding who is responsible for allocating a trade executed on its
floor. See File No. SR-Phlx-2001-28. In another separate proposal,
the Exchange proposed amendments to OFPA B-6 and Exchange Rule
1014(g) regarding the method for allocating trades executed on its
floor. See File No. SR-2001-39.
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III. Discussion
The Commission has carefully reviewed the proposed rule change, as
amended, and finds that it is consistent with the Act and the rules and
regulations promulgated thereunder applicable to a national securities
exchange and, in particular, with the requirements of section 6(b).\17\
Specifically, the Commission finds that approval of the proposed rule
change is consistent with section 6(b)(5)\18\ in that it is designed to
promote just and equitable principles of trade, to remove impediments
and to perfect the mechanism of a free and open market and a national
market system, and in general, to protect investors and the public
interest.
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\17\ 15 U.S.C. 78f(b). In approving this proposal, the
Commission has considered the proposed rule's 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 believes that the proposed rule change, as amended,
should enable the Phlx to codify the merger of its new Auto-Quote
system with its current AUTO-X system, and should provide for a more
orderly system for the automatic execution of eligible orders through
AUTO-X. The Commission notes that this proposed rule change will enable
the Phlx to automatically execute eligible orders at the Exchange's
disseminated size, subject to a minimum and a maximum AUTO-X guarantee
size that would be set by the specialist on an issue-by-issue basis,
subject to the Phlx Options Committee's approval. In addition, the
Commission believes that providing automatic executions at the
Exchange's disseminated size should enhance the ability of investors to
ascertain the actual number of contracts available for automatic
execution of eligible orders. Accordingly, the proposed rule change
should result in more transparency for investors and the marketplace.
The Commission also notes that the Exchange is eliminating the
reference to public customers orders from Exchange Rule 1080(c)
because, for certain issues, broker-dealer orders may be eligible for
automatic execution. The Commission further notes that the Exchange has
represented that, because public customers and broker-dealers may have
different AUTO-X guarantee sizes, the Exchange will make sure that the
larger of the two sizes will constitute the AUTO-X guarantee for
purposes of the pilot.\19\ This is based on the fact that, as a
business practice, the Exchange represents that it wants to provide
automatic executions for the largest size possible.\20\
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\19\ For a brief description of the pilot, see supra note 14.
\20\ See supra note 14.
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In addition, the Commission finds good cause for approving
Amendment Nos. 1 and 2 to the proposed rule change prior to the
thirtieth day after the date of publication of notice of filing thereof
in the Federal Register. The Commission finds that Amendment No. 1
provides clarification as to how the proposed rule change will operate
in relation to Phlx's current pilot in which AUTO-X is disengaged for
thirty seconds once the AUTO-X guarantee is exhausted within a fifteen-
second period. In addition, Amendment No. 1 provides a more detailed
description as to how orders will be allocated and executed, and
clarifies that the Options Committee will delegate its authority to
approve the minimum and maximum AUTO-X guarantee size for a particular
option to two Phlx Floor Officials. Amendment No. 2 amends the proposed
rule text to reflect changes to Exchange Rule 1080(c) that have been
made to the rule since this original 19b-4 proposal was filed on July
3, 2002. The Commission, therefore, finds good cause to approve
Amendment Nos. 1 and 2 to the proposed rule change on an accelerated
basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the Amendment
Nos. 1 and 2 to 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-2002-39 and should be
submitted by December 24, 2002.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-Phlx-2002-39) is hereby
approved, and that Amendment Nos. 1 and 2 to the proposed rule change
is approved on an accelerated basis.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30536 Filed 12-2-02; 8:45 am]
BILLING CODE 8010-01-P