[Federal Register: February 9, 2004 (Volume 69, Number 26)]
[Notices]
[Page 6010-6013]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09fe04-88]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49151; File No. SR-Phlx-2004-01]
Self-Regulatory Organizations; Notice of Filing and Amendments
No. 1 and 2 Thereto and Order Granting Accelerated Approval of Proposed
Rule Change by the Philadelphia Stock Exchange, Inc. Relating to the
Automatic Execution of Registered Options Trader (``ROT'') Limit Orders
on the Limit Order Book
January 29, 2004.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4,\2\ thereunder, notice is hereby given
that on January 6, 2004, 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, II, and III, below. On January 15, 2004, the
Exchange filed Amendment No. 1.\3\ On January 28, 2004, the Exchange
filed Amendment No. 2.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change, and Amendments No. 1 and
2, from interested persons, and granting accelerated approval to the
proposal, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Richard S. Rudolph, Director and Counsel,
Legal Department, Phlx to Deborah Lassman Flynn, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated
January 15, 2004 (``Amendment No. 1''). In Amendment No. 1, the
Exchange proposes to amend the rule text to clarify that if Phlx XL
is not deployed for any reason, the Exchange would implement a
functionality whereby eligible incoming orders and quotations would
automatically execute against quotations of specialists and
Streaming Quote Traders (``SQTs'') and orders of Registered Options
Traders (``ROTs'') within 30 days of the date of the determination
not to deploy.
\4\ See letter from Richard S. Rudolph, Director and Counsel,
Legal Department, Phlx to Deborah Lassman Flynn, Assistant Director,
Division, Commission, dated January 28, 2004 (``Amendment No. 2'').
In Amendment No. 2, the Exchange proposes to amend the rule text to
clarify that Phlx XL, if approved, would be deployed not later than
10 days after Commission approval.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to amend Exchange Rule 1080, Commentary .04, to
modify the timing of the deployment of a feature of its Automated
Options Market (AUTOM) \5\ system in light of the Exchange's proposal
to introduce its new electronic trading platform for options, to be
known as ``Phlx XL.'' \6\ The text of the proposed rule change is set
forth below.
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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\ See File No. SR-Phlx-2003-59 and Amendments No. 1 and 2
thereto, which describes the proposed functionality and rule changes
associated with Phlx XL, and is currently pending with the
Commission (``Phlx XL Proposal'').
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Brackets indicate deletions; italics indicate new text.
Philadelphia Stock Exchange Automated Options Market (AUTOM) and
Automatic Execution System (AUTO-X)
Rule 1080.
(a)-(j) No change.
Commentary:
.01-.03 No change.
.04 * * *
[The Exchange shall modify its AUTO-X system not later than
January, 2004, so that it shall automatically execute eligible incoming
orders against Phlx Price Improving ROT and specialist price improving
orders and orders matching such price-improving orders entered via
electronic interface with AUTOM resting on the limit order book. The
Exchange will deploy the modified system over a 15-month period.]
Not later than ten days following approval by the Securities and
Exchange Commission of the rules applicable to the Exchange's
electronic trading platform, Phlx XL, the Exchange will commence the
initial deployment of Phlx XL by allowing specialists and ROTs who are
Streaming Quote Traders (``SQTs,'' as defined in the Phlx XL rules) to
submit electronic quotations in Streaming Quote Options (as defined in
the Phlx XL rules), and ROTs who are not SQTs to submit limit orders
onto the limit order book via electronic interface with AUTOM or
manually through a Floor Broker or the Specialist. Eligible incoming
orders and quotations will automatically execute against quotations of
specialists and SQTs and orders of ROTs in accordance with the
functionality of the Phlx XL system, as set forth in the Phlx XL rules.
Over a period following the commencement of operation of the Phlx
XL system, the Exchange expects to gradually increase the number of
Streaming Quote Options eligible to be traded via Phlx XL. If the Phlx
XL system is in operation on April 30, 2005, but less than all of the
options traded on the Exchange are Streaming Quote Options, then the
Exchange shall, as of April 30, 2005, ensure that the AUTOM system
automatically executes eligible incoming orders in options that are not
then Streaming Quote Options against Phlx Price Improving ROT and
specialist price improving orders and orders matching such price-
improving orders entered via the electronic interface with AUTOM
described in this Commentary .04 and that are resting on the limit
order book.
If the Exchange for any reason determines not to deploy Phlx XL, or
if, following the initial deployment of the Phlx XL system, the
deployment of Phlx XL is terminated for any reason, then the Exchange
shall, within 30 days of such determination not to deploy Phlx XL or
termination, ensure that the AUTOM system (or any successor thereto)
automatically executes eligible incoming option orders against Phlx
Price Improving ROT and specialist price improving orders and orders
matching such price-improving orders entered via the electronic
interface with AUTOM described in this Commentary .04 and that are
resting on the limit order book. In such event, the Exchange shall, at
the time of such termination, identify to the Commission and to members
and member organizations the options subject to such automatic
execution, and shall cause all options to be subject to automatic
execution by April 30, 2005.
.05-.07 No change.
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 III below. The Phlx 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 purpose of the proposed rule change is to amend Exchange Rule
1080, Commentary .04, to reflect the proposed
[[Page 6011]]
deployment of the Exchange's proposed new options trading platform,
Phlx XL.
a. Background
In November 2002, the Commission approved proposed amendments to
Exchange Rules 1080 and 1014 adopting a feature of AUTOM known as ``ROT
Access'' to: (i) allow ROTs and specialists to enter price improving
limit orders via electronic interface with AUTOM, subject to certain
contingencies, and (ii) set forth special crowd priority, parity and
trade allocation rules that would only apply to price-improving ROT and
specialist price improving orders entered via electronic interface with
AUTOM.\7\
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\7\ See Securities Exchange Act Release No. 46763 (November 1,
2002), 67 FR 68898 (November 11, 2002) (``ROT Access Proposal'').
According to Phlx, the ROT Access Proposal was submitted as a
temporary solution in response to the Order Instituting Public
Administrative Proceedings Pursuant to Section 19(h)(1) of the
Securities Exchange Act of 1934, Making Findings and Imposing
Sanctions, Securities Exchange Act Release No. 43268 (September 11,
2000) and Administrative Proceeding File 3-10282 (the ``Order''),
which requires, among other things, that the respondent exchanges,
including the Phlx, adopt new, or amend existing, rules concerning
its automated quotation systems which substantially enhance
incentives to quote competitively and substantially reduce
disincentives for market participants to act competitively (the
``Competitive Quoting Undertaking'').
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b. The Modified System
Currently, under ROT Access, inbound orders eligible for execution
against price-improving ROT limit orders entered via the electronic
interface and orders matching such price-improving limit orders are
manually executed by the specialist. The Exchange represented in its
rules relating to ROT Access that the Exchange would modify its AUTO-X
system not later than January 2004, so that it would automatically
execute eligible incoming orders against Phlx Price Improving ROT and
specialist price improving orders and orders matching such price-
improving orders entered via electronic interface with AUTOM resting on
the limit order book (the ``Modified System''). Pursuant to Commentary
.04 to Phlx Rule 1080, the Exchange would deploy the Modified System
over a 15-month period.
Since the adoption of that provision, the Exchange has commenced
the technological development of, and filed for Commission approval of
rules relating to, its electronic trading platform, ``Phlx XL,'' on a
six-month pilot basis.\8\ The Exchange represents to the Commission
that: (i) Phlx XL, which would allow ROTs to stream competitive
proprietary option quotations into the Exchange's system in certain
options designated by the Options Committee as ``Streaming Quote
Options,'' would represent the Exchange's permanent response to the
Competitive Quoting Undertaking, and (ii) ROT limit orders placed
electronically onto the limit order book via the electronic interface
in Streaming Quote Options would be executed automatically, thus
obviating the need for the Modified System for Streaming Quote Options
(i.e., those options traded on Phlx XL).
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\8\ See Phlx XL Proposal, supra note 6.
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c. ROT Access and Phlx XL
Currently, ROTs are permitted by rule to enter electronic price
improving limit orders (and orders matching such limit orders entered
electronically by the specialist or other ROTs in the trading crowd)
onto the limit order book via electronic interface with AUTOM, and are
entitled to receive a special allocation in trades stemming from such
price improving limit orders. Such price-improving limit orders must be
for at least the lesser of the AUTO-X guarantee for the option
(currently defined as the Exchange's disseminated size) or 20
contracts. Under the Phlx XL Proposal, ROTs would continue to be
permitted under Exchange Rule 1080(b)(i)(B) and Commentary .04 to that
rule to place certain limit orders on the limit order book
electronically.
Under the Phlx XL Proposal, the requirement that such limit orders
be price-improving orders would be deleted. Instead, ROTs would be
permitted to place limit orders, including Good-Till-Cancelled
(``GTC'') orders, on the limit order book, regardless of whether such
an order improves the then-prevailing Exchange market. This would apply
to ROT limit orders entered onto the limit order book electronically in
both Streaming Quote Options trading on Phlx XL, and in non-Streaming
Quote Options that are not traded on Phlx XL. ROTs entering limit
orders on the book in both Streaming Quote Options and non-Streaming
Quote Options would be required to submit such orders with a size of at
least 10 contracts. Respecting non-Streaming Quote Options (not traded
on Phlx XL), inbound orders eligible for execution against such limit
orders would be executed and allocated manually by the specialist, as
they are today.
Respecting Streaming Quote Options, inbound AUTOM orders or
electronic quotations eligible for execution against ROT orders entered
into AUTOM via electronic interface by ROTs who elect not to stream
proprietary quotations in such options would be automatically executed
and would be allocated automatically pursuant to proposed Exchange
rules relating to Streaming Quote Options.\9\
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\9\ Id.
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d. The Phlx XL Rollout and the Competitive Quoting Undertaking
Because the Exchange believes that Phlx XL will ultimately be
deployed for all options traded on the Exchange floor-wide, the
Exchange does not believe it is necessary or prudent to invest the
resources required to deploy the Modified System described in current
Rule 1080, Commentary .04, unless the Phlx XL trading platform ceases
to be used by the Exchange for any reason (which the Exchange does not
contemplate), or if the Exchange ultimately determines not to deploy
the Phlx XL platform for all options. Because Phlx XL provides for the
automatic execution of eligible incoming orders against ROT limit
orders, the Exchange believes that it can satisfy the requirement of
the Competitive Quoting Undertaking as it relates to the automatic
execution of ROT limit orders upon the deployment of Phlx XL and as the
Exchange successively introduces additional options to trade on that
platform.
Contingent upon Commission approval of the proposed rules relating
to Phlx XL, and the completion of system development, the Exchange
would commence deployment of Phlx XL beginning with approximately 10
options, pursuant to the deployment schedule set forth in the Phlx XL
Proposal.\10\ The Exchange has not yet determined a floor-wide
deployment date.
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\10\ Id.
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The Exchange, following the initial deployment of Phlx XL, would
not be automatically executing inbound orders against ROT limit orders
in options that are not traded on Phlx XL (thus not providing such
automatic executions in all options). To ensure that the Exchange is in
compliance with the Competitive Quoting Undertaking, the Exchange has
filed this proposal.
The proposed rule provides that the Exchange would commence the
automatic execution of ROT limit orders on the limit order book in
options traded on Phlx XL within 10 days of the Commission's approval
of the system, subject to the various extenuating circumstances
described below.\11\
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\11\ The automatic execution of eligible orders against ROT
limit orders on the limit order book is a proposed functionality of
Phlx XL. Thus, such automatic execution would be effective for those
options traded on Phlx XL upon deployment of the Phlx XL platform.
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[[Page 6012]]
i. If Phlx XL Is Not Deployed or Is Terminated for Any Reason
If the Exchange determines not to deploy Phlx XL or if the
deployment of Phlx XL is terminated for any reason (which is not
contemplated by the Exchange), then the Exchange would, within 30 days
of such determination or termination, ensure that the AUTOM system
automatically executes eligible incoming option orders against Phlx
Price Improving ROT and specialist price improving orders and orders
matching such price-improving orders entered via the electronic
interface with AUTOM, consistent with the Modified System. The Exchange
would identify the options subject to such automatic execution, and
would cause all options to be subject to automatic execution by April
30, 2005.
ii. If Phlx XL Is Deployed For Less Than All Options
The proposed rule would further provide that, if the Phlx XL system
is in operation on April 30, 2005, but less than all of the options
traded on the Exchange are Streaming Quote Options (thus traded on Phlx
XL), then the Exchange would, as of April 30, 2005, ensure that the
AUTOM system automatically executes eligible incoming orders in options
that are not then Streaming Quote Options against Phlx Price Improving
ROT and specialist price improving orders, consistent with the original
proposal for the Modified System.
2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act,\12\ in general, and furthers the objectives of section
6(b)(5) of the Act,\13\ in particular, in that it is designed to
perfect the mechanisms of a free and open market and the national
market system, protect investors and the public interest and promote
just and equitable principles of trade by enabling the Exchange to
continue the development and deployment of Phlx XL while continuing to
enhance the automatic execution of ROT limit orders on the limit order
book which, as interpreted by Commission staff, forms a part of the
requirements of the Competitive Quoting Undertaking.
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\12\ 15 U.S.C. 78f(b).
\13\ 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
No written comments were either solicited or received.
III. 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. Comments may also be submitted electronically at the
following e-mail address: rule-comments@sec.gov. All comment letters
should refer to File No. SR-Phlx-2004-01. This file number should be
included on the subject line if e-mail is used. To help the Commission
process and review comments more efficiently, comments should be sent
in hard copy or by e-mail, but not by both methods. 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-2004-01 and should be
submitted by March 1, 2004.
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.\14\ 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.\15\
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\14\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(b)(5).
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The Commission believes that this proposed rule change should
assist the Exchange by allowing it to focus its resources on the
development and deployment Phlx XL, which, if approved by the
Commission, will be its new electronic trading platform for options and
its permanent response to the Competitive Quoting Undertaking. The
instant proposal should help Phlx to avoid the duplication of
technological efforts by allowing the Exchange to fulfill its
Competitive Quoting Undertaking with the deployment of Phlx XL, which
would occur within 10 days of Commission approval of the system. Thus,
Phlx will be able to avoid altering the Modified System for compliance
purposes while simultaneously developing a successor system, which
would also be designed to fulfill the undertaking. The Exchange
represents that Phlx XL would be designed to automatically execute
eligible incoming option orders against orders placed electronically on
the Exchange's limit order book by ROTs. The Exchange also represents
that if the Phlx XL is either never deployed or deployed and
subsequently terminated for any reason the Exchange would ensure that
the AUTOM system, or any successor system, would include the
functionality to automatically execute eligible incoming option orders
against Phlx Price Improving ROTs' and specialists' price improving
orders and orders matching such price-improving orders entered via the
electronic interface with AUTOM within 30 days of the determination not
to deploy or termination of Phlx XL. In addition, the Exchange would
insure that the AUTOM system would provide the automatic execution
functionality described above by April 30, 2005, if Phlx XL were not
operable for all options traded on the Exchange by that date.
The Commission believes this proposed rule change, as amended,
should allow Phlx to maximize the use of its resources in its efforts
to comply with the Competitive Quoting Undertaking in a timely fashion
as set forth in the Order. Further, the Commission notes that Phlx had
previously committed to modify its Automatic Execution System (AUTO-X)
no later than January 2004, and deploy the system over a 15-month
period.\16\ In the instant proposal, Phlx maintains its commitment to
cause all options to be
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subject to automatic execution by April 30, 2005 (i.e., 15 months from
January 2004), thus, the ultimate timetable that ROT Limit Orders in
all options on the Exchange would be subject to automatic execution
would be unchanged. Accordingly, the Commission finds good cause,
pursuant to section 19(b)(2) of the Act,\17\ for approving the proposed
rule change, as amended, prior to the 30th day after the date of
publication of notice thereof in the Federal Register.
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\16\ See ROT Access Proposal, supra note 7.
\17\ 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,\18\ that the proposed rule change (SR-Phlx-2004-01), as amended,
is hereby approved on an accelerated basis.
\18\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-2647 Filed 2-6-04; 8:45 am]
BILLING CODE 8010-01-P