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Notice

Self Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, Inc. 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

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Start Preamble December 1, 2000.

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 30, 2000, 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. On November 27, 2000, the Phlx filed Amendment No. 1 to the proposed rule change.[3] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons and to approve the amended proposal on an accelerated basis.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Phlx proposes a systems change to “AUTO-X,” the automatic execution feature of the Exchange's Automated Options Market System (“AUTOM”),[4] 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. During such thirty-second period, all orders received via AUTOM would be executed manually by the specialist. The Exchange proposes to implement the systems change on a six-month pilot basis initially involving fifteen to thirty options approved by the Exchange's Options Committee.[5] AUTOM users would be notified of the systems change and of the options included in the pilot program through the issuance of a regulatory circular and on the Exchange's website.[6]

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 purpose of the proposed rule change is to enable the Exchange to take a first step towards the implementation of the dissemination of options quotations with size, as expected to be made available by the Options Price Reporting Authority (“OPRA”) in January, 2001. It is anticipated that the systems change would assist specialists in maintaining fair and orderly markets during peak market activity, by allowing specialists to execute orders delivered via AUTOM manually for a limited period of time after the AUTO-X minimum guarantee is met.

The Exchange's Options Committee, pursuant to its authority under Exchange Rule 1080(c),[7] has determined to propose the implementation of a limited pilot program that would include the following features:

  • 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.
  • When the number of contracts executed automatically for that option meets the AUTO-X guarantee (for example, fifty contracts executed) 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.[8]
  • 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.
  • 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.

The Exchange believes that the pilot program set forth above would enable the Exchange to take a first step towards the implementation of options quotations that include size (i.e., the number of contracts generally available Start Printed Page 77060at the posted bid and ask for a given option). Currently, options quotations are disseminated without size.[9] The “counting” feature of the proposed system change would function 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 dissemination of options quotations with size. Thus, the proposed pilot program should allow the Exchange to begin the process of moving towards the implementation of quotations with size.[10]

It is also anticipated that the system change would assist specialists in maintaining fair and orderly markets during peak market activity, by allowing specialists to execute orders delivered via AUTOM manually for a limited period of time after the AUTO-X minimum guarantee is met to enable specialists to refresh their quotes.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with section 6 of the Act [11] in general, and with section 6(b)(5) in particular,[12] 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 the Exchange to prepare for the dissemination of option quotes with size, and by enabling Exchange specialists to maintain fair and orderly markets during periods of peak market activity.

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, 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 thay 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 the File No. SR-Phlx-00-96 and should be submitted by December 29, 2000.

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. 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.[13] The Commission believes that the proposed rule change 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.

The Commission notes that the Exchange is implementing the proposed systems change to AUTO-X on a pilot basis in a limited number of options, which should enable the Phlx to evaluate the program's effectiveness with respect to dissemination of quotations with size, and whether the change is assisting its specialists in maintaining a fair and orderly market. Specifically, the Commission notes that the Exchange has represented that it will evaluate the pilot program by reviewing specialists' performance in the selected options, and by monitoring and complaints relating to the pilot program. Furthermore, the Commission believes that the Phlx has provided adequate notice of the proposed change to AUTO-X to members, member organizations, and the public. The Commission notes that the Exchange has represented that it will 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.

Finally, the Commission, pursuant to section 19(b)(2) of the Act,[14] finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice thereof in the Federal Register.[15] The Commission believes that granting accelerated approval to this pilot program will allow Phlx to evaluate, without delay, the effectiveness of this systems change to AUTO-X and whether the change allows Phlx specialists the opportunity to update their quotes and maintain a fair and orderly market. Accordingly, the Commission finds that there is good cause, consistent with section 19(b)(2) of the Act,[16] to approve the proposal on an accelerated basis.

V. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Act,[17] that the proposed rule change (SR-Phlx-00-96) and Amendment No. 1 thereto, are hereby approved on an accelerated basis.

Start Signature
Start Printed Page 77061

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[18]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. Sanow, Assistant Director, Division of Market Regulation, Commission, dated November 24, 2000 (“Amendment No. 1”). In Amendment No. 1, the Phlx clarified certain aspects of the proposed rule change. Among other things, Amendment No. 1: (i) Specifies the number of, and selection criteria for, options selected for the pilot program; (ii) represents that the Exchange will post on its website a list of options included in the program and will issue a circular to this effect; (ii) clarifies that orders received by AUTO-X that exceed the minimum guarantee will receive a partial automatic execution; and (iv) clarifies that upon the implementation of quotes with size, initially size will not be decremented, and the specialist will be responsible to fill orders at its disseminated quote up to the disseminated size.

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4.  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 trading floor.

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5.  See Amendment No. 1, supra note 3.

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6.  See Amendment No. 1, supra note 3.

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7.  Exchange Rule 1080(c) provides, in relevant part, that “[t]he Options Committee may for any period restrict the use of AUTO-X on the Exchange in any option series.” See Securities Exchange Act Release No. 38792 (June 30, 1997), 62 FR 36602 (July 8, 1997) (SR-Phlx-97-24).

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8.  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 Amendment No. 1, supra note 3.

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9.  Currently, Exchange specialists and registered options traders (“ROTs”) are required to fill orders at the best market to a minimum of ten contracts. See Exchange Rule 1015(a). Exchange Rule 1080(c) provides that orders with a size of up to seventy-five contracts, subject to the approval of the Options Committee, are eligible for automatic execution via AUTO-X. However, quotations disseminated for options do not currently reflect the minimum AUTO-X size guarantee for a given option, or any size. Rather, AUTOM customers are advised of the minimum size guarantee by way of regularly published memoranda that include a list of all AUTO-X eligible options and the minimum guaranteed AUTO-X size for each such option. A major OPRA enhancement to the dissemination of quotations, to include size, is anticipated in January, 2001.

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10.  Specialists will be required to fill orders up to the AUTO-X guarantee size. Upon the implementation of quotes with size, initially size will not be decremented, and the specialist will be responsible to fill orders at the disseminated quote up to the disseminated size. See Amendment No. 1, supra note 3.

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15.  In approving this proposal, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 00-31299 Filed 12-7-00; 8:45 am]

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