Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, notice is hereby given that on March 5, 2001, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Phlx. The Phlx submitted amendments to the proposed rule change on August 29, Start Printed Page 587722001  and October 31, 2001. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Phlx proposes to amend Commentary .01 to Exchange Rule 1080, Philadelphia Stock Exchange Automated Options Market (“AUTOM”) and Automated Execution System (“AUTO-X”), to add language providing an enhanced description of Auto-Quote, the Exchange's electronic options pricing system and to permit the specialist to consult with the trading crowd in setting Auto-Quote parameters. The proposed language would be set forth in new subsection (b) of the Commentary .01. The text of the proposed rule change is set forth below. New language is in italics. Deletions are in brackets.
Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM) and Automatic Execution System (AUTO-X)
(a)-(j) No change.
(a) Automatic Quotation (Auto-Quote) is the Exchange's electronic options pricing system, which enables specialists to automatically monitor and instantly update quotations.
(b)(i) The Auto-Quote System includes three commonly used options pricing algorithms: the Black Scholes Option Pricing Model; the Cox, Ross and Rubenstein Binomial Option Pricing Model; and the Barone, Adesi and Whaley American Option Pricing Model. In addition, a specialist may separately employ other pricing models, by establishing a specialized connection by-passing the Exchange's Auto-Quote System, which is known as a specialized quote feed.
(ii) Specialists determine which model to select per option and may change models during the trading day. Each pricing model requires the specialist to input various parameters, such as interest rates, volatilities (delta, vega, theta, gamma, etc.) and dividends. The specialist may, but is not required to (a) consult with and/or (b) agree with the trading crowd in setting these parameters or selecting a model, but the members of the trading crowd are not required to provide input in these decisions, and in all cases, the specialist has the responsibility and authority to make the final determination.
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 IV 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
The purpose of the proposed rule change is to codify a description of the Exchange's Auto-Quote system, which electronically prices options, and to permit the specialist to consult with the trading crowd in setting Auto-Quote parameters. On September 11, 2000, the Commission issued an order  that requires the options exchanges to adopt new, or amend existing, rules to include any practice or procedure, not currently authorized by rule, whereby market makers determine by agreement the spreads or option prices at which they will trade any option, or the allocation of orders in that option. This proposed rule change is being submitted pursuant to this undertaking.
Currently, Exchange Rule 1080 governs the operation of AUTOM, the Exchange's automated order routing, delivery, execution and reporting system for options. Auto-Quote, one feature of AUTOM, is currently defined in Commentary .01 as the Exchange's electronic options pricing system, which enables specialists to automatically monitor and instantly update quotations.
Phlx option quotations are maintained and updated electronically through Auto-quote, which generates automatic pricing of all option series and allows modification of pricing models to guarantee accurate reflection of option prices based on the value of the underlying stock. Auto-Quote also facilitates dissemination of improving bid/offer prices for orders entered through AUTOM. Auto-Quote provides for the dissemination of appropriate and accurate prices through automatic updating.
The proposed rule change incorporates a more thorough description of Auto-Quote into Exchange rules. First, it describes its various pricing models, inputs, and parameters. Second, it provides that specialists may establish a specialized proprietary connection (“specialized quote feed”) that by-passes the Auto-Quote system. Finally, it provides that while the specialist selects the pricing model and inputs for Auto-Quote, he or she may (but is not required to and may, for proprietary business reasons, determine not to) consult with the trading crowd on the pricing model and the inputs to be used. The proposed rule change also provides that if the specialist consults with one member of the crowd, all members of the crowd present must be given the opportunity to provide input. However, members of the trading crowd would not be required Start Printed Page 58773to provide input to the specialist in setting Auto-Quote parameters.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with section 6(b) of the Act  in general and furthers the objectives of section 6(b)(5)  in particular in that it is designed to promote just and equitable principles of trade, remove impediments to a free and open market and a national market system, and protect investors and the public interest by clarifying and describing Auto-Quote, including the specialized quote feed, in Exchange rules.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Phlx does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
The Phlx did not solicit or receive written comments on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Phlx consents, the Commission will:
(A) by order approve such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
IV. 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 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 filings will also be available for inspection and copying at the principal office of the Phlx. All submissions should refer to the File No. SR-Phlx-2001-25 and should be submitted by December 14, 2001.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
3. Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated August 28, 2001 (“Amendment No. 1”). Among other things, Amendment No. 1: (i) States the reasons why a specialist would wish to consult with the trading crowd about specific Auto-Quote parameters; (ii) clarifies that if a specialist decides to consult with one member of the trading crowd about the Auto-Quote parameters, all members of the crowd that are present at the time must be given the opportunity to consult; and (iii) revises proposed Commentary .01(b)(ii) to Phlx Rule 1080 to state that the specialist may determine which model to select per option, not per series, as previously stated.Back to Citation
4. Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. Sanow, Assistant Director, Division, Commission, dated October 30, 2001 (“Amendment No. 2”). Amendment No. 2 revises the text of proposed Commentary .01(b)(ii) to Phlx Rule 1080 to clarify that where the specialist determines to consult with and/or agree with the trading crowd with respect to selecting the Auto Quote System model or setting the parameters, members of the trading crowd are not required to provide input to the specialist about these decisions.Back to Citation
5. See Order Instituting Public Administrative Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions. Securities Exchange Act Release No. 43268 (September 11, 2000) (“Order”).Back to Citation
6. See Section IV.B.j. of the Order.Back to Citation
7. This new language is being proposed inasmuch as the specialist's consultation with market makers on the pricing model and Auto Quote parameters could be viewed as determining option prices by agreement for purposes of the Order and is therefore required by the Order to be provided for in Exchange rules. The specialist may elect to discuss the pricing model with market makers for any reason, including as a check against possible error in use of the model. The specialist also may determine that such discussions are appropriate in view of the fact that the disseminated quote is deemed to be the quote of the ROTs in the crowd, unless the ROT clearly and audibly communicates, on a timely basis, an intent to adopt a different quote. See Phlx Rule 1080, Commentary .01(c).Back to Citation
8. See Amendment No. 1, supra note 3.Back to Citation
9. See Amendment No. 2, supra note 4.Back to Citation
[FR Doc. 01-29248 Filed 11-21-01; 8:45 am]
BILLING CODE 8010-01-M