thefederalregister.org Federal Register Research Archive

Document

Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto 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

Securities and Exchange Commission [Release No. 34-45090; file No. SR-Phlx-2001-100 Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"), [ 1 ] and rule 1...

PDF versionSource Record
Securities and Exchange Commission
  1. [Release No. 34-45090; file No. SR-Phlx-2001-100

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, 2001, the Philadelphia Stock ( printed page 59835) 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 8, 2001, the Phlx filed Amendment No. 1 to the proposed rule change.[3] On November 19, 2001, the Phlx filed Amendment No. 2 to the proposed rule change.[4] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons and to approve the proposal, as amended, on an accelerated basis, for an additional six-month pilot, expiring on May 31, 2002.

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”),[5] 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,[6] and subsequently extended for an additional six-month period.[7] Recently, the number of options eligible for the pilot was expanded to include all Phlx-traded options.[8] The current pilot is scheduled to expire on November 30, 2001.

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.[9] The pilot program was then extended for an additional six months and is currently scheduled to end on November 30, 2001.[10] The pilot program includes the following features:

  • 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 AUTO-X guarantee, regardless of the number of executions.
  • When the number of contracts executed automatically for that option meets the AUTO-X guarantee 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]
  • 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.

A significant purpose of this pilot program is to enable the Exchange to move towards the dissemination of options quotations with size.[12] 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 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 systems necessary for the dissemination of options quotations with size. Thus, the proposed extension of the pilot program should allow the Exchange to continue its efforts in the process of moving towards the implementation of quotations with size.

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 the Commission 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 ( printed page 59836) the revision of a quotation in one single series.[13]

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with Section 6 of the Act [14] in general, and with Section 6(b)(5) in particular,[15] 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.

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-2001-100 and should be submitted by December 21, 2001.

IV. Commission's Finding 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.[16] 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.[17] The Commission believes that an extension of the pilot program for an additional six months should help the Exchange to prepare for disseminating 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 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 Exchange noted that Phlx Rule 1080(c) provides the Phlx's Options Committee discretion to restrict the use of AUTO-X in any options series. The Exchange also clarified that orders would not be executed at an inferior price simply because they are routed to the specialist for manual handling; the orders would be handled in a manner consistent with the Exchange's rules on priority, parity, and precedence and in compliance with SEC's Quote Rule and Phlx Rule 1082 (“Firm quotations“). In addition, 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.[18] Consequently, the Commission believes that extending the pilot program for an additional six months should enable the Phlx to further evaluate the effect of disengaging AUTO-X under certain circumstances.

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 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]

Finally, the Commission finds good cause, pursuant to section 19(b)(2) of the Act,[21] for approving the proposed rule change, as amended, prior to the thirtieth day after the date of publication of notice thereof the Federal Register . 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.

V. Conclusion

It Is Therefore Ordered , pursuant to Section 19(b)(2) of the Act,[22] that the proposed rule change (SR-Phlx-2001-100), as amended, is hereby approved on an accelerated basis, as a six-month pilot, scheduled to expire on May 31, 2002.

November 21, 2001.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[23]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

3.   See Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated November 7, 2001 (“Amendment No. 1”). In Amendment No. 1, the Phlx amended its proposal by deleting a paragraph inadvertently placed in its original filing. The Phlx also clarified that it was taking steps to address the possibility of re-engaging AUTO-X prior to thirty seconds if the specialist revises its quote before thirty seconds.

Back to Citation

4.   See Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy J. Sanow, Assistant Director, Division, Commission, dated November 16, 2001 (“Amendment No. 2”). In Amendment No. 2, the Phlx confirmed that it has completed all actions required to be taken under its by-laws and rules. The Phlx's Executive Committee, pursuant to delegated authority, approved the proposed rule change for filing with the Commission on November 13, 2001.

Back to Citation

5.  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.

Back to Citation

6.   See Securities Exchange Act Release No. 43652 (December 1, 2000), 65 FR 77059 (December 8, 2000) (SR-Phlx-00-96) (“Initial Pilot Program”).

Back to Citation

7.   See Securities Exchange Act Release No. 44362 (May 29, 2001), 66 FR 30037 (June 4, 2001) (SR-Phlx-2001-56).

Back to Citation

8.   See Securities Exchange Act Release No. 44760 (August 31, 2001), 66 FR 47253 (September 11, 2001) (SR-Phlx-2001-79).

Back to Citation

9.   See supra note 6.

Back to Citation

10.   See supra note 7.

Back to Citation

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 6.

Back to Citation

12.  Currently, the size of any disseminated bid or offer by the Exchange is equal to the AUTO-X guarantee for the quoted option, except that the disseminated size of bids and offers of limit orders on the book is ten contracts and is firm regardless of the actual size of such orders. See Exchange Options Floor Procedure Advice F-7. The Exchange has established this rule setting forth the size for which its quotes are firm, and periodically publishes that size in accordance with recently amended Rule 11Ac1-1 under the Act (the “Quote Rule”). See Securities Exchange Act Release No. 44145 (April 2, 2001), 66 FR 18662 (April 10, 2001) (SR-Phlx-01-37). The pilot program is designed, in part, to enable the Exchange to roll out the system designed to decrement the disseminated size of Exchange quotes once such system is deployed.

Back to Citation

13.  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. Division staff have informed the Phlx that it would not grant the pilot program permanent approval unless the Phlx addresses this issue.

Back to Citation

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

Back to Citation

18.   See supra note 13.

Back to Citation

19.  Telephone conversation between Richard S. Rudolph, Counsel, Phlx, and Sapna C. Patel, Attorney, Division, Commission, on November 16, 2001.

Back to Citation

20.   Id. Phlx also represented that it would include language in its circular clarifying that AURO-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 Sapna C. Patel, Attorney, Division, Commission, on November 16, 2001.

Back to Citation

22.   Id.

Back to Citation

[FR Doc. 01-29718 Filed 11-29-01; 8:45 am]

BILLING CODE 8010-01-M

Legal Citation

Federal Register Citation

Use this for formal legal and research references to the published document.

66 FR 59834

Web Citation

Suggested Web Citation

Use this when citing the archival web version of the document.

“Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto 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,” thefederalregister.org (November 30, 2001), https://thefederalregister.org/documents/01-29718/self-regulatory-organizations-notice-of-filing-and-order-granting-accelerated-approval-of-proposed-rule-change-and-amend.