[Federal Register Volume 67, Number 100 (Thursday, May 23, 2002)]
[Notices]
[Pages 36287-36289]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 02-12896]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-45932; File No. SR-Phlx-00-93]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to that Portion of Proposed Rule Change Not
Previously Granted Accelerated Approval, as Amended by Amendment Nos.
4, 5, 6, and 7 thereto, Relating to Providing Automatic Executions for
Public Customer Orders at the NBBO
May 15, 2002.
I. Introduction
On September 18, 2001, January 15, 2002, March 1, 2002, March 8,
2002, and April 3, 2002, the Philadelphia Stock Exchange, Inc.
(``Phlx'' or ``Exchange'') 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\ Amendment Nos. 3,\3\ 4,\4\ 5,\5\ 6,\6\ and 7,\7\
respectively, to a proposed rule change \8\ relating to providing
automatic executions for public customer orders at the national best
bid or offer (``NBBO''). The Commission published for comment the
proposed rule change, along with Amendment Nos. 1 and 2, in the Federal
Register on December 14, 2000,\9\ and granted partial accelerated
approval to those portions of the proposed rule change and Amendment
Nos. 1 and 2 relating to the automatic execution of eligible orders at
the NBBO, provided that the NBBO is not better than the specialist's
best bid or offer (``BBO'') by a predetermined ``step-up parameter.''
Amendment Nos. 4, 5, 6, and 7, were published for comment in the
Federal Register on April 15, 2002.\10\ The Commission received no
comments on Amendment Nos. 4, 5, 6, and 7. This order approves that
portion of the proposed rule change not previously granted accelerated
approved, as amended by Amendment Nos. 4, 5, 6, and 7.
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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, Counsel, Phlx, to Nancy
Sanow, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated September 18, 2001 (``Amendment
No. 3'').
\4\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy
J. Sanow, Assistant Director, Division, Commission, dated January
15, 2002 (``Amendment No. 4). Amendment No. 4 superseded and
replaced Amendment No. 3 in its entirety.
\5\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy
J. Sanow, Assistant Director, Division, Commission, dated February
28, 2002 (``Amendment No. 5'').
\6\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy
J. Sanow, Assistant Director, Division, Commission, dated March 7,
2002 (``Amendment No. 6'').
\7\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy
J. Sanow, Assistant Director, Division, Commission, dated April 2,
2002 (``Amendment No. 7'').
\8\ The Exchange filed this proposed rule change pursuant to the
requirements of Section IV.B.h.(i)(bb) of the Commission's September
11, 2000 Order Instituting Public Administrative Proceedings
Pursuant to Section 19(h)(1) of the Act, which required the Phlx (as
well as the other floor-based options exchanges) to adopt new, or
amend existing, exchange rules concerning automatic quotation and
execution systems which specify the circumstances, if any, by which
automatic execution systems would be disengaged or operated in any
manner other than the normal manner set forth in the exchange's
rules; and, requires the documentation of the reasons for each
decision to disengage an automatic execution system or operate it in
any manner other than the normal manner. See Securities Exchange Act
Release No. 43268 (September 11, 2000), Administrative Proceeding
File No. 3-10282.
\9\ See Securities Exchange Act Release No. 43684 (December 6,
2000), 65 FR 78237 (December 14, 2000) (``Original Filing''). The
Commission received one comment letter on the Original Filing. See
letter from Edward J. Joyce, President and Chief Operating Officer,
Chicago Board Options Exchange, Inc. (``CBOE''), to Mr. Jonathan G.
Katz, Secretary, Commission, dated February 8, 2001. In its comment
letter, CBOE recommended that the Phlx amend its rule to require the
Exchange to make and keep a written record of decisions to remove an
exchange from the Phlx's calculation of the National Best Bid or
Offer (``NBBO'') and to notify an exchange when its markets have
been removed from the Phlx's NBBO calculation. In response to CBOE's
comments, Phlx proposed Amendment Nos. 5 and 6.
\10\ See Securities Exchange Act Release No. 45757 (April 9,
2002), 67 FR 19605 (April 15, 2002).
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II. Description of the Proposal
In the Original Filing, the Phlx proposed an enhancement to AUTO-X,
the automatic execution feature of the Exchange's Automated Options
Market (``AUTOM'') System, that would allow AUTO-X eligible orders to
be automatically executed at the NBBO, provided that the NBBO is not
better than the specialist's BBO by a predetermined ``step-up
parameter.'' \11\ This enhancement is known as the ``NBBO Step-Up
Feature.'' The Commission granted accelerated approval to this part of
the Original Filing. In addition, in the Original Filing, the Phlx
proposed to permit the Chairman of the Options Committee or his
designee (or if the Chairman of the Options Committee or his designee
is unavailable, two Floor Officials) to determine that, if the NBBO
Step-Up Feature was activated and quotes in certain automatic step-up
options on the Exchange or other markets were deemed not to be
reliable, such unreliable quotes would be excluded from the calculation
of NBBO and customers would receive an automatic execution at NBBO
based
[[Page 36288]]
on the remaining markets whose quotes were not deemed to be unreliable.
The Original Filing proposed that quotes would be determined to be
unreliable due to Exchange communications or systems problems; fast
markets; delays in the dissemination of quotes because of queues on the
Options Price Reporting Authority (``OPRA'') which would likely render
such quotes stale; or if the Exchange is advised by another exchange
that it is experiencing communication or system problems that would
cause its disseminated quotes to be unreliable. The Commission did not
approve this part of the Original Filing and the Phlx subsequently
filed Amendment Nos. 3, 4, 5, 6, and 7 with the Commission.\12\
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\11\ For a full discussion of Phlx's proposal, see the Original
Filing.
\12\ This proposal would apply to all situations in which the
NBBO Step-Up Feature was engaged. The Commission, in a separate
order, is approving a related proposed rule change regarding the
exclusion of certain quotes from the Phlx's calculation of the NBBO
when the NBBO Step-Up Feature is not engaged. See Securities
Exchange Act Release No. 45931 (May 15, 2002) (File No. SR-Phlx-
2001-35).
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In Amendment No. 4, the Phlx proposed to limit the factors that the
Chairman of the Options Committee or his designee \13\ (or if the
Chairman of the Options Committee or his designee is unavailable, two
Floor Officials), may rely upon to determine that quotes in options on
the Exchange or another market or markets are unreliable.\14\ Such
determination could be made by way of notification from another market
that its quotes are not firm or are unreliable; administrative message
from the Option Price Reporting Authority (``OPRA'') indicating that
another market's quotes are unreliable; quotes received from another
market designated as ``not firm'' using the appropriate indicator; and/
or telephonic or electronic inquiry to, and verification from, another
market that its quotes are not firm.\15\ In addition, AUTOM customers
would be duly notified via electronic message from AUTOM that such
quotes are excluded from the calculation of NBBO.\16\
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\13\ Such designee must be a member of the Options Committee.
\14\ See Amendment No. 4, supra note 3.
\15\ Id.
\16\ Id.
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Further, where the Chairman of the Options Committee or his
designee (or if the Chairman of the Options Committee or his designee
is unavailable, two Floor Officials), determines that responsible
brokers or dealers on the Exchange or another market or markets
previously relieved of their obligations under the Commission's Quote
Rule \17\ are no longer subject to such relief, the quotations of such
responsible broker or dealer would be included in the calculation of
the NBBO for such options. Such determination would be permitted to be
made by way of notification from another market that its quotes are
firm; administrative message from OPRA indicating that another market's
quotes are no longer unreliable; and/or telephonic or electronic
inquiry to, and verification from, another market that its quotes are
firm.\18\ AUTOM customers would be duly notified via electronic message
from AUTOM that such quotes are again included in the calculation of
NBBO.\19\
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\17\ Rule 11Ac1-1 under the Act, 17 CFR 240.11Ac1-1.
\18\ Id.
\19\ Id.
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In Amendment No. 5, the Exchange: (1) Clarified that pursuant to
the proposed rule change it would be permitted to determine to exclude
quotes from its calculation of the NBBO on a series-by-series basis or
class-by-class basis, or to determine to exclude all options quotes
from an exchange, where appropriate; (2) represented that it maintains,
on a daily basis, records of each instance in which it determines to
exclude quotes from another exchange from the Exchange's calculation of
the NBBO on a daily basis; and (3) stated that it would notify other
exchanges of the determination to exclude its quotes from the
Exchange's calculation of the NBBO and of any determination to re-
include such exchange's quotes in the Exchange's calculation of the
NBBO.\20\
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\20\ See Amendment No. 5, supra note 4.
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In Amendment No. 6, the Phlx proposed to require the Exchange to
maintain a record of each instance in which another exchange's quotes
are excluded from the Exchange's calculation of the NBBO, and to notify
such other exchange that its quotes have been so excluded.\21\
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\21\ See Amendment No. 6, supra note 5.
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In Amendment No. 7, the Phlx proposed to amend the rule text to
provide that documentation of each instance in which another exchange's
quotes are excluded from the Exchange's calculation of NBBO would
include: identification of the option(s) affected by such action; the
date and time such action was taken and concluded; identification of
the other exchange(s) whose quotes were excluded from the Exchange's
calculation of NBBO; identification of the Chairman of the Options
Committee, his designee, or two Floor Officials (as applicable) who
approved such action; the reasons for which such action was taken; and
identification of the specialist and the specialist unit. The Exchange
would maintain these documents pursuant to the record retention
requirements of the Act and the rules and regulations thereunder.\22\
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\22\ See Amendment No. 7, supra note 6.
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III. Discussion
After careful review, the Commission finds that the portion of the
proposed rule change not previously granted accelerated approval, as
amended by Amendment Nos. 4, 5, 6, and 7, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange \23\ and, in particular,
the requirements of Section 6 of the Act \24\ and the rules and
regulations thereunder. The Commission finds specifically that the
proposed rule change is consistent with Section 6(b)(5) of the Act \25\
because it provides objective criteria and well-defined procedures for
excluding another market's quote from the Phlx's determination of the
NBBO, which should increase the likelihood that Phlx's NBBO will more
accurately reflect the actual state of the market at a given time.
Specifically, the Commission notes that the determination of the
Chairman of the Options Committee or his designee (or if the Chairman
of the Options Committee or his designee is unavailable, two Floor
Officials) to exclude unreliable quotes is limited to circumstances in
which the away market has either directly communicated or confirmed
that its quotes are unreliable. In this way, the discretion afforded to
Phlx officials to determine that another market's options quotes are
unreliable is appropriately limited. Moreover, the record keeping
requirements and other proposed procedures are not unreasonable.
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\23\ In approving this proposed rule change, the Commission
notes that it has considered its impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\24\ 15 U.S.C. 78f.
\25\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the portion of the proposed rule change not previously
granted accelerated approval (SR-Phlx-00-93), as amended by Amendment
Nos. 4, 5, 6, and 7, is approved.
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\26\ Id.
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12896 Filed 5-22-02; 8:45 am]
BILLING CODE 8010-01-P