[Federal Register Volume 63, Number 240 (Tuesday, December 15, 1998)]
[Notices]
[Pages 69128-69132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33136]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40750; File No. SR-Phlx-98-54]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to Proposed Rule Change by the
Philadelphia Stock Exchange, Inc. Instituting a One-Year Pilot Program
to Return Phlx Dell Options to Trading on the Phlx Options Trading
Floor Using Amex Technology
December 4, 1998.
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 December 2, 1998, 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 December 4, 1998, the Exchange submitted Amendment No. 1 to the
proposed rule change.\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons
and to grant accelerated approval to the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Edith Hallahan, Deputy General Counsel,
Phlx, to Michael Walinskas, Deputy Associate Director, Commission,
dated December 3, 1998 (``Amendment No. 1''). In Amendment No. 1,
the Exchange proposes Commentaries to Phlx Rules 1051-1055 to
accommodate the use of Amex technology to trade Phlx Dell options.
The remaining substance of Amendment No. 1 is incorporated into this
notice and order granting accelerated 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 institute a one-year pilot program to return
Phlx Dell options to the Phlx trading floor from the American Stock
Exchange, L.L.C. (``Amex'') trading floor using Amex technology on or
about December 7, 1998. Amex technology would be used to enter, execute
and process transactions on the Phlx trading floor in Phlx Dell
options. Despite the use of Amex technology, the Phlx will continue to
be responsible for surveillance of Phlx Dell options and Phlx
transaction charges will continue to apply. Phlx rules will also
continue to apply, except as outlined below.
The Exchange notes that operational functions respecting these
options will be handled by Amex systems, including quotation
processing, booking orders, transaction processing, trade correction,
and submission to clearing through The Options Clearing Corporation
(``OCC'').
The Exchange has re-addressed the application of certain Phlx rules
that are impacted by Amex technology, determining that the following
Phlx rules, as discussed below, would not apply or would require
modification or interpretation: 1051, 1052, 1053, 1054, 1055, and 1080.
The text of the proposed rule change is available at the Office of
the Secretary, Phlx and at the Commission.
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 trade Phlx Dell
options on the Phlx trading floor using Amex technology on a pilot
basis for one-year. In addition, the Phlx proposes the ability to
switch back from Amex to Phlx technology, with certain notification.
[[Page 69129]]
Background. On June 12, 1998, the Phlx received Commission approval
to relocate Phlx Dell options to the Amex trading floor on a temporary
basis.\4\ As part of the relocation, Amex trading systems and
technology are currently used on the Amex trading floor for automated
order entry and execution, quotation processing, booking orders,
transaction processing, trade correction, and clearing through OCC. The
relocation proposal expires on December 12, 1998.
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\4\ See Securities Exchange Act Release No. 40088 (June 12,
1998), 63 FR 33426 (June 18, 1998) (``June Dell options order'').
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Since the relocation in June, trading in Phlx Dell options has
significantly increased.\5\ The Exchange believes that the increase in
volume is due in part to the perception among order flow providers that
efficient customer order entry and executions have resulted from Amex
systems. Thus, the Exchange proposes to continue to use Amex technology
upon the return of Phlx Dell options to the Phlx trading floor. The
Exchange believes that continuing to use Amex systems may limit
customer confusion as well as continue to provide efficient order entry
and executions, based upon the experience in trading Phlx Dell options
on the Amex.
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\5\ Volume has increased 66% since June from 38,418 contracts
per day before the move to 50,615 contracts per day after the move.
Recently, daily volume has exceeded 55,000 contracts.
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The Exchange continues to implement technological improvements to
its AUTOM \6\ System, such as upgrading the features of its electronic
limit order book, the X-Station. Specifically, the Exchange is in the
process of implementing the X-Station on a floor-wide basis, featuring
improved cancellation order processing.\7\ The Phlx continues to
believes that its improvements are benefiting AUTOM users. In addition,
the Exchange intends to implement other system enhancements, such as
the inclusion of market data on the X-Station and an alert for quote
throughs. The Phlx also remains committed to continuing to address
AUTOM users, including a focus on active options such as Dell. Despite
the return of Phlx Dell options to the Phlx trading floor using Amex
technology, all other Phlx options will continue to trade using Phlx
technology, including the AUTOM System.
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\6\ The Phlx Automated Options Market (AUTOM) System is the
Exchange's electronic order delivery system, which provides
automatic entry and routing of option orders to the Exchange trading
floor, pursuant to Phlx Rule 1080.
\7\ The Exchange notes that improved cancel-replace order
processing was perceived as one reason to relocate Phlx Dell options
to the Amex.
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Phlx Option. Because Phlx Dell options will be processed and
cleared through Amex systems, a quotation in Phlx Dell options located
on the Phlx will still appear as an Amex quote. For instance, vendor
systems may indicate that Dell is an ``Amex'' option. Further, Phlx
Dell options trades will appear in market data systems as Amex trades
and may be cleared with other Amex trades. Accordingly, trades cleared
by OCC may have Amex identifier codes on certain OCC reports.
Nevertheless, Dell continues to be a Phlx option.\8\ OCC has previously
advised its members that Phlx Dell options are registered, listed and
traded under the rules of Phlx.\9\ Phlx Dell options volume will
subsequently be attributed to the Phlx for various purposes, including
the determination of Option Price Reporting Authority (``OPRA'')
revenues.
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\8\ The Exchange intends to seek interpretative relief from
Commission Rule 10b-10 that representing that an options transaction
took place on the Amex does not constitute a false statement by the
broker-dealer issuing the transaction confirmation.
\9\ Phlx Dell options are currently registered by OCC as
securities listed on Phlx via a Form 8 amendment under the Act.
Trading Phlx Dell options using Amex technology in no way suggests
that these options are listed on the Amex.
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Due to the use of Amex technology to trade Phlx Dell options, the
Phlx represents that Amex will be responsible for reporting system
outages as well as other system events pursuant to the Commission's
Automation Review Policy (``ARP'') and related regulatory review
requirements \10\ Phlx also represents that Amex will also be
responsible for communicating with its systems users regarding system
outages and changes and other system-related events.
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\10\ See Securities Exchange Act Release Nos. 27445 (Nov. 16,
1989), 54 FR 48703 (Nov. 24, 1989); and 29185 (May 9, 1991), 56 FR
22490 (May 15, 1991). ARP I and ARP II are Commission policy
statements that provide guidelines for the review and assessment of
information technology resources and supporting trading and
information dissemination systems.
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Amex Technology--Trade Processing. With respect to option trade
processing, the Amex and Phlx systems operate differently, primarily
because of the timing and method of submission of trade participant
information. Phlx executions are reported as ``matched trades'' through
the AUTOM System, including complete participant clearing information
at the time of execution, for submission to OPRA. Also at that time,
initial comparison has occurred.
Amex verification and reconciliation, on the other hand, takes
places throughout the day \11\ via the Intra-Day Clearing (``IDC'')
system, separate from trade reporting functions. IDC provides an on-
line, input-driven correction facility between member firms and the IDC
system. IDC terminals are operational throughout the trading day.
Members with a password have the ability to access uncompared,
advisory, rejected, and force match option trades. The IDC system
allows clearing information to be input during the trading day rather
than at the time of execution, separating and reducing the amount of
information inputted at the time of execution for trade reporting
purposes.
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\11\ The Exchange notes that this pertains to manually executed
orders, such as trades between two Registered Options Traders
(``ROTs'') or trades manually executed by a floor broker. Orders
executed through Amex's Auto-Ex system or by the specialist through
Amex Options Display Book, however, are automatically entered upon
execution into the IDC system as a compared traded similar to Phlx
trades. See Amendment No. 1, supra note 3.
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As a result of these differences in trade processing by Amex
systems, Phlx Rules 1051-1055 are affected. Rule 1051, General
Comparison and Clearance Rule, provides that all Exchange options
transactions shall be reported to the Exchange at the time of execution
for comparison of trade information at the specialist's post and all
compared transactions shall be cleared through the OCC. Proposed
Commentary .01 will clarify that utilizing Amex technology for Phlx
Dell options results in the submission of some, but not all, trade
information at the specialist's post, as clearing and detailed
participant information would follow via IDC.
Rule 1052, Responsibility Of Clearing Options Member For Exchange
Options Transactions, places responsibility on clearing member
organizations to clear Exchange options transactions. Proposed
Commentary .01 will clarify that Phlx Dell options trading on Amex
technology are ``Exchange'' transactions for this purpose as well.
Phlx Rules 1053, Filing of Trade Information, and 1054,
Verification Of Contracts and Reconciliation Of Uncompared Trades,
require certain trade information should be supplied or verified at the
time of execution.\12\ These rules also provide that such information
should be in a form prescribed by the Exchange, and, respectively, in
accordance with procedures established by the Exchange. The Phlx
proposes that, with respect to an option trading using Amex
[[Page 69130]]
technology, some trade information (such as clearing and participant
information) need not be reported at the time of execution at the
specialist post and that these are Exchange transactions for the
purposes of Rule 1053 and 1054.
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\12\ Phlx Option Floor Procedure Advice F-2 will apply to Phlx
Dell options trading using Amex technology, such that it is the duty
of the largest participant to report the trade. In the event that
there is only one buyer and seller, the seller is required to report
the trade.
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Phlx Rule 1055, Reporting Of Compared Trades To Options Clearing
Corporation, will continue to apply to Dell options as it requires the
Exchange to furnish OCC with a report of all compared trades based on a
comparison service performed by the Exchange on that day, which will
incorporate the IDC system described above. Proposed Commentary .01
stats that Amex technology shall furnish the report and perform the
comparison service referred to in this Rule. In addition, the proposal
deletes a reference to Rule 1075 \13\ in Rule 1055.\14\
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\13\ The Commission notes that Phlx does not currently have a
Rule 1075. As such, the deletion of this reference from Rule 1055 is
not a substantive change.
\14\ See Amendment No. 1, supra note 3.
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Amex Technology--Automated Order Entry and Execution. Amex
technology \15\ regarding automated options order routing occurs
through the Common Message Switch (``CMS'').\16\ The Exchange shall
provide prior written notice to the Exchange membership describing key
elements of Amex technology and the resulting order routing
implications. With respect to contra-side participation for
automatically executed trades, Amex's Auto-Ex feature rotates among
trading crowd participants (specialists and ROTs) separately for puts
and calls, which differs from the single ```Wheel'' for each option in
the AUTOM system. Thus, the Wheel provision of Phlx Rule 1080 and Floor
Procedure Advice F-24 cannot apply.
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\15\ This is not intended to be a complete description of Amex
technology regarding automated options order routing. This limited
description is provided merely to identify the impact of trading
Phlx Dell options using Amex technology on Phlx rules.
\16\ The proposed rule change to temporarily relocate Phlx Dell
options to the Amex referred to the Amex Order File and related sub-
systems such as the Amex Options Display Book (``AODB''), Touch
Order Entry Terminal (``TOETS''), and Auto-ex.
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Pursuant to Advice F-24(e), the Phlx assigns contra party
participation on the Wheel by assigning a certain number of contracts
to each participant signed onto the Wheel per each order. Whereas the
Amex Auto-Ex system distributes the entire order on a rotational basis
to each participant. In addition, the rotation among participants is
different, as specialist participation on the Phlx Wheel, as enumerated
in Advice F-24, depends upon the Auto-Ex guarantee in that option. This
aspect of Advice F-24(e) will not apply to Phlx Dell options.
Liability.
With respect to the liability provisions of Phlx By-Law Article
XII, Section 12-11 as well as other liability-related provisions in
Amex rules,\17\ the use of the facilities clearly includes Phlx Dell
options trading on the Phlx, despite the use of Amex technology. Thus,
non-liability for damages sustained by a member or member organization
growing out of the use by such member organization of the facilities
afforded by the Exchange for the conduct of their business should be
extended to Amex systems. In trading Phlx Dell options using Amex
technology, the Phlx, its members, member organizations and employees
shall accept the same limitations on the liability of Amex, as provided
in the Amex Constitution and Rules with respect to the use of Amex
technology systems for the conduct of business, as such limitations
apply to any Amex member, member organization or employee thereof.\18\
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\17\ See also Phlx Rule 1080(e)
\18\ In the proposal, the Phlx codifies the limitation of Amex
liability to Phlx members in proposed Commentary .03 to Phlx Rule
1080. Proposed Commentary .03 also provides that Phlx members may
not copy, modify, disclose, damage, improve or create derivative
works from, sublease, assign or in any other way permit use by any
other third party of such Amex technology. See Amendment No. 1,
supra note 3.
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Other Phlx rule implications. Phlx Dell options will continue to be
traded under Phlx rules, including minimum trading increments, strike
price intervals, and position and exercise limits. Phlx Rule 1080 and
Floor Procedure Advice F-24, regarding contra-side participation
continue to apply to automated orders, to the extent its provisions
conform to Amex technology and except as otherwise described herein.
For instance, Amex parameters will apply regarding the maximum order
size eligible for electronic delivery.\19\
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\19\ Currently, such maximum size is 50 contracts.
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Survelliance. although Phlx Dell options continue to be Phlx
options, utilizing Amex technology necessitates that surveillance data
be generated by the Amex and submitted to the Phlx on a next-day basis.
The Phlx incorporates such data into its existing surveillance
procedures and generates similar surveillance reports respecting Phlx
Dell options. Certain surveillance data, such as block trades, may be
forwarded to the Phlx in the form of reports depending upon technical
and operational factors, and such data would then be incorporated into
Phlx surveillance procedures. Other than the reliance on Amex for data
and large block trade reports, surveillance of Phlx Dell options will
remain the responsibility of Phlx.
Transaction Fees. Phlx transaction fees will continue to apply to
Phlx Dell options, thus, Phlx will be responsible for transaction fee
billing and collection in accordance with such Phlx procedures. The
Phlx anticipates that fees to the Phlx respecting Amex systems use will
be determined by an agreement with the Amex. Similar to surveillance
matters, data-sharing will be necessary in order for all such billing
to be complete.
Deputization of Amex floor brokers. When Phlx Dell options
temporarily relocated to the Amex trading floor, another method for
order entry was through a deputized Amex floor broker. Deputization
involved a waiver of compliance with Phlx's rules governing floor
brokers and the requirements for membership. However, with the return
of Phlx Dell options to the Phlx trading floor, such deputization is no
longer necessary; Phlx floor brokers will resume providing this
additional method of order entry.
Notification. Prior to the return of Phlx Dell options to the Phlx
trading floor, the Exchange will also notify all member firms of the
change in trading location, emphasizing the continuation of Amex
technology. The Exchange has conducted training sessions for floor
personnel regarding Amex systems. As stated above, the Exchange will
also distribute memoranda regarding the differences in trade reporting
and pre-clearing procedures between the Phlx Dell options trading on
Amex technology and the Phlx options trading on Phlx technology
throughout the Phlx trading floor. Because Phlx Dell options will
continue to be traded using Amex technology, the larger system and
order routing changes that were required upon initial relocation to the
Amex in June should not result. Nevertheless, the Exchange plans to
notify its members, as well OCC, of the return to the Phlx trading
floor.
The Exchange believes that using Amex systems for Phlx Dell options
on the Phlx trading floor should provide consistency for members and
investors as well as a continuation of efficient order execution. The
Phlx also continues to improve upon its own technology for the
remainder of the Phlx options floor, as discussed above. Termination of
its technology arrangement with Amex, formal or informal, or the
inability of Amex technology to function properly, as reasonably
determined by the Exchange, would warrant a switch to Phlx technology.
The Exchange would
[[Page 69131]]
provide prior written notice to the Commission, Phlx members, OCC and
the Amex should such a switch be necessary.
2. Statutory Basis
For the reasons discussed above, the Exchange believes that the
proposed rule change is consistent with Section 6 of the Act in
general, and in particular, with Section 6(b)(5), \20\ in that it is
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, as well as to protect investors and the public interest by
maintaining consistency in the order entry and execution for Phlx Dell
options trading on the Phlx.
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\20\ 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 is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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. Sec. 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-98-54 and
should be submitted by January 5, 1999.
IV. Commission's Findings and Order Granting Accelerated Approval
of the Proposed Rule Change
The Commission finds that Phlx's proposal to institute a one-year
pilot program to trade Phlx Dell options on the Phlx trading floor
using Amex technology is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange. Specifically, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) \21\ in that
the arrangement between Phlx and Amex fosters cooperation and
coordination with persons engaged in regulation, clearing, settling,
processing information with respect to, and facilitating transactions
in securities.\22\
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\21\ 15 U.S.C. 78f(b)(5).
\22\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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With respect to the proposed Commentaries to Exchange Rules 1051-
1055, the Commission believes that the proposed rule changes are
reasonable and consistent with the Act as a temporary measure to
conform Phlx rules with the use of Amex technology. Although the
Commission believes that the proposed rule changes are necessary to
allow Phlx Dell options to be traded on the Phlx trading floor using
Amex technology, the Commission has concerns regarding a number of
aspects of the proposal. The Commission recognizes that importing Amex
technology to the Phlx is critical to the Phlx being able to properly
handle trading of Dell options on their trading floor. We observe that
the technology being used has not been tailored to permit trading of
Dell options in a manner that would be consistent with existing Phlx
rules.\23\ As noted above, the Exchange is committed to implementing
technological improvements to its current electronic systems including
its electronic limit order book, the X-Station.\24\ The Commission
expects that the Exchange will endeavor to continue to improve its
technology to enable Phlx Dell options to trade on Phlx in a manner
consistent with existing Phlx Rules. The Commission believes that the
existing proposal is not a desirable long-term solution for trading
Phlx Dell options. The trading processing requirements and Wheel
assignment rules applicable to Phlx-traded Dell options are being
utilized out of necessity rather than by choice--they are embedded in
the Amex technology that Phlx believes is necessary in order to
maintain fair and orderly markets in Phlx Dell options.
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\23\ See supra Section II--Amex Technology--Trade Processing.
\24\ See supra Section II--Background.
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In the filing, Phlx also proposed an amendment to Rule 1080,
disclaiming Amex's liability to Phlx members for damages growing out of
the use and enjoyment of Amex's technology and imposing liability on
Phlx members for the misuse or damage of the Amex technology. In the
June Dell options order, the Commission approved an interpretation of
Phlx By-Law Article XII, Section 12-11, which disclaims Phlx's
liability to Phlx members for damages growing out of the use and
enjoyment of Phlx's facilities, extending that limitation of liability
to the Amex.\25\ The Commission continues to believe that this
limitation of liability of the Amex \26\ to Phlx members growing out of
the use and enjoyment of the Amex technology is reasonable and
consistent with the Act. This Commentary to Rule 1080 merely codifies
the currently existing understanding between Phlx members and the Amex
as stated in the June Dell options order.
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\25\ See June Phlx Dell options order, supra note 4.
\26\ The Commission notes that, in the June Phlx Dell options
order, the limitation of liability only involved the Amex where in
this filing, the limitation of liability includes the National
Association of Securities Dealers, Inc. (``NASD''). This is due to
the recent merger of the Amex and the NASD.
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In the proposal, the Exchange represents that the Amex will be
responsible for reporting system outages as well as other systems
events pursuant to the Commission's ARP policy and related regulatory
review requirements.\27\ The Commission agrees that, because Amex
technology is being used, the Amex may be in the best position to
report system outages and other system events. Nonetheless, the
Exchange is ultimately responsible for ensuring that such outages and
system events are reported to the Commission.
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\27\ See supra Section II--Phlx Option.
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Finally, the Commission notes that, to minimize investor confusion
in the trading of Phlx Dell options, Phlx has stated that it will
provide adequate notice to its members to ensure that they and the
investing public are aware that Phlx Dell options are listed, traded,
and supervised according to Phlx rules, but are to be traded using Amex
technology on the Phlx trading floor.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the
[[Page 69132]]
Federal Register. Granting accelerated approval to the proposal will
enable the Exchange to return Phlx Dell options to the Phlx options
trading floor prior to the expiration of the Phlx Dell options order.
Accordingly, the Commission believes that good cause exists, consistent
with Section 6(b)(5) and Section 19(b)(2) of the Act, to grant
accelerated approval to the proposed rule change.\28\
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\28\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed one-year pilot program (SR-Phlx-98-54) is
approved on an accelerated basis through December 6, 1999.
\29\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33136 Filed 12-14-98; 8:45 am]
BILLING CODE 8010-01-M