Self-Regulatory Organizations; Order Granting Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 1 and 2 to the Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Providing Automatic Executions for Eligible Orders at the Exchange's Disseminated Size, Subject to a Minimum and Maximum Eligible Size Range

I. Introduction

On July 3, 2002, the Philadelphia Stock Exchange, Inc. (“Phlx”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, a proposed rule change to provide automatic executions for eligible orders at the Exchange's disseminated size, subject to a minimum and maximum eligible size range to be determined by the specialist, on an issue-by-issue basis. Notice of the proposed rule change was published for comment in the Federal Register on August 15, 2002. The Commission received no comments on the proposal. On August 26, 2002, the Exchange filed Amendment No. 1 to the proposed rule change. On November 20, 2002, the Exchange filed Amendment No. 2 to the proposed rule change. The Commission is approving the proposed rule change, and is publishing notice of, and granting accelerated approval to, Amendment Nos. 1 and 2 to the proposed rule change.

II. Description of the Proposal

The Exchange proposes to codify a change in its AUTOM and Auto-Quote systems that would permit the automatic execution of eligible orders at the Phlx's disseminated size, as defined in Exchange Rule 1082(a)(ii). Currently, the Exchange automatically executes eligible orders at a size equal to the AUTO-X guarantee for a given option, regardless of the Exchange's disseminated size. The proposed rule change would allow the Exchange to provide automatic executions for eligible orders at a size equal to the Exchange's disseminated size, subject to minimum and maximum guaranteed AUTO-X sizes (which the Exchange represents cannot exceed the Exchange's floor-wide allowable maximum guaranteed AUTO-X size for an option, which currently is 250 contracts), to be determined by the specialist and subject to the approval of the Options Committee.

The proposed amendments to Phlx Rule 1080(c) would include the following provisions:

1. If the Exchange's disseminated size is greater than the minimum guaranteed AUTO-X size, and less than the maximum guaranteed AUTO-X size, inbound eligible orders would be automatically executed up to the Exchange's disseminated size. Remaining contracts would be executed manually by the specialist or placed on the limit order book.

Example 1:

Minimum Guaranteed AUTO-X Size=10

Maximum Guaranteed AUTO-X Size=50

Disseminated Size=35

Inbound Order Size=90

In this example, the Exchange would automatically execute 35 contracts (the disseminated size). The specialist would be required to execute the remaining 55 contracts manually or, in the case of a limit order, to place the remaining 55 contracts on the limit order book, if the automatic execution has exhausted the size at that price.

2. If the Exchange's disseminated size is less than the minimum guaranteed AUTO-X size for that option, inbound eligible orders delivered via AUTOM would be automatically executed up to such minimum guaranteed AUTO-X size. Remaining contracts would be executed manually by the specialist or placed on the limit order book.

Example 2:

Minimum Guaranteed AUTO-X Size=10

Maximum Guaranteed AUTO-X Size=50

Disseminated Size=6

Inbound Order Size=20

In this example, the Exchange would automatically execute 10 contracts (the minimum guaranteed AUTO-X size) even though its disseminated size is for 6 contracts. The specialist would be required to execute the remaining 10 contracts manually at that price or the next best price or, in the case of a limit order, to place the remaining 10 contracts on the limit order book, if the automatic execution has exhausted the size at that price.

3. If the Exchange's disseminated size is greater than the maximum guaranteed AUTO-X size, inbound eligible orders would be automatically executed up to such maximum guaranteed AUTO-X size. Remaining contracts would be executed manually by the specialist at the disseminated price.

Example 3:

Minimum Guaranteed AUTO-X Size=10

Maximum Guaranteed AUTO-X Size=50

Disseminated Size=100

Inbound Order Size=90

In this example, the Exchange would automatically execute 50 contracts (the maximum guaranteed AUTO-X size). The specialist would be required to execute the remaining 40 contracts manually at that same price because the Exchange's rules concerning firm quotations require the Exchange to be firm at that price up to the disseminated size of 100 contracts.

The Exchange represents that the proposed rule change would provide that the minimum and maximum guaranteed AUTO-X sizes for a given option is to be determined on an issue-by-issue basis by the specialist and subject to the approval of the Options Committee. In determining whether to approve the minimum and maximum guaranteed AUTO-X size for each option, the Options Committee may consider, without limitation, the number of series and open interest in the option; the volatility of the option; the liquidity of the option; historical and projected volume of trading in the option; and the projected share of total trading in the option that is likely to occur at the Exchange, as well as other relevant factors.

The Exchange also proposes to delete references to public customer orders from the description of AUTO-X set forth in Exchange Rule 1080(c) in order to reflect that, in certain issues, orders for the proprietary account(s) of broker-dealers may be eligible for automatic execution via AUTO-X. Minimum and maximum sizes could be for a different number of contracts for broker-dealer orders than for customer orders. In addition, the Exchange represents that contracts that are automatically executed would be allocated automatically on the Exchange's “Wheel.” The Exchange notes that contracts executed manually would be allocated by the specialist in the same manner as all orders received via AUTOM that are manually executed by the specialist in accordance with Phlx rules.

III. Discussion

The Commission has carefully reviewed the proposed rule change, as amended, and finds that it is consistent with the Act and the rules and regulations promulgated thereunder applicable to a national securities exchange and, in particular, with the requirements of section 6(b). Specifically, the Commission finds that approval of the proposed rule change is consistent with section 6(b)(5) in that it is designed to promote just and equitable principles of trade, to remove impediments and to perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest.

The Commission believes that the proposed rule change, as amended, should enable the Phlx to codify the merger of its new Auto-Quote system with its current AUTO-X system, and should provide for a more orderly system for the automatic execution of eligible orders through AUTO-X. The Commission notes that this proposed rule change will enable the Phlx to automatically execute eligible orders at the Exchange's disseminated size, subject to a minimum and a maximum AUTO-X guarantee size that would be set by the specialist on an issue-by-issue basis, subject to the Phlx Options Committee's approval. In addition, the Commission believes that providing automatic executions at the Exchange's disseminated size should enhance the ability of investors to ascertain the actual number of contracts available for automatic execution of eligible orders. Accordingly, the proposed rule change should result in more transparency for investors and the marketplace.

The Commission also notes that the Exchange is eliminating the reference to public customers orders from Exchange Rule 1080(c) because, for certain issues, broker-dealer orders may be eligible for automatic execution. The Commission further notes that the Exchange has represented that, because public customers and broker-dealers may have different AUTO-X guarantee sizes, the Exchange will make sure that the larger of the two sizes will constitute the AUTO-X guarantee for purposes of the pilot. This is based on the fact that, as a business practice, the Exchange represents that it wants to provide automatic executions for the largest size possible.

In addition, the Commission finds good cause for approving Amendment Nos. 1 and 2 to the proposed rule change prior to the thirtieth day after the date of publication of notice of filing thereof in the Federal Register. The Commission finds that Amendment No. 1 provides clarification as to how the proposed rule change will operate in relation to Phlx's current pilot in which AUTO-X is disengaged for thirty seconds once the AUTO-X guarantee is exhausted within a fifteen-second period. In addition, Amendment No. 1 provides a more detailed description as to how orders will be allocated and executed, and clarifies that the Options Committee will delegate its authority to approve the minimum and maximum AUTO-X guarantee size for a particular option to two Phlx Floor Officials. Amendment No. 2 amends the proposed rule text to reflect changes to Exchange Rule 1080(c) that have been made to the rule since this original 19b-4 proposal was filed on July 3, 2002. The Commission, therefore, finds good cause to approve Amendment Nos. 1 and 2 to the proposed rule change on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the Amendment Nos. 1 and 2 to 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-2002-39 and should be submitted by December 24, 2002.

V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-Phlx-2002-39) is hereby approved, and that Amendment Nos. 1 and 2 to the proposed rule change is approved on an accelerated basis.