01-10390. Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating to the Automatic Display of Customer Limit Orders

April 20, 2001.

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 February 2, 2001, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change 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 to make modifications to the Exchange's Auto-Quote system that would automatically display booked limit orders for those options traded by specialists that use Auto-Quote.^[3] The text of the proposed rule change is set forth below. New text is in italics.

Philadelphia Stock Exchange Automated Options Market (AUTOM) and Automatic Execution System (AUTO-X)

Rule 1080. (a)-(j) No change.

Commentary:

.01 Automatic Quotation (Auto-Quote) is the Exchange's electronic options pricing system, which enables specialists to automatically monitor and instantly updated quotations.

Auto-Quote will automatically display booked limit orders for those options traded by specialists that use the Exchange's Auto-Quote feature.

For Phlx specialist firms using proprietary systems (called “Specialized Quote Feeds” or “SQFs”), rather than the Exchange's Auto-Quote feature, the Exchange, upon the request of SQF users, will provide SQF users with real-time order and trade information in a manner that would enable SQF users wishing to modify their own systems to display limit orders automatically.

* * * * *

II. Self-Regulatory Organization's Statements 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

1. Purpose

The purpose of the proposed rule change is to enable Exchange specialists using Auto-Quote to display limit orders as soon as practicable, and under normal market conditions, no later than 30 seconds after receipt.^[4] The proposed system change would function as an automated “fail-safe” feature to assist specialists in their compliance with the immediate limit order display requirement.^[5]

The proposed system change would enable Auto-Quote to automatically display limit orders placed on the specialist's book that improve the displayed quote.^[6] If the specialist is unable to display a limit order immediately, the proposed system change would enable Auto-Quote to automatically display a customer limit order within 30 seconds of receipt. In addition, the proposed system change would allow specialists, on an issue-by-issue basis, to configure the system to display limit orders within a shorter time period.

For Phlx specialist firms using proprietary systems (called “Specialized Quote Feeds” or “SQFs”), rather than the Exchange's Auto-Quote feature, additional systems changes would enable Exchange staff, upon the request of SQF users, to provide SQF users with real-time order receipt and trade information in a manner that would enable SQF users to modify their own systems to display limit orders automatically should they choose to do so. This information could be integrated into the SQF user's system to enable them to build a system that would function similarly to the proposed automatic display feature of Auto-Quote.

The Exchange currently anticipates deploying the modifications to Auto-Quote in the second quarter of 2001. After the deployment of the Auto-Quote modifications, the Exchange will commence assisting SQF users (upon request) in receiving required information to upgrade their systems.^[7]

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with section 6(b) of the Act ^[8] in general, and furthers the objectives of section 6(b)(5) ^[9] in particular, in that it is designed to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest, by enabling specialists to discharge their obligation to display customer limit orders.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Phlx 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 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 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 filing 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-2001-11 and should be submitted by May 17, 2001.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[10]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  Auto-Quote is the Exchange's electronic options pricing system, which enables specialists to automatically monitor and instantly update quotations, based on incremental changes in the price of the security underlying the option.

4.  Currently, Option Floor Procedure Advice (“OFPA”) A-1, Responsibility of Displaying Best bids and Offers, requires a specialist to use due diligence to ensure that the best available bid and offer is displayed for those option series in which he is assigned. The Exchange has filed proposed rule changes to OFPA A-1 and Exchange Rule 1020, Registration and Functions of Options Specialists, that provide that a specialist shall immediately display customer limit orders, i.e., as soon as practicable, and under normal market conditions, no later than 30 seconds after receipt. The proposed rule change has been published for public comment and has not yet been approved by the Commission. See Securities Exchange Act Release No. 43126 (August 7, 2000), 65 FR 49621 (August 14, 2000) (SR-Phlx-00-34).

5.  The Exchange acknowledges that the proposed rule changes to Rule 1020 and OFPA A-1 would require specialists to display customer limit orders immediately. The system change is not intended to relieve specialists from the immediate display requirement. Rather, the system change is intended to ensure that customer limit orders would be displayed within the 30-second time limit set forth in the proposed rules. The Exchange's Market Surveillance Department will enforce the immediate display requirement, regardless of the 30-second “window.”

6.  Phone call between Rick Rudolph, Counsel, Phlx, and Sonia Patton, Staff Attorney, Division of Market Regulation, Commission (April 5, 2001).

7.  The Exchange will notify all Phlx options specialists via circular when it is ready to begin testing and deploying the new Auto-Quote feature.

8.  15 U.S.C. 78f(b).

9.  15 U.S.C. 78f(b)(5).

10.  17 CFR 200.30-(9)(12).