50482 Federal Register / Vol. 71, No. 165 / Friday, August 25, 2006 / Notices 

7 15 U.S.C. 78(f)(b). 

8 15 U.S.C. 78(f)(b)(5). 9 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Amendment No. 1 replaced and superseded the 

original filing in its entirety. 

4See Partial Amendment No. 2. 

5 15 U.S.C. 78s(b)(1). 

6 17 CFR 240.19b–4. 

7 17 CFR 242.600 et seq. 

February 2007 compliance date for 

Regulation NMS that are not related to 

the requirements of the Specifications 

Date. 

2. Statutory Basis 

CBOE believes the proposed rule 

change is consistent with the Act and 

the rules and regulations under the Act 

applicable to a national securities 

exchange and, in particular, the 

requirements of Section 6(b) of the Act.7

Specifically, the Exchange believes the 

proposed rule change is consistent with 

the Section 6(b)(5) 8 requirements that 

the rules of an exchange be designed to 

promote just and equitable principles of 

trade and to protect investors and the 

public interest. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange believes the proposed 

rule change would impose no burden on 

competition that is not necessary or 

appropriate in furtherance of the 

purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

No written comments were solicited 

or received by the Exchange on this 

proposal. 

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 Exchange consents, 

the Commission will: 

(A) By order approve the 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. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–CBOE–2006–70 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–CBOE–2006–70. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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 the filing also will be 

available for inspection and copying at 

the principal office of the Exchange. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–CBOE–2006–70 and should 

be submitted on or before September 15, 

2006. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.9

Nancy M. Morris, 

Secretary. 

[FR Doc. E6–14127 Filed 8–24–06; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–54329; File No. SR–Phlx–

2006–43] 

Self-Regulatory Organizations; 

Philadelphia Stock Exchange, Inc.; 

Notice of Filing of Proposed Rule 

Change and Amendment Nos. 1 and 2 

Thereto Relating to the Exchange’s 

New Equity Trading System, XLE 

August 17, 2006. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1, and Rule 19b–4 2 thereunder, 

notice is hereby given that on July 13, 

2006, 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, II, and III, below, which Items 

have been prepared by the Phlx. On 

August 14, 2006, the Exchange filed 

Amendment No. 1 to the proposed rule 

change.3 On August 16, 2006, the 

Exchange 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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Phlx, pursuant to Section 19(b)(1) 

of the Act 5 and Rule 19b–4 thereunder,6

proposes to amend its rules to 

implement a new trading model for 

equity securities that provides the 

opportunity for entirely automated 

executions to occur within a central 

matching system accessible by Exchange 

members and member organizations and 

their Sponsored Participants, as defined 

below. The rules proposed herein are 

intended to comply with the 

requirements of Regulation NMS.7 The 

Exchange will no longer operate a 

physical trading floor for equity 

securities, nor the Philadelphia Stock 

Exchange Automated Communication 

and Execution (‘‘PACE’’) system. This 

proposal does not affect the way options 

trade on the Exchange, and the 

Exchange will continue to have a 

physical trading floor for options. The 

text of this proposed rule change is 

available on the Exchange’s Web site at 

http://www.phlx.com, in the 


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Federal Register / Vol. 71, No. 165 / Friday, August 25, 2006 / Notices 50483 

8Currently, the Exchange trades, pursuant to 

unlisted trading privileges, various equity securities 

listed on national securities exchanges, but it does 

not trade Nasdaq-listed securities. On XLE, the 

Exchange intends to trade Nasdaq-listed securities, 

as well as securities listed on other national 

securities exchanges, pursuant to unlisted trading 

privileges. 15 U.S.C. 78l(f). 

9See proposed Phlx Rule 160. 

10See proposed Phlx Rule 1(l). See also infra 

Section II.A.1.c.xviii (Market Makers). 

11Unless otherwise noted, all time references 

refer to Eastern time as effective in the City of 

Philadelphia. See Phlx Rule 101. 

12See various rules between Phlx Rules 251–423, 

as applicable. 

13See various rules between Phlx Rules 102–124, 

126–155, and 225–233, as well as certain Phlx Rules 

in the 600 and 700 series, certain Equity Floor 

Procedure Advices (‘‘EFPAs’’) from E–1 through 

Regulation 7, and Options Floor Procedure Advices 

(‘‘OFPAs’’) F–33 and Regulation 5. 

14See Phlx Rules 201–220, 236, 460–461, 500–

524, and EFPAs A–1 and A–2. 

15See certain Phlx Rules in the 800 series. 

16See proposed Phlx Rule 160. 

Commission’s Public Reference Room, 

and on the Commission’s Web site at 

http://www.sec.gov/rules/sro/ 

phlx.shtml. 

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 

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 Phlx proposes to adopt new Phlx 

Rules 160–165, 170–174, and 180–189, 

and amend or delete other rules to 

accommodate the Exchange’s proposed 

new equity system (‘‘XLE’’). The 

purpose of the proposed rule change is 

to adopt a new market structure for the 

trading of equity securities on the Phlx. 

a. Summary of XLE 

XLE would provide Exchange 

members and member organizations and 

their Sponsored Participants and their 

Participant Authorized Users, described 

herein (together known as ‘‘XLE 

Participants’’), with a more efficient 

method for displaying, routing, and 

executing orders in NMS Stocks 8 on the 

Exchange. With this new system, the 

Exchange would no longer operate a 

physical equity trading floor where 

specialists and floor brokers execute 

their orders, nor would it operate its 

PACE system, through which member 

organizations currently can send orders 

to the Exchange electronically, which 

represents the Exchange’s current 

market structure. Instead, the Exchange 

proposes to adopt a new market 

structure in which it will operate an 

automated system, XLE, where XLE 

Participants, from any location, may 

submit orders for immediate execution, 

display, or routing, as applicable.9 The 

Exchange believes that this new system 

will provide an opportunity for XLE 

Participants and their customers to 

receive efficient, low-cost executions. 

The Exchange anticipates that most 

XLE Participants will be broker-dealers 

that will send orders to XLE for 

execution, display, or routing, as 

applicable. These organizations would 

not be required to register with the 

Exchange to act in any specific capacity 

other than as a member organization or 

a Sponsored Participant of a member 

organization. The Exchange would, 

however, allow member organizations to 

register as Market Makers on XLE.10

Market Makers, once registered as such, 

could then choose to register in one or 

more securities that are traded on XLE. 

Once registered in a particular security, 

Market Makers would be required to 

maintain continuous Limit Orders on 

both sides of the market in that security 

during the Core Session (normally 9:30 

a.m. to 4 p.m.).11 In addition, Market 

Makers could also send other types of 

orders to XLE in securities in which 

they are Market Makers. 

XLE would be an order-driven system; 

there will be no ‘‘quotes’’ akin to what 

equity specialists submit on the 

Exchange today. Moreover, on XLE, 

there will be no specialists. Although 

the new rules provide for Market 

Makers, an NMS Stock may trade on 

XLE without a Market Maker. 

The Exchange intends to discontinue 

its PACE system and the operation of its 

equity trading floor, and then roll-out 

XLE in several phases, beginning with 

two-sided orders only for approximately 

one week (with each phase, generally 

starting first with NYSE and Amex 

listed securities and then Nasdaq listed 

securities); then one-sided orders, all of 

which will be deemed ‘‘Do Not Route,’’

and incoming linkage orders routed to 

the Exchange through the new NMS 

Linkage and all Intermarket Trading 

System (‘‘ITS’’) commitments; and 

finally, routing functionality. In 

addition, the Exchange may roll-out 

Reserve Orders later than it rolls out 

other one-sided orders. The Exchange 

anticipates that the roll-out will be 

complete within a two month period 

and will publish more precise 

information regarding the roll-out via 

Exchange circular. 

b. Summary of Changes 

Because the Exchange proposes to 

launch XLE in lieu of trading on its 

physical trading floor, the Exchange is 

proposing to modify or delete many 

Phlx By-laws and Phlx Rules that relate 

to floor trading. The Exchange also is 

proposing to delete outdated Phlx Rules 

that relate to the delivery and settlement 

of securities,12 which currently take 

place in registered clearing agencies. 

Most notably, changes to the Phlx Bylaws and Phlx Rules are necessary to 

reflect the proposed elimination of the 

equity trading floor 13 and equity 

specialists,14 as well as the Floor 

Procedure Committee and the Equity 

Allocation, Evaluation and Securities 

Committee.15

c. The New Trading System—XLE—

New Rules 

As stated above, the Exchange’s 

proposed new trading system is XLE. 

XLE would be a fully automated, 

electronic trading system that will 

accept orders in NMS Stocks traded on 

the Exchange from XLE Participants and 

display, route, and execute those orders 

automatically pursuant to nondiscretionary algorithms codified in the 

proposed Phlx Rules. Orders will be 

ranked on XLE in price-time priority 

regardless of the identity of the entering 

XLE Participant. Executions on XLE will 

take place automatically and 

immediately upon order entry if trading 

interest is available. XLE will provide 

an optional routing service for orders for 

which trading interest is not present on 

XLE. A more detailed description of 

XLE is set forth below. The Exchange 

intends to operate XLE as an 

‘‘automated trading center’’ for purposes 

of Regulation NMS 16 and would display 

automated quotations at all times except 

in the event that a systems malfunction 

renders XLE incapable of displaying 

automated quotations. The Exchange 

states that it would halt trading and 

therefore not display any quotations in 

the event of such a systems malfunction. 

i. New Definitions 

A number of new definitions are used 

in the proposed Phlx Rules regarding 

XLE. The term ‘‘XLE’’ shall mean the 

electronic system which is operated by 

the Exchange for the entry, display, 

execution, and reporting of orders in 


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50484 Federal Register / Vol. 71, No. 165 / Friday, August 25, 2006 / Notices 

17See proposed Phlx Rule 1(mm). 

18See proposed Phlx Rule 1(t). Definitions of the 

classes of stocks traded on Nasdaq are at proposed 

Phlx Rule 1(r)–(s). 

19See proposed Phlx Rule 1(nn). ‘‘XLE 

Participants’’ includes members and member 

organizations registered on XLE, Sponsored 

Participants, and PAUs. 

20See proposed Phlx Rule 1(x). 

21See proposed Phlx Rule 1(jj). 

22See proposed Phlx Rule 1(kk). 

23See proposed Phlx Rule 1(c). 

24See proposed Phlx Rule 1(l). 

25See proposed Phlx Rule 1(m). 

26See proposed Phlx Rule 1(a). 

27See proposed Phlx Rule 185(c). 

28See proposed Phlx Rule 1(w). 

29See proposed Phlx Rule 1(gg). 

30See proposed Phlx Rule 1(q). 

31See proposed Phlx Rule 1(bb) (Proprietary 

Order is defined as an order for the account of the 

XLE Participant who entered the order into XLE). 

32See proposed Phlx Rule 1(aa) (Professional 

Order is defined as an order for the account of a 

broker or dealer, which order is represented, as 

agent, by a XLE Participant). 

33See proposed Phlx Rule 1(ee) (Public Agency 

Order is defined as an order for the account of a 

person other than a broker or dealer, which order 

is represented, as agent, by a XLE Participant). 

34See proposed Phlx Rule 1(cc). 

35See proposed Phlx Rule 1(dd). 

36 17 CFR 242.611. 

37 17 CFR 242.600(b)(57)–(58). 

38See proposed Phlx Rule 1(cc). 

39See proposed Phlx Rule 1(h). 

40See proposed Phlx Rule 1(ff). 

41See proposed Phlx Rule 1(hh). 

42See proposed Phlx Rule 1(u). 

43See proposed Phlx Rule 101. 

44See proposed Phlx Rule 185(a), (b)(2), and (c). 

45See proposed Phlx Rule 185(b)(1) and (3). 

46See proposed Phlx Rule 162(a). 

47See proposed Phlx Rule 162(b). Under 

proposed Phlx Rule 162(b), a XLE Participant could 

mark a two-sided order not for regular way 

‘‘NMS Stocks.’’ 17 Various persons will 

be using XLE to trade NMS Stocks, 

which include stocks listed on national 

securities exchanges.18 Collectively, 

these persons are referred to as ‘‘XLE 

Participants.’’ 19 Individuals authorized 

by a member organization or a 

Sponsored Participant who use XLE are 

‘‘Participant Authorized Users’’ or 

‘‘PAUs.’’ 20 Non-members may gain 

access to XLE by becoming ‘‘Sponsored 

Participants’’ 21 who are sponsored by 

‘‘Sponsoring Member Organizations.’’ 22

Further, member organizations that 

clear transactions for XLE Participants 

are referred to as ‘‘clearing firms.’’ 23

XLE Participants that are member 

organizations may register to become 

‘‘Market Makers’’ in a particular 

security.24 Because the term ‘‘Market 

Makers’’ refers to organizations and not 

individuals, individuals who enter 

orders on behalf of Market Makers are 

called ‘‘Market Maker Authorized 

Traders’’ or ‘‘MMATs.’’ 25 In regards to 

a particular security, the term 

‘‘Approved Dealer’’ means a Market 

Maker on XLE in that security or a 

specialist or market maker registered as 

such with another exchange or the 

National Association of Securities 

Dealers, Inc. (‘‘NASD’’) in that security. 

Approved Dealers would be required to 

register as such with the Exchange. 

Approved Dealers also would be 

required to notify the Exchange 

immediately if they cease to be a 

specialist or market maker registered as 

such with another exchange or NASD in 

a security.26 Approved Dealer status 

will be used to determine how certain 

two-sided orders will be executed.27

Certain characteristics of orders on 

XLE and quotations on away markets 

are newly defined in proposed Phlx 

Rule 1. The size of orders is defined by 

the terms ‘‘odd lot,’’ 28 ‘‘round lot,’’ 29

and ‘‘mixed lot.’’ 30 Also, XLE 

Participants would be required to mark 

all orders as ‘‘Proprietary,’’ 31

‘‘Professional,’’ 32 or ‘‘Public Agency.’’ 33

As described below, XLE will take into 

account away quotations for purposes of 

order execution, display, and routing. 

The definitions include ‘‘Protected Bid, 

Offer or Quotation’’ 34 and ‘‘Protected 

NBBO.’’ 35 Because Rule 611 of 

Regulation NMS 36 changes the 

requirements the Exchange must meet 

regarding trade-throughs, the definition 

of Protected Bid, Offer or Quotation will 

reflect this. Specifically, the terms 

‘‘Protected Bid, Offer or Quotation’’

shall: (1) Have, after Rule 611 of 

Regulation NMS is operative on the 

Exchange, the same meaning as Rule 

600(b)(57) and (58),37 as appropriate, of 

Regulation NMS, provided, however 

that if another trading center providing 

a Protected Bid, Offer or Quotation 

repeatedly fails to respond within one 

second to incoming orders attempting to 

access its Protected Bid, Offer or 

Quotation, XLE may cease to consider 

those Protected Bids, Offers or 

Quotations as such by: (a) Notifying the 

non-responding trading center 

immediately after (or at the same time 

as) electing self-help; and (b) assessing 

whether the cause of the problem lies 

with its own system and, if so, taking 

immediate steps to resolve the problem; 

(2) mean, before Rule 611 of Regulation 

NMS is operative on the Exchange, for 

Nasdaq Global Market and Nasdaq 

Capital Market Securities, the best bid, 

offer or quotation, respectively, of any 

national securities exchange or national 

securities association; and (3) mean, 

before Rule 611 of Regulation NMS is 

operative on the Exchange, for securities 

other than Nasdaq Global Market and 

Nasdaq Capital Market Securities, the 

bids, offers or quotations as required by 

the ITS Plan (as long as such Plan is in 

effect) and related Exchange rules or as 

otherwise provided in any relief granted 

therefrom by the Commission.38

Other terms used in the proposed 

Phlx Rules and defined in proposed 

Phlx Rule 1 are ‘‘Good Standing,’’ 39

‘‘Quote Management Instruction’’ or 

‘‘QMI,’’ 40 ‘‘SCCP,’’ 41 and ‘‘NSCC.’’ 42

Existing terms in current Phlx Rules 2–

22 have been renumbered within 

proposed Phlx Rule 1. 

ii. Trading Hours 

XLE would operate three trading 

sessions: (1) A Pre Market Session; (2) 

a Core Session; and (3) a Post Market 

Session.43 The Pre Market Session 

would begin at 8 a.m. and continue 

until the commencement of the Core 

Session. The Core Session would take 

place during a security’s ‘‘regular 

trading hours’’ as that term is defined in 

Rule 600(b)(64) of Regulation NMS, 

which is typically from 9:30 a.m. until 

4 p.m. The Post Market Trading Session 

would begin following the conclusion of 

the Core Session, and it would end at 6 

p.m. 

iii. Access to XLE 

All XLE Participants would be able to 

access XLE through an Exchange 

electronic interface by means of their 

own communication lines or through 

lines established by service providers in 

the business of maintaining connectivity 

in the securities marketplace. In 

addition, XLE Participants may access 

XLE for the entry of two-sided orders 

through technology provided by the 

Exchange. Finally, to the extent that the 

Exchange participates in the ITS Plan or 

any other linkage plan for NMS Stocks, 

ITS commitments and other intermarket 

orders could be sent to XLE through 

these linkages. 

iv. Eligible Orders—Basic Requirements 

XLE will accept orders with either an 

immediate-or-cancel (‘‘IOC’’) 

designation 44 or with a time designation 

set to cancel at the end of one of XLE’s 

trading sessions.45 The time 

designations include immediate-orcancel or good until end of the end of 

one of XLE’s three trading sessions (Pre 

Market, Core, or Post Market). In all 

cases, any open orders on XLE at the 

end of the Post Market Session will be 

cancelled. XLE would not accommodate 

good-til-cancelled orders. XLE will 

accept orders, other than two-sided 

orders, for regular way settlement 

only.46 Two-sided orders may be 

accepted with non-regular way 

settlement.47


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settlement with one of the following conditions: (1) 

Cash; (2) next day; or (3) seller’s option. 

48 17 CFR 242.200(g). 

49 17 CFR 240.10a–1. 

50See proposed Phlx Rule 455. 

51See proposed Phlx Rule 125(a)–(b). In 

accordance with Rule 612 of Regulation NMS, 17 

CFR 242.612, XLE will accept, rank and display 

orders priced $1.00 or higher in increments no 

smaller than $0.01 and orders below $1.00 in 

increments no smaller than $0.0001. In addition, if 

a security received an exemption from Rule 612, 

XLE will accept, rank and display orders consistent 

with the fullest extent of the exemption granted to 

the security. Finally, the Exchange will seek an 

exemption from Rule 612 to accept two-sided 

orders marked Benchmark in increments no smaller 

than $0.0001. 

52See proposed Phlx Rule 185(d). 

53Executions occurring as a result of orders 

matched on XLE shall be reported by the Exchange 

to an appropriate consolidated transaction reporting 

system. The Exchange shall promptly notify XLE 

Participants of all executions as soon as such 

executions have taken place. See proposed Phlx 

Rule 188. 

54See proposed Phlx Rule 185(b)(1)(C)–(E), (b)(3), 

and (e)–(f). 

55See proposed Phlx Rule 184. 

56See proposed Phlx Rule 185(a). 

57See proposed Phlx Rule 185(b)(1)(A). 

58See proposed Phlx Rule 185(b)(1)(B). 

59See proposed Phlx Rule 185(b)(1)(A), (B), and 

(C). 

60See proposed Phlx Rule 185(b)(2)(A). 

61See proposed Phlx Rule 185(b)(2)(B). 

62See proposed Phlx Rule 185(b)(2)(C). Phlx 

intends that the ISO Order be equivalent to the 

intermarket sweep order defined in Rule 600(b)(30) 

of Regulation NMS, 17 CFR 242.600(b)(30). XLE 

Participants entering an ISO must ensure that the 

ISO meets the requirements of Rule 600(b)(30) of 

Regulation NMS. This order type will not be 

effective until Rule 611 of Regulation NMS is 

operative, which is currently scheduled for 

February 5, 2007. 

63See proposed Phlx Rule 185(b)(3). 

64At the Exchange’s request, the Commission has 

clarified the description of Pegged Orders to match 

the proposed rule text as specified in Exhibit 5. See 

Telephone call between Heather Seidel, Senior 

Special Counsel, Division of Market Regulation, 

Commission, and John Dayton, Director and 

Counsel, Phlx, on August 15, 2006 (‘‘August 15 

Telephone Call’’). 

XLE Participants would be required to 

mark all sell orders (and the sell side of 

a two-sided order) with the proper 

designation of ‘‘short’’ or ‘‘shortexempt’’ pursuant to Rule 200(g) of 

Regulation SHO.48 This will allow XLE 

to treat such short sale orders properly 

under Rule 10a–1 of the Act.49

Specifically, XLE shall not effect a sell 

order or sale of any security, except 

Nasdaq Global Market and Nasdaq 

Capital Market securities, unless such 

sell order or sale is effected in 

compliance with Rule 10a–1. XLE shall 

effect on the Exchange sell orders and 

sales of all Nasdaq securities without 

regard to any short sale price test.50

Further, all orders entered on XLE 

would be required to conform to the 

minimum increments for order entry.51

Finally, in order to help prevent 

erroneous transactions and protect 

investors and the national market 

system, all orders would be required to 

meet the price limitations imposed by 

the Exchange.52 Specifically, under 

proposed Phlx Rule 185(d), if an order 

is entered that, at the time of entry, 

would cross the best Protected Bid or 

Offer by 20% or more, the order would 

be rejected by XLE, provided, however, 

for orders priced under $1.00, such 

orders would be rejected by XLE if they 

cross the best Protected Bid or Offer by 

$0.20 or more. 

v. Order Types, Attributes, and 

Execution 

XLE will accept several order types 

from XLE Participants. Each order, 

except two-sided orders, that executes 

on XLE will execute against existing 

orders on XLE at the existing order’s 

displayable price, in order of the 

existing order’s ranking, unless it is 

routed away for execution.53 An 

existing order’s displayable price will be 

determined by XLE based on its limit 

price or pegging instructions, its 

routability and QMI (described below), 

and its short sale status.54 Existing 

orders on XLE will be ranked according 

to price-time priority.55

Market Orders. XLE will accept 

Market Orders.56 A Market Order is an 

order to buy or sell a stated amount of 

a security that is to be executed 

immediately and automatically against 

existing orders on XLE up to and 

including the price of the best away 

Protected Quotation. Any unexecuted 

shares of a Market Order will be 

cancelled. If the Protected Bid is priced 

higher than the Protected Offer, the 

Market Order shall be cancelled. 

Limited Priced Orders. XLE will 

accept a number of limited priced 

orders. XLE will accept a Limit Order.57

Limit Orders are one-sided orders to buy 

or sell a stated amount of a security at 

a specified price or better. XLE will also 

accept a Reserve Order.58 Reserve 

Orders are one-sided orders to buy or 

sell a stated amount of a security at a 

specified price or better with at least a 

round lot portion of the size that is 

displayable and with at least a round lot 

portion of the size that is not 

displayable by XLE, provided that the 

portion of the Reserve Order that is not 

displayable shall have the same price as 

the portion that is displayable. Limit 

Orders and Reserve Orders will be 

routable unless otherwise marked by a 

XLE Participant.59

Other limited priced orders include 

an IOC Order, a Single Sweep Order 

(‘‘SSO’’), and an Intermarket Sweep 

Order (‘‘ISO’’). IOC Orders will be 

executed immediately and 

automatically against existing orders on 

XLE up to and including the price of the 

best away Protected Quotation, unless 

the Protected Bid is priced higher than 

the Protected Offer, in which case XLE 

will ignore away Protected 

Quotations.60 The shares of an IOC 

Order not executed on XLE shall be 

immediately and automatically 

cancelled without routing the order 

elsewhere. Any XLE Participant may 

use an IOC Order to immediately and 

automatically execute against the full 

size of the displayed quotation on XLE 

(including any undisplayed or reserve 

size available at the price of the 

displayed quotation). As with all 

executions on XLE, XLE will 

immediately and automatically transmit 

a response to the XLE Participant who 

sent the IOC Order indicating the action 

taken with respect to the IOC Order. 

Additionally, XLE will immediately and 

automatically update its bid/offer as a 

result of the execution. 

SSOs are executed immediately and 

automatically against existing orders on 

XLE and/or away Protected Quotations, 

up to and including the order’s limit 

price.61 Any shares of the SSO not 

immediately executed on XLE or on an 

away market shall be cancelled. ISOs 

are executed immediately and 

automatically against existing orders on 

XLE at their displayable price, in order 

of their ranking, and the shares of the 

ISO not so executed shall be 

cancelled.62 An ISO will be executed on 

XLE without regard to any away 

Protected Quotations. 

Pegged Orders. XLE will also accept 

Pegged Orders. Pegged Orders are round 

or mixed lot limited price orders to buy 

or sell, only on XLE, a stated amount of 

a security at a display price set to track 

(up, down, or at) the current best 

Protected Bids or Offers on either side 

of the market by an amount specified by 

the XLE Participant in an increment 

permitted by proposed Phlx Rule 125, 

provided, however that the display 

price will not impermissibly lock or 

cross the market.63 The tracking of the 

relevant Protected Bid or Offer for 

Pegged Orders will occur on a real-time 

basis, except that when the calculated 

price for the Pegged Order would 

exceed its limit price, it will no longer 

track and will remain displayed at its 

limit price. A Pegged Order must consist 

of at least a round lot portion that is 

displayable and may include at least a 

round lot portion that is not displayable 

by XLE, provided that the portion of the 

Pegged Order that is not displayable 

shall have the same price as the portion 

that is displayable.64


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65See proposed Phlx Rule 185(c). 

66See proposed Phlx Rule 185(c)(1). 

67See proposed Phlx Rule 185(c)(2). 

68 IOC Cross Orders so marked are intended to 

meet the definition of an intermarket sweep order 

in Rule 600(b)(30) of Regulation NMS, 17 CFR 

242.600(b)(30), because the order has a limit price 

and the XLE Participant sending the order is 

responsible to send the other orders required in 

Rule 600(b)(30)(ii), 17 CFR 242.600(b)(30)(ii). 

Therefore, this order attribute will not be effective 

until Rule 611 of Regulation NMS is operative, 

which is currently scheduled for February 5, 2007. 

69See proposed Phlx Rule 185(c)(3). Orders 

marked ‘‘Benchmark’’ must meet the requirements 

of Rule 611(b)(7) of Regulation NMS, 17 CFR 

242.611(b)(7). Orders marked ‘‘Qualified Contingent 

Trade’’ must meet the requirements of an 

exemption to Rule 611 of Regulation NMS, 17 CFR 

242.611. The Exchange intends to request the 

appropriate exemptive relief to accommodate these 

Qualified Contingent Trade orders prior to the 

operative date of Regulation NMS. 

70The term ‘‘Public Agency Order’’ shall mean an 

order for the account of a person other than a broker 

or dealer, which order is represented, as agent, by 

a XLE Participant. See proposed Phlx Rule 1(ee). 

71See id. 

72The term ‘‘Proprietary Order’’ shall mean an 

order for the account of the XLE Participant who 

entered the order into XLE. See proposed Phlx Rule 

1(bb). 

73The term ‘‘Professional Order’’ shall mean an 

order for the account of a broker or dealer, which 

order is represented, as agent, by a XLE Participant. 

See proposed Phlx Rule 1(aa). 

74The term ‘‘Approved Dealer’’ means a Market 

Maker on XLE in that security or a specialist or 

market maker registered as such with another 

exchange or NASD in that security. See proposed 

Phlx Rule 1(a). 

75The Exchange believes that this is similar to the 

provisions of current National Securities Exchange 

(‘‘NSX’’) Rule 11.9(l)–(m), (u). 

76See proposed Phlx Rule 185(c)(1)–(2). 

77See August 15 Telephone Call, supra note 64. 

78See proposed Phlx Rule 181. 

79See infra note 183 (discussing PRO Securities). 

80Regardless of whether a XLE Participant 

chooses to access the routing features of XLE, all 

XLE Participants will be able to use IOC Orders to 

execute against the full size of the displayed 

quotation on XLE (including any undisplayed or 

reserve size available at the price of the displayed 

quotation). 

81 XLE Participants may mark Limit Orders and 

Reserve Order with ‘Do Not Route’ instructions. In 

that case, XLE will not route those orders, but 

instead will only execute and display them on XLE. 

See proposed Phlx Rule 185(b)(1)(D). 

82See proposed Phlx Rule 185(b)(1)(C). 

83See proposed Phlx Rule 185(b)(1)(C)(i). 

84See proposed Phlx Rule 185(b)(1)(C)(ii). The 

Exchange does not anticipate that this feature will 

be available when XLE is initially launched, but 

expects that it will be available soon afterwards. 

The Exchange will notify XLE Participants of its 

availability after the initial launch of XLE. 

Two-Sided Orders. XLE will accept a 

number of two-sided orders. Two-sided 

orders are instructions to match 

immediately and automatically on XLE 

the identified buy-side with the 

identified sell-side.65 For instance, XLE 

will accept Mid-Point Cross Orders.66

Mid-Point Cross Orders are two-sided 

orders that execute, in their entirety, at 

the midpoint of the Protected National 

Best Bid/Offer (‘‘NBBO’’), unless the 

Protected Bid is higher than the 

Protected Offer, in which case the MidPoint Cross Order will cancel. 

XLE will also accept IOC Cross 

Orders.67 IOC Cross Orders are twosided orders that execute, in their 

entirety, at the specified price, except as 

described below. IOC Cross Orders will 

be cancelled if the specified price would 

trade through the price of the best order 

on XLE disseminated pursuant to 

proposed Phlx Rule 184(c). IOC Cross 

Orders will also be cancelled if the 

specified price would trade through the 

price of the Protected NBBO, unless the 

Protected Bid is priced higher than the 

Protected Offer or the IOC Cross Order 

is marked as meeting the requirements 

of an intermarket sweep order in Rule 

600(b)(30) of Regulation NMS,68 as 

Benchmark, or as a Qualified Contingent 

Trade.69

In addition, XLE will cancel MidPoint Cross Orders (when the Protected 

NBBO is locked) and IOC Cross Orders 

if the order would trade: (1) If entered 

by an Approved Dealer, at the price of 

a Public Agency Order 70 on XLE 

disseminated pursuant to proposed Phlx 

Rule 184(c); or (2) if entered by other 

than an Approved Dealer, at the price of 

a Public Agency Order,71 a Proprietary 

Order,72 or a Professional Order 73 on 

XLE disseminated pursuant to proposed 

Phlx Rule 184(c).74 Approved Dealers 

are providing liquidity in the security, 

either on XLE, on another exchange, or 

in the over-the-counter market, through 

their specialist or market making 

activities. Therefore, the Exchange 

believes that it is appropriate to give 

two-sided orders entered by Approved 

Dealers priority over orders for the 

account of broker-dealers and over 

proprietary orders, but not Public 

Agency Orders, of XLE Participants.75

Mid-Point Cross Orders and IOC Cross 

Orders may trade at the price of any 

order on XLE disseminated pursuant to 

proposed Phlx Rule 184(c) if neither 

side of the cross order is marked as 

Proprietary, the cross order is for at least 

5,000 shares, has an aggregate value of 

at least $100,000, and its size is larger 

than the aggregate size on XLE 

disseminated pursuant to proposed Phlx 

Rule 184(c) at that price.76 Pursuant to 

proposed Rule 185(c)(iv), a non-regular 

way cross is a two-sided order that, if 

marked for non-regular way settlement, 

may execute at any price, without 

regard to the Protected NBBO or any 

other orders on XLE, provided that MidPoint Cross Orders marked non-regular 

way will be cancelled when the 

Protected Bid is higher than the 

Protected Offer. 

Finally, orders marked Benchmark 

cannot take priority over existing orders 

on XLE for less than the minimum 

quoting increment for that NMS stock 

indicated in Phlx Rule 125.77

vi. Order Routing 

The Exchange will offer an optional 

routing service for XLE Participants. 

Any member organization that is a XLE 

Participant, or a Sponsored Participant’s 

Sponsoring Member Organization, may 

enter into a Routing Agreement with the 

Exchange and the Exchange’s brokerdealer routing facility to gain access to 

the routing features of XLE.78 The 

Exchange intends to utilize PRO 

Securities LLC (‘‘PRO’’) 79 to perform 

routing and processing functions 

necessary to clear routed orders, as 

described in proposed Phlx Rule 185, as 

a facility (as defined in Section 3(a)(2) 

of the Act) of the Exchange. Certain 

order types, including Limit Orders, 

Reserve Orders, and SSOs are eligible to 

be routed.80

Limit Orders and Reserve Orders 81

will be executed and routed based on a 

XLE Participant’s QMI. 82 XLE 

Participants may choose one of two 

QMI: (1) Ship and Quote; or (2) Post 

Order and Participate (‘‘POP’’). With 

Ship and Quote,83 when the order 

arrives, XLE will execute it immediately 

and automatically against existing 

orders on XLE at their displayable price, 

up to their full size, and route orders to 

any away Protected Quotations up to 

and including the order’s limit price 

and up to and including the full 

displayable size of the Protected 

Quotation. If the order arrives during a 

time when a Protected Bid is priced 

higher than a Protected Offer, then XLE 

will not route orders to any away 

Protected Quotations. In either case, the 

remaining shares of the incoming order 

will be displayable on XLE at the order’s 

limit price. 

With POP,84 when the order arrives, 

XLE will execute it immediately and 

automatically against existing orders on 

XLE at their displayable price up to and 

including the price of the best away 

Protected Quotation and route orders to 

away Protected Quotations priced at the 

best away Protected Quotation. After 

XLE receives responses to such orders 

that were routed away, XLE will repeat 

this process by continuing to route 

orders to away Protected Quotations 

priced at the best away Protected 

Quotation until the incoming order is 

executed in its entirety or its limit price 

is reached. During this time, any 

unexecuted and unrouted shares of an 

incoming buy (sell) order will be 


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85 17 CFR 242.611. 

86Currently, the Commission has set the 

operative date for Rule 611 of Regulation NMS, 17 

CFR 242.611, on among other venues, the Exchange 

as February 5, 2007. See Securities Exchange Act 

Release No. 53829 (May 18, 2006), 71 FR 30038 

(May 24, 2006) (File No. S7–10–04). 

87 17 CFR 242.600(b)(57)–(58). 

88Pegged Orders will be displayed as described, 

supra, in the text accompanying notes 63–64. Other 

than Limit, Reserve, and Pegged Orders, orders on 

XLE are immediate-or-cancel. 

89 17 CFR 242.602. 

90See proposed Phlx Rule 184(c). 

91See proposed Phlx Rule 184(b). 

92See proposed Phlx Rule 184(a). 

93For purposes of ranking, orders are considered 

displayed based on the price that they would be 

displayed on the Exchange’s depth of book feed. 

See proposed Phlx Rule 184(b). This price is the 

same price that would be disseminated to the 

appropriate market data reporting plans pursuant to 

proposed Phlx Rule 184(c) if the order was the best 

round lot bid or offer. 

94See Partial Amendment No. 2. 

95See proposed Phlx Rule 189(b). 

96See Securities Exchange Act Release Nos. 

52651 (October 21, 2005), 70 FR 65956 (November 

1, 2005) (SR–SCCP–2004–03); and 48526 

(September 23, 2003), 68 FR 56367 (September 30, 

2003) (SR–NSCC–2003–14). 

displayable as the bid (offer) on XLE at 

$.01 away from the best Protected Offer 

(Bid), unless: (1) The Protected Bid is 

priced higher than the Protected Offer, 

then the incoming buy (sell) order will 

be displayable on XLE at the same price 

as best Protected Offer (Bid); or (2) the 

Protected Bid is priced equal to the 

Protected Offer and XLE is displaying 

an order at the price of the Protected 

NBBO on the same side of the market 

as the incoming order, then the 

incoming order will be displayable at 

the Protected NBBO. The POP 

instruction differs from the Ship and 

Quote instruction, in that with the POP 

instruction, XLE will continue to send 

orders to available liquidity so long as 

liquidity is available up to and 

including the order’s limit price. With 

the Ship and Quote instruction, XLE 

will only send orders once, to the 

liquidity that is available at the time of 

order entry. 

The following order types are, by 

definition, never routed: IOC Orders, 

ISO, Pegged Orders, IOC Cross Orders, 

and Mid-Point Cross Orders. Limit 

Orders and Reserve Orders with ‘‘Do 

Not Route’’ instructions attached are 

also never routed. Pursuant to Rule 

185(b)(1)(D), such Limit and Reserve 

Orders marked ‘‘Do Not Route’’ are 

executed immediately and 

automatically against existing orders on 

XLE at their displayable price, in order 

of their ranking, up to and including the 

price of the best away Protected 

Quotation, and the shares of the such 

Limit or Reserve Order not so executed 

shall be displayable as a bid (offer) on 

XLE, in the case of a buy (sell) order, at 

$.01 away from the best Protected Offer 

(Bid) regardless of the XLE Participant’s 

QMI, unless: (1) The Protected Bid is 

priced equal to the Protected Offer and 

XLE is displaying an order at the price 

of the Protected NBBO on the same side 

of the market as the incoming order, 

then the incoming order will be 

displayable at the Protected NBBO; or 

(2) the Protected Bid is priced higher 

than the Protected Offer, then a buy 

(sell) order will be executed 

immediately and automatically against 

existing orders on XLE at their 

displayable price, in order of their 

ranking, without regard to away 

Protected Quotations, and the shares of 

such Limit or Reserve Order not so 

executed shall be displayable on XLE at 

the limit price. 

XLE will not route orders to away 

quotations that are not Protected 

Quotations. Additionally, XLE may 

trade through the price of away 

quotations that are not Protected 

Quotations. XLE Participants should 

note that the definition of Protected 

Quotations is dependent on whether 

Rule 611 of Regulation NMS 85 is 

operative on the Exchange.86 Before 

Rule 611 of Regulation NMS is operative 

on the Exchange, a Protected Quotation 

will be, for securities other than those 

listed on Nasdaq, the best bid or offer 

of any ITS participating market center, 

subject to any exemption the Exchange 

may receive from the Commission. For 

Nasdaq securities before Rule 611 of 

Regulation NMS is operative on the 

Exchange, a Protected Quotation will be 

the best bid, offer or quotation, 

respectively, of any national securities 

exchange or national securities 

association. After Rule 611 of 

Regulation NMS is operative on the 

Exchange, a Protected Quotation will 

have the same meaning as Rule 

600(b)(57) and (58), as appropriate, of 

Regulation NMS.87 In either case, 

Protected Quotations may not include 

every available source of liquidity in the 

marketplace for a security. Therefore, 

when deciding to route agency orders to 

XLE, XLE Participants should be 

mindful of their duty of best execution. 

vii. Order Display and Ranking 

Orders (or the portion of orders) that 

are not immediately executed, routed 

away, or cancelled become orders on 

XLE available to be displayed and 

executed against new orders sent to 

XLE.88 XLE will use two methods to 

display orders that are available for 

execution. First, pursuant to Rule 602 of 

Regulation NMS,89 XLE will collect and 

make available to the appropriate 

market data reporting plans for 

dissemination the best-ranked displayed 

order(s) to buy and the best ranked 

displayed orders(s) to sell on XLE and 

the aggregate displayed size of such 

orders associated with such prices.90

Second, XLE will display all orders, 

except the undisplayed portion of 

Reserve Orders, to all users of a depth 

of book feed on an anonymous basis.91

The Exchange will make this depth of 

book feed available to any person, 

subject to any fee associated with this 

service. 

XLE will rank orders on XLE in strict 

price-time priority.92 Orders are ranked 

beginning with the highest priced orders 

to buy and the lowest priced orders to 

sell. For purposes of ranking, XLE uses 

the price at which the order is 

displayed.93 Within each price, orders 

are ranked in time priority based on the 

time that: (1) An order is received; (2) 

the price is updated; or (3) the display 

portion of a Reserve Order is reduced 

below a round lot and the display size 

is refreshed with shares from the 

undisplayed portion of the Reserve 

Order, except that the undisplayed 

portion of Reserve Orders shall be 

ranked after all other orders and display 

portions of Reserve Orders at the same 

price. With regard to Reserve Orders, 

XLE will decrement the share size of the 

display portion of a Reserve Order upon 

an execution against such portion of 

such order. When the display portion of 

a Reserve Order is reduced below a 

round lot, the display portion of that 

Reserve Order will be refreshed and reranked in time priority based on the 

time of refresh, however, the 

undisplayed portion of that Reserve 

Order will retain the ranking in relation 

to the undisplayed portion of other 

Reserve Orders based on the original 

Reserve Order entry time. Orders for 

which the price is changed are ranked 

based on the time of the change.94

viii. Anonymity 

Except as provided below, as 

proposed, transactions executed on XLE 

will be processed anonymously. This 

means that XLE transaction reports will 

indicate the details of the transaction, 

but will not reveal contra-party 

identities.95 XLE will maintain this 

anonymity after the execution by 

instructing the registered clearing 

agencies of the anonymous nature of the 

transaction.96 Additionally, no one 

having the right to trade on XLE and 

who has been a party to or has 

knowledge of an execution shall be 

under obligation to divulge, except to 

the Exchange, the name of the person 


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97See proposed Phlx Rules 161 and 189(c). 

98See, e.g., Securities Exchange Act Release No. 

49053 (January 12, 2004), 69 FR 2642 (January 16, 

2004) (SR–PCX–2003–63). 

99See proposed Phlx Rule 189(c). 

100See proposed Phlx Rule 189(d). 

101 17 CFR 240.17a–3(a)(1). 

102 17 CFR 240.17a–4(a). 

103 17 CFR 240.17a–6. 

104 17 CFR 240.10b-10. 

105See Letter from Brian A. Bussey, Assistant 

Chief Counsel, Division of Market Regulation, 

Commission, to Mai S. Shiver, Senior Counsel, 

Pacific Exchange, Inc., dated April 30, 2004. 

106See proposed Phlx Rules 1(w) and 187(a) (an 

odd lot order shall refer to an order that is sent to 

XLE for less than 100 shares or a larger order that 

has less than 100 shares remaining unexecuted). All 

odd lot orders that a XLE Participant submits to 

XLE as an odd lot order must be a Limit Order, an 

IOC Order, or a two-sided order. 

107See proposed Phlx Rule 1(q) (a mixed lot order 

shall refer to an order that is more than 100 shares, 

but shall not include orders in multiples of 100 

shares). 

108See proposed Phlx Rule 1(gg) (a round lot 

order shall refer to an order that is for 100 shares). 

Multiple round lot orders are orders for multiples 

of 100 shares, for example 400 shares. 

109See proposed Phlx Rule 187(c). 

110 ITS is not configured to accept executions in 

share amounts other than round lots and multiples 

of round lots. Therefore, XLE will not execute 

existing odd lot or odd lot portions of mixed lot 

orders against an incoming ITS commitment. XLE 

will treat any commitment or order from any other 

intermarket linkage with similar restrictions in the 

same manner. 

111 17 CFR 242.602. 

112The two market data reporting plans for 

quotations in NMS Stocks are the Consolidated 

Quotation Plan (‘‘CQ Plan’’) and the Nasdaq UTP 

Plan. 

113 XLE will, however, display the actual size of 

odd lot and mixed lot orders over its depth of book 

feed. See proposed Phlx Rule 184(b). 

114See proposed Phlx Rule 187(d). 

buying or selling in any transaction.97

The Exchange believes that post-trade 

anonymity should benefit investors 

because preserving anonymity until and 

after the settlement of a trade should 

limit the potential market impact that 

disclosing the XLE Participant’s identity 

may have. Specifically, when a contraparty’s identity is revealed, XLE 

Participants may be able to detect 

trading patterns and make assumptions 

about the potential direction of the 

market based on the XLE Participant’s 

presumed client base. For example, if 

the XLE Participant handles large 

institutional orders and becomes an 

active buyer in a security, others could 

anticipate such demand and adjust their 

trading strategy accordingly. The 

Exchange believes that this could result 

in increased costs. The Exchange 

believes that post-trade anonymity 

should not compromise a XLE 

Participant’s ability to settle an 

erroneous trade, because under 

proposed Phlx Rule 163, the clearly 

erroneous execution resolution process 

is coordinated by the Exchange, without 

the need for contra-parties to know each 

other’s identities. By masking the XLE 

Participant’s identity, the Exchange 

believes that it may help XLE 

Participants meet their best execution 

obligations by mitigating market 

impact.98

The Exchange will reveal the identity 

of the member organization or the 

member organization’s clearing firm in 

the following circumstances: (1) For 

regulatory purposes or to comply with 

an order of a court or arbitrator; (2) 

when the National Securities Clearing 

Corporation (‘‘NSCC’’) or Stock Clearing 

Corporation of Philadelphia (‘‘SCCP’’) 

ceases to act for a member organization 

or the member organization’s clearing 

firm and NSCC or SCCP determines not 

to guarantee the settlement of the 

member organization’s trades; or (3) on 

risk management reports provided to the 

contra-party of the member organization 

or the member organization’s clearing 

firm which disclose trading activity on 

an aggregate dollar value basis.99 Also, 

the Exchange will reveal to a member 

organization, no later than the end of 

the day on the date an anonymous trade 

was executed, when that member 

organization submits an order that has 

executed against an order submitted by 

that same member organization.100

In order to satisfy the member 

organization’s record keeping 

obligations under Rules 17a–3(a)(1)101

and 17a–4(a) under the Act,102 Phlx 

shall, with the exception of those 

circumstances described below, retain 

for the period specified in Rule 17a–4(a) 

the identity of each member 

organization that executes an 

anonymous transaction described in 

paragraph (b) of proposed Phlx Rule 

189. In addition, member organizations 

shall retain the obligation to comply 

with Rules 17a–3(a)(1) and 17a–4(a) 

under the Act whenever they possess 

the identity of their contra-party. In 

either case, the information shall be 

retained in its original form or a form 

approved under Rule 17a–6 under the 

Act.103 In connection with this 

proposed rule change, the Exchange 

intends to request, for XLE Participants, 

an exemption from Rule 10b-10 under 

the Act,104 regarding the required 

disclosure of the contra-party on a 

customer’s confirmation, and a noaction position on Rules 17a–3 and 17a–

4 under the Act, regarding a XLE 

Participant’s reliance on the Exchange 

for recordkeeping responsibilities for 

anonymous executions.105

ix. Odd Lots and Mixed Lots 

XLE will rank odd lot orders 106 and 

mixed lot orders 107 in the same manner 

(in price-time priority) as round lot 

orders 108 (or multiple round lot 

orders).109 This means that all incoming 

orders, except ITS commitments 110 and 

two-sided orders, will be executed 

against existing orders on XLE on an 

order-by-order basis regardless of the 

size of the existing orders. For example, 

suppose XLE receives three orders to 

buy in the following sequence: Order A 

for 50 shares priced at $10.00, Order B 

for 300 shares priced for $10.00, and 

Order C for 125 shares priced for $10.00. 

Then, XLE receives an order to sell, 

Order D, for 100 shares priced at $10.00. 

XLE will execute 50 shares of Order D 

against Order A at $10.00 and 50 shares 

of Order D against 50 shares of Order B 

at $10.00. This leaves 250 shares of 

Order B. Next, XLE receives another 

order to sell, Order E, for 280 shares 

priced at $10.00. XLE will execute 250 

shares of Order E against the remainder 

of Order B at $10.00 and 30 shares of 

Order E against 30 shares of Order C at 

$10.00. This leaves 95 shares of Order 

C. Finally, XLE receives an order to sell, 

Order F, for 100 shares at $10.00. XLE 

will execute 95 shares of Order F against 

the remainder of Order C at $10.00. This 

leaves 5 shares of Order F available to 

execute against future orders to sell. 

The market data reporting plans that 

disseminate quotations pursuant to Rule 

602 of Regulation NMS 111 only collect 

and report quotations in round lots and 

multiples of round lots.112 For purposes 

of the CQ and Nasdaq UTP Plans, the 

Exchange will not disseminate any odd 

lot orders or any size connected to the 

odd lot portion of mixed lot orders.113

For example, if XLE has two orders to 

buy at $10.00, the best price to buy on 

XLE, one consisting of 50 shares and 

another consisting of 250 shares, the 

Exchange shall disseminate to the CQ or 

Nasdaq UTP Plan, as appropriate, a 

quotation of $10.00 for 200 shares. XLE 

would ignore the 50 share odd lot order 

and takes into account 200 shares (the 

round lot multiple portion) of the 250 

share order, ignoring the remaining 50 

share portion (the odd lot portion of the 

mixed lot). XLE would not aggregate the 

odd lot portions. However, the 

Exchange’s depth of book feed would 

display both orders at their actual size, 

50 shares and 250 shares. Because the 

Exchange will not disseminate odd lot 

orders to the CQ and Nasdaq UTP Plans, 

the Exchange proposes the following 

restrictions regarding odd lot orders so 

that orders that would otherwise be 

displayable are not entered in a form 

that is undisplayable.114 Pursuant to 

proposed Phlx Rule 187(d), XLE 


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115See supra Section II.A.1.c.vi (Order Routing). 

116See supra Section II.A.1.c.vii (Order Display 

and Ranking). 

117See 17 CFR 242.611(b)(1). 

118See proposed Phlx Rule 185(c)(4). 

119See 17 CFR 242.611(b)(2). 

120See 17 CFR 242.611(b)(4). 

121See 17 CFR 242.611(b)(5). 

122Limit Orders, Reserve Orders, and SSOs. See 

proposed Phlx Rule 185(b)(1)(C)(i) and (b)(2)(B). 

123See 17 CFR 242.600(b)(30) and 17 CFR 

242.611(b)(6). 

124See 17 CFR 242.611(b)(7). 

125See proposed Phlx Rule 185(c)(3). 

126See id. See also August 15 Telephone Call, 

supra note 64. 

127See proposed Phlx Rule 188 and Partial 

Amendment No. 2. 

128See proposed Phlx Rule 186(b) and (d). 

129 17 CFR 242.610. 

130See proposed Phlx Rule 164(b). 

Participants shall not unbundle round 

lots for the purpose of entering odd lot 

limit orders in comparable amounts. 

XLE Participants shall aggregate odd lot 

orders into round lots when such orders 

are for the same account or for various 

accounts in which there is a common 

monetary interest. XLE Participants 

shall not enter both buy and sell odd lot 

limit orders in the same stock before one 

of the orders is executed for the purpose 

of capturing the spread in the stock 

when such orders are for the same 

account or for various accounts in 

which there is a common monetary 

interest. 

x. Prevention of Trade-Throughs 

XLE is designed to automatically 

prevent trade-throughs of Protected 

Quotations, both before and after Rule 

611 of Regulation NMS is operative. 

XLE would accomplish this in two 

principal ways: (1) Through the use of 

outbound routing 115 for those orders 

that will be available to route; and (2) 

by only displaying orders 116 at prices 

that would not impermissibly lock or 

cross a market. Additionally, XLE will 

take advantage of various exceptions to 

Rule 611, once operative. Phlx will 

allow XLE to trade-through a Protected 

Quotation displayed by a trading center 

that was experiencing a failure, material 

delay, or malfunction of its systems or 

equipment.117 Specifically, if another 

trading center providing a Protected 

Bid, Offer or Quotation repeatedly fails 

to respond within one second to 

incoming orders attempting to access its 

Protected Bid, Offer or Quotation, XLE 

may cease to consider those Protected 

Bids, Offers or Quotations as such by: 

(1) Notifying the non-responding trading 

center immediately after (or at the same 

time as) electing self-help; and (2) 

assessing whether the cause of the 

problem lies with its own system and, 

if so, taking immediate steps to resolve 

the problem. Further, XLE will allow 

two-sided orders for non-regular way 

settlement 118 to trade-through Protected 

Quotations.119 XLE will allow Limit, 

Reserve, IOC, and IOC Cross Orders to 

execute at prices that trade-through 

Protected Quotations when the 

Protected Bid is higher than Protected 

Offer.120 Incoming ISO orders, which 

may, by definition, trade-through 

Protected Quotations, are designed to 

take advantage of the Rule 611 

exception for intermarket sweep 

orders.121 XLE also will allow orders 122

to trade-through Protected Quotations 

when XLE has simultaneously routed an 

intermarket sweep order to execute 

against the full displayed size of that 

Protected Quotation.123 Rule 611(b)(7) 

of Regulation NMS allows orders to 

execute if their price was not based, 

directly or indirectly, on the quoted 

price of the NMS stock at the time of 

execution and for which the material 

terms were not reasonably determinable 

at the time the commitment to execute 

the order was made.124 XLE will allow 

IOC Cross Orders that have been marked 

‘‘Benchmark’’125 to trade-through 

Protected Quotations based on Rule 

611(b)(7). In addition, if the 

Commission grants the appropriate 

exemption from Rule 611 of Regulation 

NMS, XLE will allow certain IOC cross 

orders marked as ‘‘Qualified Contingent 

Trades’’ to trade through protected 

quotations.126 XLE will identify trades 

executed pursuant to an exception or 

exemption to Rule 611 of Regulation 

NMS in accordance with specifications 

approved by the operating committee of 

the relevant national market system 

plan for an NMS Stock.127

xi. Locked and Crossed Markets 

XLE would not, upon initial 

implementation, lock or cross any away 

Protected Quotations that it reads from 

an effective national market system 

plan, except in the following 

circumstances. XLE may lock or cross 

an away Protected Quotation when XLE 

reads that a Protected Bid is higher than 

a Protected Offer. XLE also may lock or 

cross an away Protected Quotation if 

XLE has first routed an order to that 

quotation and all better priced 

quotations for their full displayed size. 

Finally, if XLE is reading the Protected 

Bid equal to the Protected Offer and 

XLE is disseminating an order pursuant 

to proposed Phlx Rule 184(c) equal to 

either the best Protected Bid or best 

Protected Offer, XLE may continue to 

display new orders at the same price of 

the order it is disseminating. 

In addition, the Exchange proposes a 

rule that would require members of the 

Exchange to reasonably avoid 

displaying, and prohibit them from 

engaging in, a pattern or practice of 

displaying any quotations that lock or 

cross a Protected Quotation, and any 

manual quotations that lock or cross a 

quotation previously disseminated 

pursuant to an effective national market 

system plan, unless an applicable 

exemption applies.128 Phlx requests that 

proposed Phlx Rule 186 not become 

operative until Rule 610 of Regulation 

NMS 129 is operative on the Exchange, 

which is currently scheduled for 

February 5, 2007. 

xii. Trading Halts 

A number of current and proposed 

rules will govern trading halts on XLE. 

Proposed Phlx Rule 164(a) would allow 

the Chairman and Chief Executive 

Officer of the Exchange or his designee 

to suspend trading in any and all 

securities traded on XLE whenever in 

his or his designee’s opinion such 

suspension would be in the public 

interest. No such action shall continue 

longer than a period of two days, or as 

soon thereafter as a quorum of 

Governors can be assembled, unless the 

Board approves the continuation of such 

suspension. This is the general authority 

to suspend trading on XLE. 

Additionally, current Phlx Rules 133 

(Trading Halts Due to Extraordinary 

Market Volatility) and 136 (Trading 

Halts in Certain Exchange Traded 

Funds) would provide for trading halts 

in specific situations in securities to be 

traded on XLE. 

If trading in one or more securities is 

halted, all orders in those securities 

shall be cancelled.130 XLE shall not 

accept any orders, or any changes to 

orders (other than cancellations), in 

those securities during a trading halt. 

Immediately after the trading halt has 

ended, XLE shall begin accepting orders 

for processing. 

xiii. Clearly Erroneous Executions 

Pursuant to proposed Phlx Rule 163, 

a XLE Participant that receives an 

execution on an order that was 

submitted erroneously to XLE for its 

own or customer account may request 

that Phlx review the transaction under 

proposed Phlx Rule 163(b) within the 

time limits prescribed therein. The 

terms of a transaction executed on XLE 

would be ‘‘clearly erroneous’’ when 

there is an obvious error in any term, 

such as price, number of shares or other 

unit of trading, or identification of the 

security. A transaction made in clearly 

erroneous error and cancelled by both 

parties may be removed, if the parties 


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131An Exchange Official is an officer of Phlx or 

such other designee of Phlx. See proposed Phlx 

Rule 163(b). 

132The Referee is an Exchange employee or 

independent contractor who is appointed by the 

Phlx Board of Governors on the recommendation of 

the Audit Committee. See Phlx Rule 124. The 

Referee resolves disputes and makes certain rulings 

pursuant to Phlx Rule 124(d) and proposed Phlx 

Rule 163(c)(2). 

133See proposed Phlx Rule 163(c)(2). 

134See Phlx Rules 124(d)(iv) and (vi). 

135See proposed Phlx Rule 163(d). 

136See id. 

137 17 CFR 240.12f–2. 

138See proposed Phlx Rule 163(e). 

139See proposed Phlx Rule 185(b)(1)(A)–(B) and 

(b)(3). 

140See proposed Phlx Rule 183(a). 

141See proposed Phlx Rule 180(a). 

142See proposed Phlx Rule 165. 

143See proposed Phlx Rule 180(b). 

do not object, subject to the approval of 

Phlx. If both parties do not agree that a 

transaction is clearly erroneous, then 

the Exchange, through an Exchange 

Official,131 will then perform a review 

pursuant to proposed Phlx Rule 

163(c)(1). If the Exchange Official 

determines that the transaction is not 

clearly erroneous, the Exchange Official 

shall decline to take any action in 

connection with the completed trade. In 

the event that the Exchange Official 

determines that the transaction in 

dispute is clearly erroneous, the 

Exchange Official shall declare the 

transaction null and void or modify one 

or more of the terms of the transaction 

to achieve an equitable rectification of 

the error that would place the parties in 

the same position, or as close as 

possible to the same position that they 

would have been in, had the error not 

occurred. 

The party affected by the review may 

then appeal the decision of the 

Exchange Official to the Referee within 

the time limits set forth in Phlx Rule 

124(d)(i) (currently within fifteen 

minutes).132 The Referee shall review 

the decision of the Exchange Official as 

if it was a Floor Official Ruling.133

Therefore, the decisions of the Referee 

are final and may not be appealed to the 

Board of Governors, and members or 

member organizations who fail to 

promptly comply with the decision of 

an Exchange Official or Referee may 

result in referral to the Business 

Conduct Committee (‘‘BCC’’).134

Notwithstanding the Exchange’s dispute 

process, disputes continue to be eligible 

for arbitration pursuant to Phlx Rule 

950. 

Exchange Officials may, on their own 

motion, review transactions on XLE that 

arose during any disruption or 

malfunction in the use or operation of 

any electronic communications or 

trading facilities of the Phlx, or 

extraordinary market conditions or 

other circumstances in which the 

nullification or modification of 

transactions may be necessary for the 

maintenance of a fair and orderly 

market or the protection of investors 

and the public interest.135 Each XLE 

Participant involved in such a 

transaction shall be notified as soon as 

practicable, and the XLE Participant 

aggrieved by the action may appeal such 

action to the Referee.136

Pursuant to Rule 12f–2 under the 

Act,137 as amended, the Phlx may 

extend unlisted trading privileges to a 

security that is the subject of an initial 

public offering when at least one 

transaction in the subject security has 

been effected on the national securities 

exchange or association upon which the 

security is listed and the transaction has 

been reported pursuant to an effective 

transaction reporting plan. A clearly 

erroneous error may be deemed to have 

occurred in the opening transaction of 

the subject security if the execution 

price of the opening transaction on XLE 

is more than the lesser of $1.00 or 10% 

away from the opening price on the 

listing exchange or association. In such 

circumstances, the Exchange Official 

shall declare the opening transaction 

null and void or adjust the transaction 

price to the opening price on the listing 

exchange or association. Clearly 

erroneous executions of subsequent 

transactions of the subject security will 

be reviewed in the same manner as the 

procedure set forth in proposed Phlx 

Rule 163(c)(1).138

xiv. Pre Market, Core, and Post Market 

Sessions 

XLE will be open to accept orders for 

three different trading sessions 

beginning at 8 a.m. Eastern time and 

continuing until 6 p.m., except during 

trading halts, every trading day unless 

otherwise declared by the Exchange. 

XLE will not have any opening or 

closing auctions or rotations at the 

beginning of, during, or at the end of 

any of these sessions. Therefore, XLE 

will not accept any orders unless it is 

open for trading and can immediately 

process those orders for execution, 

routing, or display, as applicable. At the 

end of the trading day and if trading is 

halted intraday, XLE will cancel all 

existing orders so that when trading 

begins again, either the next day or after 

the halt is lifted, there are no existing 

orders that would impermissibly lock or 

cross the market. New orders would 

only be accepted when they could again 

be executed, routed, or displayed, 

which would only happen when XLE is 

open for trading. 

Because XLE will operate during three 

distinct trading sessions, a XLE 

Participant may designate during which 

contiguous XLE trading session(s) a 

Limit, Reserve, or Pegged Order is 

eligible for execution.139 For example, a 

XLE Participant could enter a Limit 

Order at 8:45:00 a.m. (during the Pre 

Market Session) for execution and 

designate it as eligible for the Pre 

Market and Core Sessions. That means 

that unless the order is fully executed, 

it will remain on XLE until the end of 

the Core Session, at which time it will 

be cancelled back to the XLE 

Participant. 

Finally, no XLE Participant may 

accept an order from a non-XLE 

Participant for execution in the Pre 

Market or Post Market Session without 

disclosing to such non-XLE Participant 

that: (1) An order must be designated 

specifically for trading in the Pre Market 

or Post Market Session to be eligible for 

trading in the Pre Market or Post Market 

Session; and (2) trading outside of 

‘‘regular’’ trading hours may involve 

material trading risks, including the 

possibility of lower liquidity, high 

volatility, changing prices, unlinked 

markets, an exaggerated effect from 

news announcements, wider spreads 

and any other relevant risk.140 Proposed 

Phlx Rule 183(b) provides a form of 

notice XLE Participants may use to 

disclose the material trading risks of 

trading in the Pre Market or Post Market 

Sessions. 

xv. Access to XLE 

The Exchange will provide access to 

XLE for its members and member 

organizations and certain other persons 

who are sponsored by member 

organizations. Members and member 

organizations can register with the 

Exchange to become a XLE Participant, 

which includes entering into a XLE 

Participant Agreement.141 The Exchange 

will confirm that the member or 

member organization has the proper 

clearing relationships 142 and has the 

ability to electronically connect to XLE. 

Member organizations may sponsor 

other persons to gain access to XLE. 

When doing so, these member 

organizations become Sponsoring 

Member Organizations. The persons that 

the Sponsoring Member Organizations 

sponsor become Sponsored 

Participants.143 A Sponsored Participant 

and its Sponsoring Member 

Organization would be required to enter 

into and maintain a XLE Participant 

Agreement with the Exchange. The 

Sponsoring Member Organization must 

designate the Sponsored Participant by 


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144See proposed Phlx Rule 180(b)(2)(A). 

145See proposed Phlx Rule 180(b)(1). 

146See proposed Phlx Rule 181. 

147See proposed Phlx Rule 182. 

148See proposed Phlx Rule 1(bb). 

149See proposed Phlx Rule 1(aa). 

150See proposed Phlx Rule 1(ee). 

151See proposed Phlx Rule 189(a)(1) and Partial 

Amendment No. 2. 152See proposed Phlx Rule 165(a). 

153See Securities Exchange Act Release No. 

41210 (March 24, 1999), 64 FR 15857 (April 1, 

1999) (SR–Phlx–96–14) (text at note 26). 

154SCCP is permitted to provide margin accounts 

for certain persons (called ‘‘Margin Members’’ at 

SCCP) that clear and settle their transactions 

through SCCP’s Omnibus Clearance and Settlement 

Account at NSCC. See Securities Exchange Act 

Release No. 48954 (December 18, 2003), 68 FR 

75013 (December 29, 2003) (SR–SCCP–2003–04). 

SCCP Margin Members who are XLE Participants 

may use their SCCP margin accounts to trade on 

XLE without needing to use another clearing firm. 

155See proposed Phlx Rule 165(c). 

name in its XLE Participant 

Agreement.144 The XLE Participant 

Agreement is intended to highlight the 

responsibilities that a XLE Participant 

has regarding its use of XLE. In 

addition, it is intended to bind 

Sponsored Participants to their terms of 

use of XLE. 

Sponsored Participants also would be 

required to enter into and maintain 

customer agreements with one or more 

Sponsoring Member Organizations so 

that Sponsoring Member Organizations 

may maintain the requisite level of 

control over the Sponsored Participants’

trading on XLE. These customer 

agreements should also establish proper 

relationship(s) and account(s) through 

which the Sponsored Participant may 

trade on XLE.145 Such customer 

agreement(s) must incorporate the 

following Sponsorship Provisions: 

1. Sponsoring Member Organization 

acknowledges and agrees that all orders 

entered by the Sponsored Participants 

and any person acting on behalf of or in 

the name of such Sponsored Participant 

and any executions occurring as a result 

of such orders are binding in all respects 

on the Sponsoring Member 

Organization; and that the Sponsoring 

Member Organization is responsible for 

any and all actions taken by such 

Sponsored Participant and any person 

acting on behalf of or in the name of 

such Sponsored Participant. 

2. Sponsoring Member Organization 

shall comply with the Exchange’s 

Certificate of Incorporation, Bylaws, 

Rules, and procedures with regard to 

XLE and Sponsored Participant shall 

comply with the Exchange’s Certificate 

of Incorporation, Bylaws, Rules, and 

procedures with regard to XLE, as if 

Sponsored Participant were a member 

organization. 

3. Sponsored Participant shall 

maintain, keep current and provide to 

the Sponsoring Member Organization a 

list of PAUs who may obtain access to 

XLE on behalf of the Sponsored 

Participant. 

4. Sponsored Participant shall 

familiarize its PAUs with all of the 

Sponsored Participant’s obligations 

under this Rule and will assure that 

they receive appropriate training prior 

to any use or access to XLE. 

5. Sponsored Participant may not 

permit anyone other than PAUs to use 

or obtain access to XLE. 

6. Sponsored Participant shall take 

reasonable security precautions to 

prevent unauthorized use or access to 

XLE, including unauthorized entry of 

information into XLE, or the 

information and data made available 

therein. Sponsored Participant 

understands and agrees that Sponsored 

Participant is responsible for any and all 

orders, trades and other messages and 

instructions entered, transmitted or 

received under identifiers, passwords 

and security codes of PAUs, and for the 

trading and other consequences thereof. 

7. Sponsored Participant 

acknowledges its responsibility to 

establish adequate procedures and 

controls that permit it to effectively 

monitor its employees’’, agents’’, and 

customers’ use and access to XLE for 

compliance with the terms of this 

agreement. 

8. Sponsored Participant shall pay 

when due all amounts, if any, payable 

to Sponsoring Member Organization, the 

Exchange or any other third parties that 

arise from the Sponsored Participants 

access to and use of XLE. Such amounts 

include, but are not limited to, 

applicable exchange and regulatory fees. 

xvi. Order Entry by XLE Participants 

XLE Participants may enter any type 

of order available on XLE provided, 

however, no XLE Participant may enter 

a Limit Order or Reserve Order without 

‘‘Do Not Route’’ instructions, or an SSO, 

unless the XLE Participant or the XLE 

Participant’s Sponsoring Member 

Organization has entered into a Routing 

Agreement.146 The Routing Agreement 

between the Exchange, the Exchange’s 

routing broker-dealer and the XLE 

Participant or the XLE Participant’s 

Sponsoring Member Organization 

allows the routing broker-dealer to act 

for the XLE Participant if the XLE 

Participant or its Sponsored Participant 

enters an order that is routable. 

In addition, all XLE Participants may 

enter Proprietary Orders, Professional 

Orders, and Public Agency Orders.147

Proprietary Orders are for the account of 

the XLE Participant who entered the 

order into XLE.148 Professional Orders 

are for the account of a broker or dealer, 

which order is represented, as agent, by 

a XLE Participant.149 Public Agency 

Orders are for the account of a person 

other than a broker or dealer, which 

order is represented, as agent, by a XLE 

Participant.150 Proprietary Orders are 

subject to the same display and ranking 

processes as agency orders (Professional 

Orders and Public Agency Orders). XLE 

Participants that enter orders on XLE 

shall mark each order (or each side of 

a two-sided order) with the appropriate 

designator to identify the order (or the 

side of the order) as Proprietary, 

Professional, or Public Agency. In 

addition, all orders would need to be 

entered with a valid clearing account 

number and two-sided orders would 

need to be entered with valid clearing 

account numbers for both sides of the 

order.151

xvii. Clearing Requirements for XLE 

Participants 

Each member organization that is a 

XLE Participant must either be a 

clearing firm, clear transactions on XLE 

through a clearing firm, or clear 

transaction through an entity duly 

authorized by the Exchange (e.g., 

SCCP).152 Each clearing firm must be 

admitted to the Exchange as a member 

organization and to SCCP as a SCCP 

Participant. Clearing firms must be 

SCCP Participants because all 

transactions on XLE will be sent to 

SCCP to perform trade reconciliation 

and confirmation functions before being 

sent to the NSCC for clearing and 

settlement, which is consistent with 

current practice on the Exchange’s 

equity trading floor.153 Additionally, 

member organizations that are XLE 

Participants may clear transactions on 

XLE through SCCP without going 

through a clearing firm.154

A clearing firm shall have a number 

of responsibilities respecting XLE 

executions. Clearing firms shall clear 

their own transactions made on XLE, if 

any. In addition to clearing their own 

transactions, a clearing firm shall be 

responsible for the clearance of the 

transactions effected by each member 

organization which gives up such 

clearing firm’s name pursuant to a letter 

of authorization, letter of guarantee or 

other authorization given by such 

clearing firm to such member 

organization, which authorization shall 

be submitted to the Exchange.155

Clearing firms may also clear 

transactions on XLE effected by 

Sponsored Participants whose 

Sponsoring Member Organization gives 

up the clearing firm or whose 


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156See proposed Phlx Rule 189(a). 

157See proposed Phlx Rule 170(a) and (b). 

158See proposed Phlx Rule 170(b). 

159See proposed Phlx Rule 170(c). 

160See proposed Phlx Rule 170(d). 

161See proposed Phlx Rule 170(e). 

162See proposed Phlx Rule 172(a). 

163See id. 

164See proposed Phlx Rule 172(b). 

165See proposed Phlx Rule 172(d). 

166See proposed Phlx Rule 172(c). 

167See proposed Phlx Rule 172(c). 

168See proposed Phlx Rule 173(d). 

169See proposed Phlx Rule 173(a). 

170See proposed Phlx Rule 1(h). 

171See proposed Phlx Rule 173(b). 

172See proposed Phlx Rule 173(c). 

Sponsoring Member Organization is the 

clearing firm.156

xviii. Market Makers 

XLE Participants that are member 

organizations may apply to register as 

Market Makers on XLE.157 While the 

presence of a Market Maker in a security 

is not a requirement on XLE, the 

Exchange believes that Market Makers 

can provide an additional source of 

liquidity to XLE in the securities in 

which the Market Maker is making 

markets. Market Makers may use any of 

the order types available to any other 

XLE Participant, but there are no special 

order types or quotations available for 

Market Makers. Orders from Market 

Makers on XLE will be treated the same 

as orders from other XLE Participants. 

In addition, Market Makers will not 

have any special or enhanced access to 

or responsibility for the orders on XLE 

in any given security. 

Market Makers shall apply to the 

Exchange for registration pursuant to 

proposed Phlx Rule 170. The Exchange 

will review an application to become a 

Market Maker considering such factors 

as capital, operations, personnel, 

technical resources, and disciplinary 

history.158 An applicant’s registration as 

a Market Maker shall become effective 

upon receipt by the member 

organization of notice of an approval of 

registration by the Exchange. In the 

event that an application is disapproved 

by the Exchange, the applicant shall 

have an opportunity to be heard upon 

the specific grounds for the denial, in 

accordance with the provisions of Phlx 

Proposed Rule 174.159 Specifically, for 

an opportunity to be heard, persons may 

appeal such action to the Exchange’s 

Board of Governors pursuant to By-Law 

Article XI, Section 11–1(a). The 

registration of a Market Maker may be 

suspended or terminated by the 

Exchange upon a determination of any 

substantial or continued failure by such 

Market Maker to engage in dealings in 

accordance with proposed Phlx Rule 

173, which describes the obligations of 

Market Makers.160 Any registered 

Market Maker may withdraw its 

registration by giving written notice to 

the Exchange. Such withdrawal of 

registration shall become effective on 

the tenth business day following the 

Exchange’s receipt of the notice. A 

Market Maker who fails to give a tenday written notice of withdrawal to the 

Exchange may be subject to formal 

disciplinary action pursuant to Phlx 

Rule 960.1 et seq. Subsequent to 

withdrawal, the member organization 

shall not be permitted to re-register as 

a Market Maker for a period of six 

months.161

Once registered as a Market Maker, a 

member organization may then register 

in a newly authorized security or in a 

security already admitted to dealings on 

XLE by filing a security registration 

form with the Exchange.162 Registration 

in the security shall become effective on 

the first business day following the 

Exchange’s approval of the registration. 

In considering a Market Maker’s 

registration for a particular security, the 

Exchange may consider the fitness of 

Market Maker as well as attributes of the 

individual security and the current 

market for the security on XLE.163 A 

Market Maker’s registration in a security 

may be terminated by the Exchange if 

the Market Maker fails to enter 

quotations in the security within five 

business days after the Market Maker’s 

registration in the security becomes 

effective.164 In addition, the Exchange 

may suspend or terminate any 

registration of a Market Maker in a 

security or securities under this 

proposed Phlx Rule 172 whenever, in 

the Exchange’s judgment, the interests 

of a fair and orderly market are best 

served by such action.165 Any such 

suspension or withdrawal of privileges 

by the Exchange is subject to review 

pursuant to proposed Phlx Rule 174, 

which permits an appeal to the Board of 

Governors pursuant to By-Law Article 

XI, Section 11–1(a). 

Alternatively, a Market Maker may 

voluntarily terminate its registration in 

a security by providing the Exchange 

with a one-day written notice of such 

termination.166 Such termination shall 

be effective on the first business day 

immediately following the business day 

the Exchange received the notice. A 

Market Maker that fails to give advanced 

written notice of termination to the 

Exchange may be subject to formal 

disciplinary action pursuant to Phlx 

Rule 960.1 et seq.167 A Market Maker 

may apply to the Exchange to withdraw 

temporarily from its Market Maker 

status in the securities in which it is 

registered.168 The Market Maker must 

base its request on demonstrated legal or 

regulatory requirements that necessitate 

its temporary withdrawal, or provide 

the Exchange an opinion of counsel 

certifying that such legal or regulatory 

basis exists. The Exchange will act 

promptly on such request and, if the 

request is granted, the Exchange may 

temporarily reassign the securities to 

another Market Maker. 

Upon becoming Market Makers and 

registering in one or more securities on 

XLE, Market Makers would be required 

to assume a number of 

responsibilities.169 Market Makers must 

engage in a course of dealings for their 

own account to assist in the 

maintenance, insofar as reasonably 

practicable, of fair and orderly markets 

on XLE. Each Market Maker must use 

electronic system(s) to maintain 

continuously two-sided markets with at 

least one Limit Order to buy and at least 

one Limit Order to sell, each for at least 

a round lot, in those securities in which 

the Market Maker is registered to trade. 

Market Makers must maintain adequate 

minimum capital in accordance with 

Phlx Rule 703. Market Makers must 

remain in Good Standing 170 with the 

Exchange. Market Makers must inform 

the Exchange of any adverse material 

change in financial or operational 

condition or significant change in 

personnel. Finally, Market Makers must 

clear and settle transactions through the 

facilities of a registered clearing agency 

using the means described in proposed 

Phlx Rule 165(a). Market Makers must 

meet these obligations during the Core 

Session in their registered securities on 

all days XLE is open for business.171 If 

the Exchange finds any substantial or 

continued failure by a Market Maker to 

engage in a course of dealings required 

by a Market Maker, such Market Maker 

will be subject to suspension or 

revocation of the registration by the 

Exchange in one or more of the 

securities in which the Market Maker is 

registered, provided, however, this does 

not limit any other power of the Board 

of Governors under the By-laws, Rules, 

or procedures of the Exchange with 

respect to the registration of a Market 

Maker or in respect of any violation by 

a Market Maker. In accordance with 

proposed Phlx Rule 174, a member 

organization may seek review of such 

suspension or revocation.172

Because Market Makers are member 

organizations, individuals who enter 

orders on XLE in the course of making 

markets for a Market Maker are Market 

Maker Authorized Traders (‘‘MMATs’’). 

The Exchange may, upon receiving an 


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173See proposed Phlx Rule 171(b). 174See proposed Phlx Rule 171(a) and Partial 

Amendment No. 2. 

175See proposed Phlx Rule 171(b)(1). 

176See proposed Phlx Rule 171(b)(2). 

177See proposed Phlx Rule 171(b)(3). 

178See proposed Phlx Rule 171(b)(4). 

179See proposed Phlx Rule 171(b)(5). 

180See proposed Phlx Rule 171(c)(1). 

181See proposed Phlx Rule 171(c)(2). 

182See proposed Phlx Rule 171(c)(3). 183At this time, PRO Securities LLC is called 

Smart Execution Securities LLC. OES is in the 

process of changing the name of Smart Execution 

Securities LLC to PRO Securities LLC. 184 15 U.S.C. 78c(a)(2). 185The optional routing of orders to away markets 

by XLE is described above in Section II.A.1.c.vi. 186Executions occurring as a result of orders 

routed away from the Exchange shall be reported 

to an appropriate consolidated transaction reporting 

system by the relevant reporting market center. The 

Exchange shall promptly notify XLE Participants of 

all executions of their orders as soon as the 

Exchange is notified that such executions have 

taken place. See proposed Phlx Rule 188. 187 15 U.S.C. 78c(a)(2). 188 15 U.S.C. 78f(b)(5). Neither PRO nor the 

Routing Agreement may unfairly discriminate 

among XLE Participants, pursuant to Section 6(b)(5) 

of the Act. See August 15 Telephone Call, supra 

note 64. 

189 17 CFR 240.17d–1. 190Pursuant to Rule 17d–1 of the Act, in making 

such designation the Commission shall take into 

consideration the regulatory capabilities and 

procedures of the SROs, availability of staff, 

convenience of location, unnecessary regulatory 

duplication, and such other factors as the 

Commission may consider germane to the 

protection of investors, the cooperation and 

coordination among self-regulatory organizations, 

and the development of a national market system 

for the clearance and settlement of securities 

transactions. 

191 17 CFR 240.17d–1. 

192See 17 CFR 240.17d–2 and Partial Amendment 

No. 2. 

193See proposed Phlx Rule 181. 

194See id. 

application in writing from a Market 

Maker on a form prescribed by the 

Exchange, register a member of the 

Exchange as a MMAT. Each MMAT 

must be a member of the Exchange at all 

times he or she is acting as a MMAT.173

All orders entered by a MMAT must 

contain the identification of the 

individual MMAT that entered the 

order.174 MMATs may be officers, 

partners, employees or other associated 

persons of member organizations that 

are registered with the Exchange as 

Market Makers.175 The Exchange may 

require a Market Maker to provide 

additional information the Exchange 

considers necessary to establish whether 

registration should be granted.176 The 

Exchange may grant a member 

conditional registration as a MMAT 

subject to any conditions it considers 

appropriate in the interests of 

maintaining a fair and orderly 

market.177 A Market Maker must ensure 

that a MMAT is properly registered to 

perform market making activities.178 In 

addition, to be eligible for registration as 

a MMAT, a person must have served as 

a dealer-specialist or market maker on a 

registered national securities exchange 

or association (or be deemed to have 

similar experience from having 

functioned as a trader) for at least one 

year within three years of the date of 

application, or, in the alternative, must 

successfully complete the General 

Securities Representative Examination 

(Series 7).179

The Exchange may suspend or 

withdraw the registration previously 

given to a person to be a MMAT if the 

Exchange determines that: (1) The 

MMAT has caused the Market Maker to 

not properly perform the 

responsibilities of a Market Maker; (2) 

the MMAT has failed to meet the 

conditions set forth under the preceding 

paragraph; or (3) the Exchange believes 

it is in the interest of maintaining fair 

and orderly markets.180 If the Exchange 

suspends the registration of a person as 

a MMAT, the Market Maker must not 

allow the person to submit orders on 

XLE.181 Any such suspension or 

withdrawal of MMAT privileges by the 

Exchange is subject to review pursuant 

to proposed Phlx Rule 174. The 

registration of a MMAT will be 

withdrawn upon the written request of 

the member organization for which the 

MMAT is registered. Such written 

request shall be submitted on the form 

prescribed by the Exchange.182

xix. Outbound Routing Facility 

In connection with the proposed 

changes to the trading rules described 

above, the Exchange intends to have 

PRO, a wholly owned subsidiary of 

Order Execution Services Holdings, Inc. 

(‘‘OES’’),183 operate as a facility (as 

defined in Section 3(a)(2) of the Act) 184

of the Exchange. PRO is a broker-dealer, 

a member of the NASD, and is applying 

to become a member organization of the 

Exchange. PRO plans to provide an 

optional routing service for the 

Exchange, in which PRO will route 

orders from the Exchange to trading 

centers with Protected Quotations 

through other brokers (‘‘Access 

Brokers’’) that are members or 

participants of those trading centers 

(such function of PRO is referred to as 

the ‘‘Outbound Router’’).185 As an 

Outbound Router, PRO will receive 

routing instructions from XLE, route 

orders to another trading center through 

an Access Broker, and be responsible for 

reporting resulting executions back to 

XLE.186 All orders routed through PRO 

would be subject to the Exchange’s 

rules. PRO cannot change the terms of 

an order or the routing instructions, nor 

does PRO have any discretion about 

where to route an order. 

The Outbound Router function of 

PRO will operate as a facility (as defined 

in Section 3(a)(2) of the Act).187 As 

such, the Outbound Router function of 

PRO is subject to the Commission’s 

continuing oversight. In particular, and 

without limitation, under the Act, the 

Exchange is responsible for filing with 

the Commission proposed rule changes 

and fees relating to the PRO Outbound 

Router function, and PRO is subject to 

exchange non-discrimination 

requirements.188

Pursuant to Rule 17d–1 under the 

Act,189 where a member of the 

Securities Investor Protection 

Corporation is a member of more than 

one self-regulatory organization 

(‘‘SRO’’), the Commission shall 

designate to one of such organizations 

the responsibility for examining such 

member for compliance with the 

applicable financial responsibility 

rules.190 The SRO designation by the 

Commission is referred to as a 

‘‘Designated Examining Authority.’’ As 

noted above, PRO is applying to become 

a member organization of the Exchange, 

and is a member of the NASD. The 

NASD is an SRO not affiliated with the 

Exchange or its affiliates. Currently, the 

NASD is the Designated Examining 

Authority for PRO pursuant to Rule 

17d–1 of the Act 191 with the 

responsibility for examining PRO for 

compliance with the applicable 

financial responsibility rules. The 

Exchange intends to enter into a 17d–2 

agreement with the NASD to regulate 

PRO in its capacity as a member of both 

the Exchange and the NASD.192

XLE Participants’ use of PRO to route 

orders to another trading center will be 

optional and subject to Exchange rules, 

as described above. Those XLE 

Participants who choose to use PRO’s 

Outbound Router function must sign a 

Routing Agreement.193 XLE Participants 

that choose not to sign a Routing 

Agreement may still enter orders on 

XLE, but they may only enter orders that 

are not routable to other trading centers, 

by definition or by instruction, such as 

IOC Orders, Pegged Orders, ISOs, as 

well as Limit Orders and Reserve Orders 

marked ‘‘Do Not Route.’’194

Finally, PRO will not engage in any 

business other than its Outbound Router 

function, except as approved by the 

Commission. The Exchange notes that 

PRO’s Outbound Routing function 

includes the clearing functions that it 

may perform for trades with respect to 

orders routed to other trading centers. 

Pursuant to proposed Phlx Rule 185(g), 

the Exchange shall establish and 


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195Currently, at least 50% of the Floor Procedure 

Committee must consist of permit holders or 

persons associated with a member organization. 

196See proposed Phlx Rule 163. 

197See Phlx By-law, Article III. 

198Phlx Rule 9, the definition of Bond, is 

proposed for deletion. 

199 17 CFR 242.602. 

200These rules are titled, respectively: Bids and 

Offers—Precedence; Precedence of Highest Bid; 

Precedence of Offers at Same Price; Member as 

Principal Having Orders to Buy and Sell; and Bids 

and Offers to Be Made Public. 

201See August 15 Telephone Call, supra note 64. 

maintain procedures and internal 

controls reasonably designed to 

adequately restrict the flow of 

confidential and proprietary 

information between the Exchange and 

the Routing Facility, and any other 

entity, including any affiliate of the 

Routing Facility, and, if the Routing 

Facility or any of its affiliates engages in 

any other business activities other than 

providing routing services to the 

Exchange, between the segment of the 

Routing Facility or affiliate that 

provides the other business activities 

and the routing services. Moreover, the 

books, records, premises, officers, 

directors, agents, and employees of the 

Routing Facility, as a facility of the 

Exchange, shall be deemed to be the 

books, records, premises, officers, 

directors, agents, and employees of the 

Exchange for purposes of and subject to 

oversight pursuant to the Exchange Act. 

The books and records of the Routing 

Facility, as a facility of the Exchange, 

shall be subject at all times to inspection 

and copying by the Exchange and the 

Commission. 

d. Modifications to Current Phlx Bylaws and Rules 

In addition to the proposed Phlx 

Rules to implement XLE, the Exchange 

is modifying various Phlx By-laws, 

Rules, EFPAs and OFPAs. Most of the 

changes are being made to either apply 

or disapply certain Phlx By-laws, Rules, 

EFPAs and OFPAs to XLE, to reflect the 

elimination of the physical trading floor 

for equity securities; to reflect the 

elimination of the Floor Procedure 

Committee and the Equity Allocation, 

Evaluation and Securities Committee; 

and to reflect the elimination of PACE, 

the Exchange’s current electronic 

system for trading equity securities. 

These changes are described below 

beginning with the By-laws, then 

followed by the Rules, EFPAs and 

OFPAs, generally in numerical order. 

e. Modifications to Current By-laws 

Proposed Phlx By-law, Article I, 

Section 1–1(ii) is being added to adopt 

a definition of XLE, because the term is 

being used in a number of other Bylaws. Phlx By-law, Article VIII, Section 

8–1 is being amended to reflect the 

elimination of the Floor Procedure 

Committee 195 and to reflect that Phlx 

officers and employees will now handle 

matters that were previously referred to 

Floor Officials or the Committee on the 

equity floor.196 The Floor Procedure 

Committee is being eliminated because 

Phlx believes that its function in 

governing conduct on the equity trading 

floor is no longer necessary in light of 

the floor’s elimination. As a practical 

matter, the Exchange believes that the 

Committee’s traditional role in 

overseeing equity trading is no longer 

necessary. The Exchange does not 

believe that the Committee is required 

by the federal securities laws, nor does 

the Exchange believe that its 

elimination is inconsistent with the Act. 

Members using XLE are represented on 

the Exchange’s Board of Governors 

through the exercise of their voting 

rights for members of the Board of 

Governors.197 In addition, Phlx By-law, 

Article X, Sections 10–1 and 10–11 are 

being amended and Section 10–16 is 

being deleted to reflect the elimination 

of the Floor Procedure Committee. 

Phlx By-law Article X, Section 10–7 is 

being amended to reflect the elimination 

of the Equity Allocation, Evaluation and 

Securities Committee, which currently 

appoints equity specialists and handles 

new equity listings. With XLE, there 

will be no specialists, but rather Market 

Makers, who will be appointed by 

Exchange staff. Exchange staff also will 

manage the listing of any new equities. 

In addition, the composition of the 

Business Conduct Committee, in 

Section 10–11 is being amended such 

that the current ‘‘equity member’’ would 

be replaced by a member or a person 

associated with a member organization 

whose business is principally carried 

out on XLE. Accordingly, XLE 

Participants will be represented on the 

key committee involved in disciplinary 

matters. Additionally, Phlx By-law 

Article X, Section 10–15, Finance 

Committee, is being amended to allow 

for a member or person associated with 

a member organization that conducts 

business primarily on XLE, rather than 

on the equity trading floor, to be 

included on that Committee as one of 

the ‘‘member’’ Committee members. 

Phlx By-law Article XVI, Sections 16–1 

and 16–2 are being amended to reflect 

the elimination of the equity floor and 

to include transactions on XLE as 

member and exchange contracts. 

f. Modifications to Current Rules 

Phlx Rule 1, Definitions, is being 

expanded to include the current 

definitions (currently contained in Phlx 

Rules 2–22) 198 and the new proposed 

definitions used in connection with 

XLE. Phlx Rule 98, Emergency 

Committee, is being amended to reflect 

the elimination of the Floor Procedure 

Committee and the creation of XLE. 

Phlx Rule 100, Committee on Floor 

Procedure, is being amended to reflect 

the elimination of the Floor Procedure 

Committee. Phlx Rules 102, Dealings on 

Floor—Hours; 103, Dealings on Floor—

Securities; and 104, Dealings on Floor—

Persons, are being amended to reflect 

that transactions in equity securities 

will no longer take place on a floor of 

the Exchange. Phlx Rule 105, 

Recognized Quotations, is being deleted 

because, as written, it would not apply 

to XLE. The Exchange is already subject 

to display its best quotations pursuant 

to Rule 602 of Regulation NMS,199 and 

the Exchange proposes to do so as 

described in proposed Phlx Rule 184(c). 

The other provisions of Phlx Rule 105 

are not applicable to XLE. Phlx Rule 

106, Unit of Trading, is being deleted, 

but the concept is codified into the 

proposed definition of Round Lot in 

proposed Phlx Rule 1(gg). Phlx Rule 

107, Bids and Offers—Other Than Unit 

of Trading, is being deleted, because all 

orders entered into XLE will specify the 

exact number of shares of the order. 

Phlx Rule 108, Bids and Offers to Be 

Made Within Six Feet of Post, is being 

amended to reflect that trading on XLE 

will not take place on the floor, but this 

rule will continue to apply to options 

and foreign currency options trading on 

the Exchange. Phlx Rule 109, Member 

May Bid for or Offer Round Lots in 

Open Market, is being deleted to reflect 

the elimination of the open outcry 

method used on the Exchange’s equity 

trading floor. Phlx Rules 110, 119 to 

121, and 123 200 are being amended or 

deleted to make them inapplicable to 

XLE, because the priority of orders on 

XLE will be governed by proposed Phlx 

Rule 184. Phlx Rule 111, Bids and 

Offers Binding, is being amended to 

incorporate a specific reference to 

orders on XLE.201 Phlx Rule 112, Bids 

and Offers—‘‘When Issued,’’ is being 

amended to reflect that the Exchange, 

through its staff, as opposed to a 

committee of the Board, will administer 

the admittance of securities for trading 

on XLE. Phlx Rules 113, 117, and 122, 

relating to non-regular way settlement, 

are being deleted and replaced by 

proposed Phlx Rule 162. Phlx Rules 9, 

114, 115, and 150 to 154 are being 

deleted because bonds will not trade on 

XLE. 


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202These rules are titled, respectively: Specialist; 

Alternate Specialists—Appointment, Assignment 

and Termination; Registrant; Responsibilities of 

Alternate Specialists; Agreement of Specialists; 

Hours; Odd-Lot Orders Must Be Given to Specialist; 

Written Orders—Day Orders; Open Orders; No 

Commission Charged; Open Orders Ex-dividend; 

Unusual Situations; Books Closed; Joint Accounts; 

Puts and Calls; and Violations of Rules. 

203These rules are titled, respectively: Records to 

Be Kept; Discretionary Order; Customer’s Order 

Receives Priority; Seller Must Be Identified; and 

Stopping Stock. 

204These Rules are titled, respectively: Odd-Lot 

Orders in Securities Which the Exchange Is the 

Primary Market; Round Lot Orders Before the 

Opening in Nasdaq/NM Securities and in Securities 

For Which the Exchange Is the Primary Market; 

Odd-Lot Orders in Securities For Which Another 

Exchange Is the Primary Market and in Nasdaq/NM 

Securities; and Round Lot Orders in Securities For 

Which Another Exchange Is the Primary Market. 

205These rules are titled, respectively: 

Philadelphia Stock Exchange Automated 

Communication and Execution System (PACE); 

Operation of PACE System When Competing 

Specialists Are Trading; and Alternative Electronic 

Order Entry. 

206See Securities Exchange Act Release No. 

45125 (December 4, 2001), 66 FR 64069 (December 

11, 2001) (SR–Phlx–2001–95) (final extension of the 

Exchange’s eVWAP pilot program). 

207See proposed Phlx Rule 165(a). 

Phlx Rule 118, Bids and Offers 

Outside Best Bid and Offer, is being 

deleted, because it is inapplicable to 

XLE. XLE will accept bids and offers 

priced below and above the best bid and 

offer, respectively, and rank those bids 

and offers on XLE pursuant to proposed 

Phlx Rule 184. Phlx Rule 124, Disputes, 

is being amended to reflect that XLE 

will not use Floor Officials for resolving 

disputes. Instead, persons using XLE 

may use proposed Phlx Rule 163 to 

address clearly erroneous executions, 

which provides that an Exchange 

official will make the determination. 

Further, the Phlx Rule 124 is being 

amended to remove a reference to the 

Floor Procedure Committee, which is 

being eliminated. Phlx Rule 126 is being 

deleted and replaced by proposed Phlx 

Rule 185(c) concerning two-sided 

orders. Phlx Rule 127, Substitute 

Principal, is being deleted, because 

orders on XLE shall be made and 

executed anonymously pursuant to 

proposed Phlx Rule 189. Phlx Rule 130, 

Offers Not Allowed on Floor, is being 

deleted because proposed Phlx Rule 185 

lists all of the order types permitted on 

XLE. Phlx Rule 134, Stop Order Bans, is 

being deleted because stop orders will 

not be permitted on XLE. Phlx Rule 155, 

General Responsibility of Floor Brokers, 

is being amended to reflect that 

transactions in equity securities will no 

longer take place on a floor of the 

Exchange. Phlx Rules 201 to 214;202 216 

to 220;203 236, Reports of Positions of 

Specialist and Alternate Specialists in 

Securities for Which the Exchange Is the 

Primary Market; 460, Procedures for 

Competing Specialists; and 461, PACE 

Remote Specialist, are being deleted. 

These rules describe equity specialists 

and how they operate currently on the 

equity trading floor of the Exchange. As 

stated above, a new type of liquidity 

provider, a Market Maker, will be 

available on XLE; the registration and 

functions are described in proposed 

Phlx Rules 170 to 173. Phlx Rules 225–

228,204 referring to order types available 

on the current equity trading floor, are 

being deleted. Order types available on 

XLE are described in proposed Phlx 

Rule 185. Phlx Rules 229 to 229B205 are 

being deleted because the Exchange’s 

current electronic order delivery and 

execution system, PACE, is being 

eliminated and replaced by XLE. Phlx 

Rule 230, ITS Pre-Opening Notification, 

and EFPA S–3, The ‘‘Three by Three’’

Requirement Applicable to Tape 

Indications and Pre-Openings, are being 

deleted; however, the operative date of 

this deletion will be no earlier than the 

date that the Exchange is no longer 

subject to the ITS pre-opening 

notification responsibilities in the ITS 

Plan. Phlx Rule 231, Inactive Securities, 

is being deleted, as it is not applicable 

to XLE, because XLE is designed to 

accommodate securities that trade 

without a specialist or market maker. 

Phlx Rule 232, Handling Orders When 

Primary Market Is Not Open for Free 

Trading (EXP, PPS, GTX Orders), is 

being deleted, as XLE will operate 

during the hours in Phlx Rule 101, 

Supplementary Material .02. Phlx Rule 

233, Trading in Nasdaq/NM Securities, 

is being deleted, as the Exchange 

anticipates that the requirements in the 

Nasdaq UTP Plan for telephone access 

to NASD market makers will be 

eliminated prior to the launch of XLE. 

Phlx Rule 237, The eVWAPTM Morning 

Session, is being deleted, as it was a 

pilot program on the Exchange that has 

expired.206 Therefore, the rule no longer 

has any application. 

Phlx Rules 251 to 273, 275 to 278, and 

291 to 423, including the Forms, are 

being deleted as obsolete, because they 

refer to the delivery and settlement of 

securities, which is not done by the 

Exchange, but by registered clearing 

agencies. The Exchange is requiring all 

XLE Participants to use the services of 

a clearing firm or SCCP to clear their 

securities transactions on XLE.207 In 

turn, these entities provide for the 

delivery and settlement of securities 

pursuant to the rules of NSCC, a 

registered clearing agency. Phlx Rules 

431, Ex-dividend, Ex-rights; 432, Exwarrants; and 442, Communications, are 

being amended to reflect the elimination 

of the Floor Procedure Committee. Phlx 

Rules 441, Visitors, and 444, Wire 

Connections Between Exchange and 

Members’ Offices, are being deleted 

because of the elimination of the equity 

trading floor. Phlx Rule 451 is being 

amended to reflect for trading on XLE 

by expanding its coverage to member 

organizations and by removing its 

references to bidding and offering in the 

open market, which are auction market 

concepts. Phlx Rules 500–524 are being 

amended to reflect the elimination of 

the Equity Allocation, Evaluation and 

Securities Committee and the 

elimination of equity specialists. 

Phlx Rule 604, Registration and 

Termination of Registered Persons, is 

being modified to reflect the elimination 

of the equity floor as well as to extend 

an exemption to persons whose member 

organization is assigned to the Exchange 

as their designated examining authority 

(‘‘DEA’’) and who is primarily engaged 

in business on XLE from the 

requirement to complete the Uniform 

Registered Representative Examination 

Series 7 (‘‘Series 7’’). Currently, persons 

trading on the equity floor are not 

required by this rule to take the Series 

7 by virtue of being on the floor and 

therefore not an off-floor trader, because 

Rule 604(e)(1) applies to persons ‘‘off 

the floor.’’ The Exchange adopted the 

Series 7 examination requirement for 

off-floor traders in 1999 in order to 

impose a competency requirement on 

persons not on its floor, and not subject 

to its registration and testing processes 

for floor personnel pursuant to Phlx 

Rule 620 and 625. 

Going forward, however, because 

there will no longer be an equity floor, 

those who trade on XLE will be, by 

definition, off-floor traders, unless they 

are trading on another Phlx trading 

floor. In order to address this situation, 

language is being added to the 

renumbered Phlx Rule 604(e)(iii) which 

would exempt those persons who are 

primarily engaged in either (1) 

Submitting proprietary or agency orders 

for execution on XLE, or (2) making 

trading decisions with respect to trading 

on XLE from the rules requirement to 

take the Series 7. Modifying the 

exemption to reflect the elimination of 

the floor is intended to maintain the 

status quo respecting the Exchange’s 

requirements to take the Series 7, and is 

not intended to broaden the exemption 

beyond dealing with the elimination of 

the equity trading floor. The Exchange 

intends to interpret this exemption to 

permit the transition of existing floor 

persons to the new XLE environment. 

Those persons currently on the 

Exchange’s equity trading floor who will 

continue to operate their equity 


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208See 15 U.S.C. 78o(b)(8). 

209See 17 CFR 240.17a–3(a)(6). 

210 15 U.S.C. 78f(b). 

211 15 U.S.C. 78k–1. 

212 15 U.S.C. 78f(b)(3). 

213 15 U.S.C. 78f(b)(5). 

214 15 U.S.C. 78k–1(a)(1). 

215 15 U.S.C. 78k–1(a)(1)(C). 

business in a similar fashion, now 

primarily on XLE, should fit within the 

exemption and therefore not be required 

to take the Series 7. The Exchange 

believes that absent other changes, 

simply moving an existing business 

from the current trading floor to XLE 

should not result in the imposition of 

the Series 7 examination. Of course, 

XLE Participants may be required by the 

rules of another SRO to take the Series 

7. Similarly, if a XLE Participant 

performs the duties reflected in revised 

Phlx Rule 604(a), they must take the 

Series 7. 

Phlx Rule 625 and EFPA F–30 are 

being amended to specifically require 

new persons using XLE to successfully 

complete training requirements. In 

addition, Phlx Rule 625 will also subject 

persons using XLE to continuing 

mandatory training requirements. For 

these reasons, the Exchange believes 

that adding the Series 7 requirement to 

these persons is not warranted. 

Rule 604 is also being amended to 

eliminate existing paragraph (c), 

Limited Registration/Floor Members, 

due to the elimination of the equity 

trading floor, and also because the 

Series 7A examination prescribed 

therein was not utilized by Exchange 

members and is being eliminated by the 

SRO administering that examination. 

Phlx Rule 606, Communications and 

Equipment, is being amended to take 

into account the elimination of the 

equity trading floor. Phlx Rule 610, 

Notification of Changes in Business 

Operations, and related EFPA F–33 and 

OFPA F–33, are being amended to 

extend their coverage to members, 

foreign currency options participants, 

and member and foreign currency 

options participant organizations for 

which the Exchange is the DEA. This 

change is appropriate because, as 

currently written, Phlx Rule 610 would 

not apply to XLE Participants because 

the rule is currently limited to 

specialists and floor brokers. The 

change would have the effect of 

extending the requirements of the rule 

beyond those trading on XLE. However, 

the Exchange believes this is warranted 

because the purpose of the rule is to 

assist the Exchange’s Examination 

Department in performing its functions 

as DEA. Therefore, the new language in 

the rule will cover all entities for which 

the Exchange is the DEA. 

Phlx Rule 640 is being amended to 

extend the exemption from continuing 

education requirements to persons 

whose activities are limited solely to the 

transaction of business on XLE with 

members or registered broker-dealers. 

Currently, this exemption applies only 

to persons whose activities are limited 

solely to the transaction of business on 

the floor with members or registered 

broker-dealers. 

Phlx Rule 701, Permission to Deal 

With Public, is being deleted, because it 

is obsolete. Today, the rules of the 

Commission require membership in the 

NASD for broker-dealers unless a 

narrow exception applies.208 As a 

member of the NASD, broker-dealers’

dealings with the public are regulated 

by NASD’s rules, making permission by 

the Exchange superfluous. Phlx Rule 

703, Financial Responsibility and 

Reporting, is being amended to reflect 

the elimination of specialists and to 

require certain brokers using XLE who 

are not self-clearing and who are 

assigned to Phlx as their DEA to have a 

sole purpose error account. Phlx Rule 

715, Monthly Payment and Reporting, is 

being amended to reflect the elimination 

of the equity trading floor. Phlx Rule 

722, Margin, is being amended to reflect 

that Market Makers may receive ‘‘good 

faith margin’’ for their market maker 

security positions in the same manner 

that equity specialists do today. Phlx 

Rule 755, Record of Orders—

Transmitted to Floor, is being deleted to 

reflect the elimination of the equity 

trading floor. Broker-dealers continue to 

have responsibilities to retain certain 

information about their orders pursuant 

to the books and records rules under the 

Act.209 Phlx Rule 774, Discretionary 

Transactions, is being deleted, however, 

the substance of subsection (c) is being 

moved to Phlx Rule 771, Excessive 

Trading by Members. The other sections 

of Phlx Rule 774 will not be applicable 

to trading on XLE, because XLE is not 

considered the floor of the Exchange. 

Phlx Rule 772, Trading for Joint 

Account, is being amended to delete 

references to odd-lot dealers, which was 

a type of dealer that is being eliminated. 

Phlx Rule 773, Participation in Joint 

Accounts, is being amended to avoid 

overlapping regulatory burdens on 

members who do business on more than 

one exchange. Phlx Rules 800, 801, 805, 

811, 813, and 864 are being modified to 

reflect the elimination of the Equity 

Allocation, Evaluation and Securities 

Committee, such that the listing of 

securities and the trading of securities 

on an unlisted trading privileges basis 

will be administered and approved by 

Exchange staff, rather than the 

Committee. 

g. Modifications to current EFPAs and 

OFPAs 

EFPA A–1 is being deleted, because 

there will be no specialists on XLE. 

EFPA A–2 is being deleted because 

there will be no stopped orders on XLE. 

EFPA E–1 is being deleted to reflect the 

elimination of the equity trading floor. 

EFPA E–5 is being amended to reflect 

the transition from the equity trading 

floor to XLE. EFPAs F–1, S–1, and S–

2 are being deleted to reflect that XLE 

will open before the primary market is 

open and remain open after the primary 

market is closed, pursuant to Phlx Rule 

101. EFPA F–25 is being amended to 

remove the word ‘‘floor,’’ in order to 

make it clear that the EFPA will apply 

to persons using XLE, which is not 

considered the floor. EFPA F–27 is 

being deleted to reflect the fact that XLE 

will not use Floor Officials for resolving 

disputes. Instead, persons using XLE 

will use proposed Phlx Rule 163 to 

address clearly erroneous executions. 

Regulations 1–7 are being deleted 

because they are only applicable to the 

equity trading floor, which is being 

eliminated. Regulation 5 that applies to 

options is being amended to reflect that 

the Floor Procedure Committee is being 

eliminated. 

2. Statutory Basis 

The Exchange believes that its 

proposal is consistent with Sections 

6(b) 210 and 11A 211 of the Act in 

general, and furthers the objectives of 

Sections 6(b)(3)212 and (5),213 and 

11A(a)(1)214 of the Act in particular, in 

that, in part, it is designed to promote 

just and equitable principles of trade, 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, for the reasons 

discussed below. 

The Exchange’s new automated 

system, XLE, will allow XLE 

Participants, from any location, to 

submit orders for immediate execution, 

display or routing, as applicable. The 

Exchange believes that XLE should 

provide an opportunity for XLE 

Participants and their customers to 

receive efficient, low-cost executions in 

an anonymous system that will execute 

orders according to a non-discretionary 

matching algorithm without the 

participation of a dealer. Therefore, the 

Exchange believes that XLE should 

further the goals Section 11A(a)(1)(C) of 

the Act,215 including: (i) The 

economically efficient execution of 

securities transactions; (ii) fair 


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216 15 U.S.C. 78f(b)(3). 217 17 CFR 200.30–3(a)(12). 

competition among brokers and dealers, 

among exchange markets, and between 

exchange markets and markets other 

than exchange markets; (iii) the 

availability to brokers, dealers, and 

investors of information with respects to 

quotations for and transactions in 

securities; (iv) the practicability of 

brokers executing investors’ orders in 

the best market; and (v) an opportunity, 

consistent with the provisions with (i) 

and (ii) above, for investors’ orders to be 

executed without the participant of a 

dealer. 

The Exchange believes that the 

proposed rule change also furthers the 

objectives of Section 6(b)(3) under the 

Act 216 in that it provides a fair 

representation on the BCC of persons 

using XLE, in that Phlx By-law Article 

X, Section 10–11 is being amended such 

that the current ‘‘equity member’’ would 

be replaced by a member or a person 

associated with a member organization 

whose business is principally carried 

out on XLE. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will impose 

any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

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 by the Exchange. 

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 Exchange 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. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–Phlx–2006–43 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–Phlx–2006–43. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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 the filing also will be 

available for inspection and copying at 

the principal office of the Phlx. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–Phlx–2006–43 and should 

be submitted on or before September 15, 

2006. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.217

Nancy M. Morris, 

Secretary. 

[FR Doc. 06–7131 Filed 8–24–06; 8:45 am] 

BILLING CODE 8010–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

Notice of Availability of the Record of 

Decision for the Final Environmental 

Impact Statement, St. George 

Replacement Airport, St. George, 

Washington County, UT 

AGENCY: Federal Aviation 

Administration, DOT. 

ACTION: Notice of availability of a record 

of decision. 

SUMMARY: The Federal Aviation 

Administration (FAA) has completed 

and is making publicly available its 

Record of Decision (ROD) for the Final 

Environmental Impact Statement (FEIS) 

containing a DOT Section 4(f)/303(c) 

Evaluation of a Proposed Replacement 

Airport for the City of St. George, Utah, 

Washington County, Utah. 

FOR FURTHER INFORMATION CONTACT: Mr. 

T.J. Stetz, Regional Environmental 

Protection Specialist, Federal Aviation 

Administration, Northwest Mountain 

Region, Airports Division, 1601 Lind 

Avenue, SW., Suite 315, Renton, 

Washington 98057–3356; telephone: 

(425) 227–2611; FAX: (425) 227–1600; 

and E-mail: TJ.Stetz@faa.gov. 

SUPPLEMENTARY INFORMATION: The FAA 

has completed and is making publicly 

available its Record of Decision for the 

proposed replacement airport at St. 

George, Utah. The FAA has published a 

Notice of Availability of the FEIS in the 

Federal Register on May 12, 2006. The 

FAA prepared the FEIS pursuant to the 

National Environmental Policy Act of 

1969. The FEIS assesses the potential 

impact of the proposed replacement 

airport, as well as the ‘‘No Action 

Alternative’’ of not constructing a new 

airport. The FAA accepted comments on 

the FEIS and prepared responses to the 

comments, both of which are included 

in an appendix to the ROD. 

The FAA selected the proposed 

replacement airport as the preferred 

alternative in meeting the purpose and 

need for improvements for St. George. 

The proposed replacement airport 

alternative includes the following 

federal actions: Construction and 

operation of a new 9,300-foot runway 

(01/19), and all support facilities (i.e., 

taxiways and associated lighting; a 

passenger terminal, apron, and 

associated parking; an aircraft rescue 

and fire-fighting (ARFF) facility; 

facilities for a fixed-base operator, 

general and corporate aviation, and air 

cargo; fuel farm facilities; airport 

maintenance facilities; and airport 

access to the Southern Corridor 

Highway). Also included in the 


cprice-sewell on PROD1PC66 with NOTICES