Document ID: SEC-2006-1039-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-08-10T04:00Z

[Federal Register: August 10, 2006 (Volume 71, Number 154)]
[Notices]               
[Page 45888-45890]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au06-137]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54267; File No. SR-Phlx-2006-42]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Priority for In-Crowd Participants Respecting Crossing, 
Facilitation and Solicited Orders in Open Outcry Transactions

August 3, 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 10, 2006, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. The 
Exchange filed the proposed rule change pursuant to section 19(b)(3)(A) 
of the Act \3\ and Rule 19b-4(f)(6) \4\ thereunder, which renders the 
proposed rule change effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1014, Commentary .05(c), to 
afford priority to in-crowd participants over out-of-crowd Streaming 
Quote Traders (``SQTs'') \5\ and Remote Streaming Quote Traders 
(``RSQTs'') \6\ in crossing,\7\ facilitation \8\ and solicited \9\ 
orders. The proposed rule change would apply only to such orders that 
are represented in open outcry with a size of at least 500 contracts on 
each side. The text of the proposed rule change is set forth below. 
Proposed new language is in italics.
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    \5\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through the Automated Options 
Market (``AUTOM'') in eligible options to which such SQT is 
assigned. An SQT may only submit such quotations while such SQT is 
physically present on the floor of the Exchange. See Phlx Rule 
1014(b)(ii)(A).
    \6\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically through AUTOM in eligible options to which such RSQT 
has been assigned. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange. See Phlx Rule 
1014(b)(ii)(B).
    \7\ A crossing order occurs when an options Floor Broker holds 
orders to buy and sell the same option series. Such a Floor Broker 
may cross such orders, provided that the trading crowd is given an 
opportunity to bid and offer for such option series in accordance 
with Exchange rules. See Phlx Rule 1064(a).
    \8\ A facilitation order occurs when an options Floor Broker 
holds an options order for a public customer and a contraside order. 
Such a Floor Broker may execute such orders as a facilitation order, 
provided that such Floor Broker proceeds in accordance with Exchange 
rules concerning facilitation orders. See Phlx Rule 1064(b).
    \9\ A solicitation occurs whenever an order, other than a cross, 
is presented for execution in the trading crowd resulting from an 
away-from-the-crowd expression of interests to trade by one broker 
dealer to another. See Phlx Rule 1064(c).
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* * * * *

Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders

    Rule 1014. (a)-(h) No change.
    Commentary:
    .01-.04 No change.
    .05 (a)-(b) No change.
    (c) Non-Electronic Orders. (i) In the event that a Floor Broker or 
specialist presents a non-electronic order in a Streaming Quote Option 
in which an RSQT is assigned, and/or in which an SQT assigned in such 
Streaming Quote Option is not a crowd participant, such SQT and/or RSQT 
may not participate in trades stemming from such a non-electronic order 
unless such non-electronic order is executed at the price quoted by the 
non-crowd participant SQT and/or RSQT at the time of execution.
    (ii) Notwithstanding the foregoing, respecting crossing, 
facilitation and solicited orders (as defined in Rule 1064) with a size 
of at least 500 contracts on each side that are represented and 
executed in open outcry, priority shall be afforded to in-crowd 
participants over RSQTs and out-of- crowd SQTs. Such orders shall be 
allocated in accordance with Exchange rules.
    (iii) The specialist and/or SQTs participating in a trading crowd 
may, in response to a verbal request for a market by a floor broker, 
state a bid or offer that is different than their electronically 
submitted bid or offer, provided that such stated bid or offer is not 
inferior to such electronically submitted bid or offer, except when 
such stated bid or offer is made in response to a floor broker's 
solicitation of a single bid or offer as set forth in Rule 1033(a)(ii).
    (iv) For purposes of this Rule, an SQT or non-SQT ROT shall be 
deemed to be participating in a crowd if such SQT is, at the time an 
order is represented in the crowd, physically located in a specific 
``Crowd Area.'' A Crowd Area shall consist of a specific physical 
location marked with specific, visible physical boundaries on the 
options floor, as determined by the Options Committee. An SQT or non-
SQT ROT who is physically present in such Crowd Area may engage in 
options transactions in assigned issues as a crowd participant in such 
a Crowd Area, provided that such SQT or non-SQT ROT fulfills the 
requirements set forth in this Rule 1014. An SQT or non-SQT ROT shall 
be deemed to be participating in a single Crowd Area.
    .06-.19 No change.
* * * * *

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

[[Page 45889]]

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 Exchange proposes to amend Phlx Rule 1014, Commentary .05 by 
affording priority to in-crowd participants over out-of-crowd SQTs and 
RSQTs in crossing, facilitation and solicited orders represented and 
executed in open outcry in order to encourage order flow providers to 
send such orders to the Exchange.
    Currently, Commentary .05 to Phlx Rule 1014 provides that, in the 
event that a Floor Broker or specialist presents a non-electronic order 
in a Streaming Quote Option in which an RSQT is assigned, and/or in 
which an SQT assigned in such Streaming Quote Option is not a crowd 
participant, such SQT and/or RSQT may not participate in trades 
stemming from such a non-electronic order unless such non-electronic 
order is executed at the price quoted by the non-crowd participant SQT 
and/or RSQT at the time of execution.
    The proposal would carve out crossing, facilitation, and solicited 
orders from the rule. Specifically, the proposed rule would state that, 
respecting crossing, facilitation and solicited orders with a size of 
at least 500 contracts on each side that are represented and executed 
in open outcry, priority would be afforded to in-crowd participants 
over RSQTs and out-of crowd SQTs. Such orders would be allocated in 
accordance with Exchange rules.\10\ The proposed rule would apply only 
to crossing, facilitation and solicited orders represented in open 
outcry, and would not apply to orders submitted electronically via the 
Exchange's electronic options trading platform, Phlx XL,\11\ to which 
other priority rules apply.\12\
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    \10\ The Commentary to Phlx Rule 1064 defines participation 
guarantees in crossing and facilitation orders, and Phlx Rule 
1014(g) sets forth the in-crowd trade allocation algorithm for other 
orders.
    \11\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
    \12\ See, e.g., Phlx Rules 1014(g)(vii) and (viii).
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    Recently, the Exchange adopted another exception to its normal 
priority rules \13\ concerning open outcry orders, affording priority 
to in-crowd participants over RSQTs and out-of crowd SQTs in split-
price transactions, even when the bid/ask differential is one minimum 
trading increment.\14\
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    \13\ See, e.g., Phlx Rules 119 and 120.
    \14\ See Securities Exchange Act Release No. 54050 (June 27, 
2006), 71 FR 38199 (July 5, 2006) (SR-Phlx-2006-37). See also, 
Securities Exchange Act Release No. 53874 (May 25, 2006), 71 FR 
32171 (June 2, 2006) (SR-Phlx-2006-18).
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    The Exchange believes that the proposed rule should provide greater 
incentive for order flow providers to submit crossing, facilitation and 
solicited orders to the Exchange, thus enabling the Exchange to compete 
with another exchange that has similar rules in effect.\15\
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    \15\ See Securities Exchange Act Release No. 51366 (March 14, 
2005), 70 FR 13217 (March 18, 2005) (SR-CBOE-2004-75) (CBOE Rule 
6.45A affords priority over out-of-crowd participants in all open 
outcry situations).
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    The proposed rule would apply only to crossing, facilitation and 
solicited orders with a size of at least 500 contracts on each side 
that are represented and executed in open outcry.\16\
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    \16\ Phlx has clarified that the proposed rule change would not 
provide priority to in-crowd participants' orders over orders on the 
limit order book, including those orders of non-public customers. 
Telephone conference on July 18, 2006 among Richard S. Rudolph, Vice 
President and Counsel, Phlx and Nancy Sanow, Assistant Director, Ira 
Brandriss, Special Counsel and Mitra Mehr, Special Counsel, Division 
of Market Regulation, Commission.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \17\ in general, and furthers the objectives of section 
6(b)(5) of the Act \18\ in particular, in that 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, by adopting a limited exception to the Exchange's priority 
rules concerning certain order types represented and executed in open 
outcry.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any 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.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, it 
has become effective pursuant to section 19(b)(3)(A) of the Act,\19\ 
and Rule 19b-4(f)(6) thereunder.\20\ At any time within 60 days of the 
filing of the proposed rule change the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \21\ normally 
does not become operative prior to 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\22\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day pre-operative delay. The Commission 
believes that such waiver is consistent with the protection of 
investors and the public interest because it would allow the Phlx to 
compete with another exchange that provides priority to in-crowd 
participants.\23\ For this reason, the Commission designates the 
proposed rule change to be effective upon filing with the 
Commission.\24\
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    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ At the Exchange's request, the Commission has waived the 
five-day pre-notice filing requirement for ``non-controversial'' 
proposals. See 17 CFR 240.19b-4(f)(6)(iii).
    \24\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
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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:

[[Page 45890]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Phlx-2006-42 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-2006-42. 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-2006-42 and should be submitted on or before August 31, 2006.
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    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-13023 Filed 8-9-06; 8:45 am]

BILLING CODE 8010-01-P