Document ID: SEC-2007-0754-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2007-05-31T04:00Z

[Federal Register: May 31, 2007 (Volume 72, Number 104)]
[Notices]               
[Page 30413-30415]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31my07-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55803; File No. SR-Phlx-2007-37]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change and Amendment No. 1 Thereto Relating to the Extension of a 
Pilot Concerning the Exchange's Directed Order Program

May 23, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 8, 2007, 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 and 
II below, which Items have been substantially prepared by the Exchange. 
On May 10, 2007, the Exchange filed Amendment No. 1. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and is approving the proposal as 
modified by Amendment No. 1 on an accelerated basis, for a pilot period 
through May 27, 2008.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to extend, for an additional one year period, a 
pilot program concerning Exchange Rule 1080, Phlx Automated Options 
Market (AUTOM) \3\ and Automatic Execution

[[Page 30414]]

System (AUTO-X), and Exchange Rule 1014, Obligations And Restrictions 
Applicable To Specialists And Registered Options Traders. Specifically, 
the pilot program covers: (1) Exchange Rule 1080(l), Directed Orders, 
under which Exchange specialists, Streaming Quote Traders (``SQTs'') 
\4\ and Remote Streaming Quote Traders (``RSQTs'') \5\ trading on the 
Exchange's electronic options trading platform, Phlx XL,\6\ receive 
Directed Orders (as defined below); and (2) Exchange Rule 
1014(g)(viii), which sets forth the trade allocation algorithm for 
electronically executed and allocated trades involving Directed Orders. 
This proposal is in connection with a pilot program that is currently 
scheduled to expire on May 27, 2006.\7\
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    \3\ AUTOM is the Exchange's electronic order delivery, routing, 
execution and reporting system, which provides for the automatic 
entry and routing of equity option and index option orders to the 
Exchange trading floor. Orders delivered through AUTOM may be 
executed manually, or certain orders are eligible for AUTOM's 
automatic execution features, AUTO-X, Book Sweep and Book Match. 
Equity option and index option specialists are required by the 
Exchange to participate in AUTOM and its features and enhancements. 
Option orders entered by Exchange members into AUTOM are routed to 
the appropriate specialist unit on the Exchange trading floor. AUTOM 
is today more commonly referred to as Phlx XL. See Exchange Rule 
1080.
    \4\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through an electronic interface 
with AUTOM via an Exchange approved proprietary electronic quoting 
device in eligible options to which such SQT is assigned. See 
Exchange Rule 1014(b)(ii)(A).
    \5\ An RSQT is a participant in the Exchange's electronic 
trading system, Phlx XL who has received permission from the 
Exchange to trade in options for his own account, and to generate 
and submit option quotations electronically from off the floor of 
the Exchange through AUTOM in eligible options to which such RSQT 
has been assigned.
    \6\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
    \7\ See Securities Exchange Act Release No. 53870 (May 25, 
2006), 71 FR 31251 (June 1, 2006) (SR-Phlx-2006-27). See also 
Securities Exchange Act Release No. 51759 (May 27, 2005), 70 FR 
32860 (June 6, 2005) (SR-Phlx-2004-91) (``May 2005 Approval 
Order'').
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    The text of the proposed rule change is available on Phlx's Web 
site at http://www.phlx.com, at the Exchange's principal office, and at 

the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to extend, for an 
additional one-year period, a pilot that allows specialists, SQTs, and 
RSQTs assigned in options that trade on Phlx XL to receive directed 
orders (``Directed Orders'') \8\ from a member or member organization 
(``Order Flow Provider'' or ``OFP'') \9\ that submits, as agent, the 
customer order to the Exchange through AUTOM, and establishes a trade 
allocation algorithm for Directed Orders that are electronically 
executed and allocated to reward such Directed Specialists, SQTs and 
RSQTs with a participation guarantee for attracting such order flow to 
the Exchange.\10\ The proposed rule is subject to a pilot program 
scheduled to expire on May 27, 2007. The extended pilot would expire 
May 27, 2008.
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    \8\ See Exchange Rule 1080(l)(i)(A).
    \9\ See Exchange Rule 1080(1)(i)(B).
    \10\ See Exchange Rule 1080(1). The word ``Directed'' modifies 
all three; that is, it is referring to a Directed Specialist, 
Directed SQT and Directed RSQT.
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    Pursuant to Rule 1080(l), OFPs must transmit Directed Orders to a 
particular specialist, SQT or RSQT through AUTOM. If the Exchange's 
disseminated best bid or offer is at the National Best Bid or Offer 
when the Directed Order is received, the Directed Order is 
automatically executed on Phlx XL and allocated to the orders and 
quotes represented in the Exchange's quotation. A Directed Specialist, 
SQT or RSQT will receive a participation allocation pursuant to Rule 
1014(g)(viii) if the Directed Specialist, SQT or RSQT was quoting at 
the NBBO at the time that the Directed Order was received.\11\ 
Otherwise, the automatic execution will be allocated to those 
quotations and orders at the NBBO pursuant to Rule 1014(g)(vii).\12\ 
The specialist will manually execute Directed Orders that are received 
when the Exchange is not quoting at the NBBO.\13\
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    \11\ See Exchange Rule 1080(l)(ii).
    \12\ See Exchange Rule 1080(l)(iii).
    \13\ See Exchange Rule 1080(l)(iv).
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    The Exchange believes that the pilot program rewards specialists, 
SQTs and RSQTs for actively engaging in marketing activities and 
establishing relationships with OFPs that generate Directed Orders sent 
to the Exchange by such OFPs. The Exchange believes that the pilot 
program will result in additional order flow to the Exchange, thus 
adding depth and liquidity to the Exchange's markets, and enabling the 
Exchange to continue to compete effectively with other options 
exchanges for order flow.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \15\ 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 permitting specialists, SQTs and RSQTs trading options on 
Phlx XL to receive Directed Orders, and by encouraging the capture of 
order flow on the Exchange by rewarding Directed Order recipients with 
a participation guarantee in trades involving Directed Orders.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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. 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 rule-comments@sec.gov. Please include 

File Number SR-Phlx-2007-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary,

[[Page 30415]]

Securities and Exchange Commission, 100 F Street, NE, Washington, DC 
20549-1090.

All submissions should refer to File Number SR-Phlx-2007-37. 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 such 
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-Phlx-2007-37 and should be submitted on or before June 
21, 2007.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6 of the Act 
\16\ and the rules and regulations thereunder applicable to a national 
securities exchange,\17\ and, in particular, the requirements of 
Section 6(b)(5) of the Act.\18\ Section 6(b)(5) requires, among other 
things, that the rules of a national securities exchange be designed to 
prevent fraudulent and manipulative acts and practices, 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. The 
Commission notes that the Exchange's Directed Order Program was 
originally approved on a one-year basis and subsequently extended for 
an additional year, in order to give the Commission an opportunity to 
evaluate the impact of the pilot program on the options markets to 
determine whether it would be beneficial to customers and to the 
options markets as a whole before approving any request for permanent 
approval of the pilot program. The Exchange has asked the Commission to 
approve the proposed rule change on an accelerated basis for an 
additional year so that the pilot program may continue uninterrupted. 
The Commission is approving the one-year extension so that the Exchange 
can continue to evaluate the Exchange's Directed Order Program.
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    \16\ 15 U.S.C. 78f.
    \17\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    The Exchange has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
believes that granting accelerated approval of the proposed rule change 
would allow the pilot program to continue without disruption for an 
additional year in order for the Exchange to continue to evaluate its 
Directed Order Program. Accordingly, the Commission finds good cause, 
consistent with Section 19(b)(2) of the Act,\19\ for approving the 
proposed rule change prior to the thirtieth day after publication of 
notice thereof in the Federal Register.
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    \19\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-Phlx-2007-37), as modified 
by Amendment No. 1, which institutes the pilot program through May 27, 
2008, is hereby approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-10376 Filed 5-30-07; 8:45 am]

BILLING CODE 8010-01-P