Document ID: SEC-2008-0421-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2008-03-18T04:00Z

[Federal Register: March 18, 2008 (Volume 73, Number 53)]
[Notices]               
[Page 14544-14546]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18mr08-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57482; File No. SR-Phlx-2007-69]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2 Thereto, Relating to Obvious Errors

March 12, 2008.
    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 September 4, 2007, the Philadelphia Stock Exchange, Inc. 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 substantially prepared by the Exchange. The Phlx filed 
Amendment No. 1 to the proposal on February 29, 2008. On March 11, 
2008, the Phlx filed Amendment No. 2 to the proposal. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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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 Exchange proposes to amend Exchange Rule 1092, Obvious Errors, 
to: (i) Change the definition of Theoretical Price to mean either the 
last National Best Bid price with respect to an erroneous sell 
transaction or the last National Best Offer price with respect to an 
erroneous buy transaction, just prior to the trade; (ii) allow an 
Options Exchange Official \3\ to establish the Theoretical Price when 
there are no quotes for comparison purposes, or when the National Best 
Bid/Offer (``NBBO'') for the affected series, just prior to the 
erroneous transaction, was at least two times the permitted bid/ask 
differential under Exchange Rule 1014(c)(1)(A)(i)(a); (iii) establish 
the Theoretical Price for transactions occurring as part of the 
Exchange's automated opening system as the first quote after the 
transaction(s) in question that does not reflect the erroneous 
transaction(s); (iv) determine the average quote width by adding the 
quote widths of sample quotations at regular 15-second intervals during 
the two minutes preceding and following an erroneous transaction; (v) 
delete the provision pertaining to trades that are automatically 
executed when the specialist or Registered Options Trader (``ROT'') 
sells $.10 or more below parity; (vi) permit nullification of 
transactions that occur during trading halts on the Exchange or in the 
underlying security in certain situations; and (vii) increase the time 
period within which a party to an erroneous transaction must notify 
Market Surveillance that they believe they are a party to a transaction 
resulting from an obvious error, and

[[Page 14545]]

establish a specific notification time period for the opening.
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    \3\See Exchange Rule 1(pp).
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    The text of the proposed rule change is available at the Exchange, 
the Commission's Public Reference Room, and http://www.phlx.com.

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 IV 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 Exchange states that the purpose of the proposed rule change is 
to enable Exchange members to better manage risk by amending the 
Exchange's Obvious Error rule to address situations that are not 
currently covered by the rule.
Definition of Theoretical Price
    Currently, Rule 1092 defines the Theoretical Price of an option 
(for purposes of Rule 1092 only) as follows: (i) If the series is 
traded on at least one other options exchange, the mid-point of the 
NBBO just prior to the transaction; and (ii) if there are no quotes for 
comparison purposes, as determined by an Options Exchange Official and 
designated personnel in the Exchange's Market Surveillance Department.
    The Exchange believes that in certain situations the application of 
the rule when determining to nullify or adjust transactions may lead to 
an unfair result for one of the parties to the transaction, 
particularly where the market for the affected series includes a bid 
price that is relatively small (for example, $0.50) and a substantially 
higher offer (for example $5.00). The result is that a transaction to 
sell that occurs correctly on the bid at $0.50 could be adjusted based 
on the midpoint of the NBBO, which is, in this example, $2.75. In such 
a case, the result is unfair to the bidder at $0.50, whose price would 
be adjusted based on the Theoretical Price of $2.75, and an unjust 
enrichment to the seller, who is entitled to $0.50 based on the bid, 
but who would receive the adjusted price of over $2.00 higher because 
of the rule, and not due to market conditions.
    Accordingly, the proposal would re-define ``Theoretical Price'' to 
mean either the last National Best Bid price with respect to an 
erroneous sell transaction or the last National Best Offer price with 
respect to an erroneous buy transaction, just prior to the trade. The 
purpose of this provision is to establish a Theoretical Price that is 
clearly defined when there are quotations to compare to the erroneous 
transaction price, and to eliminate the scenario above that arises from 
the ``mid-point'' test when the NBBO is particularly wide.
    The proposal also would permit an Options Exchange Official to 
establish the Theoretical Price when there are no quotes available for 
comparison purposes, or when the bid/ask differential of the NBBO for 
the affected series, just prior to the erroneous transaction, was at 
least two times the permitted bid/ask differential under Rule 
1014(c)(1)(A)(i)(a).\4\ In each such circumstance, the Theoretical 
Price would be determined by an Options Exchange Official. In order to 
expedite the process, the current requirement for Market Surveillance 
input would be deleted.
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    \4\ Phlx Rule 1014(c)(1)(A)(i)(a) permits a difference of no 
more than $.25 between the bid and the offer for each option 
contract for which the prevailing bid is less than $2; no more than 
$.40 where the prevailing bid is $2 or more but less than $5; no 
more than $.50 where the prevailing bid is $5 or more but less than 
$10; no more than $.80 where the prevailing bid is $10 or more but 
less than $20; and no more than $1 where the prevailing bid is $20 
or more, provided that, in the case of equity options, the bid/ask 
differentials stated above shall not apply to in-the-money series 
where the market for the underlying security is wider than the 
differentials set forth above. For such series, the bid/ask 
differentials may be as wide as the quotation for the underlying 
security on the primary market, or its decimal equivalent rounded up 
to the nearest minimum increment. The Exchange may establish 
differences other than the above for one or more series or classes 
of options.
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    The Exchange believes that the objective standard for the 
determination of a ``wide market'' based on existing permissible bid/
ask differentials provides a sound guideline for Options Exchange 
Officials in determining Theoretical Price when there are no quotes for 
comparison purposes.
    The proposed rule change also would state that for transactions 
occurring as part of the Exchange's automated opening system, the 
Theoretical Price would be the first quote after the transaction(s) in 
question that does not reflect the erroneous transaction(s).
Erroneous Quote in Primary Underlying Market
    Currently, in order for an options trade to be nullified or 
adjusted due to an erroneous quote in the primary market for the 
underlying security, Market Surveillance is required to conduct complex 
and cumbersome research involving the average quote width in the 
underlying quote during the two minutes preceding and following the 
transaction.
    In order to streamline and expedite the process, the proposal would 
amend this provision such that Market Surveillance would not be 
required to review each quote during this time period. Instead, the 
average quote width would be determined by adding the quote widths of 
sample quotations at regular 15-second intervals during the four minute 
time period referenced above, and dividing by the number of quotation 
samples used.
Transactions During Trading Halts
    The proposed rule change would permit nullification of transactions 
that occur during trading halts on the Exchange or in the primary 
market for the underlying security. Specifically, the Exchange proposes 
to adopt new Rule 1092(c)(iv), which would provide that trades would be 
nullified when: (i) The trade occurred during a trading halt in the 
affected option on the Exchange; (ii) respecting equity options 
(including options overlying ETFs), the trade occurred during a trading 
halt on the primary market for the underlying security; or (iii) 
respecting index options, the trade occurred during a trading halt on 
the primary market in underlying securities representing more than 10% 
of the current index value.
Notification Period
    The proposal would increase the current time period within which a 
party to an erroneous transaction must notify Market Surveillance that 
they believe they are a party to a transaction resulting from an 
obvious error, and establish a specific time period applicable to 
openings.
    Specifically, a specialist or ROT must notify Market Surveillance 
within fifteen minutes of the transaction (increased from the current 
five-minute window). A member or member organization that initiated the 
order from off the floor of the Exchange must notify Market 
Surveillance within twenty minutes of the execution (increased from the 
current fifteen-minute window).
    Additionally, Rule 1092(e)(i) would be amended to afford a longer 
time

[[Page 14546]]

period during which non-broker-dealer customers may notify Market 
Surveillance that they believe they participated in a transaction that 
was the result of an Obvious Error. Respecting transactions that occur 
as part of the Exchange's automated opening process, after the proposed 
twenty-minute notification period and until 4:30 p.m. Eastern Time 
(``ET'') on the subject trade date, where parties to the transaction 
are a non-broker-dealer customer and an Exchange specialist, Streaming 
Quote Trader, (``SQT''),\5\ Remote Streaming Quote Trader 
(``RSQT''),\6\ or non-SQT ROT,\7\ the non-broker-dealer customer may 
request review of the subject transaction, and the execution price of 
the transaction will be adjusted to the first quote after the 
transaction(s) in question that does not reflect the erroneous 
transaction(s) (provided the adjustment does not violate the customer's 
limit price) by an Options Exchange Official,\8\ if there was an 
Obvious Error. The Exchange believes that this provision should address 
the situation on the opening where a large opening order might cause 
the Exchange's opening transaction to result from an Obvious Error, 
because the Exchange's opening price is defined as the price at which 
the greatest number of contracts will trade.\9\
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    \5\ An SQT is an Exchange 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).
    \6\ 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.
    \7\ Currently, there are a number of ROTs on the Exchange's 
options floor that do not stream electronic quotations into the Phlx 
XL system, known as ``non-SQT ROTs.'' A Non-SQT ROT is defined as an 
ROT who is neither an SQT nor an RSQT. See Exchange Rule 
1014(b)(ii)(C).
    \8\ In order to correct an oversight, the Exchange is replacing 
the term ``Floor Official'' with ``Options Exchange Official,'' 
which should have been changed in a previous proposed rule change. 
See Securities Exchange Act Release No. 55877 (June 7, 2007), 72 FR 
32937 (June 14, 2007) (SR-Phlx-2006-87).
    \9\ See Exchange Rule 1017(c).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\10\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\11\ in particular, in that it is designed 
to promote just and equitable principles of trade, 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 modernizing the Exchange's Obvious Error rule to address 
situations not covered in the current rule.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 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

    The Exchange did not solicit or receive any written comments on the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period: (i) As the Commission 
may designate up to 90 days of such date if it finds such longer period 
to be appropriate and publishes its reasons for so finding, or (ii) as 
to which the 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 rule-comments@sec.gov. Please include 
File Number SR-Phlx-2007-69 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-2007-69. 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. 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-2007-69 and should be 
submitted on or before April 8, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-5419 Filed 3-17-08; 8:45 am]

BILLING CODE 8011-01-P