Document ID: SEC-2010-0222-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-02-09T05:00Z

[Federal Register: February 9, 2010 (Volume 75, Number 26)]
[Notices]               
[Page 6428-6431]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09fe10-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61480; File No. SR-Phlx-2010-14]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX, Inc. Relating 
to Transaction Fees and Rebates for Options

February 3, 2010.
    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 January 26, 2010, NASDAQ OMX PHLX, 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 
Exchange. 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.
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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 the Exchange's Fee Schedule by 
adopting, on a pilot basis, per contract transaction fees for options 
overlying the PowerShares QQQ Trust (``QQQQ'')[supreg]; Ishares Russell 
2000 (``IWM'') and Citigroup Inc. (``C''). The fees would apply to: (i) 
Transaction sides that remove liquidity from the Exchange's 
disseminated market, and (ii) Firm and broker-dealer quotes and orders 
that are included in the Exchange's disseminated market.
    Additionally, the Exchange proposes to offer a transaction rebate 
to certain liquidity providers, as described more fully below.
    While changes to the Exchange's fee schedule pursuant to this 
proposal are effective upon filing, the Exchange has designated this 
proposal to be operative for trades settling on or after February 1, 
2010. The proposed changes to the fee schedule will be effective on a 
pilot basis, scheduled to expire March 2, 2010.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/
Filings/, at the principal office of the Exchange, at the Commission's 
Public Reference Room, and on the Commission's Web site at http://
www.sec.gov.

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 purpose of the proposed rule change is to increase liquidity 
and to attract order flow in QQQQ, IWM and C options on the Exchange.
Transaction Charges for Removing Liquidity
    The Exchange proposes to assess a per-contract transaction charge 
in QQQQ, IWM and C options on six different categories of market 
participants that submit orders and/or quotes that remove, or ``take,'' 
liquidity from the Exchange. The per-contract transaction charge would 
depend on the category of market participant submitting an order or 
quote to the Exchange that removes liquidity.
    The proposed amendments to the Exchange's Fee Schedule would break 
down market participants by the following six categories: (i) 
Specialists, Registered Options Traders (``ROTs'') \3\ that do not 
submit electronic quotations (``Non-Streaming ROTs''),\4\ Streaming 
Quote Traders (``SQTs''),\5\ and Remote Streaming Quote Traders 
(``RSQTs''),\6\ (ii) customers that submit orders that are not Directed 
Orders \7\ (``Non-Directed Customers''); (iii) customers that submit 
Directed Orders (``Directed Customers''); \8\ (iv) specialists, SQTs 
and

[[Page 6429]]

RSQTs that receive Directed Orders (``Directed Participants'' or 
``Directed Specialists, RSQTs, or SQTs'' \9\); (v) Firms; and (vi) 
broker-dealers.
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    \3\ An ROT is a regular member or a foreign currency options 
participant of the Exchange located on the trading floor who has 
received permission from the Exchange to trade in options for his 
own account.
    \4\ In addition to the fees for QQQQ, IWN and C options, Non-
Streaming ROTs will be assessed the fees applicable to Standard and 
Poor's Depositary Receipts/SPDRs (``SPY''). See SR-Phlx-2009-116.
    \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 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 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 Exchange Rule 
1014(b)(ii)(B).
    \7\ ``Directed Order'' means any customer order (other than a 
stop or stop-limit order as defined in Rule 1066) to buy or sell 
which has been directed to a particular specialist, RSQT, or SQT by 
an Order Flow Provider, as defined below. To qualify as a Directed 
Order, an order must be delivered to the Exchange via AUTOM.
    \8\ For the purposes of this fee, a Directed Customer is an 
order from a customer directed to a Directed Participant for 
execution. A Directed Participant is a Specialist, SQT, or RSQT that 
executes an order directed to it for execution.
    \9\ See Exchange Rule 1080(l), `` * * * The term `Directed 
Specialist, RSQT, or SQT' means a specialist, RSQT, or SQT that 
receives a Directed Order.'' A Directed Participant has a higher 
quoting requirement as compared with a specialist, SQT or RSQT who 
is not acting as a Directed Participant. See Exchange Rule 1014.
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    The per-contract transaction charges to be assessed on participants 
who submit proprietary quotes and/or orders that remove liquidity in 
QQQQ, IWM and C options from the Exchange in QQQQ, IWM and C options 
are, by category:

------------------------------------------------------------------------
                                                          Charge  (per
                       Category                             contract)
------------------------------------------------------------------------
Specialist, ROT, SQT, RSQT............................             $0.40
Non-Directed Customer.................................              0.40
Directed Customer.....................................              0.25
Directed Participants.................................              0.30
Firms.................................................              0.45
Broker-Dealers........................................              0.45
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Transaction Charges for Adding Liquidity
    The Exchange proposes to assess a transaction charge of $0.35 per 
contract to Firms and $0.45 per contract to broker-dealers.
Rebates
    In order to promote and encourage liquidity in QQQQ, IWM and C 
options, the Exchange proposes to amend its fee schedule to include a 
per-contract rebate relating to transaction charges for orders or 
quotations that add liquidity in QQQQ, IWM and C options. The amount of 
the rebate would depend on the category of participant whose order or 
quote was executed as part of the PHLX Best Bid and Offer. 
Specifically, the per-contract rebates are, by category:

------------------------------------------------------------------------
                                                          Rebate  (per
                       Category                             contract)
------------------------------------------------------------------------
Specialist, ROT, SQT, RSQT............................             $0.20
Non-Directed Customer.................................              0.05
Directed Customer.....................................              0.20
Directed Participants.................................              0.25
Firms.................................................               N/A
Broker-Dealers........................................               N/A
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Applicability of Other Fees
     The $900,000 monthly cap that is currently applicable to 
ROTs and specialists transacting equity options will not be applicable 
to the fees described herein.\10\
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    \10\ See proposed rule change SR-Phlx-2009-104.
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     The $85,000 Firm Related Equity Option Cap will not be 
applicable to the fees described herein.\11\
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    \11\ See Securities Exchange Act Release No. 61337 (January 12, 
2010), 75 FR 2905 (January 19, 2010) (SR-Phlx-2009-104.)
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     The Exchange pays a per-contract Market Access Provider 
(``MAP'') Subsidy to any Exchange member organization that qualifies as 
an Eligible MAP.\12\ The MAP Subsidy will not apply to electronic 
transactions in QQQQ, IWM and C.\13\
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    \12\ An ``Eligible MAP'' is defined in the Exchange's Fee 
Schedule in the Market Access Provider Subsidy.
    \13\ See Securities Exchange Act Release No. 59537 (March 9, 
2009), 74 FR 11151 (March 16, 2009) (SR-Phlx-2009-19).
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     Payment for Order Flow fees \14\ will not be collected on 
transactions in QQQQ, IWM and C options.
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    \14\ See Securities Exchange Act Release No. 59841 (April 29, 
2009), 74 FR 21035 (May 6, 2009) (SR-Phlx-2009-38).
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     All electronic auctions will be free to Non-Directed 
Customers, Directed Customers, Directed Participants, Specialists, SQTs 
and RSQTs.\15\ Electronic auctions include, without limitation, the 
Complex Order Live Auction (``COLA''),\16\ and Quote and Market Exhaust 
auctions.\17\ Firms and broker-dealers will be assessed the appropriate 
charge for removing liquidity.
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    \15\ With respect to electronic auctions, it is systemically 
difficult to determine which participant(s) would qualify for a 
rebate, therefore the Exchange has determined not to apply the 
rebate to transactions resulting from electronic auctions.
    \16\ COLA is the automated Complex Order Live Auction process. A 
COLA may take place upon identification of the existence of a COLA-
eligible order either: (1) Following a COOP, or (2) during normal 
trading if the Phlx XL system receives a Complex Order that improves 
the cPBBO. See Exchange Rule 1080.
    \17\ Market Exhaust occurs when there are no Phlx XL II 
participant (specialist, SQT or RSQT) quotations in the Exchange's 
disseminated market for a particular series and an initiating order 
in the series is received. In such a circumstance, the Phlx XL II 
system, using Market Exhaust, will initiate a Market Exhaust auction 
for the initiating order. Under Market Exhaust, any order volume 
that is routed to away markets will be marked as an Intermarket 
Sweep Order or ``ISO.'' See Exchange Rule 1082.
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     The fees described herein will not apply to contracts 
executed during the Exchange's opening process.\18\ Firms and broker-
dealers will be assessed the appropriate charge for removing liquidity.
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    \18\ See Exchange Rule 1017.
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     The Exchange pays an Options Floor Broker Subsidy to 
member organizations with Exchange registered Floor Brokers for 
eligible contracts that are entered into the Exchange's Options Floor 
Broker Management System. The Options Floor Broker Subsidy will be 
applicable to the transactions described herein.\19\
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    \19\ See Securities Exchange Act Release No. 60578 (August 27, 
2009), 74 FR 45666 (September 3, 2009) (SR-Phlx-2009-72).
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     The Exchange assesses a Cancellation Fee of $2.10 per 
order on member organizations for each cancelled electronically 
delivered customer order in excess of the number of customer orders 
executed on the Exchange by that member organization in a given 
month.\20\ The Cancellation Fee will continue to apply.
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    \20\ See Securities Exchange Act Release No. 60188 (June 29, 
2009), 74 FR 32986 (July 9, 2009) (SR-Phlx-2009-48).
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     Transaction fees for Linkage ``P'' and ``P/A'' Orders 
would be applicable to the transaction listed herein.\21\
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    \21\ See Securities Exchange Act Release No. 60210 (July 1, 
2009), 74 FR 32989 (July 9, 2009) (SR-Phlx-2009-53). This pilot is 
scheduled to expire on July 31, 2010. The Exchange understands that 
certain exchanges continue to utilize Linkage to send P/A Orders.
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     Regular Equity Option transaction fees will apply to 
Complex Orders that are electronically executed against a contra-side 
order with the same Complex Order Strategy.
     Single contra-side orders that are executed against the 
individual components of Complex Orders will be charged under the 
proposed Fee Schedule. The individual components of such a Complex 
Order will not be charged.
     QQQQ, IWM and C transactions executed via open outcry will 
be subject to the standard equity options fee schedule. However, if one 
side of the transaction is executed using the Options Floor Broker 
Management System \22\ and any other side of the trade was the result 
of an electronically submitted order or a quote, then the fees proposed 
herein will apply to the FBMS contracts and contracts that are executed 
electronically on all sides of the transaction.
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    \22\ The Options Floor Broker Management System (``FBMS'') is a 
component of the Exchange's system designed to enable Floor Brokers 
and/or their employees to enter, route and report transactions 
stemming from options orders received on the Exchange. The Options 
Floor Broker Management System also is designed to establish an 
electronic audit trail for options orders represented and executed 
by Floor Brokers on the Exchange, such that the audit trial provides 
an accurate, time-sequenced record of electronic and other orders, 
quotations and transactions on the Exchange, beginning with the 
receipt of an order by the Exchange, and further documenting the 
life of the order through the process of execution, partial 
execution, or cancellation of that order. AUTOM is the Exchange's 
electronic order delivery and reporting system, which provides for 
the automatic entry and routing of Exchange-listed equity options, 
index options and U.S. dollar-settled foreign currency options 
orders to the Exchange trading floor. See Exchange Rule 1080, 
Commentary .06.

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[[Page 6430]]

The Effect of Current Fees Applicable to SPY
    The proposed fees for options overlying QQQQ, IWM and C currently 
apply to options overlying SPY.\23\ The Exchange began charging the 
same fees for SPY beginning with trades settling on or after January 4, 
2010 on a pilot basis, scheduled to expire March 2, 2009 (the 
``pilot''). As stated above, the proposed fees for QQQQ, IWM and C 
options will be made part of the pilot.
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    \23\ See SR-Phlx-2009-116.
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    Prior to the implementation of the pilot respecting SPY options, 
the percentage of customer orders in SPY options executed on the 
Exchange that were Directed Customer orders was 83.6%. Since the 
implementation of the pilot in SPY options, 93.8% are now Directed 
Customer orders. This change suggests that charging different rates for 
Directed and Non-Directed Customer orders creates an incentive for 
member organizations to direct customer order flow to an Exchange 
specialist, SQT or RSQT. The economic benefit of directing order flow 
to Exchange specialists, SQTs and RSQTs, coupled with the incentive 
based pricing for providing liquidity, have resulted in narrower 
spreads and increased size in the Exchange's disseminated market in SPY 
options. Furthermore, the Exchange's disseminated size in SPY options 
represents a higher percentage of the National Best Bid/Offer 
(``NBBO'') in SPY options since the implementation of the pilot. 
Because of this, the Exchange has routed fewer customer orders to away 
markets, thereby providing customers with faster and more efficient 
executions at the NBBO on the Exchange, and reducing the number of 
instances in which the liquidity disseminated by away markets might be 
executed before such routed orders arrive.
    The Exchange expects that this pricing model will affect its 
markets for options overlying QQQQ, IWM and C in the same way it has 
affected its markets for SPY options. The economic incentives to direct 
orders to Exchange Directed Participants, and the concomitant narrowed 
spreads, increased liquidity, more frequent NBBO pricing, and overall 
market efficiencies experienced by the Exchange in SPY options should 
also be realized in QQQQ, IWM and C options. The proposal benefits 
customers, the investing public and the options markets on the Exchange 
in particular, and on the options markets as a whole.
    The Exchange is also proposing to make a minor modification to the 
Fee Schedule to remove all plural references in the categories.
    The proposed changes to the fee schedule will be effective for 
transactions settling on or after February 1, 2010, and will be 
effective for a pilot period scheduled to expire March 2, 2010.
2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
fees is consistent with Section 6(b) of the Act \24\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \25\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members. The impact of the amendments 
upon the net fees paid by a particular market participant will depend 
on a number of variables, including its monthly volumes, the order 
types it uses, and the prices of its quotes and orders (i.e., its 
propensity to add or remove liquidity).
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    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(4).
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    Specifically, the Exchange believes that its proposal to charge a 
different fee and to pay a different rebate for Non-Directed Customers 
relative to Directed Customers is an equitable allocation of reasonable 
fees and other charges among Exchange members, and is consistent with 
the current fee schedule and industry fee assessments of member firms 
that allow for different rates to be charged for different order types 
originated by dissimilarly classified market participants.\26\
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    \26\ NYSE Amex currently charges different rates to different 
market participants in assessing its firm facilitation fee. See 
Securities Exchange Act Release No. 60378 (July 23, 2009), 74 FR 
38245 (July 31, 2009) (SR-NYSEAmex-2009-38).
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    The Exchange notes that orders routed to the Exchange as Principal 
Acting as Agent Orders (``P/A Orders'') \27\ via the Intermarket Option 
Linkage (``Linkage'') under the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage (the ``Plan'') accounted for 
most of the Non-Directed order flow the Exchange received in the 
symbols affected under the instant proposal. The participating U.S. 
options exchanges determined to withdraw from the Plan and, on June 17, 
2008, the Exchange filed an executed copy of the Options Order 
Protection and Locked/Crossed Market Plan (``New Plan''), joining all 
other approved options markets in adopting the New Plan. The concept of 
P/A orders routed through a central Linkage ``hub'' does not exist 
under the New Plan. P/A Orders were routed to remove liquidity from the 
Exchange under the Plan; orders routed from away markets to remove 
liquidity are now routed directly to the Exchange, in large part as 
Non-Directed Customer orders. The Exchange assessed transaction fees 
applicable to the execution of P/A Orders, but did not assess 
transaction fees on customer orders sent to the Exchange outside the 
Linkage. The Exchange also charged different per-contract transaction 
fees for P/A Orders and Principal Orders (``P Orders'') \28\ sent to 
remove liquidity from the Exchange. The Exchange charged $0.45 per 
option contract for P Orders sent to the Exchange and $.30 per contract 
for P/A Orders,\29\ while charging nothing for customer orders 
submitted to the Exchange outside the Linkage. The Exchange believes 
that Non-Directed Customers now ``stand in the shoes'' of what were 
previously P/A Orders, and the proposed transaction charges applicable 
to Non-Directed Customers are similar to the charges that applied to P/
A Orders. Thus, these proposed fees are not unfairly discriminatory 
relative to the proposed fees for Directed Customers, based upon the 
precedent of charging for P/A Orders but not for customer orders sent 
outside the Linkage.
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    \27\ A P/A order is an order for the principal account of a 
specialist (or equivalent entity on another participant exchange 
that is authorized to represent public customer orders), reflecting 
the terms of a related unexecuted Public Customer order for which 
the specialist is acting as agent.
    \28\ A Principal Order is an order for the principal account of 
an Eligible Market Maker and is not a P/A Order.
    \29\ See Securities Exchange Act Release No. 60210 (July 1, 
2009), 74 FR 32989 (July 9, 2009) (SR-Phlx-2009-53).
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    Order flow providers that control customer order flow and route 
customer orders to exchanges are responsible to obtain the best pricing 
available for their customers. An order flow provider has the ability 
to enter into arrangements whereby they may receive consideration for 
directing the customer order to a specific market maker (specialists, 
SQTs and/or RSQTs). Under the proposal, a Directed Customer would be 
charged a lower per-contract transaction fee, and would receive a 
higher rebate, based on such an arrangement.
    The Exchange operates in a highly competitive market in which 
market participants can readily direct order flow to competing venues 
if they deem fee levels at a particular exchange to be excessive or 
unfair. The Exchange believes that the fees it charges for options 
overlying QQQQ, IWM and C remain competitive with fees charged by other 
venues, provides incentives that improve execution quality and 
therefore continue to be reasonable and equitably allocated to those 
members that opt to

[[Page 6431]]

send order flow to the Exchange rather alternative options exchanges.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \30\ and paragraph (f)(2) of Rule 19b-4 \31\ 
thereunder. 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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    \30\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \31\ 17 CFR 240.19b-4(f)(2).
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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:

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-2010-14 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2010-14. 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 Web site viewing and 
printing 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 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-Phlx-2010-14 and should be 
submitted on or before March 2, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-2786 Filed 2-8-10; 8:45 am]
BILLING CODE 8011-01-P