Document ID: SEC-2005-0476-0001
Agency: sec
Document Type: Notice
Title: \17\ 15 U.S.C. 78k(a).   \18\ 17 CFR 240.11a2-2T. Rule 11a2-2T generally states that a member of a national securities exchange (the ``initiating member) may not effect a transaction on that exchange for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion unless:   (i) the transaction is execut
Posted Date: 2005-12-30T05:00Z

[Federal Register: December 30, 2005 (Volume 70, Number 250)]
[Notices]               
[Page 77435-77438]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30de05-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 53021; File No. SR-Phlx-2005-86]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Extension of a Pilot Program Concerning Split Price 
Priority in Open Outcry

December 23, 2005.
    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 December 21, 2005, 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 prepared by the Phlx. The 
Exchange filed the proposal pursuant to section 19(b)(3)(A) of the 
Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission.\5\ 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).
    \5\ The Exchange requested the Commission to waive the five-day 
pre-filing notice requirement and the 30-day operative delay, as 
specified in Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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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 six-month period, a 
pilot program set forth in Exchange Rule 1014(g)(i)(C), governing 
purchase or sale priority for orders of 100 option contracts or more 
(``pilot''). The rule affords priority to members that purchase (sell) 
fifty or more contracts at

[[Page 77436]]

a particular price at the next lower (higher) price in purchasing 
(selling) the equivalent number of contracts in the same series. Such 
priority only applies to orders that represent the same transaction or 
order as the previous purchase (sale), and only applies to transactions 
in equity options and options overlying Exchange Traded Fund Shares 
(``ETFs'') that are effected in open outcry. The pilot is scheduled to 
expire December 31, 2005.\6\ The Exchange proposes to extend the pilot 
through June 30, 2006. The text of the proposed rule change is 
available on the Phlx Web site (http://www.phlx.com), at the Phlx's 

Office of the Secretary and at the Commission's Public Reference 
Room.\7\
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    \6\ See Securities Exchange Act Release No. 51820 (June 10, 
2005), 70 FR 35759 (June 21, 2005) (SR-Phlx-2005-28).
    \7\ The proposed rule change amends the current text of Phlx 
Rule 1014(g)(i)(C) by adding a phrase to indicate that the provision 
is ``subject to a pilot scheduled to expire June 30, 2006.''
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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 purpose of the proposed rule change is to extend the pilot, 
which establishes rules that facilitate the execution of large orders, 
which by virtue of their size and the need to execute them at multiple 
prices may be difficult to execute without a limited exception to 
current Exchange priority rules.
    The pilot, as set forth in Exchange Rule 1014(g)(i)(C), establishes 
a priority rule regarding open outcry split price transactions in 
equity options and options overlying ETFs generally to permit a member 
who is responding to an order \8\ for at least 100 contracts \9\ who 
buys (sells) at least 50 contracts at a particular price to have 
priority over all others in purchasing (selling) up to an equivalent 
number of contracts of the same order at the next lower (higher) price 
without being required to yield to existing customer interest in the 
limit order book. Absent this proposed rule, such orders would be 
required to yield priority.\10\
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    \8\ Clarification as per telephone call on December 21, 2005, 
between Richard Rudolph, Vice President and Counsel, Phlx and Ira 
Brandriss, Special Counsel, Division of Market Regulation, 
Commission (``Telephone Call of December 21st'').
    \9\ Orders for a size of less than 100 contracts would not be 
affected by this proposed rule.
    \10\ See, e.g., Exchange Rule 119(a).
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    For example, when a floor broker (``Floor Broker'') is representing 
a customer's order to purchase 100 contracts and a member executes a 
purchase of 50 of those contracts at a price of $.30, the member would 
have priority over all market participants to purchase the remaining 50 
contracts in the order at $.25.\11\ Two trades would be reported to the 
tape, one a purchase of 50 contracts at $.30, and the other a purchase 
of 50 contracts at $.25. The effect to the customer would be a net 
purchase price of $.275 for 100 contracts.
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    \11\ Clarified as per Telephone Call of December 21st.
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    The Exchange believes that the pilot should lead to more aggressive 
quoting by crowd participants, which in turn could lead to better 
executions. A crowd participant might be willing to trade at a better 
price for a portion of an order if he/she were assured of trading with 
the balance of the order at the next pricing increment. As a result, 
Floor Brokers representing orders in the trading crowd might receive 
better-priced executions.
    Under the split price priority rule, the Exchange's Options 
Committee \12\ has the ability to increase the minimum qualifying order 
size to a number larger than 100 contracts. Any changes, which would 
have to apply to all products under the committee's jurisdiction, would 
be announced to the membership via Exchange Circular.
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    \12\ The Options Committee has general supervision of the 
dealings of members on the options trading floor. See Exchange By-
Law Article X, Section 10-20.
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    One possible limitation on the ability of crowd participants to use 
the split price priority rule is the current requirement that orders 
for controlled accounts \13\ generally must yield priority to orders 
for customer accounts. Using the example above, if the $.25 represents 
orders for customer accounts, those orders would have priority over 
orders for controlled accounts at $.25. This means that a holder of a 
controlled account who is willing to trade at $.30 and $.25 may be 
unwilling to trade at the price of $.30 if he/she cannot trade the 
balance of the order at $.25 because of the requirement to yield to 
orders for customer accounts.\14\ The Exchange believes that, in the 
context of the split-price priority rule, this could compromise the 
member's willingness to execute the first part of the order at a price 
of $.30 (using the above example), thereby potentially making it 
difficult to achieve price improvement for the Floor Broker's customer 
on the Phlx. Instead, the order might trade at another exchange that 
has no impediments, i.e., no customer interest at those price levels. 
Accordingly, one significant aspect of the pilot is a limited exception 
to the existing priority requirement concerning controlled accounts.
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    \13\ A controlled account includes any account controlled by or 
under common control with a broker-dealer. Customer accounts are all 
other accounts. Equity option and index option orders of controlled 
accounts are required to yield priority to customer orders when 
competing at the same price. Orders of controlled accounts generally 
are not required to yield priority to other controlled account 
orders. See Exchange Rule 1014(g)(i)(A).
    \14\ Clarified as per Telephone Call of December 21st.
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    The Exchange believes that it is reasonable to make a limited 
exception to the rule requiring controlled accounts to yield priority 
to non-controlled accounts in order to allow split price trading. In 
this regard, the exception is similar in operation to the current 
limited ``spread-type'' priority exception \15\ under Exchange rules. 
This exception (which is established in the rules of many options 
exchanges) was intended to facilitate the trading of spread, or 
``hedge'' orders,\16\ which by virtue of their multi-legged composition 
could be more difficult to trade without a limited exception to the 
priority rule for one of the legs. The purpose behind the split-price 
priority exception is the same--to bring about the execution of large 
orders, which by virtue of their size and the need to execute them at 
multiple prices may be difficult to execute without a limited exception 
to the priority rules. The split-price priority exception operates in 
the same manner as the hedge order exception by

[[Page 77437]]

allowing a member effecting a trade that betters the market to have 
priority on the balance of that trade at the next pricing increment, 
even if there are orders in the book at the same price.
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    \15\ Currently, a member that executes at least one option leg 
of a spread order at a better price than established bid or offer 
for that option contract, and no option leg of the spread order is 
executed at a price outside of the established bid or offer for that 
option contract, has priority over all other orders at the same 
price. See Exchange Rule 1033(d).
    \16\ The Exchange defines a ``hedge order'' as any spread type 
order for the same account. See Exchange Rule 1066(f).
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    In order to address potential concerns regarding section 11(a) of 
the Act,\17\ the Exchange adopted Commentary .19 to Exchange Rule 1014 
as part of the pilot. Section 11(a) generally prohibits members of 
national securities exchanges from effecting transactions for the 
member's own account, absent an exemption. Under the proposal, there 
could be situations where because of the limited exception to customer 
priority, orders on behalf of members could trade ahead of orders of 
nonmembers in violation of section 11(a). Commentary .19 makes it clear 
that Floor Brokers may avail themselves of the split-price priority 
rule, but that they are obligated to ensure compliance with section 
11(a). Specifically, a Floor Broker bidding (offering) on behalf of a 
Phlx member broker-dealer that is not a specialist or Registered 
Options Trader (``ROT'') on the Exchange is required to ensure that the 
order he/she represents qualifies for an exemption from section 
11(a)(1) of the Act or that the transaction satisfies the requirements 
of Rule 11a2-2(T) \18\ under the Act.\19\ Otherwise, the Floor Broker 
is required to yield priority to order(s) for the account(s) of non-
members.
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    \17\ 15 U.S.C. 78k(a).
    \18\ 17 CFR 240.11a2-2T. Rule 11a2-2T generally states that a 
member of a national securities exchange (the ``initiating member'') 
may not effect a transaction on that exchange for its own account, 
the account of an associated person, or an account with respect to 
which it or an associated person thereof exercises investment 
discretion unless:
    (i) the transaction is executed on the floor, or through use of 
the facilities, of the exchange by a member (the ``executing 
member'') which is not an associated person of the initiating 
member;
    (ii) the order for the transaction is transmitted from off the 
exchange floor;
    (iii) neither the initiating member nor an associated person of 
the initiating member participates in the execution of the 
transaction at any time after the order for the transaction has been 
so transmitted; and
    (iv) in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person 
thereof exercises investment discretion, neither the initiating 
member nor any associated person thereof retains any compensation in 
connection with effecting the transaction: provided, however, that 
this condition shall not apply to the extent that the person or 
persons authorized to transact business for the account have 
expressly provided otherwise by written contract referring to 
Section 11(a) of the Act and this section executed on or after March 
15, 1978, by each of them and by such exchange member or associated 
person exercising investment discretion.
    \19\ The Exchange notes that there are other exemptions from the 
requirements of Section 11(a).
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2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with section 6(b) of the Act \20\ in general, and furthers the 
objectives of section 6(b)(5) of the Act \21\ in particular, in that it 
is designed to perfect the mechanisms of a free and open market and the 
national market system, protect investors and the public interest and 
promote just and equitable principles of trade, by establishing a 
limited priority rule regarding split-price transactions.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 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,\22\ 
and Rule 19b-4(f)(6) thereunder.\23\ 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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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally 
does not become operative prior to 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\25\ 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 five-day pre-filing notice requirement and 
the 30-day 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 extend without interruption a rule 
similar to rules already in place at other options exchanges and thus 
would permit the Exchange to continue to better compete for larger-
sized orders. For these reasons, the Commission designates the proposed 
rule change to be effective upon filing with the Commission.\26\
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    \24\ 17 CFR 240.19b-4(f)(6).
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ 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:

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-2005-86 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-86. 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

[[Page 77438]]

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-2005-86 and should be submitted on 
or before January 20, 2006.
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    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
Jonathan G. Katz,
Secretary.
[FR Doc. E5-8129 Filed 12-29-05; 8:45 am]

BILLING CODE 8010-01-P