Document ID: SEC-2008-1628-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2008-12-01T05:00Z

[Federal Register: December 1, 2008 (Volume 73, Number 231)]
[Notices]               
[Page 72889-72892]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de08-138]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58995; File No. SR-Phlx-2008-74]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the NASDAQ OMX PHLX, Inc., 
Relating to Automated Openings in Index Options

November 21, 2008.
    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 November 20, 2008, the 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, pursuant to section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Exchange Rules 1017, 1047A, and 
Options Floor Procedure Advice (``OFPA'') G-2, to: (i) Provide that 
index options will open automatically following the receipt by the 
Exchange's system of the opening price in the underlying index, and 
(ii) modify the circumstances authorizing the Exchange to halt trading 
in index options and to re-open trading of index options following a 
trading halt.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.phlx.com/regulatory/reg_rulefilings.aspx.

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

[[Page 72890]]

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 eliminate the 
requirement that a specified minimum percentage of the underlying value 
of an index be open for trading in order for index options overlying 
such index to open for trading, and re-open following trading halts, in 
the Exchange's automated opening system \5\ on its electronic trading 
platform for options, Phlx XL.\6\ A further purpose of the proposed 
rule change is to amend Rule 1047A and OFPA G-2 to provide that it will 
no longer require a minimum percentage of the underlying value of an 
index to be halted in order for the Exchange to halt trading in options 
overlying the index, and that trading in a halted index option may be 
resumed upon a determination by an Options Exchange Official that the 
conditions which led to the halt are no longer present.
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    \5\ For a complete description of the Exchange's automated 
opening system, see Exchange Rule 1017. See also, Securities 
Exchange Act Release No. 52667 (October 25, 2005), 70 FR 65953 
(November 1, 2005) (SR-Phlx-2005-25).
    \6\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 44612 (August 3, 2004) (SR-Phlx-2003-59).
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Background
    Rule 1017 and the relevant sections of OFPA G-2 were initially 
adopted when the Exchange listed options overlying proprietary indices 
only. At the time, the Exchange's rules envisioned systemic 
calculations of the open for trading percentage of the underlying value 
of a particular proprietary index in order to determine whether options 
overlying such an index could open automatically under Exchange rules, 
and whether the specialist in such index options could elect to engage 
the system.
    Values of non-proprietary indices underlying many of the options 
traded on the Exchange, such as options based on the KBW Bank Index, 
are currently calculated outside the NASDAQ OMX Group,\7\ and the 
Exchange receives electronic price feeds from outside market data 
vendors (``vendors''). For such indices, the percentage of the 
underlying value that is open is generally not disseminated by the 
outside vendors. Moreover, while the information respecting index 
values and percentage of underlying value of proprietary indices may be 
accessible to Phlx XL participants,\8\ it is not easily accessible to 
the general public.
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    \7\ The NASDAQ OMX Group has integrated internally the 
calculations of the legacy proprietary NASDAQ and legacy proprietary 
Phlx indices. All NASDAQ OMX Group indices are calculated using the 
same index ``engine''.
    \8\ The term ``Phlx XL participant'' means SQTs, RSQTs, non-SQT 
ROTS, specialists and non-Phlx market makers on another exchange; 
non-broker-dealer customers and non-market-maker off-floor broker-
dealers; and Floor Brokers using the Options Floor Broker Management 
System. See Securities Exchange Act Release No. 58361 (August 14, 
2008), 73 FR 49529 (August 21, 2008) (SR-Phlx-2008-50).
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    The proposed elimination of the ``percentage open'' calculation 
from the Exchange's rules is intended to make rules governing the 
opening of index options on the Exchange consistent and transparent 
across both proprietary and non-proprietary indices. Specifically, the 
rules would provide that options overlying both types of indices would 
open automatically upon receipt of the opening price in the underlying 
index, regardless of what percentage of the index value is open for 
trading.
Pre-Opening Orders and Quotes
    Exchange Rule 1017(a) currently states that, respecting index 
options, the Exchange will accept orders and quotes for a period of 
time before the scheduled opening in the underlying securities 
constituting 100% of the index value. The proposed rule change would 
amend Rule 1017(a) to eliminate the 100% benchmark, and instead state 
that in the case of index options, before the Exchange receives the 
opening price in the underlying index (and not less than one hour as 
determined by the Options Committee with notice to the membership via 
Exchange circular), Phlx XL will accept orders and quotes in index 
options during the ``Pre-Opening Phase.''
    Current Rule 1017(b) requires the specialist assigned in the 
particular option to enter opening quotes not later than one minute 
following the dissemination of a quote or trade by the market for the 
underlying security or, in the case of index options, following the 
dissemination of a quote or trade by the markets for underlying 
securities constituting 100% of the index value. The proposed rule 
change would provide that the specialist must enter such opening quotes 
following the receipt of the opening price of the underlying index.
    Once the specialist submits such opening quotes, respecting index 
options the Phlx XL system will calculate an Anticipated Opening Price 
(``AOP'') and an Anticipated Opening Size (``AOS''), provided, under 
current rules, that (i) the Exchange has received market orders, or the 
book is crossed (highest bid is higher than the lowest offer) or locked 
(highest bid equals the lowest offer); and (ii) either (A) the 
specialist's quote has been submitted; (B) the quotes of at least two 
Phlx XL participants have been submitted within two minutes opening 
trades or quotes on the markets for underlying securities constituting 
100% of the index value, or (C) if neither the specialist's quote nor 
the quotes of two Phlx XL participants have been submitted within two 
minutes of the opening trades or quotes on the markets for underlying 
securities constituting 100% of the index value, one Phlx XL 
participant has submitted their quote.
    The proposed rule change would amend all of the above parameters in 
the rules for the calculation of an AOP and AOS respecting index 
options to base the time period on the receipt of the opening price in 
the underlying index (or such shorter time as determined by the Options 
Committee and disseminated to membership via Exchange Circular).
Opening
    Current Exchange Rule 1017(b)(iii) provides that, respecting index 
options, when the conditions described are satisfied, the system will 
open the series for trading within a time period not to exceed 5 
seconds (as determined by the Exchange and disseminated to membership 
via Exchange circular) following the dissemination of a quote or trade 
by the markets for underlying securities constituting 100% of the index 
value. The Exchange proposes to amend the rule to remove the 
``percentage open'' calculation requirement and provide that the 
overlying index option would open when the Exchange has received the 
opening price in the underlying index.
    Under the proposal, if there is an imbalance on the opening for an 
index option, the Phlx XL system will send an Imbalance Notice to Phlx 
XL participants provided that the Exchange has received the opening 
price in the underlying index.
    Current Rule 1017(g) states that the specialist may engage the 
automated opening system to open index options when underlying 
securities representing 50% of the current index value of all the 
securities underlying the index have opened for trading on the markets 
and that the system will automatically open such options when 
underlying securities representing 100% of all the securities 
underlying the index have opened for trading on the markets. The 
proposal would amend the rule to provide that index options will open

[[Page 72891]]

automatically when the Exchange's system has received the opening price 
of the underlying index. The specialist would thus have no need to 
determine the percentage of underlying value that is open, since the 
index option would open automatically upon receipt by the system of the 
opening price in the underlying index.
    The corresponding sections of Exchange Rule 1047A, and OFPA G-2 
concerning the opening of index options will include the same language 
reflecting the manner in which index options would open under the 
proposal as stated above.\9\
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    \9\ The Exchange notes that Rule 1047A and OFPA G-2 refer to 
``Industry Index'' and ``Market Index'' options. The Exchange 
represents that, respecting opening and reopening of Industry and 
Market Index options, the Phlx XL system does not make a distinction 
between the two in terms of the current percentages of index value 
necessary for automatic openings. Therefore, such openings would 
take place on the Exchange uniformly among all index options traded 
on the Exchange.
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Trading Halts and Re-Openings Following a Trading Halt
    The Exchange is proposing additional amendments to Rule 1047A and 
OFPA G-2 to reflect the conditions under which the Exchange would halt 
trading in index options, and re-opening trading in index options 
following a trading halt. The purpose of this proposal is to reflect 
the deletion from the rule of the calculation of the percentage of an 
underlying index as discussed above, because current rules concerning 
trading halts in index options include a ``percentage halted'' 
requirement. In the same way that the rules concerning automated 
openings in index options system would no longer include the 
``percentage open'' calculation requirement, Rule 1047A and OFPA G-2 
would not include a ``percentage halted'' calculation requirement.
    Specifically, Rule 1047A(c) and OFPA G-2(c) each state that 
whenever trading on the market in underlying securities representing 
more than 10% of the current index value is halted or suspended on the 
primary market, trading on the Exchange in any option may be halted 
with the approval of an Options Exchange Official. For consistency, and 
because the proposal would eliminate the calculation of ``percentage 
open'' from the rules, the proposed rule change would eliminate the 
current ``10% halted'' requirement from Rule 1047A and OFPA G-2, and 
provide that trading on the Exchange in any index option may be halted 
with the approval of an Options Exchange Official, whenever trading on 
the primary market in any underlying security is halted or 
suspended.\10\
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    \10\ The Exchange notes that it has deleted references to 
``primary market'' regarding openings in options in a separate 
filing. See SR-Phlx-2008-75. Then Exchange does not intend to delete 
such references from its rules governing trading halts.
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    Additionally, Rule 1047A(c)(iv) and OFPA G-2(c)(iv) currently state 
that in the event that trading is halted on the primary market in 
underlying securities representing more than 10% of the current index 
value, the specialist may halt trading in the option overlying such 
index, subject to the approval of an Options Exchange Official within 
five minutes of the halt in trading in the option. The proposed rule 
change would account for the deletion of such a calculation requirement 
from the rule and provide that the specialist may take such action 
whenever trading on the primary market in any underlying security is 
halted.
    Finally, respecting re-openings following a trading halt, Rule 
1047A(d) and OFPA G-2(d) state that trading in any class or series of 
stock index options that has been the subject of a halt by the Exchange 
may be resumed upon a determination by an Options Exchange Official 
that the conditions which led to the halt are no longer present, or 
that underlying securities representing 50% or more of the current 
index value are not subject to halt or suspension in the market for the 
trading of such underlying securities. The proposed rule change would 
delete the ``50%'' provision because of the proposed elimination of all 
such calculations from the Exchange's rules. Under the proposal, such 
trading would resume upon a determination by an Options Exchange 
Official that the conditions which led to the halt are no longer 
present.
    The Exchange believes that the proposed rule change is necessary to 
promote consistency and transparency concerning the automated opening 
of proprietary and non-proprietary index options on the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \11\ in general, and furthers the objectives of section 
6(b)(5) of the Act \12\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
title matters not related to the purposes of the Act or the 
administration of the Exchange.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange further believes that the proposed rule change should 
promote consistency and transparency respecting the opening of trading 
in all index options traded on the Exchange, and also respecting 
trading halts and re-openings following trading halts, which would 
benefit customers and Phlx XL participants trading index options on the 
Exchange.

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 rule does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; or (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, the proposed rule change has become effective 
pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 
thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has met this requirement.
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    At any time within 60 days of the filing of such 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

[[Page 72892]]

interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.

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 No. SR-Phlx-2008-74 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2008-74. 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 No. SR-Phlx-2008-74 and should be 
submitted on or before December 22, 2008.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-28420 Filed 11-28-08; 8:45 am]

BILLING CODE 8011-01-P