Document ID: SEC-2006-1551-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-11-29T05:00Z

[Federal Register: November 29, 2006 (Volume 71, Number 229)]
[Notices]               
[Page 69173-69176]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no06-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54807; File No. SR-Phlx-2006-53]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Assignments in Options Based on Root Symbol

November 21, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 69174]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 18, 2006, 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, II, 
and III, below, which Items have been prepared by the Phlx.\3\ On 
November 21, 2006, the Exchange filed Amendment No. 1 to the proposed 
rule change.\4\ 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.
    \3\ At the Exchange's request, the Commission has made certain 
clarifying additions and deletions to the description of the 
proposed rule change. See Telephone Conversations between Richard S. 
Rudolph, Vice President and Counsel, Phlx, Cyndi Rodriguez, Special 
Counsel, Division of Market Regulation (``Division''), Commission 
and Johnna B. Dumler, Special Counsel, Division, Commission, on 
September 14, 2006 and September 20, 2006.
    \4\ In Partial Amendment No. 1, the Exchange clarified in the 
proposed rule text that root symbols are assigned to series by the 
Options Clearing Corporation.
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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 Phlx Rule 507, Application for 
Assignment in Streaming Quote Options, by adopting new Commentary .01 
to the rule, which would authorize the Exchange's Options Allocation, 
Evaluation and Securities Committee (``OAESC''),\5\ to assign trading 
privileges in options to Streaming Quote Traders (``SQTs'') \6\ and 
Remote Streaming Quote Traders (``RSQTs'') \7\ by ``root symbol'' (as 
defined more fully below), such that an SQT or RSQT may be assigned in 
only certain series of an option. The text of the proposed rule change, 
as amended, is set forth below. Italic indicates new text.
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    \5\ The OAESC is a standing committee of the Exchange that has 
jurisdiction over the allocation, retention and transfer of the 
privileges to deal in all options to, by and among members on the 
options and foreign currency options trading floors. It is 
responsible for appointing specialists, alternate or assistant 
specialists or odd-lot dealers on the options and foreign currency 
options trading floors. It also establishes standards for the 
periodic review and evaluation of their performance and is empowered 
to suspend or revoke their appointments upon showing of reasonable 
cause therefore. See Phlx By-Law Article X, Section 10-7(a). See 
also Phlx Rule 500.
    \6\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through AUTOM in eligible options 
to which such SQT is assigned. An SQT may only submit such 
quotations while such SQT is physically present on the floor of the 
Exchange. See Phlx Rule 1014(b)(ii)(A).
    \7\ 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 Phlx Rule 
1014(b)(ii)(B).
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* * * * *
Application for Assignment in Streaming Quote Options
    Rule 507. (a)--(g) No change.
    Commentary:
    .01. An applicant may request assignment by ``root symbol,'' such 
that an SQT or RSQT may be assigned in only certain series of an 
option. A root symbol is the options trading mnemonic used for each 
option. The Exchange may list different root symbols, as applied by the 
Options Clearing Corporation (``OCC''), in series overlying the same 
underlying security depending, without limitation, on the strike price 
of the series, the expiration of the series, the price of the 
underlying security, and/or mergers and acquisitions relating to the 
underlying security.
* * * * *

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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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, as amended, is to mitigate 
quote traffic and address quote capacity issues by reducing the number 
of quotations required to be submitted on the Exchange. The proposal 
would permit the OAESC to assign trading privileges to SQTs and RSQTs, 
upon their request, only in specific series of a particular option 
based on the ``root symbol'' of the series, instead of assigning 
trading privileges in all series of such option. Thus, as described 
below, SQTs and RSQTs would be required to submit quotations in fewer 
series.
Current Assignment Rule
    Phlx Rule 507 currently provides the solicitation, application and 
review process to be followed by the OAESC when an SQT or RSQT submits 
an application for assignment in an option. Under Phlx Rule 507, an 
application for assignment must be submitted in writing to the 
Exchange's designated staff and would be required to include, at a 
minimum, the name of the SQT or RSQT applicant and written verification 
from the Exchange's Membership Services Department that such SQT or 
RSQT applicant is qualified as a ROT.
    To ensure an SQT or RSQT applicant's technological readiness to 
submit electronic quotes, Phlx Rule 507(b)(ii) mandates that no 
application for assignment in Streaming Quote Options would be approved 
by the OAESC without written certification signed by an officer (Vice 
President or above) of the Exchange's Financial Automation Department 
\8\ indicating that the SQT or RSQT applicant has sufficient 
technological ability to support his/her continuous quoting 
requirements as set forth in Phlx Rule 1014(b)(ii), and the SQT or RSQT 
applicant has successfully completed, or is scheduled to complete, 
testing of its quoting system with the Exchange.
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    \8\ The Exchange's Financial Automation Department is 
responsible for the design, development, implementation, testing and 
maintenance of the Exchange's automated trading systems, 
surveillance systems, and back office systems, and for monitoring 
the quality of performance and operational readiness of such 
systems, in addition to user training and validation of user 
technology as it pertains to such users' interface with the 
Exchange's systems.
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SQT and RSQT Quoting Requirements
    Currently, SQTs and RSQTs that do not receive Directed Orders \9\ 
in a Streaming Quote Option \10\ are responsible to quote continuous, 
two-sided markets in not less than 60% of the series in each Streaming 
Quote Option in which such SQT or RSQT is assigned.\11\
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    \9\ The term ``Directed Order'' means any customer order (other 
than a stop or stop-limit order as defined in Phlx Rule 1066) to buy 
or sell which has been directed to a particular specialist, RSQT, or 
SQT by an Order Flow Provider. See Phlx Rule 1080(l)(i)(A).
    \10\ A Streaming Quote Option is an option in which SQTs may 
generate and submit option quotations if such SQT is physically 
present on the Exchange floor, and RSQTs may generate and submit 
option quotations from off the floor of the Exchange, 
electronically. See Phlx Rule 1080(k). Currently, all options 
trading on the Exchange are Streaming Quote options.
    \11\ See Phlx Rule 1014(b)(ii)(D)(1).
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    An SQT or RSQT that receives Directed Orders (``DSQT'' or 
``DRSQT'', respectively) is responsible to quote continuous, two-sided 
markets in not

[[Page 69175]]

less than 99% of the series listed on the Exchange in at least 60% of 
the options in which such DSQT or DRSQT is assigned.\12\ Whenever a 
DSQT or DRSQT enters a quotation in an option in which such DSQT or 
DRSQT is assigned, such DSQT or DRSQT must maintain continuous 
quotations for not less than 99% of the series of the option listed on 
the Exchange until the close of that trading day.\13\
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    \12\ See Phlx Rule 1014(b)(ii)(D)(1).
    \13\ See Phlx Rule 1014(b)(ii)(D)(1).
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The Proposal
    The Exchange proposes to permit SQT and RSQT applicants to request 
assignment in an option by ``root symbol.'' Today, all assignments are 
by overlying option, meaning the SQT and RSQT applicants that are 
assigned in a particular option are assigned in all series of such 
option. Therefore, the calculation of the percentage of series required 
to be quoted is based on every series listed in such option, thus 
requiring SQTs and RSQTs to quote most series.
    Root symbols are the basic symbols used to identify an option, such 
as, for example, ``ABQ'' for options on fictitious ``ABC Corporation.'' 
The various series of options on ABC Corporation are identified with 
two additional symbols reflecting the expiration month and the strike 
price, which also indicate whether it is a put or call option. ABC 
Corporation may have different root symbols other than ABQ because of 
the number of strike prices (there are not enough letters in the 
alphabet to capture all potential strike prices), the expiration months 
available, and whether any mergers or acquisitions have occurred. Thus, 
an option on the Exchange overlying a single underlying security could 
have several different root symbols.
    The Exchange anticipates that, if options can be assigned by root 
symbol, SQTs and RSQTs may more carefully tailor their requests to the 
specific roots in which they are interested, which should encourage 
quality quoting. According to the Exchange, SQTs and RSQTs often submit 
quotes with bid/ask differentials as wide as the Exchange's rules 
permit in series that they have no interest in quoting.\14\ The effect 
of this is that, in order to meet their quoting continuity 
requirements, SQTs and RSQTs submit continuous quotations that are not 
at or even near the best bid or offer on the Exchange, nor the National 
Best Bid or Offer. Such quotations result in unnecessary quote traffic 
on the Exchange, often causing issues of concern respecting quote 
capacity. This proposal should reduce the number of series assigned to 
SQTs and RSQTs by the OAESC, and consequently reduce the number of 
quotes submitted by SQTs and RSQTs.
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    \14\ Streaming Quote Options trading on the Exchange's fully 
electronic trading platform for options, Phlx XL, may be quoted 
electronically with a difference not to exceed $5 between the bid 
and offer regardless of the price of the bid. The $5 bid/ask 
differentials only apply to Streaming Quote Options trading on Phlx 
XL and only following the opening rotation in each security. See 
Phlx Rule 1014(c)(i)(A)(2).
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \15\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \16\ 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 reducing the number of options 
quotations required to be submitted, which should enable the Exchange 
to mitigate quote traffic and capacity.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 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, as 
amended, 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

    Written comments on the proposed rule change, as amended, were 
neither solicited nor received.

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 Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, as amended, or,
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, 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, as amended, 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-2006-53 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-2006-53. 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, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
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 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-2006-53 and should be 
submitted on or before December 20, 2006.

[[Page 69176]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-20212 Filed 11-28-06; 8:45 am]

BILLING CODE 8011-01-P