Document ID: SEC-2006-1600-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-12-11T05:00Z

[Federal Register: December 11, 2006 (Volume 71, Number 237)]
[Notices]               
[Page 71605-71607]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11de06-80]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54859; File No. SR-Phlx-2006-51]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Relating to Performance 
Evaluations for Streaming Quote Traders and Remote Streaming Quote 
Traders

December 1, 2006.
    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 November 22, 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 substantially prepared by the 
Phlx. 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 Phlx, pursuant to Section 19(b)(1) of the Act \3\ and Rule 19b-
4 thereunder,\4\ proposes to adopt Phlx Rule 510, SQT and RSQT 
Performance Evaluation, to establish performance requirements for 
Streaming Quote Traders (``SQTs'') \5\ and Remote Streaming Quote 
Traders (``RSQTs'').\6\ The text of the proposed rule change is 
available on the Phlx's

[[Page 71606]]

Web site at http://www.phlx.com, at the Phlx's Office of the Secretary, 

and at the Commission's Public Reference Room.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \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 Phlx 
Rule 1014(b)(ii)(A). AUTOM is the Exchange's electronic order 
delivery, routing, execution and reporting system, which provides 
for the automatic entry and routing of equity option and index 
option orders to the Exchange trading floor. Orders delivered 
through AUTOM may be executed manually, or certain orders are 
eligible for AUTOM's automatic execution features, AUTO-X, Book 
Sweep and Book Match. AUTOM is today more commonly referred to as 
Phlx XL. See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59) and Phlx Rule 
1080.
    \6\ An RSQT is a participant in 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. See Phlx Rule 1014(b)(ii)(B).
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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 adopt new Phlx Rule 
510 to (1) Establish performance requirements for SQTs and RSQTs, (2) 
authorize the Exchange to conduct performance evaluations periodically, 
and (3) authorize the Exchange's Options Allocation, Evaluation and 
Securities Committee (``OAESC'') \7\ to take corrective action where 
minimum requirements are not met.
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    \7\ See Phlx By-Law Article X, Section 10-7. OAESC has 
jurisdiction over, among other things: the appointment of 
specialists on the options and foreign currency options trading 
floors; allocation, retention and transfer of privileges to deal in 
options on the trading floors; and administration of the 500 series 
of the Phlx rules.
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    Proposed Phlx Rule 510 provides for monthly performance evaluations 
of SQTs and RSQTs to determine whether they have fulfilled performance 
standards relating to, among other things, quality of markets, 
efficient quote submission to the Exchange (including quotes submitted 
through a third party vendor), competition, observance of ethical 
standards, and administrative factors.
    The proposal would permit the Exchange to consider requests for 
relief from established quote spread parameters on the Exchange \8\ and 
efficiency of quote submission through the Specialized Quote Feed 
(``SQF''), as defined in Phlx Rule 1080, Commentary .01. Failure to 
meet established minimum performance requirements could result in 
restriction by the OAESC of additional options assignments; suspension, 
termination, or restriction of an existing assignment on one or more 
options; or suspension, termination, or restriction of an SQT's or 
RSQT's status as such.
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    \8\ See Phlx Rule 1014(c)(i)(A).
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    New Phlx Rule 510 would establish specific criteria for each option 
assigned to an SQT or RSQT that would be regularly evaluated by the 
Exchange. First, the Exchange would evaluate the percentage of total 
quotes submitted by the SQT or RSQT that represent the NBBO. If the 
percentage of the total quotes that represent the NBBO is in the lowest 
quartile of all SQTs or RSQTs for two or more consecutive months, this 
may be considered sub-standard performance.
    Second, the Exchange would evaluate the SQT or RSQT's adherence to 
the Exchange's established quoting requirements pursuant to Phlx Rule 
1014.\9\ If an SQT or RSQT fails to meet the quoting requirements as 
prescribed by the rule, this may be considered sub-standard 
performance.
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    \9\ Phlx Rule 1014(b)(ii)(D)(1) provides that an SQT and an RSQT 
shall be responsible to quote continuous, two-sided markets in not 
less than 60% of the series in each option in which such SQT or RSQT 
is assigned, provided that, on any given day, a Directed SQT 
(``DSQT'') or a Directed RSQT (``DRSQT'') (as defined in Phlx Rule 
1080(l)(i)(C)) shall be responsible to quote continuous, two-sided 
markets in not 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. 
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.
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    Third, the Exchange would consider the number of requests for quote 
spread parameter \10\ relief for the purposes of evaluating performance 
standards.
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    \10\ Phlx Rule 1034 establishes maximum allowable bid/ask 
differentials on the Exchange.
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    Finally, to evaluate efficient quote submission to the Exchange, 
the Exchange will consider how an SQT or RSQT optimizes the submission 
of quotes through the SQF, as defined in Phlx Rule 1080, by evaluating 
the number of individual quotes per quote ``block'' received by the 
Exchange.
    A quote ``block'' is a component of the Exhange's SQF application 
that allows for delivery of a set of multiple quotations from the SQT 
or RSQT to the Exchange. Within a single ``block,'' the SQT or RSQT can 
deliver quotes for any number of option series ranging from 1 to 99.
    An SQT or RSQT is assigned a number of ports or lines on which they 
can send quote blocks. The number of lines assigned dictates the number 
of blocks that may be sent simultaneously by the SQT or RSQT. The 
number of lines assigned to an SQT or RSQT is generally a function of 
the number of products being quoted, taking into account the throughput 
required to minimize quote latency risk.
    The Exchange intends to evaluate the average number of quotes (1-
99) submitted within the SQT or RSQT's quote blocks. The number of 
quotes delivered in each block would generally be a measure of the SQT 
or RSQT's quoting efficiency. For example, a firm sending an average of 
1 quote in each block may be considered inefficient while a firm 
sending an average of 99 quotes in each block would be considered very 
efficient.
    In general, the expenditure of systemic resources required to 
process an inefficient block is nearly equal to the expenditure of 
systemic resources required to process an efficient block. Therefore, 
an efficient SQT or RSQT can achieve a much higher level of quote 
submission than an inefficient SQT or RSQT using nearly the same amount 
of exchange system resources. The Exchange believes that the regular 
monitoring of quoting efficiency in this fashion will result in more 
efficient quoting on the Exchange (i.e., more quotes submitted per 
block), thus preserving and maximizing Exchange system capacity for 
handling quote traffic.
    In conclusion, the Exchange believes that the proposed performance 
requirements for SQTs and RSQTs should, among other things, promote 
quoting efficiency and preserve system capacity, increase competition, 
minimize requests for relief from quote spread parameters, and 
encourage efficient adherence to quoting obligations, to the benefit of 
customers and the marketplace in general.
2. Statutory Basis
    The Exchange believes that the proposed rule change 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 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 establishing performance 
standards for SQTs and RSQTs, which should, in turn, improve the 
quality of markets on 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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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

[[Page 71607]]

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 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, 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-2006-51 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-2006-51. 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. 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-2006-51 and should be submitted on or before January 2, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E6-20963 Filed 12-8-06; 8:45 am]

BILLING CODE 8011-01-P