Document ID: SEC-2010-1677-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2010-11-02T04:00Z

[Federal Register: November 2, 2010 (Volume 75, Number 211)]
[Notices]               
[Page 67427-67431]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02no10-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63192; File No. SR-Phlx-2010-145]

 
Self-Regulatory Organizations; The NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Establish Remote Specialists

October 27, 2010.
    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 October 14, 2010, NASDAQ OMX PHLX LLC (``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 is filing with the Commission a proposal to amend 
Exchange Rule 501 (Specialist Appointment), Rule 506 (Allocation 
Application), Rule 507 (Application for Approval as an SQT or RSQT and 
Assignment in Options), Rule 1014 (Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders), and Rule 
1020 (Registration and Functions of Options Specialists) to allow 
certain Exchange members to act as option specialists that are not 
physically present on the option trading floor. The Exchange also 
proposes to amend Options Floor Procedure Advices A-7 (Responsibility 
To Cancel), A-10 (Specialist Trading With Book), B-3 (Trading 
Requirements), and E-1 (Required Staffing of Options Floor) \3\ to 
conform them with the proposed rule changes.
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    \3\ Options Floor Procedure Advices (``OFPAs'' or ``Advices'') 
generally correspond to Exchange rules. For example, OFPA B-3 is a 
corresponding Advice to Rule 1014 Commentary .01 and OFPA A-10 is a 
corresponding Advice to Rule 1063. OFPAs are part of the Exchange's 
minor rule plan (``MRP'' or ``Minor Rule Plan''), which consists of 
Advices with preset fines, pursuant to Rule 19d-1(c) under the Act. 
17 CFR 240.19d-1(c). See Securities Exchange Act Release No. 50997 
(January 7, 2005), 70 FR 2444 (January 13, 2005) (SR-Phlx-2003-40) 
(approval order establishing Floor Broker Management System in OFPA 
C-2 and Rule 1063). The Exchange is not proposing to change the 
fines in any Advices.
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    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, on the Commission's 
Web site at http://www.sec.gov; and at the Commission's Public 
Reference Room.

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 this proposal is to amend Exchange Rules 501, 506, 
507, 1014, and 1020 and Option Floor Procedure Advices A-7, A-10, B-3, 
and E-1 to allow certain Exchange members to act as option specialists 
that are not physically present on the option trading floor.
Background
    There are several types of market makers on the Exchange, including 
Registered Options Traders (``ROTs''),\4\ Streaming Quote Traders 
(``SQTs''),\5\ Remote Streaming Quote Traders

[[Page 67428]]

(``RSQTs''),\6\ and specialists.\7\ Specialists are Exchange members 
who are registered as options specialists pursuant to Rule 1020(a). 
Paragraph (b) of Rule 1020 states that as a condition of a member being 
registered as a specialist in one or more options, it is understood 
that, in addition to the execution of commission orders \8\ entrusted 
to him in such options, a specialist is to engage in a course of 
dealings for his own account to assist in the maintenance, insofar as 
reasonably practicable, of a fair and orderly market on the Exchange in 
such options. Paragraph (c) states that a specialist or his member 
organization shall not effect on the Exchange purchases or sales of any 
option in which such specialist is registered, for any account in which 
he or his member organization is directly or indirectly interested, 
unless such dealings are reasonably necessary to permit such specialist 
to maintain a fair and orderly market. Paragraph (d) sets forth 
criteria for a specialist dealing in his own account in relation to 
assisting in the maintenance, insofar as reasonably practicable, of a 
fair and orderly market in the options in which he is registered.
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    \4\ 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. See Rule 1014(b)(i).
    \5\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically in 
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 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 in options to which such RSQT has been assigned. An 
RSQT may only submit such quotations electronically from off the 
floor of the Exchange. See Rule 1014(b)(ii)(B).
    \7\ Rule 1014 also discusses other market makers including 
Directed SQTs and Directed RSQTs, which receive Directed Orders as 
defined in Rule 1080(l)(i)(A). Specialists may likewise receive 
Directed Orders.
    \8\ The Exchange proposes to delete the word ``commission'' from 
Rule 1020(b) to clarify that orders entrusted to specialists and 
[sic] are not limited to only commission orders.
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    Specialists apply for allocation of options issues pursuant to Rule 
501 and RSQTs apply for assignment in options pursuant to Rule 507. The 
Exchange administers Rules 500 through 599 (the ``Allocation and 
Assignment Rules''), including Rules 501, 506, and 507 as proposed 
herein.\9\
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    \9\ See Securities Exchange Act Release No. 59924 (May 14, 
2009), 74 FR 23759 (May 20, 2009) (SR-Phlx-2009-23) (approval order 
that, among other things, established that Exchange staff 
administers Rules 500 through 599). See also Rule 500.
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    The Allocation and Assignment Rules generally describe the process 
for: Application for becoming and appointment of specialists; 
allocation of classes of options to specialist units and individual 
specialists; application for becoming and approval of SQTs and RSQTs 
and assignment of options to them; and specialist, SQT, and RSQT 
performance evaluations. The Allocation and Assignment Rules also 
indicate under what circumstances new allocations may not be made.\10\
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    \10\ See, e.g., Supplementary Material .01 to Rule 506 
(specialist may not apply for a new allocation for a period of six 
months after an option allocation was taken away from the specialist 
in a disciplinary proceeding or an involuntary reallocation 
proceeding).
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    Each options class and series listed on the Exchange must currently 
have a specialist that has a physical presence on the options floor 
(``floor-based specialist'').\11\ The floor-based specialist system is 
historically based in the traditional open outcry auction market system 
that has trading crowds at physical trading posts on the floor and 
Floor Brokers \12\ that represent orders on the floor on behalf of 
others (``auction market system'' or ``open outcry system''). The 
auction market system is necessary, and indeed invaluable, to certain 
types of market participants (e.g., institutional traders and certain 
large-volume traders). The Exchange has developed, in parallel to the 
auction market system, an extensive electronic means to execute option 
orders.\13\ As a result, the Exchange operates an options market that 
combines a traditional open outcry auction market trading floor with 
electronic trading (the ``current Phlx market'').\14\
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    \11\ At least one exchange that uses a specialist system has 
allowed certain option series to trade without a designated lead 
market maker (specialist). See Securities Exchange Act Release No. 
56001 (July 2, 2007), 72 FR 37557 (July 10, 2007) (SR-NYSEArca-2007-
34) (order approving). And at least one exchange that does not have 
a specialist system has allowed options to be traded without any 
market maker. See Securities Exchange Act Release No. 61735 (March 
18, 2010), 75 FR 14227 (March 24, 2010) (SR-NASDAQ-2010-007) (order 
approving).
    \12\ An Options Floor Broker is an individual who is registered 
with the Exchange for the purpose, while on the Options Floor, of 
accepting and executing options orders received from members and 
member organizations. An Options Floor Broker shall not accept an 
order from any other source unless he is the nominee of a member 
organization qualified to transact business with the public in which 
event he may accept orders from public customers of the 
organization. See Rule 1060.
    \13\ See Rule 1080 regarding the Exchange's electronic order, 
trading, and execution system. See also Securities Exchange Act 
Release Nos. 46763 (November 1, 2002), 67 FR 68898 (November 13, 
2002) (SR-Phlx-2002-04) (order approving the Exchange's electronic 
interface for specialists and ROTs, AUTOM); 50100 (July 27, 2004), 
69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59) (order approving the 
Exchange's electronic platform for options, XL); and 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32) (order approving 
the Exchange's enhanced electronic platform, XL II).
    \14\ The current Phlx market model combining open outcry and 
electronic trading is also used by other options exchanges, such as 
Chicago Board Options Exchange, Inc. (``CBOE''), NYSE Amex LLC 
(``NYSE Amex'') and NYSE Arca, Inc. (``NYSE Arca''). Only electronic 
options trading is done on other exchanges, such as the 
International Securities Exchange, LLC (``ISE'') and The NASDAQ 
Stock Market LLC (``NASDAQ'').
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    The Exchange has found that it can be difficult, if not impossible, 
to allocate certain option products; and has found that specialists may 
at times relinquish their options privileges. This could occur when, as 
an example, underlying securities are involved in a takeover, a merger/
acquisition situation, or some type of rights offering. Without a 
specialist that is willing to accept, or retain, allocation of an 
option, however, the Exchange may not list such options, to the 
detriment of market participants and public investors. This filing 
seeks to remedy the inability to allocate options where no floor-based 
specialists are available for allocation.\15\
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    \15\ The Exchange has a process whereby certain options (e.g. 
securities of a subsidiary, or convertible into the securities of 
the issuer, issued in connection with a name change or a reverse 
stock split, or created in connection of a merger or acquisition or 
a ``spin-off'' transaction), are automatically allocated to the 
specialist that is already allocated the related options. See 
Supplementary Material .02 to Rule 506 and Exchange Act Release No. 
60455 (August 6, 2009), 74 FR 40857 (August 13, 2009) (SR-Phlx-2009-
62) (notice of filing and immediate effectiveness).
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Specialist Rights and Obligations

    The Exchange initially proposes to define remote specialist in Rule 
1020. In particular, the Exchange proposes to add sub-paragraph (a)(ii) 
stating that a Remote Specialist is a qualified RSQT approved by the 
Exchange to function as a specialist in one or more options if the 
Exchange determines that it cannot allocate such options to a non-
remote specialist (that is, a floor based specialist) (``Remote 
Specialist'').
    A Remote Specialist has all the rights and obligations of a 
specialist, unless Exchange rules provide otherwise. The Exchange 
believes that the concept of specialist rights and obligations applying 
to all specialists, including Remote Specialists, is paramount to the 
proposal and therefore uniformly applicable. The Exchange proposes to 
underscore this principle by indicating in Rule 1020(a) that the term 
specialist includes a Remote Specialist as defined in Rule 1020(a)(ii) 
and registered pursuant to Rule 501; and indicating that a Remote 
Specialist has all the rights and obligations of an options specialist 
unless Exchange rules provide otherwise.

Becoming a Remote Specialist

    The Exchange proposes to amend Rule 501, which generally deals with 
the process of applying for approval as a specialist, and to amend the 
rule to indicate that in certain circumstances RSQTs may act as 
specialists.
    In particular, the Exchange proposes new paragraph (f)(i) to state 
that RSQTs,

[[Page 67429]]

as defined in Rule 1014, may submit an application to be an approved 
specialist unit.\16\ Upon application by a qualified RSQT (which has to 
become an RSQT pursuant to Rule 507), the Exchange will approve such 
organization as an approved off-floor Remote Specialist unit which may 
function as a specialist unit in one or more options. The Exchange 
could approve a Remote Specialist if the Exchange determines that it 
cannot allocate such options to a floor specialist. A Remote Specialist 
would not, in contrast to an on-floor specialist, have any physical 
presence on the options floor. Therefore, a Remote Specialist would 
not, in contrast to an on-floor specialist, have any duties emanating 
from having a floor presence. The Exchange clarifies in proposed Rule 
501(f)(iii) that, as stated in Rule 1020(a)(ii), all specialist rights 
and obligations apply to Remote Specialists unless otherwise noted in 
the rules.
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    \16\ A ``specialist unit'' including a Remote Specialist unit, 
may have one or more individual ``specialists.''
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    The Exchange believes that it is important that each Remote 
Specialist is available and reachable at all times during trading 
hours. The Exchange therefore proposes language in Rule 501(f)(ii) 
stating that every Remote Specialist must be accessible to exchange 
staff and members throughout all trading hours for the products 
allocated to the specialist.\17\ To ensure that each Remote Specialist 
is reachable, the Exchange proposes language in sub-paragraph (f)(ii) 
stating that a Remote Specialist shall provide Exchange staff and 
members with telephone access to such specialist and/or associated 
staff at all times during trading hours.\18\
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    \17\ For Exchange trading hours, see Rule 101.
    \18\ To the extent necessary, the Exchange will announce such 
communication arrangements to its members via an Options Trading 
Alert (``OTA'') or Options Regulatory Alert (``ORA'').
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    Rule 501(b) currently indicates that each specialist unit will 
include in the initial application the unit's back up specialist 
arrangements; and Rule 501(d) indicates that each specialist unit will 
indicate its assistant specialist.\19\ Remote Specialists will not need 
to meet the assistant specialist staffing or the back-up specialist 
unit requirement. The Exchange believes that this is rational and 
appropriate for Remote Specialists, who have constrained open outcry 
capabilities.\20\ As such, the Exchange proposes to amend Rule 501 to 
indicate that back up specialist arrangements and assistant specialist 
requirements are not applicable to Remote Specialists.\21\ All other 
Rule 501 application requirements will be applicable to Remote 
Specialists.
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    \19\ Paragraph (b) of Rule 501 states, in relevant part, that 
initial application(s) to become a specialist unit shall be in a 
form and/or format prescribed by the Exchange and shall include the 
following: the identity of the unit's staff positions and who will 
occupy those positions; the unit's clearing arrangements; the unit's 
capital structure, including any lines of credit; and the unit's 
back up arrangements endorsed by the parties.
    Paragraph (d) of Rule 501 states, in relevant part, that each 
unit must consist of at least the following staff for each trading 
floor specialist post: one head specialist; and one assistant 
specialist that must be associated with the specialist unit.
    \20\ Moreover, recognizing that the market making functions of 
Remote Specialists and RSQTs may be similar in many respects but are 
not identical, the Exchange notes that current RSQTs, who also have 
constrained open outcry capabilities, have been fulfilling market 
making requirements on the Exchange (e.g. making two-sided market 
quotations) for years without specific back-up personnel 
requirements. See Securities Exchange Act Release No. 50100 (July 
27, 2004), 69 FR 46612 (SR-Phlx-2003-59) (approval order relating to 
the Exchange's electronic trading platform XL and, among other 
things, Rule 507). See also Rules 507 and 1014.
    \21\ This concept follows through to the OFPAs. The Exchange 
proposes to clarify Advice E-1 to exempt a Remote Specialist from 
the specialist obligation to have personnel on the trading floor, 
while retaining the Remote Specialist obligation to have a 
representative available telephonically.
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    The requirement that each specialist designates an assistant 
specialist and a back-up specialist was initially established to help 
ensure that there would be adequate liquidity in a given issue in the 
event the appointed specialist was unavailable. At the time, the 
Exchange options market was strictly a floor-based auction market and 
there may have only been a few market makers (or market participants) 
in any given issue. It was therefore necessary to have an assistant or 
back-up specialist ready to take over as specialist if the appointed 
specialist was unable to fulfill its obligations. The rationale 
underlying the assistant/back-up requirement has become antiquated with 
the development of the classic auction system into the current Phlx 
market with extensive electronic-based trading. As such, RSQTs are 
assigned in the same options that are allocated to specialists and, in 
conjunction with other market makers on the Exchange, are able to 
provide liquidity in the event of a specialist's temporary absence. 
Moreover, since nearly all option issues traded on the Exchange are 
traded on multiple exchanges, the historical risk to be managed by the 
current assistant/backup requirement (namely, the ability of the 
Exchange to foster the provision of liquidity for investors) is no 
longer present.
    The Exchange proposes clarifying changes to Rule 506, which deals 
with the process of qualified specialist units (that is, specialist 
units approved pursuant to Rule 501) applying for, and receiving, 
allocation of a class of options; and indicates under what 
circumstances new allocations cannot be made. Paragraph (b) currently 
states that an allocation application shall, at a minimum, include the 
name and background of the head specialist and assistant specialist(s), 
the unit's experience and capitalization demonstrating an ability to 
trade the particular options class sought, and any other reasons why 
the unit believes it should be assigned or allocated the security. In 
addition, the Exchange may require that the application include other 
information such as system acceptance/execution levels and guarantees. 
The Exchange proposes to indicate in paragraph (b) that the assistant 
specialist requirement is not applicable to Remote Specialists. 
Paragraph (c) currently states that the Exchange's decisions regarding 
allocation of specialist privileges are communicated in writing to 
floor members. In light of the off-floor Remote Specialist proposal, 
the Exchange would modify paragraph (c) to indicate that communications 
would not be confined only to floor members, but would be made to all 
Exchange members (e.g. specialists, RSQTs, SQTs and ROTs).
    Finally in terms of the application process, the Exchange proposes 
to clarify the parameters of Rule 507. This rule currently describes 
the process and criteria for successfully becoming an RSQT or SQT, 
which includes: Significant market-making and/or specialist experience; 
superior resources, including capital, technology and personnel; 
demonstrated history of stability, superior electronic capacity, and 
superior operational capacity; and proven ability to interact with 
order flow in all types of markets.\22\
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    \22\ For all RSQT application and approval criteria, see Rule 
507(a)(i)(A) through (a)(i)(G).
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    After a market maker on the Exchange applies and is approved 
pursuant to Rule 507 to be an RSQT, the RSQT may then apply to become a 
Remote Specialist pursuant to the separate process set forth in Rule 
501. The Exchange clarifies this two-step process in proposed new 
paragraph (f) of Rule 507, which states that nothing in Rule 507 shall 
be construed to automatically qualify an RSQT to be a Remote Specialist 
on the Exchange.

Quoting Obligations and Priority

    Rule 1014 sets forth the quoting (market making) obligations for 
all market makers on the Exchange, with quoting requirements for RSQTs 
specified in Rule 1014(b)(ii)(D)(1) \23\ and

[[Page 67430]]

quoting requirements for specialists specified in Rule 
1014(b)(ii)(D)(2).\24\ The Exchange proposes to clarify that the two-
sided market quoting requirements for specialists are applicable to 
Remote Specialists. The Exchange proposes also to clarify that RSQTs 
will have different quoting requirements when they are acting as Remote 
Specialists as opposed to when they are acting as RSQTs.
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    \23\ Regarding RSQT market making obligations, Rule 
1014(b)(ii)(D)(1) states, in relevant part, that in addition to the 
other requirements for ROTs set forth in this Rule 1014, except as 
provided in sub-paragraph (4) below, an SQT and an RSQT shall be 
responsible to quote two-sided markets in not less than 60% of the 
series 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 Rule 1080(l)(i)(C)) shall be responsible to quote 
two-sided markets in the lesser of 99% of the series listed on the 
Exchange or 100% of the series listed on the Exchange minus one 
call-put pair, in each case 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 until the close of that trading day 
quotations for the lesser of 99% of the series of the option listed 
on the Exchange or 100% of the series of the option listed on the 
Exchange minus one call-put pair. To satisfy the applicable 
requirements of this sub-paragraph (D)(1) with respect to quoting a 
series, an SQT, RSQT, DSQT, or DRSQT must quote such series 90% of 
the trading day (as a percentage of the total number of minutes in 
such trading day) or such higher percentage as the Exchange may 
announce in advance. The Exchange may consider exceptions to the 
requirement to quote 90% (or higher) of the trading day based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances.
    \24\ Regarding specialist market making obligations, Rule 
1014(b)(ii)(D)(2) states, in relevant part, that the specialist 
shall be responsible to quote two-sided markets in the lesser of 99% 
of the series or 100% of the series minus one call-put pair in each 
option in which such specialist is assigned. To satisfy the 
requirement of this sub-paragraph (D)(2) with respect to quoting a 
series, the specialist must quote such series 90% of the trading day 
(as a percentage of the total number of minutes in such trading day) 
or such higher percentage as the Exchange may announce in advance. 
The Exchange may consider exceptions to the requirement to quote 90% 
(or higher) of the trading day based on demonstrated legal or 
regulatory requirements or other mitigating circumstances.
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    Specifically, the Exchange proposes to state in Rule 
1014(b)(ii)(D)(2) that RSQTs functioning as Remote Specialists in 
particular options shall be responsible to quote two-sided markets just 
as on-floor specialists are now required to do. The Exchange also 
proposes to state in Rule 1014(b)(ii)(D)(1) that the RSQT quoting 
requirements found therein are not applicable to RSQTs when they are 
acting as Remote Specialists (in which case the specialist quoting 
requirements found in sub-paragraph (D)(2) are applicable). The 
Exchange believes that this appropriately establishes quoting 
equivalency among on-floor specialists and Remote Specialists.
    Rule 1014 establishes that the market making (quoting) obligations 
do not apply to RSQTs (as well as to SQTs, DSQTs, and DRSQTs) in terms 
of certain types of options products. In particular, Rule 
1014(b)(ii)(D)(4) states that RSQTs and the other market makers shall 
be deemed not to be assigned in any Quarterly Option Series 
(``QOS''),\25\ any adjusted option series,\26\ and any option series 
until the time to expiration for such series is less than nine months; 
and thereby establishes an exemption for RSQTs and the other market 
makers from the obligations set forth in Rule 1014 in the noted 
categories of products. The Exchange proposes to add new language to 
sub-paragraph (D)(4) to indicate that these exemptions apply to RSQTs 
only when they are acting as RSQTs, and do not apply to RSQTs when they 
are functioning as Remote Specialists in particular options.
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    \25\ QOS are options series that expire at the close of business 
on the last business day of a calendar quarter. See Commentary .08 
to Rule 1012. For index QOS, see Rule 1101A.
    \26\ Adjusted option series are defined in Rule 
1014(b)(ii)(D)(4) as an option series wherein one option contract in 
the series represents the delivery of other than 100 shares of 
underlying stock or Exchange-Traded Fund Shares.
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    Rule 1014(b)(ii)(B) currently indicates that no person who is 
either directly or indirectly affiliated with an RSQT (``affiliated 
RSQT'') is allowed to submit quotations as a specialist, SQT, RSQT or 
non-SQT ROT in options in which such affiliated RSQT is assigned. These 
restrictions remain. The Exchange proposes to amend sub-paragraph 
(b)(ii)(B) only to indicate that an RSQT cannot quote both as RSQT and 
as Remote Specialist in a particular security. That is, if an RSQT is a 
Remote Specialist in a particular security, the Remote specialist must 
make a market (submit quotations) as a specialist and may not make a 
market as an RSQT in that particular security.
    On-floor specialists currently participate in trades that are 
affected in open outcry, as well as electronically. In general, a 
trading crowd (including an on-floor specialist) has priority over out-
of-crowd SQTs and RSQTs at the execution price for orders with the size 
of at least 500 contracts, while out-of crowd SQTs and RSQTs have 
priority for orders of less than 500 contracts. In light of the central 
concept that to the extent practicable (and unless otherwise noted in 
Exchange rules), specialists and Remote Specialists are treated the 
same, that is, have similar rights and obligations, both specialists 
and Remote Specialists would have similar priority rights to the extent 
practicable. As such, Remote Specialist priority rights would be 
coextensive with their ability to submit electronic quotations via the 
Exchange's electronic order, execution, and trading system, Phlx XL, 
while not being on the floor. For example, Commentary .05(c)(ii) states 
that respecting crossing, facilitation and solicited orders (as defined 
in Rule 1064) with a size of at least 500 contracts on each side that 
are represented and executed in open outcry, priority shall be afforded 
to in-crowd participants over RSQTs and out-of crowd SQTs, and that 
such orders shall be allocated in accordance with Exchange rules. The 
Exchange proposes to add Remote Specialists to Commentary .05(c)(ii) so 
that they are treated similarly for priority purposes because they do 
not engage in open outcry floor trading.
    Commentary .05(b) to Rule 1014 states that SQTs and RSQTs can 
submit orders electronically via XL, the Exchange's electronic order, 
execution and trading system. The Exchange proposes to add Remote 
Specialists to Commentary .05(b) so that they can likewise submit 
quotes electronically; and to confirm that, similarly to RSQTs, the 
Exchange has the ability to allocate one or more options to Remote 
Specialists. Commentary .05(C)(i) indicates that if a Floor Broker 
presents a non-electronic order in an option assigned to an RSQT, such 
RSQT or SQT may not participate in trades stemming from the non-
electronic order unless the order is executed at the price quoted by 
the non-crowd RSQT or SQT at the time of execution. The Exchange 
proposes to include Remote Specialists in Commentary .05(C)(i) to 
establish priority that is coextensive with Remote Specialist 
electronic quoting and trading capabilities.\27\
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    \27\ The Exchange has submitted an immediately effective filing 
proposing to delete obsolete terminology from certain Exchange rules 
including Rule 1014, which filing is subject to a 30 day operative 
delay. See Securities Exchange Act Release No. 63036 (October 4, 
2010), 75 FR 62621 (October 12, 2010) (SR-Phlx-2010-131) (notice of 
filing and immediate effectiveness). SR-Phlx-2010-131 has proposed 
changes to the rule text of certain rules that are discussed in this 
filing, specifically sub-paragraph (b)(i)(B) and Commentary .05 of 
Rule 1014, and the text of these rules in Exhibit 5 reflects the 
changes made in SR-Phlx-2010-131 that are operative as of October 
27, 2010.
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    The Exchange proposes to clarify several OFPAs commensurate with a 
Remote Specialist's off-floor electronic quoting and trading 
capabilities. In particular, the Exchange proposes to state in Advice 
A-10 that a Remote Specialist is exempted from the specialist duty of 
ensuring that at least one ROT is present in a floor trading crowd 
before such specialist can participate as principal in a trade. The 
Exchange proposes to state in Advice

[[Page 67431]]

A-7 that a Remote Specialist is exempted from the specialist obligation 
to advise a Floor Broker about cancellations. Additionally, the 
Exchange proposes to state in Advice B-3 that a Remote Specialist is 
exempted from the requirement that an ROT, including a specialist, 
trade a certain percentage of volume on the Exchange in person.

Surveillance

    The Exchange has developed surveillance procedures for its auction 
and electronic markets. The Exchange will use the surveillance 
procedures now in place regarding specialists to perform surveillance 
of Remote Specialists.

Conclusion

    The Exchange believes that its proposal to enable Remote Streaming 
Quote Traders to act as Remote Specialists where no on-floor 
specialists are willing to accept, or retain, an option allocation 
would enable Remote Specialists to provide a market that does not 
otherwise exist on the Exchange to the benefit of traders, investors, 
and public customers making hedging and trading decisions. The Exchange 
believes that allowing specialists to function off-floor also removes 
an operational issue by allowing off-floor specialists that are not 
required to be present on the trading floor in respect of certain 
option issues. Accordingly, the Exchange believes that the proposed 
rule change is designed to promote just and equitable principles of 
trade and to be in the public interest.
    Finally, the Exchange notes that the Commission has approved, or 
options exchanges have filed for immediate effectiveness, proposals 
that allow these exchanges to have off-floor (remote) market makers 
that are similar in concept to the proposed Remote Specialists.\28\ The 
Exchange does not believe that this filing raises any novel issues.
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    \28\ See Securities Exchange Act Release Nos. 55531 (March 26, 
2007), 72 FR 15736 (April 2, 2007) (SR-CBOE-2006-94) (order 
approving proposal to establish off-floor Delegated Primary Market-
Makers); 57747 (April 30, 2008), 73 FR 25811 (May 7, 2008) (SR-CBOE-
2008-49) (notice of filing and immediate effectiveness to establish 
off-floor Lead Market-Makers); 57568 (March 26, 2008), 73 FR 18016 
(April 2, 2008) (SR-CBOE-2008-32 (notice of filing and immediate 
effectiveness to establish ability of off-floor Delegated Primary 
Market-Makers to operate in any options class traded on Hybrid); and 
52827 (November 23, 2005), 70 FR 72139 (December 1, 2005) (SR-PCX-
2005-56) (approval order establishing Lead Market Makers).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \29\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \30\ 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 facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system by allowing 
Exchange option specialists that are not on an Exchange floor where the 
Exchange determines that it cannot allocate options to a floor based 
specialist.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 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

    Within 45 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 Exchange consents, the Commission shall: (a) By order approve 
or disapprove 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-2010-145 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-2010-145. 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 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-2010-145 and should be 
submitted on or before November 23, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27645 Filed 11-1-10; 8:45 am]
BILLING CODE 8011-01-P