Document ID: SEC-2005-0011-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2005-09-22T04:00Z

[Federal Register: September 22, 2005 (Volume 70, Number 183)]
[Notices]               
[Page 55650-55655]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se05-70]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 52448; File No. SR-Phlx-2005-25]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1, 2, and 3 Thereto by the Philadelphia Stock 
Exchange, Inc. Relating to the Adoption of New Rules That Would 
Establish an Automated Opening System on the Exchange

September 15, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4\2\ thereunder, notice is hereby given that 
on April 21, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change. The Exchange 
submitted Amendment No. 1,\3\ Amendment No. 2,\4\ and Amendment No. 3 
\5\ to its proposal on June 1, 2005, September 1, 2005, and September 
14, 2005, respectively. The proposed rule change, as amended, is 
described in Items I, II, and III, below, which Items have been 
prepared by the Phlx. 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\ See Form 19b-4, dated June 1, 2005 (``Amendment No. 1''). 
Amendment No. 1 replaced the original filing in its entirety.
    \4\ See Form 19b-4, dated September 1, 2005 (``Amendment No. 
2''). Amendment No. 2 replaced Amendment No. 1 in its entirety.
    \5\ See Form 19b-4, dated September 14, 2005 (``Amendment No. 
3''). In Amendment No. 3, Phlx, in part, deleted proposed rule text 
to clarify that during a manual opening all market orders are to be 
executed at one price.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to adopt new rules that would establish an 
automated opening system on the Exchange. The Exchange also proposes to 
make

[[Page 55651]]

conforming amendments to various existing rules and Option Floor 
Procedure Advices (``OFPAs''). The text of the proposed rule change is 
available on the Exchange's Web site (http://www.phlx.com), at the 

Exchange's Office of the Secretary, 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 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 increase the number 
of option orders and transactions handled and executed electronically 
on the Exchange by establishing a fully automated opening system.

Background

    In July, 2004, the Exchange began trading options on its new 
electronic options trading platform, Phlx XL.\6\ Because Phlx XL does 
not currently include an automated opening functionality, specialists 
are currently required to open option series manually. The proposed 
rule change would establish a fully automated opening system for 
options traded on Phlx XL \7\ as part of the Phlx XL system.
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    \6\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 44612 (August 3, 2004) (SR-Phlx-2003-59).
    \7\ Currently, all equity and index options, and options 
overlying Exchange Traded Fund Shares (``ETFs'') that are listed on 
the Exchange are traded on Phlx XL.
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Pre-Opening

    For a period of time before the scheduled opening in the underlying 
security (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 during the ``Pre-Opening Phase.'' The 
Phlx XL system will disseminate to specialists, Streaming Quote Traders 
(``SQTs''),\8\ Remote Streaming Quote Traders (``RSQTs''),\9\ and non-
SQT ROTs \10\ who are required to submit continuous two-sided 
electronic quotations pursuant to Exchange Rule 1014(b)(ii)(E) \11\ 
(collectively, for purposes of proposed Rule 1017, ``Phlx XL 
participants'') information about resting orders on the book that 
remain from the previous trading session and orders submitted prior to 
the opening.
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    \8\ 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 Exchange Rule 1014(b)(ii)(A).
    \9\ An RSQT is a 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 Exchange Rule 
1014(b)(ii)(B).
    \10\ A non-SQT ROT is a ROT who is neither an SQT nor an RSQT. 
See Exchange Rule 1014(b)(ii)(C).
    \11\ Exchange Rule 1014(b)(ii)(E) requires non-SQT ROTs who 
transact more than 20% of their contract volume in an option 
electronically versus in open outcry during a particular calendar 
quarter to submit proprietary electronic quotations in such an 
option during the subsequent calendar quarter for a certain number 
of series in such option, depending on the percent of total volume 
transacted electronically versus in open outcry on the Exchange in 
such option.
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    The purpose of this provision is to establish that a pre-opening 
phase must occur each day and to make Exchange members and member 
organizations aware of the time the Exchange will begin accepting pre-
opening orders and quotes.
    A further purpose of this provision is to establish by rule that 
the Exchange will provide information to Phlx XL participants about 
orders on the limit order book during the pre-opening phase. Such 
information would include, without limitation, the option symbol, the 
limit price and the size of the limit order, the terms of the order 
(i.e., day, good-till-cancelled), buy or sell, call or put, and any 
other conditions applicable to the limit order.

Calculation of Opening Price

    The system will calculate an Anticipated Opening Price (``AOP'') 
and Anticipated Opening Size (``AOS'') when a quote or trade has been 
disseminated by the primary market for the underlying security, and 
under the conditions set forth below. The specialist assigned in the 
particular option must enter opening quotes not later than one minute 
following the dissemination of a quote or trade by the primary market 
for the underlying security. The purpose of this provision is to ensure 
that the specialist is able to accurately quote the option overlying 
the underlying security once such underlying security has opened, and 
to ensure that the specialist promptly satisfies his or her quoting 
obligations established under Exchange rules.\12\ The specialist may 
submit opening quotes prior to this time; the proposed rule is intended 
to establish the time within which the specialist must submit opening 
quotes and not to preclude the specialist from submitting such quotes 
prior to that time.
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    \12\ Exchange Rule 1014(B)(ii)(D) requires specialists to quote 
continuous, two-sided markets in not less than 100% of the series in 
each Streaming Quote Option in which such specialist is assigned, 
and requires an SQT and an RSQT quote continuous, two-sided markets 
in not less than 60% of the series in each Streaming Quote Option 
(as defined in Rule 1080(k)) in which such SQT or RSQT is assigned.
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    An AOP may only be calculated if: (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 that are required to submit 
continuous, two-sided quotes in 100% of the series in all option issues 
in which such Phlx XL participant is assigned (``100% 
participants''),\13\ have been submitted within two minutes of the 
opening trade or quote on the primary market for the underlying 
security (or such shorter time as determined by the Options Committee 
and disseminated to the membership via Exchange Circular); or (C) if 
neither the specialist's quote nor the quotes of two 100% participants 
have been submitted within two minutes of the opening trade or quote on 
the primary market for the underlying security (or such shorter time as 
determined by the Options Committee and disseminated to the membership 
via Exchange Circular), one 100% participant has submitted their quote.
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    \13\ An example of a 100% participant is a new category of ROT 
on the Exchange known as a ``Directed SQT'' or a ``Directed RSQT,'' 
defined as an SQT or RSQT that receives a Directed Order. See 
Securities Exchange Act Release No. 51759 (May 27, 2005), 70 FR 
32860 (June 6, 2005) (SR-Phlx-2004-91).
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    The purpose of this provision is to ensure that the affected series 
will open regardless of whether the specialist has submitted a 
quotation (the specialist may not submit his or her quote due to, for 
example, system malfunctions), provided that a 100% participant is 
quoting in the affected series. The

[[Page 55652]]

Exchange believes that when a Phlx XL participant is quoting in 100% of 
the series in a particular option, the series should be opened as soon 
as possible regardless of whether the specialist has submitted a 
quotation.\14\ The 100% participant's quotations enable the Exchange to 
disseminate continuous quotations in each underlying option series, 
thus ensuring that the Exchange will provide liquid markets in such 
series once the series has opened.
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    \14\ A specialist that fails to submit opening quotes within one 
minute of the opening on the primary market would be subject to 
possible disciplinary action.
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Opening Order/Quote Imbalance

    In situations where an AOP may be calculated (i.e., when the 
conditions described above are present) and there is an order/quote 
imbalance, the system will immediately send an imbalance notice 
indicating the imbalance side (buy or sell) and the AOP and AOS (an 
``Imbalance Notice'') to Phlx XL participants provided that the primary 
market for the underlying security has disseminated the opening quote 
or trade. Phlx XL participants that have not submitted opening quotes 
will then submit their opening quotes and Phlx XL participants that 
have submitted opening quotes may submit revised opening quotes,\15\ 
and thereafter the system will disseminate an updated Imbalance Notice 
every five seconds (or such shorter period as determined by the Options 
Committee and disseminated to membership via Exchange Circular) until 
the series is open. If no imbalance exists, no Imbalance Notice will be 
sent, and the system will establish an opening price as described 
below.
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    \15\ Telephone conversation between Richard S. Rudolph, Vice 
President and Counsel, Phlx, and Terri L. Evans, Special Counsel, 
Division of Market Regulation (``Division''), on September 6, 2005 
(clarifying that Phlx XL participants that have previously submitted 
opening quotes may submit revised quotes).
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    The system will calculate the AOP and AOS based on quotes, market 
orders and current resting orders on the limit order book. The Exchange 
believes that the calculation and dissemination of the AOP and AOS to 
Phlx XL participants should provide such Phlx XL participants with 
sufficient information to determine whether or not to submit revised 
quotations in order to participate in the opening, based on the dynamic 
movement of the AOS as additional quotes and market orders are 
received.

Actual Opening Price

    The proposal would establish the opening price of a series in 
situations where there is no opening quote/order imbalance. Proposed 
Rule 1017(c)(i) would define the opening price as the price at which 
the maximum quantity of contracts will be traded. Because the Exchange 
believes that an option series should open if at all possible to ensure 
fair and orderly markets in such series, the proposed rule would 
establish a series of ``tie-breakers'' that the system will follow in 
establishing the opening price when two or more prices would satisfy 
the maximum quantity criteria. Specifically, when two or more prices 
would be the price at which the maximum quantity of contracts will be 
traded, the system will establish the opening price based on the 
following criteria, in order: (1) The price at which the greatest 
number of customer orders will be traded; (2) the price at which the 
maximum number of Phlx XL participants will trade; and, should there 
continue to be two or more prices that satisfy the maximum quantity 
criteria, the opening price will be (3) the price that is closest to 
the closing price from the previous trading session.
    The Exchange believes that the third ``tie-breaker,'' specifying 
that the opening price would be the price at which the greatest number 
of Phlx XL participants will trade (once it is established that the 
opening price would be the price at which the maximum quantity of 
contracts and the greatest number of customer orders will trade) should 
ensure that the opening price would reflect the actual state of the 
market, i.e., the price at which more Phlx XL participants are willing 
to trade.
    The Exchange believes that these ``tie-breaking'' rules should 
enable the Exchange to open trading expeditiously in a series despite 
the fact that there may be two or more prices that would result in the 
maximum quantity of contracts being traded under a variety of 
scenarios, which the system will account for in automatically 
determining an opening price.

Priority on Openings

    The system will give priority to market orders first (including a 
limit order to buy which is at a higher price than the price at which 
the option is to be opened and a limit order to sell which is at a 
lower price than the price at which the option is to be opened, which 
will be treated as market orders), then to resting limit orders at the 
opening price. The purpose of this provision is to ensure that the 
maximum number of contracts trade at the opening price. The inclusion 
of limit orders that are at a better price than the opening price in 
the pool of market orders should ensure that all such orders trade at 
the opening price before limit orders with a limit price that is equal 
to the opening price.

Contingency, Hedge, and Synthetic Option Orders

    Contingency Orders, Hedge Orders, and Synthetic Option Orders, as 
defined in Exchange Rule 1066, are not considered in the determination 
of the opening price, and do not participate in the opening trade 
because such order types generally include two or more option 
components, and may also include a stock component.

Floor-Brokered Orders

    To be considered in the determination of the opening price and to 
participate in the opening trade, orders represented by Floor Brokers 
must be entered onto the book electronically. The purpose of this 
provision is to ensure that limit orders represented by Floor Brokers 
at the opening are captured electronically at the opening price for 
inclusion in the opening.\16\ Otherwise, a limit order held by a Floor 
Broker in the trading crowd that is not placed onto the limit order 
book electronically would not be included in the automated opening 
because such a limit order would not be incorporated into the Phlx XL 
system.
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    \16\ In January, 2005, the Exchange adopted rules regarding the 
immediate display of limit orders, requiring Floor Brokers and 
Registered Options Traders that wish to place limit orders onto the 
limit order book to do so electronically. See Securities Exchange 
Act Release No. 51064 (January 21, 2005), 70 FR 4180 (January 28, 
2005) (SR-Phlx-2004-73). See also, Exchange Rules 1080, Commentary 
.02; 1014, Commentary .18; and 1063, Commentary .01.
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Inbound Orders and Quotes Received While the System Completes the 
Opening Trade

    Inbound orders and quotes will not be included in the calculation 
of the opening price for a brief period established by the system (and 
thus not within the discretion of any Phlx XL participant) while the 
system is in the process of completing the opening trade. During such 
brief period, such inbound orders and quotes will be entered into the 
Phlx XL system in order of their arrival. The purpose of the brief 
interval during which such inbound quotes and orders will not be 
included in the calculation of the opening price is to allow the system 
to calculate the opening price after the underlying security opens in 
the primary market using the quotes and orders received up to the time 
of the brief interval, so that dynamic quotations and orders received 
while the system is calculating the opening price do not have the 
effect of

[[Page 55653]]

continually changing the calculated opening price. If there were no 
such brief interval, it is possible that such dynamic quotes and 
orders, if not excluded, could cause the series never to open because 
the system could continue to calculate the opening price indefinitely.
    Proposed Rule 1017(d) would provide that, as the opening price is 
determined by series, the system will disseminate through OPRA the 
opening trade price, if any, and then the quote after the series is 
open. The system will process and open the series for a given option in 
random order. If there are no orders in a particular series when the 
underlying security opens, the Exchange will disseminate quotations at 
the best bid and offer in such series submitted by Phlx XL participants 
assigned in the particular option.

Situations in Which the Option Series Will Not Open

    The proposed rule would set forth three conditions under which the 
system will not open a series.
    First, the system will not open a series when there is no quote 
from the specialist or a 100% participant. The purpose of this 
provision is to ensure that a series will not open if there is no Phlx 
XL participant that is providing continuous, two-sided quotations in a 
particular series.
    Second, the system will not open a series when the opening price is 
not within an acceptable range (as determined by the Options Committee 
and announced to Exchange members and member organizations by way of 
Exchange Circular) compared to the highest offer and the lowest bid 
(e.g., the upper boundary of the acceptable range may be 125% of the 
highest quote offer and the lower boundary may be 75% of the lowest 
quote bid). This is to provide a limitation on the range of the opening 
price in an option so that it is reasonably aligned with the opening 
price in the underlying security, and so that the opening price does 
not fall significantly outside of the bids/offers entered during the 
pre-opening phase. The Exchange proposes a similar conforming amendment 
to Commentary .15 to Exchange Rule 1014.
    Third, the system will not open a series when the opening trade 
would leave a market order imbalance (i.e., there are more market 
orders to buy or to sell for the particular series than can be 
satisfied by the limit orders, market orders and quotes on the other 
side of the market). This is to ensure that no market orders that would 
be eligible for execution at the opening price would be left 
unexecuted, while other market orders receive executions.

No Specialist or 100% Participant Quote or Quote Outside Acceptable 
Range

    If the specialist or a Phlx XL participant with a 100% quoting 
requirement is not quoting as described in proposed Rule 1017(e)(i), or 
if the opening price is not within an acceptable range as described in 
proposed Rule 1017(e)(ii), proposed Rule 1017(f) would provide that two 
Floor Officials may authorize the manual opening of the affected series 
where necessary to ensure a fair and orderly market. In such a 
circumstance, the Exchange's existing rules concerning manual openings 
would apply.\17\
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    \17\ See, e.g., the Commentary to Rule 1017, Rules 1047, 1047A, 
and OFPAs A-12, A-14 and G-2.
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Manual Opening by Specialist

    Proposed Rule 1017(g)(i) would provide that if a condition or the 
absence of a required condition not otherwise covered by the proposed 
rule would prevent an opening trade to occur, the specialist may, with 
prior notification to Market Surveillance staff, determine to open a 
series manually in the interest of a fair and orderly market, subject 
to the approval of two Floor Officials within five minutes of the 
opening of the affected series. Manual openings would be required to be 
conducted in accordance with current Commentary .01-.03 of Exchange 
Rule 1017.
    A further purpose of this provision is to enable the specialist to 
conduct a manual opening in a timely fashion without undertaking the 
time-consuming burden of seeking out two Floor Officials prior to such 
manual opening. If the specialist were required to do so, it is highly 
likely that the time required to seek approval of two Floor Officials 
would unduly delay such a manual opening. The Exchange believes that 
the required prior notification to Market Surveillance staff, coupled 
with the requirement to obtain the approval of two Floor Officials 
within five minutes of the opening of the affected series, provides the 
Exchange with sufficient regulatory oversight to monitor such activity. 
A specialist would be subject to disciplinary action if it is 
determined that the specialist violated the rule.
    As a housekeeping matter, to conform the existing rule to current 
Exchange definitions, Commentary .03 to Exchange Rule 1017 would be 
amended to provide that Contingency Orders, Hedge Orders, and Synthetic 
Option Orders, as defined in Exchange Rule 1066 do not participate in 
opening rotations or in the determination of an opening price.

Index Options

    Respecting options overlying an index, the proposal would permit 
the specialist to engage the automated opening system to open such 
options when at least 50% of the current index value of all the 
securities underlying the index have opened for trading on the primary 
market. This is consistent with current Exchange rules concerning the 
manual opening and re-opening of Industry Index options (as defined 
below).\18\
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    \18\ See Exchange Rule 1047A(a)(i) and OFPA G-2.
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    The Exchange notes that current Exchange Rule 1047A and OFPA G-2, 
respecting the opening of index options, distinguish between an 
Industry Index,\19\ which as stated above, may be opened when at least 
50% of the current index value of all the securities underlying the 
index have opened for trading on the primary market, and which must 
currently be opened when at least 90% of the current index value of all 
the securities underlying the index have opened for trading on the 
primary market; and a Market Index \20\ by requiring the opening 
rotation for Market Index options to be held at or as soon as 
practicable after the opening of business on the Exchange, with no 
similar requirements as to the percentage of the current index value of 
all the securities underlying the index which must be opened for the 
option overlying such index to open. The proposal would apply this 
distinction respecting manual openings only, whereas the system will 
not make a distinction between an Industry Index option and a Market 
Index option in determining to open such an option automatically based 
on the percentage of the current index value of all the securities 
underlying the index that must be opened.
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    \19\ An Industry Index is defined as an index designed to be 
representative of price movements in particular categories of 
stocks. See Exchange Rule 1000A(b)(11).
    \20\ A Market Index an index designed to be representative of 
general price movements in the stock market. Id.
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    Under the proposal, with respect to automated openings in an 
Industry or Market Index conducted pursuant to Rule 1017, the 
specialist may engage the automated opening system to open such options 
when underlying securities representing 50% of the current index value 
of all the securities underlying the index have opened for trading on 
the

[[Page 55654]]

primary market. The Exchange proposes to amend Rule 1047A and OFPA G-2 
to require the opening of an Industry Index when 100% of the current 
index value of all the securities underlying the index have opened for 
trading on the primary market. The system thus will automatically open 
all index options when underlying securities representing 100% of the 
current index value of all the securities underlying the index have 
opened for trading on the primary market.
    Therefore, when at least 50% of the current index value of all the 
securities underlying an index have opened for trading on the primary 
market, the specialist may determine to engage the automated opening 
system to open it for trading; when 100% of the current index value of 
all the securities underlying an index have opened for trading on the 
primary market, the system will automatically open it for trading.

Reopening Following a Trading Halt

    The procedure described in the proposed Rule may be used to reopen 
an option after a trading halt.

Conforming Amendments to Current Exchange Rules and OFPAs

    The Exchange proposes to delete Commentary .03(d)(iii) from 
Exchange Rule 1017, which currently states that the specialist will not 
open a series when there is a market on opening order with no 
corresponding order. The Exchange currently does not accept market on 
opening orders and thus Commentary .03(d)(iii) is unnecessary.
    In addition to the proposed amendments to Exchange Rule 1017, the 
Exchange is proposing various conforming amendments to current Exchange 
rules and OFPAs that relate to openings and re-openings following a 
trading halt.
    The Exchange proposes to amend Exchange Rule 1047, Trading 
Rotations, Halts and Suspensions, to reflect an automated opening 
conducted pursuant to Exchange Rule 1017 shall be considered a 
``trading rotation'' for purposes of these rules. Thus, any requirement 
to conduct a rotation under the rule could be fulfilled by initiating 
an automated opening or re-opening by the system.
    Exchange Rule 1047(c) would be amended to reflect that two Floor 
Officials (with the concurrence of a Market Surveillance officer (and 
not the appropriate Floor Standing Committee as reflected in the 
current rule) would have the authority, respecting a particular class 
or series of options, to delay the opening, to halt and reopen after a 
halt, to open where the underlying stock or ETF has not opened. The 
Exchange believes that it is more expedient and less cumbersome for two 
Floor Officials to make such decisions, rather than convening the full 
Committee to make such a decision.
    Exchange Rule 1047 would be further amended to delete all 
references to the Series Opening Request Ticket (``SORT'') 
Procedure,\21\ an obsolete procedure that is no longer in use on the 
Exchange. The Exchange proposes a similar amendment to OFPA A-12 
Opening Rotations and SORT Procedures.
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    \21\ A SORT opening, which is no longer implemented on the 
Exchange, was one where the specialist opened all series in an 
options class simultaneously after rotating only those series for 
which a SORT was received. The SORT is a form that was submitted by 
a member with interest in a particular series to the specialist, at 
least five minutes prior to the opening of trading, and signaled the 
specialist to rotate that series. Prior to conducting a SORT 
procedure, the specialist would announce to the crowd that such a 
procedure was to be utilized, and in which series, if any, a SORT 
had been received.
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    Commentary .02 to Exchange Rule 1047 would be amended to require 
the specialist to inform the Market Surveillance staff in the event 
that trading in an underlying stock or Exchange-Traded Fund Share has 
not opened in the primary market for such stock or Exchange-Traded Fund 
Share within a reasonable time after the opening of business, or, in 
the event that current quotations for any underlying foreign currency 
are for any reason unavailable. The purpose of this proposed amendment 
is to clarify that the Market Surveillance staff would then take the 
appropriate steps to determine the cause of such delay or 
unavailability, rather than the chairman of the appropriate Floor 
Standing Committee or his delegate on the floor, as the rule currently 
provides. The Exchange believes that it is more practical and efficient 
for the specialist to report any such delay or unavailability to the 
Market Surveillance staff, who are located on the floor and are readily 
available to the specialist in such circumstances.
    The Exchange also proposes to amend Exchange Rule 1047A, Trading 
Rotations, Halts or Reopenings, which governs index options. As 
described above, one substantive change involves the current 
requirement to open an Industry Index option when underlying securities 
representing 90% of the current index value of all the securities 
underlying the index have opened for trading on the primary market. The 
Exchange proposes to amend this provision to require the opening of an 
index when 100% of the current index value of all the securities 
underlying the index have opened for trading on the primary market. The 
purpose of this proposal is to eliminate any uncertainty as to what the 
underlying index value would be once the remaining 10% of the 
underlying index value has opened on the primary market, thus enabling 
the specialist to price the option overlying the index accurately and 
with a reasonable degree of certainty.
    For clarity, the sentence providing that it is the responsibility 
of the specialist to arrange the price at which an option series opens 
and re-opens on the Exchange would be deleted, as this provision is 
currently found and will be retained in Commentary .03 to Exchange Rule 
1017 concerning manual openings, and the system, not the specialist, 
would establish the opening price in an automated opening.
    For consistency, OFPA A-12 would be amended to establish that the 
acceptable range within which the opening price must be established, 
would apply to both automated openings and manual openings conducted 
pursuant to Exchange Rule 1017 and the Commentary thereto. A similar 
amendment is proposed respecting OFPA A-14, Equity Option and Index 
Option Opening Parameters.
    OFPA G-2, Trading Rotations, Halts or Reopenings, would be amended 
to reflect that an Industry Index option must open once the underlying 
securities representing 100% (a proposed increase from 90%) of the 
current index value of all the securities underlying the index have 
opened for trading on the primary market, and that respecting automated 
openings the system will automatically open an index when 100% of the 
current index value of all the securities underlying the index have 
opened for trading on the primary market. The OFPA would continue to 
provide that the specialist in an Industry Index option may conduct a 
manual opening rotation or may engage the system for an automated 
opening in such option when 50% of the current index value of all the 
securities underlying the index have opened for trading on the primary 
market (either by way of a manual rotation or by engaging the system). 
The Exchange also proposes to delete references to Super Cap Index 
options from OFPA G-2, because the Exchange no longer lists this 
product.
    Exchange Rules 1047 and 1047A, and OFPAs A-12 and G-2 would be 
amended to include the provision that an automated opening conducted 
pursuant to Exchange Rule 1017 would be considered a ``rotation'' for 
purposes

[[Page 55655]]

of the rules and OFPAs. Finally, these rules would also be amended to 
include the term ``Market Surveillance officer'' to conform to the 
current Exchange staff structure.

Deployment of the Automated Opening System

    The Exchange will deploy the automated opening system on an issue-
by-issue basis. The Exchange anticipates that at least 10 issues will 
be deployed on the system within four weeks from the date of approval 
of the rules relating to the system by the Commission, and that the 
system will be deployed for all options traded on the Exchange within 
twelve weeks of such approval.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \22\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \23\ 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 the national 
market system, and, in general, to protect investors and the public 
interest, by establishing rules for an automated opening system, 
thereby increasing the number of option orders handled electronically 
on the Exchange.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 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.\24\
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    \24\ Telephone conversation between Richard S. Rudolph, Vice 
President and Counsel, Phlx, and Terri L. Evans, Special Counsel, 
Division, Commission on September 14, 2005 (clarifying Phlx's 
statement on burden on competition).
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    C. Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants, or Others
    Written comments 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 Exchange 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, 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-2005-25 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-25. 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-2005-25 and should be submitted on or before 
October 13, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-18899 Filed 9-21-05; 8:45 am]

BILLING CODE 8010-01-P