Document ID: SEC-2006-1064-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-08-18T04:00Z

[Federal Register: August 18, 2006 (Volume 71, Number 160)]
[Notices]               
[Page 47856-47859]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au06-138]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54312; File No. SR-Phlx-2006-28]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendments No. 1, 2, and 3 Thereto Relating to the Deletion of 
Obsolete Provisions from Exchange Rules

 August 14, 2006.
    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 28, 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 and 
II below, which Items have been prepared by the Phlx. On June 15, 2006, 
July 19, 2006, and August 10, 2006, the Exchange filed Amendments No. 
1,\3\ 2,\4\ and 3,\5\ respectively. The Exchange has designated the 
proposed rule change, as amended, as constituting a non-controversial 
rule change under Rule 19b-4(f)(6) under the Act,\6\ which renders the 
proposal effective upon filing with the Commission. 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\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ Amendment No. 2 replaced the original filing and Amendment 
No. 1 in their entirety.
    \5\ Amendment No. 3 made clarifying changes to the rule text by 
retaining a description of Auto-X and clarifying that the term Auto-
X is currently applied to include Book Match and Book Sweep in the 
Exchange's rules, including those rules concerning the engagement 
and disengagement of Auto-X.
    \6\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend various Exchange rules to delete 
obsolete provisions relating to trading systems and practices that are 
no longer in effect on the Exchange, particularly as the new options 
system, Phlx XL, replaced the old ``AUTO-X'' provisions.\7\ The text of 
the proposed rule change, as amended, is available on the Exchange's 
Web site at http://www.phlx.com, at the Exchange's Office of the 

Secretary, and the Commission's Public Reference Room.
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    \7\ In July 2004, the Exchange began trading equity options on 
Phlx XL, followed by index options in December 2004. Phlx XL was 
completely rolled out by February 2005, such that all options are 
now ``Streaming Quote Options.'' See Securities Exchange Act Release 
No. 50100 (July 27, 2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-
2003-59).
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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 delete provisions in 
the Exchange's rules that no longer apply because of technological 
advancements or obsolete trading practices. Specifically, the following 
amendments are proposed:
    Quotation Size: The Phlx XL rules originally provided in Exchange 
Rule 1014(b) that electronic quotations submitted on Phlx XL could be 
submitted with a quotation size of fewer than 10 contracts for a 
specific period of time following the initial deployment of Phlx XL. 
The maximum time period during which such a quotation size was 
permitted was one year following the deployment of Phlx XL, after which 
all electronic quotations submitted on Phlx XL had to be for a size of 
at least 10 contracts. Because it has been more than one year since the 
initial deployment of Phlx XL, the rule is now obsolete. Quotations 
submitted on Phlx XL currently must have a size of at least 10 
contracts. Additionally, quotations made by non-SQT ROTs in open outcry 
in response to a request for a market were originally permitted to 
quote with a size fewer than 10 contracts during this period. Non-SQT 
ROTs must now provide such quotations with a size of at least 10 
contracts.
    Continuous Open Outcry Quoting Obligation: Currently, Exchange Rule 
1014(b)(ii)(E)(1)(C) describes the open outcry quoting obligation 
applicable to non-SQT ROTs in response to a request for a quote by a 
Floor Broker, specialist, Floor Official, or other ROT (including an 
SQT). The Exchange proposes to delete the portion of the rule that 
describes the minimum quote size for such a quotation during various 
phases of the rollout of Phlx XL. Because Phlx XL is now deployed 
floor-wide, and the rollout periods described in the rule have all 
expired, that portion of the rule is no longer necessary.
    Definition of ``Remainder of the Order'': Currently, Exchange Rule 
1014(g)(i)(A)(1) defines ``Remainder of the Order'' as, respecting non-
Streaming Quote Options, the portion of an Initiating Order that 
remains following the allocation of contracts to customers that are on 
parity in accordance with Rule 1014(g)(i). The term ``Remainder of the 
Order'' is used in the Exchange's rules concerning the allocation of

[[Page 47857]]

contracts traded in open outcry and allocated in the crowd.\8\ During 
the rollout period of Phlx XL, some options traded as ``Streaming Quote 
Options'' on the Phlx XL platform, while others continued to trade as 
``non-Streaming Quote Options.'' Currently, all options traded on the 
Exchange are traded on Phlx XL as ``Streaming Quote Options.'' Exchange 
Rule 1014(g)(i)(A)(1) originally contemplated that non-Streaming Quote 
Options would generally be traded and allocated in open outcry. Thus, 
now that there are no longer any non-Streaming Quote Options, the 
Exchange proposes to amend Exchange Rule 1014(g)(i)(A)(1) such that the 
definition of ``Remainder of the Order,'' in that sub-paragraph would 
apply only to transactions that are executed and allocated in open 
outcry by a participant other than the specialist.\9\
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    \8\ See Exchange Rule 1014(g)(v).
    \9\ The Exchange notes that both Streaming Quote Options and 
Non-Streaming Quote Options have been executed in open outcry since 
the initial deployment of Phlx XL.
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    The term ``Remainder of the Order'' also appears in Exchange Rule 
1014(g)(i)(A)(2) respecting orders that are executed manually by the 
specialist. Because the specialist is responsible as agent for limit 
orders on the limit order book, Exchange Rule 1014(g)(i)(A)(2) requires 
the specialist to allocate to customer orders, and next to off-floor 
broker-dealer limit order first. ``Remainder of the Order'' in this 
situation means the portion of the initiating order that after the 
specialist makes such an allocation. The Exchange is proposing a 
corresponding amendment to Options Floor Procedure Advice (``OFPA'') B-
6, Priority of Options Orders for Equity Options and Index Options by 
Account Type.
    ROT Access: Prior to the deployment of Phlx XL, Exchange 
specialists and ROTs were permitted to submit price improving limit 
orders onto the limit order book electronically in non-Streaming Quote 
options. Specialists and ROTs that submitted such price-improving limit 
orders were entitled to receive a special allocation. The program, 
known as ``ROT Access'' and codified in Exchange Rule 1014(g)(i)(B), 
applied to options that did not trade on Phlx XL because it was, before 
Phlx XL, the only way for ROTs to enter trading interest independently 
and electronically. Currently, all options traded on the Exchange are 
traded on Phlx XL, thus obviating the need for ROT Access.\10\
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    \10\ The Exchange notes that the proposed rule change would not 
affect the ability of a non-SQT ROT (i.e., an on-floor Exchange ROT 
that does not submit electronic quotes) to place limit orders onto 
the limit order book via electronic interface.
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    Exchange Rule 1014(g)(i)(B) is therefore proposed to be deleted. 
The introductory phrase ``[r]especting Streaming Quote Options'' in 
Exchange Rule 1014(g)(i)(A)(2) and the caption ``Assignment in 
Streaming Quote Options'' in Exchange Rule 1014 Commentary .05(b) are 
deleted as unnecessary because all equity and index options now trade 
as Streaming Quote Options.
    During the development and deployment of Phlx XL, the Exchange 
adopted Commentary .04 to Exchange Rule 1080, which among other things 
describes when Phlx XL would be deployed following Commission approval 
of the rules applicable to Phlx XL, and actions to be taken by the 
Exchange in the event that Phlx XL was not deployed for all options 
trading on the Exchange by April 30, 2005. Because Phlx XL was deployed 
for all options trading on the Exchange prior to April 30, 2005, these 
portions of Commentary .04 are moot and thus proposed to be deleted.
    Assignment in Non-Streaming Quote Options: Exchange Rule 1014, 
Commentary .05(a) currently describes assignments in non-Streaming 
Quote Options. Because all options on the exchange currently trade on 
Phlx XL (and thus there are no non-Streaming Quote Options), Exchange 
Rule 1014, Commentary .05(a) is proposed to be deleted.
    AUTO-X: Exchange Rule 1080(c) currently includes references to the 
antiquated notion of an artificial ``AUTO-X guarantee'' and a minimum 
and maximum guaranteed AUTO-X size. Because the Exchange's Phlx XL 
automatic execution features (Book Match \11\ and Book Sweep \12\ ) 
currently provide for automatic executions up to the disseminated size 
(for which the responsible brokers or dealers that are quoting are 
firm), there is no longer an artificial ``AUTO-X guarantee'' for which 
the Exchange will provide automatic executions. Therefore, the Exchange 
proposes to delete the relevant sections of Rule 1080(c) discussing an 
artificial AUTO-X guarantee. In addition, the Options Committee's 
ability to restrict the use of AUTO-X and increase the size of eligible 
orders is being deleted, as automatic execution processes, Book Match 
and Book Sweep, are described in other parts of the rule.
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    \11\ Book Match is an automatic execution feature of the 
Exchange's systems that automatically executes inbound marketable 
orders against limit orders on the book or specialist, RSQT and/or 
SQT electronic quotes (``electronic quotes'') at the disseminated 
price where: (1) The Exchange's disseminated size includes limit 
orders on the book and/or electronic quotes at the disseminated 
price; and (2) the disseminated price is the National Best Bid or 
Offer. See Exchange Rule 1080(g)(i)(B).
    \12\ Book Sweep is an automatic execution feature of the 
Exchange's systems that, respecting non-Streaming Quote Options, 
allowed certain orders resting on the limit order book to be 
automatically executed when the bid or offer generated by the 
Exchange's system or by the specialist's proprietary quoting system 
locks (i.e., $1.00 bid, $1.00 offer) or crosses (i.e., $1.05 bid, 
$1.00 offer) the Exchange's best bid or offer in a particular series 
as established by an order on the limit order book. Orders in non-
Streaming Quote Options executed by the Book Sweep feature were 
allocated among crowd participants participating on the Wheel. Book 
Sweep is being retained for Streaming Quote Options. See Exchange 
Rule 1080(c)(iii). Telephone conversation between Richard Rudolph, 
Vice President and Counsel, Exchange, and Terri Evans, Special 
Counsel, Division, Commission, on August 9, 2006 (clarifying that 
Book Sweep is being retained).
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    Exchange Rule 1080(c)(iii)(A) currently describes the Exchange's 
``Book Sweep'' automatic execution and Wheel allocation functionality 
respecting non-Streaming Quote Options. Because there are no longer any 
non-Streaming Quote Options and the Wheel is obsolete, the Exchange 
proposes to delete the current text of Exchange Rule 1080(c)(iii)(A). 
The current text of Exchange Rule 1080(c)(iii)(B) respecting the Book 
Sweep functionality applicable to Streaming Quote Options, which are 
allocated automatically pursuant to Exchange Rule 1014(g)(vii), and not 
on the ``Wheel,'' would be retained and renumbered accordingly.
    The Wheel: Prior to the floor-wide deployment of Phlx XL, contra-
side participation for AUTO-X automatic execution in non-Streaming 
Quote Options rotated among Wheel participants (the specialist and ROTs 
signed onto the Wheel) in accordance with Exchange Rule 1080(g)(i)(A). 
Trades executed on the Wheel were allocated in accordance with the 
algorithm set forth in OFPA F-24. Because all options on the Exchange 
are traded on Phlx XL, and because the Wheel is no longer in use in the 
Exchange's trading system, Exchange Rule 1080(g)(i)(A) and OFPA F-24 
are proposed to be deleted.
    Additionally, Exchange Rule 1080(g)(i) currently provides that the 
contra-side to automatically executed orders may be a Wheel 
Participant. There are no longer any Wheel Participants on the 
Exchange; therefore the Exchange proposes to amend Exchange Rule 
1080(g)(i) to provide that the contra-side to automatically executed 
orders may be an electronic quotation,\13\ which reflects the current

[[Page 47858]]

system that has been in place for Streaming Quote Options since the 
deployment of Phlx XL. Finally, for accuracy, the Exchange proposes to 
delete the reference to AUTO-X from the title of Exchange Rule 1080(g).
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    \13\ See supra note 10.
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    Collective Crowd Quote/Firm Quotations: Exchange Rule 1080, 
Commentary .01(b)(ii) currently provides that, respecting non-Streaming 
Quote Options, specialists determine which model to select per option 
and may change models during the trading day, and that the specialist 
may, but is not required to (a) consult with and/or (b) agree with the 
trading crowd in setting these parameters or selecting a model, but the 
members of the trading crowd are not required to provide input in these 
decisions, and in all cases, the specialist has the responsibility and 
authority to make the final determination. Because all options on the 
Exchange trade on Phlx XL, and each Phlx XL participant submits 
independent quotations, the rule is obsolete and is proposed to be 
modified.\14\
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    \14\ Telephone conversation between Richard Rudolph, Vice 
President and Counsel, Exchange, and Terri Evans, Special Counsel, 
Division, Commission, on August 9, 2006 (clarifying that the rule is 
being modified and not deleted).
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    Exchange Rule 1080, Commentary .01(c) states that with respect to 
non-Streaming Quote Options, the disseminated market (whether by Auto-
Quote or specialized quote feed) is deemed to represent the quotations 
of all ROTs in that option unless a ROT has expressly indicated 
otherwise in a clear and audible manner, respecting either a specific 
series, the class or the option (specifying LEAPS), and with sufficient 
time for the specialist to take action to update the quote if 
necessary. Because there are no longer any non-Streaming Quote Options 
and there is no collective quote (rather, there are independent 
quotations), the Exchange proposes to modify Exchange Rule 1080, 
Commentary .01, to reflect that specialists, SQTs and RSQTs submit 
individual quotations. For the same reason, a similar modification 
concerning a collective quoting requirement is proposed to Exchange 
Rule 1082.
    Disseminated Size: Exchange Rule 1082(a)(ii)(A) defines 
``disseminated size'' as it applies to non-Streaming Quote Options. 
Because there are no longer any non-Streaming Quote Options, Exchange 
Rule 1082(a)(ii)(A) is proposed to be deleted. The phrase ``[w]ith 
respect to non-Streaming Quote Options'' is deleted from Exchange Rule 
1082(b)(i) as obsolete.\15\ The introductory phrases ``respecting 
Streaming Quote Options'' and ``[w]ith respect to Streaming Quote 
Options'' are deleted from Exchange Rule 1082(a)(ii)(B) and Exchange 
Rule 1082(b)(ii) respectively as unnecessary, since all equity and 
index options are now Streaming Quote Options.
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    \15\ The remaining text of Exchange Rule 1082(b) concerning the 
firm quote obligations of a responsible broker or dealer acting as 
agent on behalf of a limit order would be retained, since Floor 
Brokers still may represent limit orders in the crowd and would be 
the ``responsible broker or dealer'' in that situation.
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    The Exchange is proposing a corresponding amendment to OFPA F-7, 
Size of Exchange's Disseminated Bid or Offer.
    Firm Quote Rule Citation: Exchange Rule 1082(a)(iii) currently 
provides that the term ``SEC Quote Rule'' shall mean Rule 11Ac1-1 under 
the Securities Exchange Act of 1934, as amended (the ``Act''). 
Recently, Regulation NMS under the Act was promulgated, and the SEC 
Quote Rule was re-designated as Rule 602 of Regulation NMS.\16\ The 
proposal would amend Rule 1082(a)(iii) accordingly.
    Specified Disengagement Size: Commentary .07 to Exchange Rule 1080 
contains references to the ``specified disengagement size'' that 
applied to the Exchange's ``rapid fire'' mechanism prior to the 
deployment of Phlx XL. Because that ``rapid fire'' program no longer 
exists and has been replaced with Exchange Rule 1093, Phlx XL Risk 
Monitor Mechanism,\17\ Commentary .07 is proposed to be deleted.
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    \16\ 17 CFR 242.602.
    \17\ See Securities Exchange Act Release No. 53166 (January 23, 
2006) 71 FR 4625 (January 27, 2006) (SR-Phlx-2006-05).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\18\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\19\ 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 removing rule provisions which have become obsolete due to 
changes in technology, trading practices, or other changes that make 
such provisions obsolete. According to the Exchange, eliminating the 
obsolete provisions is in the public interest because it will eliminate 
possible confusion regarding the Exchange's current practices.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 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 were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule change: (1) Does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) does not become 
operative for 30 days from the date on which it was filed, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\20\ and Rule 19b-4(f)(6) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the 5-day pre-
filing notice requirement \22\ and the 30-day operative delay. The 
Commission has determined to waive the 5-day pre-filing notice 
requirement. Also, the Commission, consistent with the protection of 
investors and the public interest, has determined to waive the 30-day 
operative delay to allow the deletion of obsolete or unnecessary rules 
to take effect immediately, which should allow the Exchange to 
immediately reflect the currently applicable rules in its rule book. 
Accordingly, the Commission designates the proposal to be effective and 
operative upon filing with the Commission.\23\ At any time within 60 
days of the filing of such proposed rule change, the Commission may 
summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors,

[[Page 47859]]

or otherwise in furtherance of the purposes of the Act.\24\
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    \22\ Telephone conversation between Richard Rudolph, Vice 
President and Counsel, Exchange, and Terri Evans, Special Counsel, 
Division, Commission, on August 9, 2006.
    \23\ For purposes of waiving the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \24\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the proposed rule change, as amended, to 
have been filed on August 10, 2006, when Amendment No. 3 was filed.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Phlx-2006-28 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-2006-28. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of the filing also will be available for 
inspection and copying at the principal office of the Phlx. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2006-28 and should be 
submitted on or before September 8, 2006.
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    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
Nancy M. Morris,
Secretary.
[FR Doc. E6-13640 Filed 8-17-06; 8:45 am]

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