Document ID: SEC-2008-0610-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2008-04-24T04:00Z

[Federal Register: April 24, 2008 (Volume 73, Number 80)]
[Notices]               
[Page 22199-22201]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ap08-92]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57683; File No. SR-Phlx-2008-27]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Relating to Access to XLE on 
Phlx's Options Floor

April 18, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 11, 2008, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been substantially prepared by the 
Phlx. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to delete Phlx Rule 1014(e)(iii), which 
limits the actions of Registered Options Traders (``ROTs'') related to 
trading in Phlx's equity market in certain situations, and adopt Phlx 
Rule 175 prohibiting an XLE Market Maker from acting as an options 
specialist or option market maker in options overlying the securities 
in which the XLE Market Maker is registered.
    The text of the proposed rule change is available at the Exchange, 
the Commission's Public Reference Room, and http://www.phlx.com.

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 the proposed rule change is to clarify that members 
and member organizations on the Phlx options floor are permitted to 
have connectivity to XLE, Phlx's electronic equity trading system. XLE 
provides to those Phlx member organizations and their Sponsored 
Participants authorized to enter orders on the system (``XLE 
Participants'') a system for the entry and execution of NMS Stock 
orders. XLE is the sole means on Phlx to enter and execute NMS Stock 
orders; the physical equity trading floor has been discontinued.\3\ The 
Exchange states that, in the past, Phlx's physical equity and options 
floor were separated by a wall, which required a member to leave one 
floor and walk to the other floor in order to participate on the other 
floor. In addition, the wall prevented any line of sight or line of 
hearing between the two floors. Specifically, the wall helped to 
prevent someone on one floor from using information gained there on the 
other floor without first physically leaving the one floor and walking 
to the other, thereby mitigating the ``time and place'' advantage 
gained from being on that floor.\4\
---------------------------------------------------------------------------

    \3\ See Phlx Rule 160.
    \4\ Phlx Rule 606 regulates the use of electronic and telephonic 
means of communication on the floor.
---------------------------------------------------------------------------

    When XLE started, the trading of NMS Stocks on Phlx ceased to take 
place on a physical floor and, instead, now takes place electronically 
according to the algorithms programmed in the software that operates 
XLE.\5\ XLE Participants cannot alter these algorithms, nor does the 
identity of a XLE Participant affect the execution of the order. Access 
to XLE is available to XLE Participants through an Exchange electronic 
interface by means of their own communication lines or through lines 
established by service providers in the business of maintaining 
connectivity in the securities marketplace. In addition, XLE 
Participants may access XLE for the entry of two-sided orders through

[[Page 22200]]

technology provided by the Exchange.\6\ The Exchange states that all 
information about the price and size of executions on XLE is made 
available to both XLE Participants and non-XLE Participants at the same 
time and in the same manner; it may be accessed by means of the 
consolidated tape plans or by means of Phlx's own depth of book feed, 
both of which are available to XLE Participants and non-XLE 
Participants in a non-discriminatory manner. Phlx further states that, 
with the discontinuation of the physical equity floor, there is no 
longer any time and place advantage to any XLE Participant using XLE. 
All information about the price and size of executions on XLE is made 
available simultaneously to anyone, including XLE Participants and to 
those persons who may be on the Phlx options floor.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 54538 (September 28, 
2006), 71 FR 59184 (October 6, 2006).
    \6\ The technology provided by the Exchange does not disseminate 
any information about orders or executions on XLE other than those 
of the XLE Participant entering the orders.
---------------------------------------------------------------------------

    Therefore, the Exchange submits that connectivity to trading on XLE 
from the Phlx options floor does not present an advantage for either 
trading on XLE or to trading on the Phlx options floor. In fact, 
options floor participants currently have access to other execution 
venues and order routing mechanisms for the underlying securities. 
Possession of XLE order entry technology does not give the possessor 
any special information advantage that could be used on the Phlx 
options floor because access to XLE information is available to all on 
a non-discriminatory basis. In addition, physical presence on the Phlx 
options floor does not provide an advantage in priority for orders 
entered into XLE from the Phlx options floor because XLE executes 
orders in price-time priority based on a pre-set algorithm that is 
unalterable by the XLE Participant entering the order and does not take 
into account the location where an order is entered. In order to 
further facilitate connectivity to trading on XLE in all securities, 
Phlx proposes to delete Phlx Rule 1014(e)(iii), which places 
restrictions on ROTs trading in options after trading in the underlying 
security.
    To address concerns about Integrated Market Making,\7\ in 
particular possession by options Specialists or Registered Options 
Traders of non-public information in the options market that could be 
used if they were also a Market Maker on XLE \8\ in the underlying 
equity security,\9\ the Exchange proposes new Phlx Rule 175, which 
prohibits Integrated Market Making to prevent the potential misuse non-
public information. Specifically, proposed Phlx Rule 175 prohibits 
Market Makers on XLE, or any member, limited partner, officer, or 
associated person thereof, from acting as an options Specialist, 
Registered Options Trader or functioning in any capacity involving 
market making responsibilities, in any option overlying a security in 
which the Market Maker on XLE is registered as such. For example, an 
affiliate of a Market Maker on XLE registered in equity security IBM 
would be prohibited from becoming the options Specialist in options on 
IBM. In addition, proposed Phlx Rule 175 would prohibit a member 
organization whose member was a Registered Options Trader in options on 
IBM from becoming a Market Maker on XLE registered in the equity 
security IBM. This would be prohibited because that Market Maker on XLE 
would then have an associated person who is a Registered Options Trader 
in an option overlying a security in which the Market Maker on XLE 
would be registered.
---------------------------------------------------------------------------

    \7\ Integrated Market Making involves making market in both 
options and the securities underlying those options.
    \8\ See Phlx Rule 1(l). Market Makers must be member 
organizations. See Phlx Rule 170(b).
    \9\ The information available to options Specialist and 
Registered Options Traders from XLE does not raise similar concerns. 
XLE is electronic and does not operate as a traditional physical 
trading floor where physical presence could provide a participant 
with information that is not otherwise publicly available. All 
information about orders and trades on XLE is available to everyone 
simultaneously over the consolidated tape and over XLE's market data 
feed.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \10\ in general, and furthers the objectives of section 
6(b)(5) of the Act \11\ 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 providing another venue for persons on the Phlx options 
floor to execute orders in NMS Stocks. Currently, persons on the Phlx 
options floor have access to other execution venues and order routing 
mechanisms for the underlying securities. This proposed rule change 
would permit those persons access to XLE, thereby increasing the 
markets available for execution of their orders. Additionally, this 
proposal would prohibit a Market Maker on XLE or any member, limited 
partner, officer, or associated person thereof from acting as an 
options Specialist, Registered Options Trader or function in any 
capacity involving market making responsibilities, in any option 
overlying a security in which the Market Maker on XLE is registered as 
such. This prohibition would prevent the use of non-public information 
in the options market by options Specialists or Registered Options 
Traders that could be used if they were also a Market Maker on XLE in 
the underlying security.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    No written comments were either solicited or 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 shall:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2008-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission,

[[Page 22201]]

100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2008-27. 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, 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 Number SR-Phlx-2008-27 and should be 
submitted on or before May 15, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Nancy M. Morris,
Secretary.
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. E8-8874 Filed 4-23-08; 8:45 am]

BILLING CODE 8010-01-P