Document ID: SEC-2006-0106-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-01-27T05:00Z

[Federal Register: January 27, 2006 (Volume 71, Number 18)]
[Notices]               
[Page 4625-4631]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27ja06-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53166; File No. SR-Phlx-2006-05]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval to a Proposed 
Rule Change and Amendment No. 1 Thereto Relating to the Phlx XL Risk 
Monitor Mechanism

January 23, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 13, 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 Exchange. On January 
19, 2006, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons. In 
addition, the Commission is granting accelerated approval of the 
proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 corrected certain technical errors in the 
text of the proposed rule change.
---------------------------------------------------------------------------

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

    The Exchange proposes to adopt Phlx Rule 1093, Phlx XL Risk Monitor 
Mechanism, to provide Exchange specialists, Streaming Quote Traders 
(``SQTs''),\4\ Remote Streaming Quote Traders (``RSQTs''),\5\ and non-
SQT ROTs \6\ who are required to submit continuous two-sided electronic 
quotations pursuant to Phlx Rule 1014(b)(ii)(E) \7\ (collectively, 
``Phlx XL participants'') protection from the unreasonable risk 
associated with the execution of an excessive number of contracts 
resulting from near simultaneous executions in a single option issue. 
Such protection would be provided by way of the implementation of a 
Risk Monitor Mechanism. The Exchange also proposes conforming changes 
to Phlx Rule 1017, Openings in Options, and to Phlx Rule 1082, Firm 
Quotations, to describe the Exchange's disseminated quotation when the 
disseminated size is exhausted and the specialist has not yet revised 
its quotation. The text of the proposed rule change, as amended, is 
below. Proposed new language is in italics; proposed deletions are in 
[brackets].
---------------------------------------------------------------------------

    \4\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through the Exchange's Automated 
Options Market (``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 Phlx Rule 
1014(b)(ii)(A).
    \5\ 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 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 Phlx Rule 
1014(b)(ii)(B).
    \6\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT. 
See Phlx Rule 1014(b)(ii)(C).
    \7\ Phlx 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.
---------------------------------------------------------------------------

Phlx XL Risk Monitor Mechanism

    Rule 1093. (a) The Phlx XL system (the ``system'') will maintain a 
counting program (``counting program'') for each specialist, SQT, RSQT, 
and non-SQT ROT who is required to submit continuous two-sided 
electronic quotations pursuant to Rule 1014(b)(ii)(E) (collectively, 
``Phlx XL participants'') assigned in a particular option. The counting 
program will count the number of contracts traded in such an option by 
each Phlx XL participant within a specified time period, not to exceed 
15 seconds, established by each Phlx XL participant (the ``specified 
time period''). The specified time period will commence for an option 
when a transaction occurs in any series in such option.
    (b)(i) Risk Monitor Mechanism. The system will engage the Risk 
Monitor Mechanism in a particular option when the counting program has 
determined that a Phlx XL participant has traded a Specified Engagement 
Size (as defined below) established by such Phlx XL participant during 
the specified time period. When such Phlx XL participant has traded the 
Specified Engagement Size during the specified time period, the Risk 
Monitor Mechanism will automatically remove such Phlx XL participant's 
quotations from the Exchange's disseminated quotation in all series of 
the particular option.
    (ii) Specified Engagement Size. The Specified Engagement Size is 
determined by the following: (A) For each series in an option, the 
counting program will determine the percentage that the number of 
contracts executed in that series represents relative to the 
disseminated size in that series (``series percentage''); (B) The 
counting program will determine the sum of the series percentages in 
the option issue (``issue percentage''); (C) Once the counting program 
determines that the issue percentage equals or exceeds a percentage 
established by the Phlx XL participant, not less than 100% (``Specified 
Percentage''), the number of executed contracts in the option issue 
equals the Specified Engagement Size. For example, if a Phlx XL 
participant is quoting in four series of a particular option issue, and 
sets its Specified Percentage at 100%, the Specified Engagement Size 
would be determined as follows:

[[Page 4626]]

Example I

----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100              40              40
Series 2........................................................              50              20              40
Series 3........................................................             200              20              10
Series 4........................................................             150              15              10
                                                                 -----------------
    Total.......................................................             500              95             100
----------------------------------------------------------------------------------------------------------------

    In this example the Specified Engagement Size is 95 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 100%.

Example II

----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100               0               0
Series 2........................................................              50               0               0
Series 3........................................................             200               0               0
Series 4........................................................             150             150             100
                                                                 -----------------
    Total.......................................................             500             150             100
----------------------------------------------------------------------------------------------------------------

    In this example the Specified Engagement Size is 150 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 100%.
    If a Phlx XL participant is quoting in four series of a particular 
option, and sets its Specified Percentage at 200%, the Specified 
Engagement Size would be determined as follows:

Example III

----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100              80              80
Series 2........................................................              50              40              80
Series 3........................................................             200              40              20
Series 4........................................................             150              30              20
                                                                 -----------------
    Total.......................................................             500             190             200
----------------------------------------------------------------------------------------------------------------

    In this example the Specified Engagement Size is 190 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 200%. The Specified Engagement 
Size will be automatically offset by a number of contracts that are 
executed on the opposite side of the market in the same option issue 
during the specified time period (the ``Net Offset Specified Engagement 
Size''). For example, a Phlx XL participant that buys calls and also 
sells calls or buys puts in the same option during the specified time 
period would have a Net Offset Specified Engagement Size as follows:

Example IV

----------------------------------------------------------------------------------------------------------------
                                                                   Sell call/buy    Net offset
             Series                    Size          Buy call           put            size         Percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................             100              60              20              40              40
Series 2........................              50             100              80              20              40
Series 3........................             200             150             130              20              10
Series 4........................             150              75              60              15              10
                                 -----------------
    Total.......................             500             385             290              95             100
----------------------------------------------------------------------------------------------------------------

    The Net Offset Specified Engagement Size for each series is 
determined by offsetting the number of contracts executed on the 
opposite side of the market for each series during the specified time 
period. The Risk Monitor Mechanism shall be engaged once the Net Offset 
Specified Engagement Size is for a net number of contracts executed 
among all series in an option issue during the specified time period 
that

[[Page 4627]]

represents an issue percentage equal to or greater than the Specified 
Percentage.
    (c) Any marketable orders, or quotes that are executable against a 
Phlx XL participant's disseminated quotation that are received prior to 
the time the Risk Monitor Mechanism is engaged will be automatically 
executed at the disseminated price up to the Phlx XL participant's 
disseminated size, regardless of whether such an execution results in 
executions in excess of the Phlx XL participant's Specified Engagement 
Size.
    (d) In the event that the specialist's quote is removed by the Risk 
Monitor Mechanism and there are no other Phlx XL participants quoting 
in the particular option, the system will automatically provide two-
sided quotes that comply with the Exchange's rules concerning quote 
spread parameters on behalf of the specialist until such time as the 
specialist revises the quotation. All quotations generated by the 
Exchange on behalf of a specialist shall be considered ``firm 
quotations'' and shall be the obligation of the specialist.
    (e) The system will automatically reset the counting program and 
commence a new specified time period when:
    (i) A previous counting period has expired and a transaction occurs 
in any series in such option; or
    (ii) The Phlx XL participant refreshes his/her quotation, in a 
series for which an order has been executed (thus commencing the 
specified time period) prior to the expiration of the specified time 
period.
* * * * *

Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders

Rule 1014. (a) No change.
(b) ROT. (i) No change.
    (ii) (A)-(C) No change.
    (D) Market Making Obligations Applicable in Streaming Quote 
Options. In addition to the other requirements for ROTs set forth in 
this Rule 1014, an SQT and an RSQT shall be responsible to 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, provided that a Directed SQT or RSQT (as 
defined in Rule 1080(l)(i)(C)) shall be responsible to quote 
continuous, two-sided markets in not less than [100] 99% of the series 
in each Streaming Quote Option in which they receive Directed Orders 
(as defined in Rule 1080(l)(i)(A)). The specialist shall be responsible 
to quote continuous, two-sided markets in not less than [100] 99% of 
the series in each Streaming Quote Option in which such specialist is 
assigned.
    (E) No change.
(c)-(h) No change.
Commentary: No change.
* * * * *

Openings in Options

Rule 1017. (a) No change.
(b) 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. 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] 99% of the 
series in all option issues in which such Phlx XL participant is 
assigned (``[100] 99% 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 membership via Exchange Circular); or (C) 
if neither the specialist's quote nor the quotes of two [100] 99% 
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 membership via Exchange circular), one [100] 99% 
participant has submitted their quote.
In situations where an AOP may be calculated 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; 
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 in 
paragraph (c) below.
(c)-(d) No change.
(e) The system will not open a series if one of the following 
conditions is met:
    (i) there is no quote from the specialist or a [100] 99% 
participant;
    (ii)-(iii) No change.
(f)-(j) No change.
Commentary: No change.
* * * * *

Firm Quotations

Rule 1082. (a) (i) No change.
    (ii) (A)-(B) No change.
    (C)(1) If an SQT or RSQT's (other than a Directed SQT or RSQT) 
quotation size in a particular series in a Streaming Quote Option is 
exhausted or removed by the Risk Monitor Mechanism, such SQT or RSQT's 
quotation shall be deleted from the Exchange's disseminated quotation 
until the time the SQT or RSQT revises his/her quotation.
    (2) If the Exchange's disseminated size in a particular series in a 
Streaming Quote Option is exhausted at that particular price level, and 
no specialist, SQT or RSQT has revised their quotation immediately 
following the exhaustion of the Exchange's disseminated size at such 
price level, the Exchange shall automatically [disseminate the 
specialist's most recent disseminated price prior to the time of such 
exhaustion] provide two-sided quotes that comply with the Exchange's 
rules concerning quote spread parameters on behalf of the specialist 
until such time as the specialist revises the quotation, with a size of 
one contract.
    (iii)-(iv) No change.
(b)-(d) No change.
Commentary: No change.
* * * * *

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 had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Phlx has prepared summaries, set forth in Sections 
A, B, and C below, of the

[[Page 4628]]

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 provide Phlx XL 
participants protection from the unreasonable risk of multiple nearly 
simultaneous executions. The risk to Phlx XL participants is not 
limited to a single series in an option issue; Phlx XL participants 
have exposure in all series of a particular option issue, requiring 
them to offset or hedge their overall position in an option issue.
    Phlx XL participants submit proprietary electronic quotations in 
options in which they are assigned based on proprietary pricing models 
that rely on various factors such as the price and market volatility of 
the underlying security. The Phlx XL participant's pricing model and 
automated quotation system will continuously enter updated quotations 
in all series of an option based on changes in the various factors 
included in its pricing models. In addition to the Phlx XL 
participant's own proprietary quoting system, the Risk Monitor 
Mechanism would provide an additional tool to the Phlx XL participant 
to help manage the risk associated with providing liquidity in a large 
number of series across an option in which it is assigned.
    Specialists trading on Phlx XL, together with SQTs and RSQTs that 
receive Directed Orders \8\ are currently required to submit 
continuous, two-sided quotations in 100% of the series in each option 
in which they are assigned.\9\ SQTs and RSQTs that do not receive 
Directed Orders are required to submit continuous, two-sided quotations 
in 60% of the series in each option in which they are assigned.\10\ 
Phlx XL participants are thus exposed to the possibility of near-
simultaneous executions that can create large, unintended principal 
positions that expose the Phlx XL participant to unnecessary market 
risk. Consequently, Phlx XL participants may be more likely to widen 
their quotations, quote less aggressively, and limit their disseminated 
size in order to address these risks. The Risk Monitor Mechanism is 
intended to address these concerns by assisting Phlx XL participants in 
managing their market risk.
---------------------------------------------------------------------------

    \8\ See Phlx Rule 1080(l).
    \9\ See Phlx Rule 1014(b)(ii)(D). The proposed rule change would 
reduce the percentage quoting requirement as described more fully 
below.
    \10\ Id.
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Phlx XL Risk Monitor Mechanism

    The Phlx XL Risk Monitor Mechanism would begin with a counting 
program that would count the number of contracts traded in a particular 
option by each Phlx XL participant within a specified time period 
established by each Phlx XL participant (the ``specified time 
period''). The specified time period would commence for an option when 
a transaction occurs in any series in such option. The specified time 
period may not exceed 15 seconds; Phlx XL participants may, however, 
set the specified time period for less than 15 seconds.
    The system would engage the Risk Monitor Mechanism in a particular 
option when the counting program has determined that a Phlx XL 
participant has traded a Specified Engagement Size (as defined below) 
established by such Phlx XL participant during the specified time 
period. When such Phlx XL participant has traded the Specified 
Engagement Size during the specified time period, the Risk Monitor 
Mechanism would automatically remove such Phlx XL participant's 
quotations from the Exchange's disseminated quotation in all series of 
the particular option until such Phlx XL participant submits a new, 
revised quotation.
    Specified Engagement Size. Each Phlx XL participant would establish 
a Specified Engagement Size.\11\ When such Phlx XL participant has 
traded the Specified Engagement Size during the specified time period, 
the Risk Monitor Mechanism would automatically remove such Phlx XL 
participant's quotations from the Exchange's disseminated quotation in 
all series of the particular option.
---------------------------------------------------------------------------

    \11\ A Phlx XL participant could establish the Specified 
Engagement Size as 100% or greater of the number of contracts 
executed in each series during the specified time period relative to 
the disseminated size. For example, a Phlx XL participant could 
establish the Specified Engagement Size as 200%, in which case the 
Risk Monitor Mechanism would not be engaged until 200% of the number 
of contracts in each series have been executed during the specified 
time period relative to the disseminated size. A Phlx XL participant 
could also establish the Specified Engagement Size as, for example, 
120%, in which case the Risk Monitor Mechanism would not be engaged 
until 120% of the number of contracts in each series have been 
executed during the specified time period relative to the 
disseminated size. In any event, however, a Phlx XL participant may 
not establish a Specified Engagement Size that is less than 100%.
---------------------------------------------------------------------------

    The Specified Engagement Size is determined as follows: For each 
series in an option, the counting program would determine the 
percentage that the number of contracts executed in that series 
represents relative to the disseminated size in that series (the 
``series percentage''). The counting program would then determine the 
sum of the series percentages in the underlying option issue (the 
``issue percentage''). Once the counting program determines that the 
issue percentage equals or exceeds a percentage established by the Phlx 
XL participant which may not be less than 100% (the ``Specified 
Percentage''), the number of executed contracts in the option issue 
equals the Specified Engagement Size.
    For example, if a Phlx XL participant is quoting in four series of 
a particular option issue, and sets its Specified Percentage at 100%, 
the Specified Engagement Size would be determined as follows:
Example I

----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100              40              40
Series 2........................................................              50              20              40
Series 3........................................................             200              20              10
Series 4........................................................             150              15              10
                                                                 -----------------
    Total.......................................................             500              95             100
----------------------------------------------------------------------------------------------------------------

[[Page 4629]]

    In this example the Specified Engagement Size is 95 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 100%.
Example II

----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100               0               0
Series 2........................................................              50               0               0
Series 3........................................................             200               0               0
Series 4........................................................             150             150             100
                                                                 -----------------
    Total.......................................................             500             150             100
----------------------------------------------------------------------------------------------------------------

    In this example the Specified Engagement Size is 150 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 100%.
    If a Phlx XL participant is quoting in four series of a particular 
option, and sets its Specified Percentage at 200%, the Specified 
Engagement Size would be determined as follows:
Example III

----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100              80              80
Series 2........................................................              50              40              80
Series 3........................................................             200              40              20
Series 4........................................................             150              30              20
                                                                 -----------------
    Total.......................................................             500             190             200
----------------------------------------------------------------------------------------------------------------

    In this example the Specified Engagement Size is 190 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 200%.
    Offset on the Opposite Side of the Market. The Risk Monitor 
Mechanism would calculate the number of contracts executed on one side 
of the market during the specified time period, and offset that number 
of contracts by the number of contracts executed on the opposite side 
of the market during the specified time period. The purpose of this 
provision is to account for the offset in risk of one option position 
created by a position in the same option issue on the opposite side of 
the market. Because the risk in such a situation is neutral, the 
Exchange believes that Phlx XL participants should continue executing 
contracts until the actual risk that is created by the Specified 
Engagement Size is realized.
    The Specified Engagement Size would thus be automatically offset by 
a number of contracts that are executed on the opposite side of the 
market in the same option issue during the specified time period (the 
``Net Offset Specified Engagement Size''). The Risk Monitor Mechanism 
would be engaged when the Net Offset Specified Engagement Size is for a 
number of contracts executed among all series during the specified time 
period that represents an issue percentage that is equal to or greater 
than the specified percentage. For example, a Phlx XL participant that 
buys calls and also sells calls or buys puts in the same option during 
the specified time period would have a Net Offset Specified Engagement 
Size as follows:
Example IV

----------------------------------------------------------------------------------------------------------------
                                                                   Sell call/buy    Net offset
             Series                    Size          Buy call           put            size         Percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................             100              60              20              40              40
Series 2........................              50             100              80              20              40
Series 3........................             200             150             130              20              10
Series 4........................             150              75              60              15              10
                                 -----------------
    Total.......................             500             385             290              95             100
----------------------------------------------------------------------------------------------------------------

    In this example, 675 contracts have been executed during the 
specified time period (buy calls 385 + sell calls/buy puts 290). The 
Net Offset Specified Engagement Size for each series is determined by 
offsetting the number of contracts executed on the opposite side of the 
market for each series during the specified time period. The Risk 
Monitor Mechanism would be engaged once the Net Offset Specified 
Engagement Size is executed for a net number of contracts among all 
series during the specified time period that represents an issue 
percentage that is equal to or greater than the specified percentage.
    Firm Quotations. In order to remain consistent with the Exchange's 
rules concerning Firm Quotations,\12\ the proposed rule change would 
provide that any marketable orders, or quotes that are executable 
against a Phlx XL participant's disseminated quotation,

[[Page 4630]]

that are received prior to the time the Risk Monitor Mechanism is 
engaged would be automatically executed at the disseminated price up to 
the Phlx XL participant's disseminated size, regardless of whether such 
an execution results in executions in excess of the Phlx XL 
participant's Specified Engagement Size. Therefore, it is possible for 
a Phlx XL participant to execute a number of contracts that is greater 
than the Specified Engagement Size before the Risk Monitor Mechanism 
removes their quote from the Exchange's disseminated market.
---------------------------------------------------------------------------

    \12\ See Phlx Rule 1082.
---------------------------------------------------------------------------

    Further, the proposed rule change would establish that, in the 
event that the specialist's quote is exhausted or removed by the Risk 
Monitor Mechanism, and there are no other Phlx XL participants quoting 
in the particular option, the system would automatically provide two-
sided quotes that comply with the Exchange's rules concerning quote 
spread parameters on behalf of the specialist until such time as the 
specialist revises the quotation. All quotations generated by the 
Exchange on behalf of a specialist would be considered ``firm 
quotations'' and shall be the obligation of the specialist. The 
Exchange proposes conforming changes to Rule 1082 to reflect this 
situation.
    The purpose of this provision is to ensure that the Exchange 
disseminates continuous quotations in all series traded on the 
Exchange, even in situations where no Phlx XL participant is 
disseminating its own quotations due to, for example, system 
malfunctions. The Exchange believes that it should ``take control'' of 
a Phlx XL participant's quotation only in limited circumstances (i.e., 
only when the Exchange's failure to do so would result in no 
disseminated market from the Exchange), and that the Phlx XL 
participants then quoting should determine the Exchange's disseminated 
price and size.
    The Exchange proposes to amend Phlx Rule 1014(b)(ii)(D) to reduce 
the obligation of specialists and Phlx XL participants that receive 
Directed Orders \13\ to quote continuous, two-sided markets in not less 
than 100% of the series in each option in which they are assigned. The 
new obligation would be to quote in 99% of such series. The purpose of 
this proposal is to make the Exchange's rules concerning quoting 
requirements consistent with the Risk Monitor Mechanism's functionality 
(i.e., the removal of individual specialist and Directed SQT and RSQT 
quotations from the Exchange's disseminated market). If the quoting 
obligation were to remain at 100% for these particular Phlx XL 
participants, a rule violation would occur each time the Risk Monitor 
Mechanism removes their quotation. Thus, the Exchange proposes to 
reduce this obligation so that removal of individual quotations does 
not result in violations of Exchange rules.
---------------------------------------------------------------------------

    \13\ See Phlx Rule 1080(l).
---------------------------------------------------------------------------

    For consistency, the Exchange proposes conforming amendments to 
Phlx Rule 1017, Openings in Options, to change references to ``100% 
participants'' and re-name them ``99% participants.''
    Re-Setting the Counting System. Finally, the proposed rule change 
provides that the system would automatically reset the counting program 
and commence a new specified time period when either: (i) a previous 
counting period has expired and a transaction occurs in any series in 
such option; or (ii) the Phlx XL participant refreshes his/her 
quotation, in a series for which an order has been executed (thus 
commencing the specified time period) prior to the expiration of the 
specified time period.
    The commencement of the specified time period is event-driven, 
i.e., upon the execution of a transaction in a particular series in an 
option. The system would only initiate a specified time period when 
such an execution occurs. If there is no activity in an option, the 
system would not repeatedly commence and calculate the expiration of a 
new specified time period for such option unnecessarily. Once an 
execution occurs, however, a specified time period would commence.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\14\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\15\ 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 assisting Phlx XL participants in managing their 
risk through the Risk Monitor Mechanism.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 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 would 
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. 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-2006-05 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 20549-9303.
    All submissions should refer to File Number SR-Phlx-2006-05. 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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such 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 publicly available. All 
submissions should refer to File Number SR-Phlx-2006-05 and should be 
submitted on or before February 17, 2006.

[[Page 4631]]

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder, applicable to a national 
securities exchange.\16\ In particular, the Commission believes that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\17\ which requires among other things, that the rules of the 
Exchange are 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. The Commission notes that the 
proposal does not alter the obligations of Phlx XL participants, except 
for the fact that it will reduce specialists and Phlx XL participants 
that receive directed orders continuous quoting obligation from 100% of 
the series in each option in which it is assigned to 99% of the series 
in each option in which it is assigned. The Commission notes that this 
reduction should provide specialists and Phlx XL participants that 
receive directed orders a brief amount of time to update their quotes 
after the Risk Monitor Mechanism removes their quotes from the 
Exchange's disseminated quotation. In addition, the Commission believes 
that the proposed rule change should provide Phlx XL participants 
assistance in effectively managing their quotations.
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    \16\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Phlx has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
notes that similar proposals to provide protection from risk for market 
makers have been approved for other options exchanges.\18\ The 
Commission believes that granting accelerated approval of the proposal 
should provide Phlx XL participants with similar protections from the 
risk associated with an excessive number of near simultaneous 
executions in a single options class. Accordingly, the Commission finds 
good cause, pursuant to Section 19(b)(2) of the Act,\19\ for approving 
the proposed rule change, as amended, prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register.
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    \18\ See Securities Exchange Act Release Nos. 51049 (January 18, 
2005), 70 FR 3756 (January 26, 2005) (SR-BSE-2004-52); 51050 
(January 18, 2005), 70 FR 3758 (January 26, 2005) (SR-ISE-2004-31); 
and 51740 (May 25, 2005), 70 FR 32686 (June 3, 2005) (SR-PCX-2005-
64).
    \19\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-Phlx-2006-05) and Amendment 
No. 1 thereto be, and hereby are, approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-1017 Filed 1-26-06; 8:45 am]

BILLING CODE 8010-01-P