Document ID: SEC-2009-1044-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing of Proposed Rule Change Relating to Exchange Rules for the Options Order Protection and Locked/Crossed Market Plan
Posted Date: 2009-07-28T04:00Z

[Federal Register: July 28, 2009 (Volume 74, Number 143)]
[Notices]               
[Page 37270-37274]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jy09-84]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60363; File No. SR-Phlx-2009-61]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing of Proposed Rule Change Relating to Exchange Rules for the 
Options Order Protection and Locked/Crossed Market Plan

July 22, 2009.
    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 July 20, 2009, NASDAQ OMX PHLX, 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. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to modify the Exchange's rules to reflect 
its participation in the Options Order Protection and Locked/Crossed 
Market Plan (``Plan''). The proposed rules implement the Exchange's 
participation in the Plan, and will be substantially similar to the 
rules of other exchanges that are also implementing the Plan with minor 
variations to account for differences between the exchanges' market 
structures.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

 1. Purpose
    On June 17, 2008, the Exchange filed an executed copy of the 
Options Order Protection and Locked/Crossed Market Plan (``Plan''), 
joining all other approved options markets in adopting [sic] the Plan. 
The Plan requires each options exchange to adopt rules implementing 
various requirements specified in the Plan. This proposal is designed 
to fulfill that obligation.

Background

    The Plan will replace the current Plan for the Purpose of Creating 
and Operating an Intermarket Option Linkage (``Linkage Plan''). That 
plan requires its participant exchanges to operate a stand-alone system 
or ``Linkage'' for sending order-flow between exchanges to limit trade-
throughs. The Options Clearing Corporation (``OCC'') operates the 
Linkage system (the ``System''). The Linkage rules provide for unique 
types of Linkage orders, with a complicated set of requirements as to 
who may send such orders and under what conditions. Before a market 
maker can trade through another exchange's quote, it first must send a 
Linkage order and then wait three seconds for a response.
    While the Linkage largely has operated satisfactorily, it is under 
significant strain. When the Commission approved the Linkage Plan in 
2000, average daily volume (``ADV'') in the options market was 
approximately 2.6 million contracts across all exchanges. By 2007, the 
ADV had increased four-fold to more than 10.8 million contracts, 
putting added strain on the ability of market makers to comply with the 
complex Linkage rules. At the same time, the options markets have been 
moving towards quoting in pennies. This greatly increases the number of 
price changes in an option, giving rise to greater chances of trade-
throughs and missing markets as market makers send Linkage orders and 
have to wait three seconds for a response.
    Based upon experience in the equities markets following the 
adoption of Regulation NMS in 2005, the options exchanges have 
determined to replace the System with the Plan providing for a set of 
rules and procedures designed to avoid trade-throughs and locked 
markets. The key to Regulation NMS's price-protection provisions is the 
Intermarket Sweep Order (``ISO''). Each equity exchange must adopt 
rules ``reasonably designed to prevent trade-throughs.'' Exempted from 
trade-through liability is an ISO, which is an order a member sends to 
an exchange displaying a price inferior to the national best bid and 
offer (``NBBO''), while simultaneously sending orders to trade against 
the full size of any other exchange that is displaying the NBBO. A 
simple prohibition against most trade-throughs, coupled with the ISO 
mechanism, has given the equities markets a straight-forward system to 
provide customers with price protection in a fast-moving, high-volume 
market that is quoted in pennies.
    Proposed Temporary Linkage Rule. The Exchange proposes to adopt 
Rule 1088 which provides that the Exchange will continue to accept 
Principal Acting as Agent (``P/A'') and Principal Orders from options 
exchanges that continue to use such orders to address trade-throughs 
via the existing linkage for a temporary period.
    Deletion of References to Linkage Orders. The Exchange proposes to 
delete references to Linkage P and P/A orders from its rules. 
Specifically, the Exchange proposes to delete current Rules 1081 and 
1083 through 1087, which currently make up the Exchange's rules that 
track the Linkage Plan. Additionally, for consistency, the Exchange 
proposes to delete references to Linkage P and P/A Orders from Rule 
1080.
    The Proposed New Definitions. The proposed Plan incorporates a 
number of defined terms, some identical to definitions from the 
existing Linkage Plan and others that have been developed along with 
the proposed Plan itself. Accordingly, Phlx is proposing to adopt new 
Rule 1083, which sets forth the defined terms for use under the 
proposed Plan.
    The Proposed Trade Through Rule. The Plan essentially would apply 
the Regulation NMS price-protection provisions to the options markets. 
Similar to Regulation NMS, the Plan would require participants to adopt

[[Page 37271]]

rules ``reasonably designed to prevent Trade-Throughs,'' while 
exempting ISOs from that prohibition.
    Accordingly, the Exchange is proposing to adopt new Rule 1084, 
which codifies the requirement that the Exchange and other Plan 
participants avoid trading through superior prices on other markets. 
The Exchange is also proposing to add an ISO order in Rule 1066 based 
upon the definition of ISO currently used by Nasdaq for compliance with 
Regulation NMS when trading equities. Rule 1080(b) would be amended to 
reflect that an ISO is a permitted order that may be entered on the 
Exchange's systems. The ISO order will be exempt from the prohibition 
against trading-through, as well as several additional exceptions to 
the trade-through prohibition that track the exceptions under 
Regulation NMS or correspond to unique aspects of the options market, 
or both. Specifically:
     System Issues: Proposed Rule 1084(b)(i) tracks Section 
5(b)(i) of the Plan which corresponds to the system-failure exception 
in Regulation NMS \5\ for equity securities and permits trading through 
an Eligible Exchange that is experiencing system problems.
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    \5\ See Rule 611(b)(1) under the Act.
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     Trading Rotations: Proposed Rule 1084(b)(ii) tracks 
Section 5(b)(ii) of the Plan which carries forward the current Trade-
Through exception in the Old Plan \6\ and is the options equivalent to 
the single price opening exception in Regulation NMS for equity 
securities.\7\ Some Options exchanges use a trading rotation to open an 
option for trading, or to reopen an option after a trading halt. The 
rotation is effectively a single price auction to price the option and 
currently there are no practical means to include prices on other 
exchanges in that auction.
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    \6\ See Linkage Plan Section 8(c)(iii)(E).
    \7\ See Rule 611(b)(3) under the Exchange Act.
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     Crossed Markets: Proposed Rule 1084(b)(iii) tracks Section 
5(b)(iii) which corresponds to the crossed quote exception in 
Regulation NMS for equity securities.\8\ If a Protected Bid is higher 
than a Protected Offer, it indicates that there is some form of market 
dislocation or inaccurate quoting. Permitting transactions to be 
executed without regard to Trade-Throughs in a Crossed Market will 
allow the market to quickly return to equilibrium.
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    \8\ See Rule 611(b)(4) under the Exchange Act.
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     Intermarket Sweep Orders (``ISOs''): These two exceptions 
correspond to the ISO exceptions in Regulation NMS for equity 
securities.\9\ Proposed Rule 1084(b)(iv) tracks Section 5(b)(iv) of the 
Plan which permits a Participant to execute orders it receives from 
other Participants or members that are marked as ISO even when it is 
not at the NBBO. Proposed Rule 1084(b)(v) tracks Section 5(b)(v) of the 
Plan which allows a Participant to execute inbound orders when it is 
not at the NBBO, provided it simultaneously ``sweeps'' all better-
priced interest displayed by Eligible Exchanges.
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    \9\ See Rule 611(b)(5) and (6) under the Exchange Act.
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     Quote Flickering: Proposed Rule 1084(b)(vi) tracks Section 
5(b)(vi) of the Plan which corresponds to the flickering quote 
exception in Regulation NMS for equity securities.\10\ Options 
quotations change as rapidly, if not more rapidly, than equity 
quotations. Indeed, they track the price of the underlying security and 
thus change when the price of the underlying security changes. This 
exception provides a form of ``safe harbor'' to market participants to 
allow them to trade through prices that have changed within a second of 
the transaction causing a nominal Trade-Through.
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    \10\ See Rule 611(b)(8) under the Exchange Act.
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     Non-Firm Quotes: Proposed Rule 1084(b)(vii) tracks Section 
5(b)(vii) of the Plan which carries forward the current non-firm quote 
Trade-Through exception in the Old Plan.\11\ By definition, an Eligible 
Exchange's quotations may not be firm for automatic execution during 
this trading state and thus should not be protected from Trade-
Throughs. In effect, these quotations are akin to ``manual quotations'' 
under Regulation NMS.
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    \11\ See Linkage Plan Section 8(c)(iii)(C).
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     Complex Trades: Proposed Rule 1084(b)(viii) tracks Section 
5(b)(viii) of the Plan which carries forward the current complex trade 
exception in the Old Plan \12\ and will be implemented through rules 
adopted by the Participants and approved by the Commission. Complex 
trades consist of multiple transactions (``legs'') effected at a net 
price, and it is not practical to price each leg at a price that does 
not constitute a Trade-Through. Narrowly-crafted implementing rules 
will ensure that this exception does not undercut Trade-Through 
protections.
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    \12\ See Linkage Plan Section 8(c)(iii)(G).
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     Customer Stopped Orders: Proposed Rule 1084(b)(ix) tracks 
Section 5(b)(ix) of the Plan which corresponds to the customer stopped 
order exception in Regulation NMS for equity securities.\13\ It permits 
broker dealers to execute large orders over time at a price agreed upon 
by a customer, even though the price of the option may change before 
the order is executed in its entirety.\14\
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    \13\ See Rule 611(b)(9) under the Exchange Act.
    \14\ For a further discussion on how this exemption operates, 
see Regulation NMS Adopting Release, Exchange Act Release No. 51808 
(June 9, 2005) at notes 322-325.
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     Stopped Orders and Price Improvement: Proposed Rule 
1084(b)(x) tracks Section 5(b)(x) of the Plan which would apply if an 
order is stopped at price that did not constitute a Trade-Through at 
the time of the stop. In this case, an exchange could seek price 
improvement for that order, even if the market moves in the interim, 
and the transaction ultimately is effected at a price that would trade 
through the then currently-displayed market.
     Benchmark Trades: Proposed Rule 1084(b)(xi) tracks Section 
5(b)(xi) of the Plan which would cover trades executed at a price not 
tied to the price of an option at the time of execution, and for which 
the material terms were not reasonably determinable at the time of the 
commitment to make the trade. This corresponds to a Trade-Through 
exemption in Regulation NMS for equity trades.\15\ Phlx does not 
currently permit these types of options trades, and any transaction-
type relying on this exemption would require Phlx to adopt implementing 
rules, subject to Commission review and approval.
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    \15\ See Rule 611(b)(7) under the Exchange Act.
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    The Proposed Locked and Crossed Markets Rule. Similar to Regulation 
NMS, the Plan requires its participants to adopt, maintain and enforce 
rules requiring members: to avoid displaying locked and crossed 
markets; to reconcile such markets; and to prohibit members from 
engaging in a pattern or practice of displaying locked and crossed 
markets. These provisions are subject to exceptions that are contained 
in the rules of each participant and that are to be approved by the 
Commission.
    Accordingly, the Exchange proposes to adopt new Rule 1086, which 
would set forth the general prohibition against locking/crossing other 
eligible exchanges as well as several exceptions that the Plan 
participants approved that permit locked markets in limited 
circumstances. Specifically, the exceptions to the general prohibition 
on locking and crossing occur when (1) the locking or crossing 
quotation was displayed at a time when the Exchange was experiencing a 
failure, material delay, or malfunction of its systems or equipment; 
(2) the locking or crossing quotation was displayed at a time when 
there is a Crossed Market; or (3) the Member simultaneously routed an 
ISO to execute against the full displayed size of any locked or crossed 
Protected Bid or Protected Offer.

[[Page 37272]]

    Phlx Routing Arrangements. The Exchange proposes to rely upon the 
order routing arrangements already in place on its market, except that 
the Exchange proposes amendments to Rules 1080(m)(iv)(B) and (C) 
concerning FIND \16\ and SRCH \17\ Orders.
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    \16\ A FIND order is an order that is routable upon receipt, or 
any time the option goes through an opening process. See Exchange 
Rule 1080(m)(iv)(B).
    \17\ A SRCH order is an order that is routable at any time. See 
Exchange Rule 1080(m)(iv)(C).
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    Currently, when the Phlx Best Bid/Offer (``PBBO'') is inferior to 
the Away Best Bid/Offer (``ABBO'') FIND and SRCH Orders are routed to 
the ABBO markets (following a ``Route Timer'' during which Phlx 
participants may price improve) and, if size remains in the FIND or 
SRCH Order following such routing, the Exchange will trade the order at 
the next PBBO price up to one minimum price variation (``MPV'') through 
the ABBO price subject to the order's limit price, or be entered into 
the Phlx XL II book and posted at its limit price one MPV inferior to 
the ABBO price if its limit price is equal to or through the ABBO 
price.
    Under the instant proposal, Rules 1080(m)(iv)(B) and (C) would be 
amended to provide that if, at the end of the Route Timer, the ABBO is 
still the best price, the FIND Order will route to the away market(s) 
whose disseminated price is better than the PBBO (not just to the ABBO 
markets), up to a size equal to the lesser of either: (a) the away 
markets' size, or (b) the remaining size of the FIND Order. If the FIND 
Order still has remaining size after such routing, it will (i) trade at 
the next PBBO price (with no limitation of one MPV through the ABBO 
price), subject to the order's limit price, and, if contracts still 
remain unexecuted, the remaining size will be routed to away markets 
disseminating the same price as the PBBO, or (ii) be entered into the 
Phlx XL II book and posted at its limit price. A FIND Order that is 
routed to an away market will be marked as an ISO. Such ISO will 
conform to the requirements contained in proposed Rules 1066(i) and 
1083(h).
    Under the proposal, respecting SRCH Orders, if, at the end of the 
Route Timer, the ABBO is still the best price, the SRCH order will 
route to the away market(s) whose disseminated price is better than the 
PBBO, up to a size equal to the lesser of either: (a) The away markets' 
size, or (b) the remaining size of the SRCH order. If the SRCH order 
still has remaining size after such routing, it may (1) trade at the 
next PBBO price (or prices) if the order price is locking or crossing 
that price (or prices) up to the ABBO price, and/or (2) be entered into 
the Phlx XL II book at its limit price if not locking or crossing the 
Phlx price or the ABBO. The Phlx XL II system will route and execute 
contracts contemporaneously at the end of the Route Timer. Once on the 
book, the SRCH order is eligible for routing if it is locked or crossed 
by an away market. A SRCH Order that is routed to an away market will 
be marked as an ISO. Such ISO will conform to the requirements 
contained in proposed Rules 1066(i) and 1083(h).
    Thus, the limitation on execution and/or booked limit order prices 
of one MPV away from the ABBO following routing of a FIND or SRCH Order 
to the ABBO markets (and all better-priced away markets) would be 
eliminated. This is consistent with the Plan and with the ISO Order 
type.
    The Exchange proposes to amend its rules concerning orders that 
have been subject to its Quote Exhaust and Market Exhaust processes.
    Respecting the Quote Exhaust feature, Exchange Rule 
1082(a)(ii)(B)(3)(g)(iv)(A) and (B) currently state that remaining 
order volume from orders that have been subject to Quote Exhaust and 
routed to away markets will be posted on the Exchange at the ABBO 
price. Under the current proposal, if there still remain unexecuted 
contracts after trading at the Phlx and/or routing, the Quote Exhaust 
process of evaluating the Best Price will be repeated for any remaining 
order volume that is marketable.
    Specifically, if the Exchange's Best Price is the Exchange's next 
available price standing alone, the Phlx XL II system will execute the 
initiating quote or order at the Exchange's next available price up to 
the Exchange's disseminated size. If the Best Price is equal to the 
ABBO price, the Phlx XL II system will execute the initiating quote or 
order at the Exchange's next available price up to the Exchange's 
disseminated size, and any remaining order volume from the execution on 
the Exchange will be routed away to the away market(s). If the Best 
Price is equal to the Exchange's pre-determined ``Acceptable Range'' 
price (based on a table published on the Exchange's web site), the Phlx 
XL II system will execute the initiating quote or order at the 
Exchange's next available price up to the Exchange's disseminated size, 
and any remaining volume from the execution on the Exchange will be 
posted at the Acceptable Range price for the remaining size, for a 
period of time not to exceed ten seconds and then cancelled after such 
period of time has elapsed.
    Under the proposal, Rule 1082(a)(ii)(B)(4)(d)(vi) would be amended 
to state that, under the various Best Price scenarios, if after trading 
at the Phlx and/or routing, there is a remainder of the initiating 
order, and such remainder is still marketable, the entire process of 
evaluating the Best Phlx price and the ABBO will be repeated until: (A) 
The order size is exhausted, or (B) the order reaches its limit price. 
If there still remain unexecuted contracts after routing but the order 
has reached its limit price, the remainder will be posted at the 
order's limit price, except that, when the limit price crosses the 
Acceptable Range Price, the remainder will be posted at the Acceptable 
Range Price for a period of time not to exceed ten seconds and then 
cancelled after such period of time has elapsed. For a pilot period 
scheduled to expire November 30, 2009, during this up to ten second 
period, the Phlx XL II system will disseminate on the opposite side of 
the market from remaining unexecuted contracts: (i) A bid price of 
$0.00, with a size of one contract if the remaining size is a seller, 
or (ii) an offer price of $200,000, with a size of one contract if the 
remaining size is a buyer.
    Respecting the Market Exhaust Auction, Exchange Rule 
1082(a)(ii)(B)(4)(d)(iv) describes what happens to remaining order 
volume respecting orders subject to Market Exhaust. Currently, if the 
total number of contracts priced at the ABBO would not satisfy the 
number of marketable contracts the Exchange has, the Phlx XL II system 
will determine how many contracts it has available on the Exchange at a 
price equal to the ABBO. If the total number of ABBO contracts plus the 
number of contracts available on the Exchange at the ABBO price would 
satisfy the number of marketable contracts the Exchange has, the ABBO 
price becomes the ``Exchange Auction Price'' and the Phlx XL II system 
will trade available contracts on the Exchange at the Exchange Auction 
Price and contemporaneously route any remaining contracts to away 
markets at the Exchange Auction Price. Additionally, if the total 
number of ABBO contracts plus the number of contracts available on the 
Exchange at the ABBO price would not satisfy the number of marketable 
contracts the Exchange has, the Phlx XL II system currently will 
determine how many contracts are available on the Exchange at a price 
that is one Minimum Price Variation (``MPV'') through the ABBO price. 
If the total number of ABBO contracts plus the number of contracts

[[Page 37273]]

available on the Exchange at the ABBO price plus the number of 
contracts available on the Exchange at a price that is one MPV through 
the ABBO price would satisfy the number of marketable contracts the 
Exchange has, the price that is one MPV through the ABBO becomes the 
Exchange Auction Price.
    Under the proposal, the ``one MPV away'' calculation will be 
deleted, and the Exchange's system will determine how many marketable 
contracts can be routed to all better priced away markets, not limited 
to the ABBO markets as stated in the current rule. This is because 
under the Plan, orders may be traded on the Exchange at the best 
Exchange price without the ``one MPV'' limitation if ISOs are routed to 
better priced away markets. Under both Quote Exhaust and Market 
Exhaust, all orders routed to away markets will be marked as ISOs. Such 
ISOs will conform to the requirements contained in proposed Rules 
1066(i) and 1083(h).
    Proposed Rule 1082(a)(ii)(B)(4)(d)(iv)(B) would state that, if the 
total number of contracts priced at the ABBO would not satisfy the 
number of marketable contracts the Exchange has, the Phlx XL II system 
will determine how many contracts are available on all better priced 
away markets. If the total number of contracts available on better 
priced away markets would satisfy the number of marketable contracts 
available on the Exchange, the Phlx XL II system will route all 
marketable contracts on the Exchange to other markets at the better 
prices.
    If the total number of contracts priced at better priced away 
markets would not satisfy the number of marketable contracts the 
Exchange has, the Phlx XL II system will determine how many contracts 
it has available on the Exchange at the best Exchange price. If the 
total number of better priced away contracts plus the number of 
contracts available on the Exchange at the best Exchange price would 
satisfy the number of marketable contracts the Exchange has, the best 
Exchange price becomes the Exchange Auction Price and the Phlx XL II 
system will contemporaneously route the full size of displayed interest 
at better priced away markets to such better priced away markets, and 
trade remaining contracts on the Exchange at the Exchange Auction 
Price. In this situation, the Phlx XL II system will price any 
contracts routed to other markets at the away market price.
    If the total number of better priced away contracts plus the number 
of contracts available on the Exchange at the PBBO price would not 
satisfy the number of marketable contracts the Exchange has, the Phlx 
XL II system will determine an Exchange Auction Price, using all 
available better priced away markets plus all available Exchange 
contracts, that will satisfy the number of marketable contracts the 
Exchange has. If that price is equal to or within the order limit price 
and the ``Auction Quote Range'' (``AQR'') determined by the Exchange, 
that price becomes the Exchange Auction Price and the system will 
contemporaneously route the full size of displayed interest at better 
priced away markets to such better priced away markets, and trade 
remaining contracts on the Exchange at the Exchange Auction Price. In 
this situation, the Phlx XL II system will price any contracts routed 
to other markets at the Exchange Auction Price.
    Finally, the Exchange proposes similar changes to its ``Provisional 
Auction.'' Again, the ``one MPV'' calculation would be deleted, and 
pricing will be based on the best Exchange price instead of the ABBO.
    Under the proposal, if the total number of better priced away 
contracts plus the number of contracts available on the Exchange at the 
Exchange Auction Price would not satisfy the number of marketable 
contracts the Exchange has, the system may repeat the auction process 
up to three times. If after that number of times, the Phlx XL II system 
still cannot either route and/or trade the entire initiating order, the 
Phlx XL II system will conduct a Provisional Auction by establishing 
the Exchange Auction Price at the AQR Price, routing to all away 
markets disseminating prices better than or equal to the Exchange 
Auction Price for their disseminated size, and trading as many 
contracts as possible on the Exchange at the AQR price. In this 
situation, the Phlx XL II system will price any contracts routed to 
other markets at the AQR price. Any unexecuted contracts from the 
initiating order will be displayed in the Exchange quote at the 
Exchange Auction Price for the remaining size for a brief period not to 
exceed ten seconds and subsequently cancelled back to the entering 
participant if they remain unexecuted and priced through the Auction 
Price. Just as under current rules, for a pilot period scheduled to 
expire November 30, 2009, during the brief period, the Phlx XL II 
system will disseminate, on the opposite side of the market from 
remaining unexecuted contracts: (i) A bid price of $0.00, with a size 
of one contract if the remaining size is a seller, or (ii) an offer 
price of $200,000, with a size of one contract if the remaining size is 
a buyer.
    Miscellaneous. The Exchange proposes miscellaneous changes to its 
rules in connection with the new Plan. Specifically, The Exchange 
proposes the following amendments:
     Exchange By-Law Article XII, Section 12-11 would be 
amended to delete references to the Linkage Plan.
     Exchange Rule 1017(k) respecting automated openings on the 
Phlx XL II system, would be amended to state that any order volume that 
is routed to away markets pursuant to Rule 1017 will be marked as an 
ISO. Such ISO will conform to the requirements contained in proposed 
Rules 1066(i) and 1083(h).
     Exchange Rule 1033(a)(ii) and Options Floor Procedure 
Advice (``OFPA'') F-32, Solicitation of Quotations, currently state 
that, in response to a floor broker's solicitation of a single bid or 
offer, the members of a trading crowd (including the specialist and 
ROTs) may discuss, negotiate and agree upon the price or prices at 
which an order of a size greater than the AUTO-X guarantee can be 
executed at that time. The Rule and OFPA would be amended to delete 
references to the Linkage Plan and instead refer to the new Plan, and 
to delete references to Exchange rules that are being deleted in this 
filing. Additionally, the Rule and OFPA would be updated to reflect 
that the rule applies to single crowd bids and offers for orders of a 
size greater than the Exchange's disseminated size, instead of the 
obsolete ``AUTO-X guarantee'' (the Exchange's disseminated size is firm 
and is the guaranteed electronic order execution size).
     Rule 1034(a)(i)(C) currently states that a Linkage P/A 
Order that has been sent from the Exchange to, and price-improved on, 
another exchange at a price expressed in other than the appropriate 
minimum trading increment described in this rule, and then submitted to 
the Exchange for execution against the original customer limit order 
that gave rise to the Linkage P/A Order, may be traded on the Exchange 
at such price. Under the proposal, Rule 1034(a)(i)(C) would be amended 
to state that the Phlx XL II system will reject any order received at a 
price expressed in other than the appropriate minimum trading 
increment.
     The Exchange proposes to amend Rule 1066, Certain Types of 
Orders Defined, by adopting Rule 1066(i), which defines an ISO as a 
limit order that is designated as an ISO in the manner prescribed by 
the Exchange and is executed within the system by Participants at 
multiple price levels without respect to Protected Quotations of other 
Eligible Exchanges as defined in

[[Page 37274]]

Rule 1083. ISOs are immediately executable within the Phlx XL II system 
or cancelled, and shall not be eligible for routing as set out in Rule 
1080.
    Simultaneously with the routing of an ISO to the Phlx XL II system, 
one or more additional limit orders, as necessary, are routed by the 
entering party to execute against the full displayed size of any 
Protected Bid or Offer (as defined in Rule 1083(n)) in the case of a 
limit order to sell or buy with a price that is superior to the limit 
price of the limit order identified as an ISO. These additional routed 
orders must be identified as ISOs.
     Rules 1080(b)(i)(A), (B) and (C) would be amended to 
permit ISOs on the Phlx XL II system.
     Rule 1080(c)(iv)(F), currently states that the specialist 
will handle an order manually when the price of a limit order is not in 
the appropriate minimum trading increment pursuant to Rule 1034, 
including a Linkage P/A Order that has been sent from the Exchange to, 
and price-improved on, another exchange at a price expressed in other 
than such appropriate minimum trading increment, and then submitted to 
the Exchange for execution against the original customer limit order 
that gave rise to the Linkage P/A Order. As stated above in the 
proposed amendment to Rule 1034(a)(i)(C), the Phlx XL II system will 
reject any order received at a price expressed in other than the 
appropriate minimum trading increment. Therefore, Rule 1080(c)(iv)(F) 
will be deleted.
     Rule 1080(vi) would be deleted in its entirety because it 
contains obsolete language the concerning routing of Linkage P/A Orders 
and the handling of broker-dealer orders in the legacy Phlx XL system.
    Implementation. The Exchange proposes to implement this proposed 
rule change upon withdrawal from the current Linkage Plan and 
effectiveness of the new Plan. Implementation is currently scheduled 
for August 31, 2009.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\18\ in general, and with 
Section 6(b)(5) of the Act,\19\ in particular, in that the proposal is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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. In 
particular, the Exchange believes that adopting rules that implement 
the Plan will facilitate the trading of options in a national market 
system by establishing more efficient protection against trade-throughs 
and locked and crossed markets.
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    \18\ 15 U.S.C. 78f.
    \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 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 self-regulatory organization 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.
    The Exchange has requested accelerated approval of this proposed 
rule change prior to the 30th day after the date of publication of the 
notice in the Federal Register. The Commission is considering granting 
accelerated approval of the proposed rule change at the end of a 21-day 
comment period.

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-2009-61 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2009-61. 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 the filing will also be available for 
inspection and copying at the principal office of the self-regulatory 
organization. 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-2009-61 and should be submitted on or before August 18, 2009.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-17882 Filed 7-27-09; 8:45 am]

BILLING CODE 8010-01-P