

[Federal Register: November 1, 2005 (Volume 70, Number 210)]
[Notices]               
[Page 65953-65956]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01no05-123]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52667; File No. SR-Phlx-2005-25]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to a Proposed Rule Change and Amendments No. 2, 
3, and 5 Thereto Relating to the Adoption of New Rules That Would 
Establish an Automated Opening System on the Exchange

October 25, 2005.

I. Introduction

    On April 21, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\, and Rule 19b-4 \2\ thereunder, a 
proposed rule change that would establish an automated opening system 
on the Exchange. The Exchange submitted Amendments No. 1,\3\ 2,\4\ and 
3 \5\ to its proposal on June 1, 2005, September 1, 2005, and September 
14, 2005, respectively. The proposed rule change, as amended, was 
published for comment in the Federal Register on September 22, 2005.\6\ 
No comments were received on the proposal. The Phlx submitted Amendment 
No. 4 \7\ on September 23, 2005, and Amendment No. 5 \8\ on September 
26, 2005. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4, dated June 1, 2005 (``Amendment No. 1''). 
Amendment No. 1 replaced the original filing in its entirety.
    \4\ See Form 19b-4, dated September 1, 2005 (``Amendment No. 
2''). Amendment No. 2 replaced Amendment No. 1 in its entirety.
    \5\ See Form 19b-4, dated September 14, 2005 (``Amendment No. 
3''). In Amendment No. 3, Phlx, in part, deleted proposed rule text 
to clarify that during a manual opening all market orders are to be 
executed at one price.
    \6\ See Securities Exchange Act Release No. 52448 (September 15, 
2005), 70 FR 55650.
    \7\ See Form 19b-4, dated September 23, 2005. The Exchange 
subsequently submitted Amendment No. 5, which was intended to 
supercede and replace Amendment No. 4. As a result, the Exchange 
withdrew Amendment No. 4 on October 19, 2005. See Form 19b-4, dated 
October 19, 2005.
    \8\ See Form 19b-4, dated September 26, 2005. In Amendment No. 
5, the Exchange made technical changes to accurately reflect the 
differences between proposed rule language and current rule text, as 
well as made technical changes to better conform Exhibits 4 and 5 to 
each other. The Act does not require notice and comment for 
technical amendments.
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II. Description of the Proposed Rule Change

    In July 2004, the Exchange began trading options on its new 
electronic options trading platform, Phlx XL.\9\ Because Phlx XL does 
not currently include an automated opening functionality, specialists 
are currently required to open option series manually. The proposed 
rule change would establish a fully automated opening system for 
options traded on Phlx XL as part of the Phlx XL system.
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    \9\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 44612 (August 3, 2004) (SR-Phlx-2003-59).
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Pre-Opening

    For a period of time before the scheduled opening in the underlying 
security (and not less than one hour as determined by the Options 
Committee with notice to the membership via Exchange circular), Phlx XL 
will accept orders and quotes during the ``Pre-Opening Phase.'' The 
Phlx XL system will disseminate to specialists, Streaming Quote Traders 
(``SQTs''), Remote Streaming Quote Traders (``RSQTs''), and non-SQT 
ROTs who are required to submit continuous two-sided electronic 
quotations pursuant to Exchange Rule 1014(b)(ii)(E) \10\ (collectively, 
for purposes of proposed Phlx Rule 1017, ``Phlx XL participants'') 
information about resting orders on the book that remain from the 
previous trading session and orders submitted prior to the opening.
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    \10\ Exchange Rule 1014(b)(ii)(E) requires non-SQT ROTs who 
transact more than 20% of their contract volume in an option 
electronically versus in open outcry during a particular calendar 
quarter to submit proprietary electronic quotations in such an 
option during the subsequent calendar quarter for a certain number 
of series in such option, depending on the percent of total volume 
transacted electronically versus in open outcry on the Exchange in 
such option.
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Calculation of Opening Price

    The system will calculate an Anticipated Opening Price (``AOP'') 
and Anticipated Opening Size (``AOS'') when a quote or trade has been 
disseminated by the primary market for the underlying security, 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 be calculated only 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

[[Page 65954]]

quote has been submitted; (B) the quotes of at least two Phlx XL 
participants that are required to submit continuous, two-sided quotes 
in 100% of the series in all option issues in which such Phlx XL 
participant is assigned (``100% participants''),\11\ have been 
submitted within two minutes of the opening trade or quote on the 
primary market for the underlying security (or such shorter time as 
determined by the Options Committee and disseminated to the membership 
via Exchange Circular); or (C) if neither the specialist's quote \12\ 
nor the quotes of two 100% participants have been submitted within two 
minutes of the opening trade or quote on the primary market for the 
underlying security (or such shorter time as determined by the Options 
Committee and disseminated to the membership via Exchange Circular), 
one 100% participant has submitted its quote.
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    \11\ An example of a 100% participant is a new category of ROT 
on the Exchange known as a ``Directed SQT'' or a ``Directed RSQT,'' 
defined as an SQT or RSQT that receives a Directed Order. See 
Securities Exchange Act Release No. 51759 (May 27, 2005), 70 FR 
32860 (June 6, 2005) (SR-Phlx-2004-91).
    \12\ For example, a specialist may not submit a quote due to 
systems malfunctions. A specialist, however, who fails to submit 
opening quotes within one minute of the opening on the primary 
market would be subject to possible disciplinary action.
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Opening Order/Quote Imbalance

    In situations where an AOP may be calculated (i.e., when the 
conditions described above are present) and there is an order/quote 
imbalance, the system will immediately send an imbalance notice 
indicating the imbalance side (buy or sell) and the AOP and AOS (an 
``Imbalance Notice'') to Phlx XL participants assigned to the options 
class provided that the primary market for the underlying security has 
disseminated an opening quote or trade. Phlx XL participants may then 
submit their opening or 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 below.

Actual Opening Price

    The proposal would establish the opening price of a series in 
situations where there is no opening quote/order imbalance. Proposed 
Phlx Rule 1017(c)(i) would define the opening price as the price at 
which the maximum quantity of contracts would be traded. The proposed 
rule would establish a series of ``tie-breakers'' that the system would 
follow in establishing the opening price when two or more prices would 
satisfy the maximum quantity criteria. Specifically, when the maximum 
quantity of contracts could be traded at two or more prices, the system 
would establish the opening price based on the following criteria, in 
order: (1) The price at which the greatest number of customer orders 
would be traded; (2) the price at which the maximum number of Phlx XL 
participants would trade; and (3) the price that is closest to the 
closing price from the previous trading session.

Priority on Openings

    The system will give priority to market orders first (including a 
limit order to buy which is at a higher price than the price at which 
the option is to be opened and a limit order to sell which is at a 
lower price than the price at which the option is to be opened, which 
will be treated as market orders), then to resting limit orders at the 
opening price.

Contingency, Hedge, and Synthetic Option Orders

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

Floor-Brokered Orders

    To be considered in the determination of the opening price and to 
participate in the opening trade, orders represented by Floor Brokers 
must be entered onto the book electronically.

Inbound Orders and Quotes Received While the System Completes the 
Opening Trade

    Inbound orders and quotes will not be included in the calculation 
of the opening price for a brief period established by the system (and 
thus not within the discretion of any Phlx XL participant) while the 
system is in the process of completing the opening trade. During such 
brief period, such inbound orders and quotes will be entered into the 
Phlx XL system in order of their arrival.
    Proposed Rule 1017(d) would provide that, as the opening price is 
determined by series, the system will disseminate through OPRA the 
opening trade price, if any, and then the quote after the series is 
open. The system will process and open the series for a given option in 
random order. If there are no orders in a particular series when the 
underlying security opens, the Exchange will disseminate quotations at 
the best bid and offer in such series submitted by Phlx XL participants 
assigned in the particular option.

Situations in Which the Option Series Will Not Open

    The proposed rule would set forth three conditions under which the 
system will not open a series. First, the system will not open a series 
when there is no quote from the specialist or a 100% participant. 
Second, the system will not open a series when the opening price is not 
within an acceptable range (as determined by the Options Committee and 
announced to Exchange members and member organizations by way of 
Exchange Circular) compared to the highest offer and the lowest bid 
(e.g., the upper boundary of the acceptable range may be 125% of the 
highest quote offer and the lower boundary may be 75% of the lowest 
quote bid). Third, the system will not open a series when the opening 
trade would leave a market order imbalance (i.e., there are more market 
orders to buy or to sell for the particular series than can be 
satisfied by the limit orders, market orders and quotes on the other 
side of the market).

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

    If the specialist or a Phlx XL participant with a 100% quoting 
requirement is not quoting as described in proposed Phlx Rule 
1017(e)(i), or if the opening price is not within an acceptable range 
as described in proposed Phlx Rule 1017(e)(ii), proposed Phlx Rule 
1017(f) would provide that two Floor Officials may authorize the manual 
opening of the affected series where necessary to ensure a fair and 
orderly market. In such a circumstance, the Exchange's existing rules 
concerning manual openings would apply.\13\
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    \13\ See, e.g., the Commentary to Phlx Rule 1017, Phlx Rules 
1047, 1047A, and OFPAs A-12, A-14 and G-2.
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Manual Opening by Specialist

    Proposed Phlx Rule 1017(g)(i) would provide that if a condition or 
the absence of a required condition not otherwise covered by the 
proposed rule would prevent an opening trade to occur, the specialist 
may, with prior notification to Market Surveillance staff, determine to 
open a series manually in

[[Page 65955]]

the interest of a fair and orderly market, subject to the approval of 
two Floor Officials within five minutes of the opening of the affected 
series. Manual openings would be required to be conducted in accordance 
with current Commentary .01-.03 of Exchange Rule 1017.

Index Options

    Under the proposal, with respect to automated openings in an 
Industry or Market Index conducted pursuant to Phlx Rule 1017, the 
specialist may engage the automated opening system to open such options 
when underlying securities representing 50% of the current index value 
of all the securities underlying the index have opened for trading on 
the primary market. The system will automatically open all index 
options when underlying securities representing 100% of the current 
index value of all the securities underlying the index have opened for 
trading on the primary market.\14\
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    \14\ The Exchange proposes to amend Phlx Rule 1047A and OFPA G-2 
to require the opening of an Industry Index when 100% of the current 
index value of all the securities underlying the index have opened 
for trading on the primary market.
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Reopening Following a Trading Halt

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

Conforming Amendments to Current Exchange Rules and OFPAs

    In addition to the proposed amendments to Exchange Rule 1017, the 
Exchange is proposing various conforming amendments to current Exchange 
rules and OFPAs that relate to openings and re-openings following a 
trading halt, as well as deleting references to obsolete procedures and 
modifying certain processes.
    The Exchange proposes to delete Commentary .03(d)(iii) from 
Exchange Rule 1017, which currently states that the specialist will not 
open a series when there is a market on opening order with no 
corresponding order. The Exchange currently does not accept market on 
opening orders and thus Commentary .03(d)(iii) is unnecessary.
    The Exchange proposes to amend Exchange Rules 1047 and 1047A and 
OFPAs A-12 and G-2 to reflect an automated opening conducted pursuant 
to Exchange Rule 1017 shall be considered a ``trading rotation'' for 
purposes of these rules and OFPAs. These rules would also be amended to 
include the term ``Market Surveillance officer'' to conform to current 
Exchange staff structure.
    Exchange Rule 1047(c) would be amended to reflect that two Floor 
Officials (with the concurrence of a Market Surveillance officer) and 
not the appropriate Floor Standing Committee as reflected in the 
current rule would have the authority, respecting a particular class or 
series of option, to delay the opening, to halt and reopen after a 
halt, and to open where the underlying stock or ETF has not opened.
    Exchange Rule 1047 would be further amended to delete all 
references to the Series Opening Request Ticket (``SORT'') Procedure, 
an obsolete procedure that is no longer in use on the Exchange. The 
Exchange proposes a similar amendment to OFPA A-12 Opening Rotations 
and SORT Procedures.
    Commentary .02 to Exchange Rule 1047 would be amended to require 
the specialist to inform the Market Surveillance staff in the event 
that trading in an underlying stock or Exchange-Traded Fund Share has 
not opened in the primary market for such stock or Exchange-Traded Fund 
Share within a reasonable time after the opening of business, or, in 
the event that current quotations for any underlying foreign currency 
are for any reason unavailable. Market Surveillance staff would then 
take the appropriate steps to determine the cause of such delay or 
unavailability, rather than the chairman of the appropriate Floor 
Standing Committee or his delegate on the floor, as the rule currently 
provides.
    For consistency, OFPA A-12 would be amended to establish that the 
acceptable range within which the opening price must be established, 
would apply to both automated openings and manual openings conducted 
pursuant to Exchange Rule 1017 and the Commentary thereto. A similar 
amendment is proposed respecting OFPA A-14, Equity Option and Index 
Option Opening Parameters. The Exchange also proposes to delete 
references to Super Cap Index options from OFPA G-2, because the 
Exchange no longer lists this product.

Deployment of the Automated Opening System

    The Exchange represents that it would deploy the automated opening 
system on an issue-by-issue basis. According to the Exchange, at least 
10 issues would be deployed on the system within four weeks from the 
date of Commission approval of the proposed rule change, and all 
options traded on the Exchange would be deployed on the system within 
twelve weeks of such approval.

III. Discussion

    After careful consideration, 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 and, in particular, the requirements of section 6 
of the Act.\15\ Specifically, the Commission finds that the proposal is 
consistent with section 6(b)(5) of the Act,\16\ which requires, in 
part, that the rules of an exchange be 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.\17\
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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Commission believes that the proposed automated opening system 
may facilitate an expedited opening of options on Phlx and thereby 
improve market efficiency for all market participants. Moreover, the 
Commission believes that the proposed rules should provide transparency 
to all market participants with respect to the manner in which an 
opening price is determined on the Exchange and ensure that the opening 
is conducted in a fair and orderly fashion.
    The Commission also believes that the Exchange's proposal to allow 
two Floor Officials with the concurrence of a Market Surveillance 
Officer, rather than the appropriate Floor Standing Committee, to, 
among other things, delay the opening, halt and reopen after a halt, 
and open where the underlying stock or ETF has not opened, may 
facilitate the decision making process. Furthermore, the Commission 
notes that this approval structure is substantially similar to an 
existing rule of the American Stock Exchange LLC.\18\
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    \18\ See Amex Rule 918(c).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Phlx-2005-25), as amended, 
is approved.
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    \19\ 15 U.S.C. 78s(b)(2).


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6027 Filed 10-31-05; 8:45 am]

BILLING CODE 8010-01-P
