

[Federal Register: December 1, 2005 (Volume 70, Number 230)]
[Notices]               
[Page 72141-72143]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de05-63]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52817; File No. SR-Phlx-2005-47]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendment No. 1 Thereto To Reduce the Value of the Nasdaq Composite 
Index[supreg] Underlying the Options Traded Under the Symbol QCE

November 22, 2005.
    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 November 9, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Phlx. On November 18, 
2005, the Phlx filed Amendment No. 1 to the proposed rule change.\3\ 
The Phlx filed the proposal pursuant to section 19(b)(3)(A) of the Act 
\4\ and Rule 19b-4(f)(6) thereunder,\5\ which renders the proposal 
effective upon filing with the Commission.\6\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange asked the Commission to 
waive the 30-day operative delay required by Rule 19b-4(f)(6)(iii). 
See 17 CFR 240.19b-4(f)(6)(iii). See also discussion infra section 
III.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ The Phlx has asked the Commission to waive the 30-day 
operative delay required by Rule 19b-4(f)(6)(iii), 17 CFR 240.19b-
4(f)(6)(iii). See supra note 3.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to decrease by a factor of ten (10) the value of 
the index that underlies the options that are approved to trade on the 
Exchange under the symbol QCE (``QCE Options'') and thereby decrease 
the strike prices for the QCE Options, in order to eliminate investor 
confusion between the QCE Options and the QCX Options.\7\ The proposed 
decrease would be achieved by multiplying the Adjusted Base Period 
Market Value that is applied to the index underlying the QCE Options 
(``QCE Index'') by ten. The position and exercise limits applicable to 
QCE Options (currently 300,000 contracts on either side of the market 
in the near-term months) would remain unchanged.
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    \7\ See infra section II.A.1 for the definition of ``QCX 
Options'' and for the general background.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
    In December 2003, the Commission approved Phlx's proposed rule 
change to trade full-value options on the Nasdaq Composite 
Index[supreg] \8\ under the

[[Page 72142]]

symbol QCX (``QCX Options'') and reduced-value options on the Nasdaq 
Composite Index[supreg] under the symbol QCE.\9\ Both the QCE Options 
and QCX Options were based on the full-value Nasdaq Composite 
Index[supreg] and had identical strike prices, but the Premium 
Quotation Multiplier for QCX was 100 and the Premium Quotation 
Multiplier for QCE was 10. The Exchange has heard from a number of 
market participants that investors in QCE Options and QCX Options have 
become confused and not willing to trade these products because the 
identical options strike prices and similar ticker symbols tend to 
create the possibility of placing a mistaken order.\10\ As a result of 
this investor confusion, trading in the QCE and QCX Options diminished, 
and the Exchange delisted both the QCE and QCX Options on or about 
March 21, 2005.
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    \8\ The composite index is a cash-settled, capitalization-
weighted, broad-based, A.M. settled index composed of approximately 
3,400 stocks listed and traded on The Nasdaq Stock Market, Inc. 
(``Nasdaq''). Nasdaq[supreg], Nasdaq Composite[supreg] and Nasdaq 
Composite Index[supreg] are registered trademarks of The Nasdaq 
Stock Market, Inc. (which with its affiliates are the 
``Corporations'') and are licensed for use by the Philadelphia Stock 
Exchange. The product(s) described herein have not been passed on by 
the Corporations as to their legality or suitability. The product(s) 
are not issued, endorsed, sold, or promoted by the Corporations. The 
Corporations make no warranties and bear no liability with respect 
to the product(s).
    The Corporations do not guarantee the accuracy and/or 
uninterrupted calculation of the Nasdaq Composite Index[supreg] or 
any data included therein. The Corporations make no warranty, 
express or implied, as to results to be obtained by the exchange, 
owners of the product(s), or any other person or entity from the use 
of the Nasdaq Composite Index[supreg] or any data included therein. 
The Corporations make no express or implied warranties, and 
expressly disclaim all warranties of merchantiability or fitness for 
a particular purpose or use with respect to the Nasdaq Composite 
Index[supreg] or any data included therein. Without limiting any of 
the foregoing, in no event shall the Corporations have any liability 
for any lost profits or special, incidental, punitive, indirect, or 
consequential damages, even if notified of the possibility of such 
damages.
    \9\ See Securities Exchange Act Release No. 48884 (December 5, 
2003), 68 FR 69753 (December 15, 2003).
    \10\ As approved in 2003, a QCE Option contract is one-tenth the 
size of a QCX Option contract. Customarily, strike prices for a 
full-size options contract and a reduced-size options contract would 
also differ by a factor of ten. However, since both QCE and QCX 
Options were linked to the same value of the Nasdaq Composite 
Index[supreg], the strike prices for QCE and QCX Options were 
identical.
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    The purpose of the proposed rule change is to reduce the value of 
the QCE Index by a factor of ten and thereby effectively reduce the 
strike price of QCE Options in order to eliminate investor confusion 
between the QCE Options and the QCX Options. By reducing the value of 
the QCE Index by a factor of ten, investors in QCE Options would see a 
similar reduction in the strike prices of QCE Options contracts, and 
would be less likely to be confused between the QCE and QCX Options 
products.
    For example, as of October 27, 2005, the value of the Nasdaq 
Composite Index[supreg] was 2063.50, and a near-month at-the-money call 
premium for the QCE Option would have been at a minimum its intrinsic 
value of $63.50 per contract.\11\ The Exchange proposes to reduce the 
value of the QCE Index to one-tenth of the value of the Nasdaq 
Composite Index[supreg], or 206.35, which would effectively be a ``ten-
for-one split.'' This would be achieved by multiplying the Adjusted 
Base Period Market Value, the divisor used to calculate the QCE Index, 
by ten. In order to maintain a proper economic ratio between the two 
options (that is, QCX Options are ten times the value of QCE Options), 
each QCE Option contract would be assigned a strike price of one-tenth 
of the original strike price. In addition, the Premium Quotation 
Multiplier, which is currently $100.00 for QCX Options and $10.00 for 
QCE Options, will be increased to $100.00 for QCE Options to maintain a 
reasonable equivalence in the options premium in relation to the new 
strike prices. Thus, for example, a hypothetical option buyer of one 
QCE 2000 call prior to the date of effectiveness of this proposed rule 
change would have been quoted a premium of $63.50; after applying the 
Premium Quotation Multiplier of $10.00, such option buyer would have 
paid a premium of $635.00. Similarly, a hypothetical option buyer of 
one QCE 200 call subsequent to the date of effectiveness of this 
proposed rule change would be quoted a premium of $6.35; after applying 
the Premium Quotation Multiplier of $100.00, such option buyer would 
pay a premium of $635.00. As a result, the premium paid, after applying 
the Premium Quotation Multiplier, would be $635.00 both before and 
after the date of effectiveness of this proposed rule change. The 
position and exercise limits applicable to QCE Options would remain 
unchanged. The options trading symbol would remain QCE.
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    \11\ While QCX and QCE Options are currently delisted and not 
trading, Nasdaq has agreed to continue to calculate and disseminate 
the value for both the full-value Nasdaq Composite Index[supreg] and 
the QCE Index, and has been doing so since July 1, 2005, to enable 
the trading of options overlying the indexes. Nasdaq will continue 
to disseminate these index values at least once every fifteen 
seconds during the normal trading day. The Exchange understands that 
in calculating and disseminating these index values, Nasdaq will 
synchronize the timing of changes in the indexes so that they occur 
simultaneously in both indexes, and the smaller QCE Index will at 
all times be one-tenth the value the larger Nasdaq Composite 
Index[supreg], to negate arbitrage opportunities.
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    The Exchange will list the new, lower strike prices for QCE Options 
pursuant to Phlx Rule 1101A, Terms of Option Contracts. The Exchange 
will announce the effective date of the proposed rule change by way of 
an Exchange memorandum to the membership, also serving as notice of the 
strike price changes.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of section 6(b) of the Act,\12\ in general, and 
furthers the objectives of section 6(b)(5) of the Act,\13\ in 
particular, because it is designed to promote just and equitable 
principles of trade, as well as to protect investors and the public 
interest, by establishing a lower index value for the QCE Index which 
should, in turn, eliminate customer confusion and facilitate trading in 
QCE Options. The Exchange believes that reducing the value of the QCE 
Index should not raise manipulation concerns or cause adverse market 
impact because the Exchange will continue to employ its surveillance 
procedures and has proposed an orderly procedure to achieve the index 
value adjustment, which includes providing adequate prior notice to 
market participants.\14\
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ The Exchange further believes that reducing the value of 
the QCE Index should not impact investors because at the present 
time there is no open interest or trading in QCE Options overlying 
such index.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Phlx has neither solicited nor received written comments on the 
proposed rule change.

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

    The foregoing proposed rule change has been filed by the Exchange 
as a ``non-controversial'' rule change pursuant to section 
19(b)(3)(A)(i) of the Act \15\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\16\ Consequently, because the foregoing proposed rule 
change: (1) Does not significantly affect the protection of investors 
or the public interest; (2) does not impose any significant burden on 
competition; and (3) by its terms does not become operative for 30 days 
after the date of this filing, or such shorter time as the Commission 
may designate if consistent with the protection of investors and the 
public interest, and the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change at least five 
days prior to the filing date, it has become effective pursuant to 
section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(i).
    \16\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest.

[[Page 72143]]

    The Phlx has asked the Commission to waive the 30-day operative 
delay to allow the Exchange to promptly decrease the value of the QCE 
Index that underlies the QCE Options so that trading in the QCE and QCX 
Options may re-commence. The Commission has determined to waive the 30-
day operative delay period.\17\ The Commission believes that waiving 
the 30-day operative delay period is consistent with the protection of 
investors and the public interest because it will allow the Exchange to 
re-list the QCE and QCX Options products in a more timely manner with a 
reduced risk of investors confusing the two products and placing 
mistaken orders.
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    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\18\
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    \18\ The effective date of the original proposed rule change is 
November 9, 2005, and the effective date of Amendment No. 1 is 
November 18, 2005. For purposes of calculating the 60-day period 
within which the Commission may summarily abrogate the proposed rule 
change under section 19(b)(3)(C) of the Act, the Commission 
considers such period to commence on November 18, 2005, the date on 
which the Exchange filed Amendment No. 1. See 15 U.S.C. 
78s(b)(3)(C).
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IV. Solicitation of Comments

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

Electronic Comments

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

File No. SR-Phlx-2005-47 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File No. SR-Phlx-2005-47. 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. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Phlx. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File No. SR-Phlx-2005-47 and should be submitted on or before December 
22, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6730 Filed 11-30-05; 8:45 am]

BILLING CODE 8010-01-P
