

[Federal Register: December 29, 2005 (Volume 70, Number 249)]
[Notices]               
[Page 77234-77235]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29de05-115]                         


[[Page 77234]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53004; File No. SR-Phlx-2005-78]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to the Extension of a Pilot Concerning Priority in 
Trades Involving Synthetic Option Orders

December 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 December 13, 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 Phlx. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and is approving the proposed rule change on an 
accelerated basis, for a pilot period expiring on June 30, 2006.
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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

    Phlx proposes to extend, for an additional six months, the pilot 
concerning Exchange rule 1033(e), which affords priority to synthetic 
option orders (as defined below) traded in open outcry over bids and 
offers in the trading crowd but not over bids (offers) of public 
customers on the limit order book and not over crowd participants who 
are willing to participate in the synthetic option order at the net 
debit or credit price. The proposed rule change would apply to orders 
for 100 contracts or more and would be subject to a pilot program 
scheduled to expire on June 30, 2006. The text of the proposed rule 
change is set forth below. Brackets indicate deletions; italics 
indicates new text.
* * * * *

Bids and Offers--Premium

Rule 1033. (a)-(d) No change.
    (e) Synthetic Option Orders. When a member holding a synthetic 
option order, as defined in rule 1066, and bidding or offering on the 
basis of a total credit or debit for the order has determined that the 
order may not be executed by a combination of transactions at or within 
the bids and offers established in the marketplace, then the order may 
be executed as a synthetic option order at the total credit or debit 
with one other member, provided that, the member executes the option 
leg at a better price than the established bid or offer for that option 
contract, in accordance with rule 1014. Subject to a pilot expiring 
[December 31] June 30, 200[5] 6, synthetic option orders in open 
outcry, in which the option component is for a size of 100 contracts or 
more, have priority over bids (offers) of crowd participants who are 
bidding (offering) only for the option component of the synthetic 
option order, but not over bids (offers) of public customers on the 
limit order book, and not over crowd participants that are willing to 
participate in the synthetic option order at the net debit or credit 
price.
(f)-(i) 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, 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 III below. 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
    The purpose of the proposed rule change is to extend for a six-
month period the pilot that facilitates the execution of an option 
order that is represented in the crowd together with a stock component, 
known under the Exchange rules as a synthetic option order,\3\ which by 
virtue of the stock component may be difficult to execute without a 
limited exception to the Exchange priority rules. The current pilot is 
scheduled to expire on December 31, 2005.\4\ Phlx proposes to extend 
the pilot to June 30, 2006.
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    \3\ Exchange Rule 1066(g) defines a s synthetic option order as 
an order to buy or sell a stated number of option contracts and buy 
or sell the underlying stock or Exchange-Traded Fund Share in an 
amount that would offset (on a one-for-one basis) the option 
position. For example: (1) Buy-write: An example of a buy-write is 
an order to sell one call and buy 100 shares of the underlying stock 
or Exchange-Traded Fund Share. (2) Synthetic put: An example of a 
synthetic put is an order to buy one call and sell 100 shares of the 
underlying stock or Exchange-Traded Fund Share. (3) Synthetic call: 
An example of a synthetic call is an order to buy (or sell) one put 
and buy (or sell) 100 shares of the underlying stock or Exchange-
Traded Fund Share.
    \4\ See Securities Exchange Act Release No. 52140 (July 27, 
2005), 70 FR 45481 (August 5, 2005) (SR-Phlx-2005-31).
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    The pilot provides that, if an Exchange member who is holding a 
synthetic option order and bidding or offering on a net debit or credit 
basis determines that such synthetic option order cannot be executed at 
the net debit or credit against the established bids and offers in the 
crowd, the member bidding for or offering the synthetic option on a net 
debit or credit basis may execute the synthetic option order with one 
other crowd participant, provided that the option portion of the 
synthetic option order is executed at a price that is better than the 
established bid or offer for the option. Thus, if the desired net debit 
or credit amount cannot be achieved by way of executing against the 
established bids and offers in the crowd, the member may elect to trade 
at the desired net debit or credit amount with one other member, 
provided that there is price improvement for the option component of 
the synthetic option order.
    Exchange Rule 1033(e) affords synthetic option orders priority over 
bids (offers) of the trading crowd but not over bids (offers) of public 
customers on the limit order book and not over crowd participants that 
are willing to participate in the synthetic option order at the net 
debit or credit price. The effect of Exchange Rule 1033(e) is that a 
crowd participant bidding or offering for the synthetic option order 
has priority over other crowd participants that are bidding or offering 
only for the option component of the order. Exchange Rule 1033(e) 
applies only to synthetic option orders of 100 contracts or more.
    In addition, Exchange Rule 1033(e) provides that members bidding 
and offering for synthetic option orders of 100 contracts or more do 
not have priority over bids (offers) of public customers on the limit 
order book.\5\ Therefore, if members of the trading crowd wish to trade 
a synthetic option order that is marketable against public customer 
orders on the limit order book, public customers would have priority. 
Multiple public customer orders at the same price are accorded priority 
based on time.
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    \5\ See Exchange Rule 1080, Commentary .02.

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[[Page 77235]]

    The Exchange believes that the pilot, which provides a limited 
exception to the Exchange's priority rules only respecting controlled 
accounts \6\ competing at the same price, should enable Floor Brokers 
representing synthetic option orders to provide best executions to 
customers placing such orders and should enable the Exchange to provide 
liquid markets and compete for order flow in such orders.
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    \6\ A controlled account includes any account controlled by or 
under common control with a broker-dealer. Customer accounts are all 
other accounts. Orders of controlled accounts are required to yield 
priority to customer orders when competing at the same price. Orders 
of controlled accounts generally are not required to yield priority 
to other controlled account orders. See Exchange Rule 1014(g)(i)(A).
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    As stated above, the pilot applies only to synthetic option orders 
in which the option component is for a size of 100 contracts or more 
that are represented in the trading crowd in open outcry and would be 
subject to a pilot program through June 30, 2006.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \8\ in particular, in that it is designed to perfect 
the mechanisms of a free and open market and the national market 
system, protect investors and the public interest and promote just and 
equitable principles of trade, by adopting a limited exception to the 
Exchange's priority rules concerning synthetic option orders.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 would 
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. 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-2005-78 in 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 Number SR-Phlx-2005-78. 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 the filing 
also will be available for inspection and copying at the principal 
office of 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 Number SR-Phlx-2005-78 
and should be submitted on or before January 19, 2006.

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

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange,\9\ and, in particular, with the requirements of Section 6(b) 
of the Act \10\ and the rules and regulations thereunder. The 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\11\ which requires, among other things, 
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 to protect investors and the public 
interest. The Commission notes that the priority rules with respect to 
the execution of synthetic option orders on other options exchanges are 
similar to Exchange Rule 1033(e).\12\ In general, such rules serve to 
reduce the risk of incomplete or inadequate executions of synthetic 
option orders by allowing the synthetic option orders to have priority 
over bids and offers of crowd participants who are bidding or offering 
only for the option component of the synthetic option order but only 
subject to restrictions such as those proposed by Phlx. For example, 
the pilot would continue to protect the priority of public customer 
orders on the limit order book. In addition, the pilot protects the 
priority of crowd participants who are willing to participate in the 
synthetic option order at the net debit or credit price.
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    \9\ In approving this rule, the Commission notes that it has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ See, e.g., Securities Exchange Act Release Nos. 20294 
(October 17, 1983), 48 FR 49114 (October 24, 1983) (approving SR-
CBOE-83-4); 47959 (May 30, 2003), 68 FR 34441 (June 9, 2003) 
(approving SR-CBOE-2002-05); 44955 (October 18, 2001), 66 FR 53819 
(October 24, 2001) (approving SR-ISE-2001-18); and 46646 (October 
11, 2002), 67 FR 64428 (October 18, 2002) (approving SR-ISE-2002-
20).
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    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\13\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of the notice of the filing 
thereof in the Federal Register. The Commission believes that granting 
accelerated approval would preserve the pilot for synthetic option 
orders without interruption.
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    \13\ 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 
\14\ that the proposed rule change (SR-Phlx-2005-78) is hereby approved 
on an accelerated basis for a pilot period to expire on June 30, 2006. 
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-8070 Filed 12-28-05; 8:45 am]

BILLING CODE 8010-01-P
