

[Federal Register: February 13, 2006 (Volume 71, Number 29)]
[Notices]               
[Page 7604-7607]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe06-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53242; File No. SR-Phlx-2006-11]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change and Amendment No. 1 Thereto Relating to Quoting Obligations 
for Directed Streaming Quote Traders and Directed Remote Streaming 
Quote Traders and Changes to the Exchange's Opening Rule

February 7, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 3, 2006, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. On February 
6, 2006, the Exchange filed Amendment No. 1.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and is approving the proposal on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Partial Amendment dated February 6, 2006 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange amended the proposed rule 
text to provide that, whenever a Directed Streaming Quote Trader or 
Directed Remote Streaming Quote Trader enters a quotation in an 
option in which such trader is assigned, such trader must maintain 
continuous quotations for not less than 99% (instead of 100%) of the 
series of the option listed on the Exchange until the close of that 
trading day, and added clarifying language to the ``Purpose'' 
section of the proposed rule change to note that, in order to 
participate in a Directed Order that is received in a particular 
Streaming Quote Option, a Directed Streaming Quote Trader or 
Directed Remote Streaming Quote Trader must be quoting continuously 
in not less than 99% of the series of such Streaming Quote Option.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Exchange Rule 1014(b)(ii)(D) and 
Exchange Rule 1017(b)(ii) to: (1) Delete the requirement that Streaming 
Quote Traders (``SQTs'') \4\ and Remote Streaming Quote Traders 
(``RSQTs'') \5\ submit continuous electronic quotations in not less 
than 99% of the series in each Streaming Quote Option in which they 
receive Directed Orders; \6\ (2) establish a new quoting obligation for 
SQTs and RSQTs that receive Directed Orders; and, as a result of these 
changes, (3) establish that, if the specialist is not quoting at the 
opening, the system will nonetheless open a series when any two Phlx XL 
participants are quoting in such series within two minutes of the 
opening of the underlying security on the primary market for the 
underlying security (or such shorter time as determined by the Options 
Committee and disseminated to membership via Exchange Circular), or 
when one Phlx XL participant is quoting in such series thereafter.
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    \4\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically 
through AUTOM in eligible options to which such SQT is assigned. An 
SQT may only submit such quotations while such SQT is physically 
present on the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(A).
    \5\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically through AUTOM in eligible options to which such RSQT 
has been assigned. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(B).
    \6\ The term ``Directed Order'' means any customer order to buy 
or sell which has been directed to a particular specialist, RSQT, or 
SQT by an Order Flow Provider, as defined below. To qualify as a 
Directed Order, an order must be delivered to the Exchange via 
AUTOM. See Exchange Rule 1080(l)(i)(A).
    The term ``Order Flow Provider'' (``OFP'') means any member or 
member organization that submits, as agent, customer orders to the 
Exchange. See Exchange Rule 1080(l)(i)(B).
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    The text of the proposed rule change is set forth below. Brackets 
indicate deletions; italics indicates new text.
* * * * *

Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders

Rule 1014. (a) No change.
(b) ROT. (i) No change.
    (ii) (A)-(C) No change.
    (D) Market Making Obligations Applicable in Streaming Quote 
Options.
    (1) In addition to the other requirements for ROTs set forth in 
this Rule 1014, an SQT and an RSQT shall be responsible to quote 
continuous, two-sided markets in not less than 60% of the series in 
each Streaming Quote Option (as defined in Rule 1080(k)) in which such 
SQT or RSQT is assigned, provided that, on any given day, a Directed 
SQT (``DSQT'') or a Directed RSQT (``DRSQT'') (as defined in Rule 
1080(l)(i)(C)) shall be responsible to quote continuous, two-sided 
markets in not less than 99% of the series listed on the Exchange in at 
least 60% of the options in which such DSQT or DRSQT is assigned. 
Whenever a DSQT or DRSQT enters a quotation in an option in which such 
DSQT or DRSQT is assigned, such DSQT or DRSQT must maintain continuous 
quotations for not less than 99% of the series of the option listed on 
the Exchange until the close of that trading day.
    [a Directed SQT or RSQT (as defined in Rule 1080(l)(i)(C)) shall be 
responsible to quote continuous, two-sided markets in not less than 99% 
of the series in each Streaming Quote Option in which they receive 
Directed Orders (as defined in Rule 1080(l)(i)(A))].
    (2) The specialist shall be responsible to quote continuous, two-
sided markets in not less than 99% of the series in each Streaming 
Quote Option in which such specialist is assigned.
    (3)[(1) During a six month period commencing on the date of the 
initial deployment of Phlx XL (the ``initial six-month period''), any 
SQT or RSQT assigned in a Streaming Quote Option (and the specialist 
assigned in such Streaming Quote Option) may submit electronic 
quotations with a size of fewer than 10 contracts for a period of sixty 
days after such option begins trading as a Streaming Quote Option. 
Beginning on the sixty-first day after such option begins trading as a 
Streaming Quote Option, ] SQTs, RSQTs and the specialist assigned in 
such Streaming Quote Option shall submit

[[Page 7605]]

electronic quotations with a size of not less than 10 contracts.
    [(2) During a six month period commencing on the first day 
following the expiration of the initial six-month period, any SQT or 
RSQT assigned in a Streaming Quote Option (and the specialist assigned 
in such Streaming Quote Option) may submit electronic quotations with a 
size of fewer than 10 contracts for a period of thirty days after such 
option begins trading as a Streaming Quote Option. Beginning on the 
thirty-first day after such option begins trading as a Streaming Quote 
Option, SQTs, RSQTs and the specialist assigned in such Streaming Quote 
Option shall submit electronic quotations with a size of not less than 
10 contracts.
    (3) Thereafter, any SQT or RSQT assigned in a Streaming Quote 
Option that is newly deployed on Phlx XL (and the specialist assigned 
in such Streaming Quote Option) shall submit electronic quotations with 
a size of not less than 10 contracts beginning on the date on which 
such Streaming Quote Option begins trading on Phlx XL.]
(E) No change.
(c)-(h) No change.
Commentary: No change.
* * * * *

Openings In Options

Rule 1017. (a) No change.
(b) The system will calculate an Anticipated Opening Price (``AOP'') 
and Anticipated Opening Size (``AOS'') when a quote or trade has been 
disseminated by the primary market for the underlying security, and 
under the conditions set forth below. The specialist assigned in the 
particular option must enter opening quotes not later than one minute 
following the dissemination of a quote or trade by the primary market 
for the underlying security. An AOP may only be calculated if: (i) The 
Exchange has received market orders, or the book is crossed (highest 
bid is higher than the lowest offer) or locked (highest bid equals the 
lowest offer); and (ii) either (A) the specialist's quote has been 
submitted; (B) the quotes of at least two Phlx XL participants [that 
are required to submit continuous, two-sided quotes in 99% of the 
series in all option issues in which such Phlx XL participant is 
assigned (``99% participants''),] have been submitted within two 
minutes of the opening trade or quote on the primary market for the 
underlying security (or such shorter time as determined by the Options 
Committee and disseminated to membership via Exchange Circular); or (C) 
if neither the specialist's quote nor the quotes of two [99% ] Phlx XL 
participants have been submitted within two minutes of the opening 
trade or quote on the primary market for the underlying security (or 
such shorter time as determined by the Options Committee and 
disseminated to membership via Exchange circular), one [99%] Phlx XL 
participant has submitted their quote. A Phlx XL participant that 
submits a quote pursuant to this Rule 1017(b) in any series when the 
specialist's quote has not been submitted shall be required to submit 
continuous, two-sided quotes in such series until such time as the 
specialist submits his/her quote, after which the Phlx XL participant 
that submitted such quote shall be obligated to submit quotations 
pursuant to Rule 1014(b)(ii)(D). In situations where an AOP may be 
calculated and there is an order/quote imbalance, the system will 
immediately send an imbalance notice indicating the imbalance side (buy 
or sell) and the AOP and AOS (an ``Imbalance Notice'') to Phlx XL 
participants provided that the primary market for the underlying 
security has disseminated the opening quote or trade. Phlx XL 
participants that have not submitted opening quotes will then submit 
their opening quotes, and Phlx XL participants that have submitted 
opening quotes may submit revised opening quotes; thereafter the system 
will disseminate an updated Imbalance Notice every five seconds (or 
such shorter period as determined by the Options Committee and 
disseminated to membership via Exchange Circular) until the series is 
open. If no imbalance exists, no Imbalance Notice will be sent, and the 
system will establish an opening price as described in paragraph (c) 
below.
(c)-(d) No change.
(e) The system will not open a series if one of the following 
conditions is met:
    (i) there is no quote from the specialist or [a 99%] Phlx XL 
participants, as described in Rule 1017(b)(ii)(B) and (C) above;
    (ii)-(iii) No change.
(f)-(j) No change.
Commentary: No change.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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
    According to the Exchange, the purpose of the proposed rule change 
is to encourage Directed Orders by establishing a new quoting 
obligation for Directed SQTs (``DSQTs'') and Directed RSQTs 
(``DRSQTs'') \7\ that would require them to quote continuous, two-sided 
markets in not less than 99% of the series listed on the Exchange in at 
least 60% of the options in which such DSQT or DRSQT is assigned. The 
Exchange notes that, in order to participate in a Directed Order that 
is received in a particular option, a DSQT or DRSQT must be quoting 
continuously in not less than 99% of the series of such option.\8\ 
According to the Exchange, the proposed rule change is similar to the 
quoting obligation for participants that receive Directed Orders on 
other exchanges.\9\
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    \7\ The term ``Directed Specialist, RSQT, or SQT'' means a 
specialist, RSQT, or SQT that receives a Directed Order. See 
Exchange Rule 1080(l)(i)(C).
    \8\ See Amendment No. 1.
    \9\ The Exchange notes that the International Securities 
Exchange, Inc. (``ISE'') currently has rules in effect concerning 
``Preferenced Orders'' that are virtually identical to the 
Exchange's rules concerning Directed Orders (See ISE Rule 713, 
Supplementary Material .03). The quoting obligation applicable to 
ISE Competitive Market Makers, including those that receive 
``Preferenced Orders'' is contained in ISE Rule 804(e)(2). See also, 
Securities Exchange Act Release No. 51818 (June 10, 2005), 70 FR 
35146 (June 16, 2005) (SR-ISE-2005-18). The instant proposed rule 
change, which tracks ISE Rule 804, is intended to enable the 
Exchange to compete for Directed Orders by establishing a quoting 
obligation for Directed SQTs and RSQTs that is virtually identical 
to the quoting obligation applicable to ISE Competitive Market 
Makers that receive ``Preferenced Orders.''
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Deletion of 99% Quoting Requirement for Directed SQTs/RSQTs

    Currently, Exchange Rule 1014(b)(ii)(D) requires DSQTs and DRSQTs 
to quote continuous, two-sided markets in not less than 99% of the 
series in each Streaming Quote Option in which they are assigned.\10\ 
According to the Exchange, for competitive reasons, the proposed rule 
change would amend that quoting requirement applicable to DSQTs and 
DRSQTs.\11\

[[Page 7606]]

Instead, DSQTs and DRSQTs, would be obligated to submit quotations 
under proposed Exchange Rule 1014(b)(ii)(D)(1), described below. This 
obligation would be similar to that of other exchanges with Directed or 
Preferenced Order flow programs.\12\ The Exchange stated that it is now 
concerned that the current quoting obligation is impeding Directed 
Order flow to the Exchange.
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    \10\ Telephone call by and between Edith Hallahan, Senior Vice 
President and Deputy General Counsel, Phlx; and David Hsu, Special 
Counsel, Division of Market Regulation, Commission, on February 7, 
2006.
    \11\ Id.
    \12\ See, e.g., ISE Rule 804(e)(2). See also, Securities 
Exchange Act Release No. 51818 (June 10, 2005), 70 FR 35146 (June 
16, 2005) (SR-ISE-2005-18).
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New Quoting Obligation for DSQTs and DRSQTs

    The proposed rule change would provide that, on any given day, a 
DSQT or a DRSQT would be responsible to quote continuous, two-sided 
markets in not less than 99% of the series listed on the Exchange of at 
least 60% of the options in which such DSQT or DRSQT is assigned. The 
Exchange believes that this new quoting obligation for DSQTs and DRSQTs 
should encourage member organizations to send Directed Orders to DSQTs 
and DRSQTs on the Exchange.
    In order to ensure continuity of quoting, the proposed rule change 
would provide that, whenever a DSQT or DRSQT enters a quotation in an 
option in which such DSQT or DRSQT is assigned, such DSQT or DRSQT must 
maintain continuous quotations for not less than 99% of the series of 
the option listed on the Exchange until the close of that trading day. 
The Exchange believes that this should promote liquidity on the 
Exchange.

Amendments to Rule 1017, Openings in Options

    Currently, Exchange Rule 1017(b) provides that a series may open 
when: (i) The Exchange has received market orders, or the book is 
crossed (highest bid is higher than the lowest offer) or locked 
(highest bid equals the lowest offer); and (ii) either (A) the 
specialist's quote has been submitted; (B) the quotes of at least two 
Phlx XL participants that have the 99% quoting obligation (``99% 
participants'') have been submitted within two minutes of the opening 
trade or quote on the primary market for the underlying security (or 
such shorter time as determined by the Options Committee and 
disseminated to membership via Exchange Circular); or (C) if neither 
the specialist's quote nor the quotes of two 99% participants have been 
submitted within two minutes of the opening trade or quote on the 
primary market for the underlying security (or such shorter time as 
determined by the Options Committee and disseminated to membership via 
Exchange Circular), one 99% participant has submitted their quote.
    Because proposed Exchange Rule 1014(b)(ii)(D) modifies the quoting 
obligations of the 99% participants,\13\ the Exchange proposes to amend 
Exchange Rule 1017(b) to establish that, if the specialist is not 
quoting at the opening, the system will open a series when any two Phlx 
XL participants are quoting within two minutes of the opening on the 
primary market for the underlying security, or when any single Phlx XL 
participant has submitted his/her quote thereafter, thus eliminating 
the requirement that such Phlx XL participants must be 99% participants 
in order for the series to open.
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    \13\ See supra note 10.
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    In order to ensure the continuity of quotations in series that are 
opened when the specialist has not submitted his or her quotation, the 
proposed rule change would provide that a Phlx XL participant that 
submits a quote pursuant to the proposed rule in any series when the 
specialist's quote has not been submitted would be required to submit 
continuous, two-sided quotes in such series until such time as the 
specialist submits his/her quote, after which the Phlx XL participant 
that submitted such quote would be obligated to submit quotations as 
described above under proposed Exchange Rule 1014(b)(ii)(D).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \14\ in general, and furthers the objectives of section 
6(b)(5) of the Act \15\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by enabling the Exchange to compete for order flow in 
Directed Orders by establishing a new quoting obligation applicable to 
DSQTs and DRSQTs.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not 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 Exchange has not solicited, and does not intend to solicit 
comments on the proposed rule change. The Exchange has not received any 
written comments from members or other interested parties.

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-2006-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-Phlx-2006-11. 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 also will be available for inspection and copying at the 
principal office of the Exchange. 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-2006-11 and should

[[Page 7607]]

be submitted on or before March 6, 2006.

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

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of section 6 of the Act 
\16\ and the rules and regulations thereunder applicable to a national 
securities exchange,\17\ and, in particular, the requirements of 
Section 6(b)(5) of the Act.\18\ Section 6(b)(5) requires, among other 
things, that the rules of a national securities 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.
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    \16\ 15 U.S.C. 78f.
    \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).
    \18\ 15.U.S.C. 78f(b)(5).
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    The Commission previously approved, on a one-year pilot basis 
expiring May 27, 2006, rules that permit each specialist, DSQT, or 
DRSQT assigned in options trading on the Phlx XL system to receive a 
Directed Order, provided that such specialist, DSQT, or DRSQT is 
quoting at the National Best Bid or Offer at the time the Directed 
Order is received by the Exchange.\19\ In addition, the Directed Order 
Rules Release noted that, like specialists, DSQTs or DRSQTs would be 
required to quote continuous, two-sided markets in not less than 100% 
of the series in each Streaming Quote Option in which they receive 
Directed Orders.\20\ While the current proposal would reduce the 
quoting obligations of a DSQT or DRSQT to not less than 99% of the 
series listed on the Exchange of at least 60% of the Stream Quote 
Options in which such DSQT or DRSQT is assigned, the Commission notes 
the current proposal would not reduce the quoting obligations of a DSQT 
and DRSQT in Streaming Quote Options in which a DSQT or DRSQT 
participates in a Directed Order. Specifically, the proposed rule 
change would require a DSQT or DRSQT to maintain continuous quotations 
in not less than 99% of the series of any Streaming Quote Options in 
which it participates in a Directed Order.\21\
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    \19\ See Securities Exchange Act Release No. 51759 (May 27, 
2005), 70 FR 32860 (June 6, 2005) (the ``Directed Order Rules 
Release''). This order does not affect the expiration date of the 
Directed Order rules.
    \20\ In connection with the adoption of the Exchange's Risk 
Monitor Mechanism, the 100% quoting obligation was reduced to 99%. 
See Securities Exchange Act Release No. 53166 (January 23, 2006), 71 
FR 4625 (January 27, 2006).
    \21\ See proposed Exchange Rule 1014(ii)(D)(1).
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    In addition, the Commission notes that the proposed amendments to 
Exchange Rule 1017(b) would continue to permit the system to open upon 
the quote or quotes of DSQTs or DRSQTs, and thus may continue to 
facilitate an expedited opening of options on the Exchange and thereby 
improve market efficiency for all market participants. The Commission 
also notes that a Phlx XL participant that submits a quote pursuant to 
the Opening Amendment in any series when a specialist's quote has not 
been submitted would be required to submit continuous, two-sided quotes 
in such series until such time as the specialist submits his/her quote.
    The Exchange has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
notes that the proposed rule change relating to DSQT and DRQST quoting 
obligations is substantially similar to ISE Rule 804,\22\ which was 
previously approved by the Commission after notice and comment, and 
therefore the proposed rule change relating to DSQT and DRSQT quoting 
obligations does not raise any new regulatory issues. The Commission 
does not believe that the proposed amendments to Exchange Rule 1017(b) 
would significantly impact the current opening process because any Phlx 
XL participant that submits a quote pursuant to proposed rule would be 
required to submit continuous, two-sided quotes in such series until 
such time as the specialist submits his/her quote. Accordingly, the 
Commission finds good cause, consistent with section 19(b)(2) of the 
Act,\23\ for approving the proposed rule change prior to the thirtieth 
day after publication of notice thereof in the Federal Register.
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    \22\ See supra note 9.
    \23\ 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,\24\ that the proposed rule change (SR-Phlx-2006-11) and Amendment 
No. 1 are hereby approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.

 [FR Doc. E6-1963 Filed 2-10-06; 8:45 am]

BILLING CODE 8010-01-P
