

[Federal Register: March 15, 2006 (Volume 71, Number 50)]
[Notices]               
[Page 13441-13443]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15mr06-182]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53449; File No. SR-Phlx-2005-45]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 1 Thereto Relating to 
the Automatic Execution of Option Transactions During Crossed Markets

March 8, 2006.

I. Introduction

    On July 12, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the automatic 
execution of options transactions during crossed markets. The proposed 
rule change was published for comment in the Federal Register on July 
27, 2005.\3\ The Exchange filed Amendment No. 1 to this proposal on 
December 9, 2005.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 52082 (July 20, 2005), 
70 FR 43493.
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    The Commission received no comments regarding the proposal. This 
notice and order approve the proposed rule change and solicit comments 
from interested persons on Amendment No. 1, and approve Amendment No. 1 
on an accelerated basis.

II. Description of the Proposal

    Currently, Phlx Rule 1080(c)(iv)(A) states that an order otherwise 
eligible for automatic execution will instead be manually handled by 
the specialist when the Exchange's disseminated market is crossed or 
crosses the disseminated market of another options exchange.\4\ The 
proposed rule change would limit the specialist's manual handling of 
orders during crossed markets to situations where the market is crossed 
by more than one minimum trading increment (i.e., 2.10 bid, 2 offer). 
The proposed rule would provide that an order otherwise eligible for 
automatic execution would instead be handled manually by the specialist 
when the Exchange's disseminated market is crossed by more than one 
minimum trading increment, or crosses the disseminated market of 
another options exchange by more than one minimum trading increment. 
Thus, the effect of the proposal is that orders would be eligible for 
automatic execution when the Exchange's disseminated market is crossed 
or crosses another exchange's market by just one minimum trading 
increment (and where the Exchange's disseminated market is the 
NBBO).\5\
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    \4\ Eligible orders are currently executed automatically on the 
Exchange during locked markets (i.e., 2 bid, 2 offer). See 
Securities Exchange Act Release No. 47359 (February 12, 2003), 68 FR 
8322 (February 20, 2003) (SR-Phlx-2003-03).
    \5\ Orders otherwise eligible for automatic execution will 
instead be handled manually by the specialist when the Exchange's 
disseminated market is not the NBBO. See Exchange Rule 
1080(c)(iv)(E). Therefore, for an order to be eligible for automatic 
execution during a crossed market, the Exchange's disseminated 
market must be the NBBO.
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    In Amendment No. 1, the Exchange proposes to amend Phlx Rule 1085, 
Order Protection, to provide a new exception to liability for the 
satisfaction of trade-throughs. Specifically, the Exchange proposes to 
add as a new exception to liability the situation when a trade-through 
is the result of an automatic execution when the Exchange's 
disseminated market is the NBBO and is crossed by not more than one 
minimum trading increment, or crosses the disseminated market of 
another options exchange by not more than one minimum trading 
increment.
    Lastly, as a housekeeping matter, the Exchange proposes to delete 
Phlx Rule 1080(c)(iv)(G), a reference to an expired pilot program 
relating to the disengagement of AUTO-X for ``non-Streaming Quote 
Options.'' \6\ There are no longer any non-Streaming Quote Options 
traded on the Exchange; therefore Phlx Rule 1080(c)(iv)(G) is no longer 
applicable.
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    \6\ A ``non-Streaming Quote Option'' was previously defined as 
an option that is not traded on the Exchange's electronic trading 
platform for options, ``Phlx XL.'' See Securities Exchange Act 
Release No. 50100 (July 27, 2004), 69 FR 46612 (August 3, 2004) (SR-
hlx-2003-59). All options traded on the Exchange are now traded on 
Phlx XL.
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III. Discussion

    The Commission finds that the proposal is consistent with the 
requirements of the Act.\7\ In particular, the Commission finds that 
the proposed rule change furthers the objectives of Section 6(b)(5),\8\ 
in that it 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 facilitating 
transactions in securities, and to remove impediments to and perfect 
the

[[Page 13442]]

mechanism of a free and open market and national market system.
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    \7\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that markets that are crossed by only one 
minimum trading increment in today's increasingly electronic 
marketplace reflect the number and speed of electronic quotations and 
the number of market makers submitting such quotations, and, therefore, 
do not necessarily indicate system errors that may result in unusual 
risk to market makers, making automatic execution undesirable.
    The Commission believes that by permitting automatic executions 
during crossed markets in such limited situations as proposed by the 
Exchange, orders should be handled more promptly and Exchange 
specialists and Registered Options Traders (``ROTs'') should still have 
sufficient ability to manage their market risk during times of crossed 
markets. A market crossed by an amount greater than one minimum trading 
increment may be an indication that one or more options market(s) or 
market makers may be experiencing quotation system issues that do not 
reflect current market conditions and consequently orders on the 
Exchange would be handled manually by the specialist in such 
circumstances.
    The Commission notes, however, that in the event Phlx automatically 
executes orders when the Exchange's disseminated market is crossed, or 
crosses the disseminated market of another options exchange, by one 
minimum trading increment, the Exchange would be permitting trade-
throughs \9\ in contravention of Section 8(c) of the Plan for the 
Purpose of Creating and Operating an Intermarket Option Linkage 
(``Linkage Plan'') and Exchange Rule 1085.\10\ The Commission believes 
that it is appropriate and in the public interest for Phlx to except 
members from trade-through liability in the event that the trade-
through occurred as a result of an automatic execution when the 
Exchange's disseminated market is the NBBO and is crossed by not more 
than one minimum trading increment, or crosses the disseminated market 
of another options exchange by not more than one minimum trading 
increment. The Commission believes that, in this limited circumstance, 
the benefit of providing an automatic execution outweighs the harm of 
the resultant trade-through. Therefore, concurrent with this order, the 
Commission is granting Phlx an exemption from the requirement under 
Exchange Act Rule 608(c) that Phlx comply with, and enforce compliance 
by its members with, Section 8(c) of the Linkage Plan, which provides 
that, ``absent reasonable justification and during normal market 
conditions, members in [Participants'] markets should not effect Trade-
Throughs'' \11\ and from Section 4(b) of the Linkage Plan, which 
requires the Exchange to enforce compliance by its members with Section 
8(c) of the Linkage Plan.
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    \9\ A ``Trade-Through'' is defined in Section 2(29) of the 
Linkage Plan as ``a transaction in an options series at a price that 
is inferior to the NBBO.''
    \10\ The Linkage Plan is a national market system plan approved 
by the Commission pursuant to Section 11A of the Exchange Act, 15 
U.S.C. 78k-1, and Exchange Act Rule 608. See Securities Exchange Act 
Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000).
    \11\ See letter from Robert L.D. Colby, Acting Director, 
Division of Market Regulation, Commission, to Meyer S. Frucher, 
Chairman and Chief Executive Officer, Phlx, dated March 8, 2006.
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    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. In Amendment No. 1, the Exchange proposes to 
modify Phlx Rule 1085 to include a new exception to liability for the 
satisfaction of trade-throughs under the Linkage Plan. Specifically, 
the Exchange proposes that when a trade-through is the result of an 
automatic execution when the Exchange's disseminated market is the NBBO 
and is crossed by not more than one minimum trading increment, or 
crosses the disseminated market of another options exchange by not more 
than one minimum trading increment, the Exchange member that effected 
the trade-through should not be liable for satisfaction of such trade-
through. Because the Phlx's proposal, which was published for comment, 
to permit automatic executions in certain, limited crossed market 
situations would inevitably result in trade-throughs and the proposal, 
therefore, could not be implemented without the changes to Phlx Rule 
1085 proposed in Amendment No. 1, the Commission finds that good cause 
exists to accelerate approval of Amendment No. 1 to permit the proposed 
rule change to be implemented on an expedited basis.
    Therefore, the Commission finds that granting accelerated approval 
to Amendment No. 1 is appropriate and consistent with Section 19(b)(2) 
of the Act.\12\
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    \12\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether the Amendment 
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-2005-45 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-2005-45. 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 Section. Copies of 
such filing also will be available for inspection and copying at the 
principal offices 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-2005-45 and should be submitted on or before April 
5, 2006.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Phlx-2005-45) is approved, 
and Amendment No. 1 thereto is approved on an accelerated basis.
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    \13\ 15 U.S.C. 78s(b)(2).


[[Page 13443]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

Nancy M. Morris,
Secretary.
[FR Doc. E6-3698 Filed 3-14-06; 8:45 am]

BILLING CODE 8010-01-P
