

[Federal Register: May 23, 2006 (Volume 71, Number 99)]
[Notices]               
[Page 29701-29702]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23my06-97]                         


[[Page 29701]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53822; File No. SR-Phlx-2006-32]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Zero Bid Options

May 17, 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 May 16, 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. The Exchange 
filed the proposed rule change as a ``non-controversial'' rule change 
under Rule 19b-4(f)(6) under the Act,\3\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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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 1080(i) to provide that 
the Exchange's Automated Options Market (AUTOM) System \4\ will only 
convert a market order to sell in a ``zero-bid option'' \5\ into a 
limit order to sell such option at $0.05 if the Exchange's best bid/
offer (the ``PBBO'') has a bid/ask differential of less than or equal 
to $0.25 and (i) the National Best Bid or Offer (``NBBO'') reflects a 
zero bid in an option listed on multiple exchanges or (ii) the 
Exchange's disseminated bid is zero for an option listed only on the 
Exchange.
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    \4\ AUTOM is the Exchange's electronic order delivery, routing, 
execution and reporting system, which provides for the automatic 
entry and routing of equity option and index option orders to the 
Exchange trading floor. Orders delivered through AUTOM may be 
executed manually, or certain orders are eligible for AUTOM's 
automatic execution features, AUTO-X, Book Sweep and Book Match. 
Equity option and index option specialists are required by the 
Exchange to participate in AUTOM and its features and enhancements. 
Option orders entered by Exchange members into AUTOM are routed to 
the appropriate specialist unit on the Exchange trading floor. AUTOM 
is today more commonly referred to as Phlx XL. See Exchange Rule 
1080.
    \5\ A ``zero-bid option'' is an option with a bid price of zero, 
meaning the option is virtually worthless. According to the 
Exchange, a bid price of zero typically occurs in situations where 
there is no intrinsic value in the series quoted (i.e., where an 
option series is out-of-the-money by a relatively large amount and 
such series is close to expiration).
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    The text of the proposed rule change is set forth below. Italics 
indicates new text; deletions are bracketed.
* * * * *
Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)
    Rule 1080. (a)--(h) No change.
    (i) Zero-bid option series. The AUTOM System will convert market 
orders to sell a particular option series to limit orders to sell with 
a limit price of $.05 that are received when:
    (A) For options listed only on the Exchange:
    (1) the Exchange's disseminated bid price in such option series is 
zero;[,] and
    (2) the Exchange's disseminated quotation in the series has a bid/
ask differential less than or equal to $0.25; or
    (B) For options that are listed on multiple exchanges:
    (1) the disseminated NBBO includes a bid price of zero in the 
series; and
    (2) the Exchange's disseminated quotation in the series has a bid/
ask differential less than or equal to $0.25.

[to limit orders to sell with a limit price of $.05] Such orders will 
be automatically placed on the limit order book in price-time priority.
    (j)-(l) 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 IV 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, Proposed Rule Change

1. Purpose
    According to the Exchange, the purpose of the proposed rule change 
is to modify Exchange Rule 1080(i) so as to limit the circumstances in 
which AUTOM will convert a market order to sell into a limit order to 
sell a zero-bid option at $0.05. The Exchange adopted Rule 1080(i) as a 
means of automating the handling of these orders.\6\ Currently, 
Exchange Rule 1080(i) provides for the conversion of all market orders 
to sell that are received when the Exchange is disseminating a bid of 
zero in that option.
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    \6\ See Securities Exchange Act Release No. 51544 (April 14, 
2005), 70 FR 20613 (April 20, 2005) (SR-Phlx-2005-03).
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    Since the adoption of Exchange Rule 1080(i), the Exchange has 
concluded that not all options with a zero bid are the same. The 
Exchange currently treats options that have an offer price of a few 
dollars on the Exchange, as well as options that are not ``zero-bid'' 
on other exchanges, as zero-bid options. Accordingly, this proposal 
outlines additional factors that the Exchange would consider when 
determining whether an option is a zero-bid option for purposes of Rule 
1080(i), including the Exchange's spread and the NBBO. The Exchange 
believes that the new criteria would clarify when an option is truly a 
zero-bid option for which orders in that option should be subject to 
automated handling versus orders for non-zero-bid options that would 
require manual handling.
    The Exchange believes that taking the spread into consideration 
would help limit the conversion of market orders to sell to only those 
for true zero-bid options, because options with an offer much higher 
than above $0.25 are likely not to be worthless options. Similarly, for 
options traded on more than one exchange, the NBBO is relevant for 
validating whether an option truly is a zero-bid option.
2. Statutory Basis
    The Exchange believes that the proposed rule change 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 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 limiting the instances in which 
the Exchange's AUTOM system converts a market order to sell an option 
that is not a zero-bid option series under Rule 1080(i).
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    \7\ 15 U.S.C. 78(b).
    \8\ 15 U.S.C. 78f(b)(5).

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[[Page 29702]]

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) by its terms, 
does not become operative for 30 days after the date of filing, the 
proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \9\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\10\ 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.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the five-day 
pre-filing notice requirement and the 30-day operative delay. The 
Commission believes waiving the five-day pre-filing notice and the 30-
day operative delay is consistent with the protection of investors and 
the public interest. Such waivers would allow the Exchange to 
implement, without undue delay, the proposed amendment to Exchange Rule 
1080(i), which would clarify when an option is truly a zero-bid option 
for which orders in that option should be subject to automated handling 
versus orders for non-zero-bid options that would require manual 
handling. For this reason, the Commission designates the proposal to be 
effective and operative upon filing with the Commission.\11\
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    \11\ For purposes only of waiving the operative date of 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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IV. 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-2006-32 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-2006-32. 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 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-2006-32 and should be submitted on or before June 
13, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-7819 Filed 5-22-06; 8:45 am]

BILLING CODE 8010-01-P
