

[Federal Register: June 2, 2006 (Volume 71, Number 106)]
[Notices]               
[Page 32171-32173]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02jn06-137]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53874; File No. SR-Phlx-2006-18]

 
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 Split Price 
Priority in Options

May 25, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on March 2, 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 May 9, 
2006, Phlx filed an amendment to the proposed rule change (``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\ In Amendment No. 1, the Exchange revised the rule text of 
the proposed rule change to clarify its meaning and revised the 
purpose section to clarify the operation of the Exchange's current 
split price priority rule and the proposed modification to that 
rule.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Phlx Rule 1014(g)(i)(C) \4\ to adopt 
a new split price priority provision that establishes priority for in-
crowd participants in split price transactions over the quotations of 
participants that are not located in the crowd (i.e., out-of-crowd 
Streaming Quote Traders (``SQTs'') \5\ and Remote Streaming Quote 
Traders (``RSQTs'') \6\) even where the market has a bid/ask 
differential of one minimum trading increment.\7\ The text of the 
proposed rule change, as amended, is set forth below. Proposed new 
language is in italics; deleted language is in brackets.\8\
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    \4\ Phlx Rule 1014(g)(i)(C) is subject to a pilot program 
scheduled to expire on June 30, 2006. See infra Section II. A.1.
    \5\ 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 Phlx Rule 1014(b)(ii)(A).
    \6\ 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 Phlx Rule 
1014(b)(ii)(B).
    \7\ Generally, all options on stocks, indexes, and Exchange 
Traded Funds quoting in decimals at $3.00 or higher have a minimum 
increment of $.10, and those quoting in decimals under $3.00 have a 
minimum increment of $.05. See Phlx Rule 1034(a).
    \8\ The bracketed word ``and'' in the final sentence of the rule 
text set forth below is indicated in Exhibit 4 of the proposed rule 
change.
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* * * * *
Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders
Rule 1014. (a)-(f) No change.
(g) Equity Option and Index Option Priority and Parity
    (i) (A)-(B)
    (C) Purchase or sale priority for orders of 100 contracts or more. 
If a member purchases (sells) 50 or more option contracts of a 
particular series at a particular price or prices, he shall, at the 
next lower (higher) price have priority in purchasing (selling) up to 
the equivalent number of option contracts of the same series that he 
purchased (sold) at the higher (lower) price or prices, but only if his 
bid (offer) is made promptly and the purchase (sale) so effected 
represents the opposite side of a transaction with the same order or 
offer (bid) as the earlier purchase or purchases (sale or sales).
    When the market has a bid/ask differential of one minimum trading 
increment and the bid and/or offer represent the quotation of an out-
of-crowd SQT or an RSQT, such member shall have priority over such SQT 
and/or RSQT with respect to both the bid and the offer.
    The Options Committee may increase the ``minimum qualifying order 
size'' above 100 contracts for all products under its jurisdiction. 
Announcements regarding changes to the minimum qualifying order size 
shall be made via an Exchange circular. This paragraph is subject to a 
pilot scheduled to expire June 30, 2006, and shall only apply to 
transactions in equity options (including [and] options overlying 
Exchange Traded Fund Shares (``ETFs'')) and only to such transactions 
that are effected in open outcry.
    (h) 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, as 
amended, 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
    The purpose of the proposed rule change is to modify an existing 
pilot program concerning split-price transactions (``pilot''),\9\ which 
by virtue of their size and the need to execute them at multiple prices 
may be difficult to execute without a limited exception to current 
Exchange priority rules, as described below. The pilot is scheduled to 
expire on June 30, 2006.
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    \9\ See Securities Exchange Act Release No. 53021 (December 23, 
2005), 70 FR 77435 (December 30, 2005) (SR-Phlx-2005-86).
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    The Exchange proposes to modify the pilot such that when the market 
has a bid/ask differential of one minimum trading increment and the bid 
and/or offer represent the quotation of an out-of-crowd SQT or an RSQT, 
the rule would apply to grant priority over such

[[Page 32172]]

SQT and/or RSQT with respect to the bid and/or the offer. Thus, the 
Exchange is expanding the pilot to include priority in both trades of 
the split price transaction where there is a minimum trading increment 
market, but only over an out-of-crowd SQT or an RSQT. Such priority 
would apply only when the bid and/or ask, as applicable, represent the 
quotation of an out-of-crowd SQT or an RSQT.

Current Pilot

    The current pilot, applicable to equity options (including options 
overlying Exchange Traded Fund Shares, permits a member with an order 
for at least 100 contracts \10\ who buys (sells) at least 50 contracts 
at a particular price to have priority over all others in purchasing 
(selling) up to an equivalent number of contracts of the same order at 
the next lower (higher) price without being required to yield priority, 
including to existing customer interest in the limit order book. Absent 
this rule, such orders would be required to yield priority.\11\
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    \10\ Orders for a size of less than 100 contracts are not 
eligible for the current pilot and would not be affected by this 
proposed rule change.
    \11\ See Phlx Rule 119(a).
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    For example, where the market is $.25-$.35, a Floor Broker who is 
representing an order to purchase 100 contracts and executes a purchase 
of 50 of those contracts at a price of $.30 has priority over all 
market participants to purchase the remaining 50 contracts in the order 
at $.25. Two trades would be reported to the tape, one a purchase of 50 
contracts at $.30 and the other a purchase of 50 contracts at $.25. The 
Floor Broker's customer thus would receive a net purchase price of 
$.275 for 100 contracts.
    In this example, the Floor Broker would not be able to use this 
provision in a minimum increment market (e.g., $.25-$.30), because he 
or she could not execute the first trade at $.30 at all, regardless of 
the current split price priority provision, because that provision does 
not give priority over whoever is offering at $.30 until the second 
trade. Accordingly, the Exchange is proposing to amend the split price 
priority provision, as described below.

Proposed Modification to the Current Pilot

    As stated above, the current pilot contemplates that a member who 
purchases (sells) 50 or more option contracts of a particular series at 
a particular price or prices has priority at the next lower (higher) 
price in purchasing (selling) up to the equivalent number of option 
contracts of the same series that he or she purchased (sold) at the 
higher (lower) price or prices. The proposed rule change would afford 
priority to members physically located in the crowd with respect to 
split price transactions in those instances when the market has a bid/
ask differential of one minimum trading increment and the bid and/or 
ask represent quotations of members physically located outside of the 
crowd. The Exchange believes that this provision should enable it to 
compete for order flow in situations where Floor Brokers seek split 
price executions in open outcry when the bid and/or ask consists of 
RSQT quotations and/or the quotations of an out-of-crowd SQT and there 
is a bid/ask differential of one minimum trading increment.
    The Exchange provides the following example: assume a Floor Broker 
represents an order to purchase 100 contracts in a series where the 
market is $0.25 bid, $0.30 offer, and both the bid and offer represent 
quotations submitted by out of-crowd SQTs \12\ or RSQTs. Under the 
proposal, the Floor Broker and contra-side participant in the trading 
crowd would be afforded priority over the out-of-crowd SQT or RSQT at 
both $0.25 and $0.30, because the bid/ask differential is one minimum 
trading increment ($.05). This would enable the Floor Broker to execute 
a split-price order at a net price ($0.275) that improves the market. 
According to the Phlx, the effect (and ultimate benefit) to that Floor 
Broker's customer would be a net purchase price of $.275 for 100 
contracts. The proposed rule change would apply only with respect to 
quotations submitted by out-of-crowd SQTs and RSQTs, and thus would not 
operate to afford priority over, for example, customer or broker-dealer 
orders or in-crowd SQT quotes.
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    \12\ The specialist and/or SQTs participating in a trading crowd 
may, in response to a verbal request for a market by a Floor Broker, 
state a bid or offer that is different than their electronically 
submitted bid or offer, provided that such stated bid or offer is 
not inferior to such electronically submitted bid or offer. See Phlx 
Rule 1014, Commentary .05(c).
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    The Exchange believes that, in situations where the market has a 
bid/ask differential of one minimum trading increment, it is 
potentially difficult for the Floor Broker to achieve price improvement 
for the Floor Broker's customer on the Phlx. Instead, the order might 
trade at another exchange that has no impediments, i.e., rules that 
afford priority to in-crowd participants over out-of-crowd participants 
generally, regardless of split price priority.\13\ Accordingly, the 
Exchange has proposed a limited exception to its priority rule in the 
context of split price transactions.
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    \13\ The Phlx cites to Chicago Board Options Exchange, 
Incorporated (``CBOE'') Rule 6.45A, which provides that only in-
crowd market participants are eligible to participate in open outcry 
trade allocations. See Securities Exchange Act Release No. 51366 
(March 14, 2005), 70 FR 13217 (March 18, 2005) (SR-CBOE-2004-75). 
The Phlx notes that CBOE Rule 6.45A affords priority over out-of-
crowd participants even where there is no split price priority 
situation. CBOE Rule 6.47 contains CBOE's split price provision, 
which is similar to current Phlx Rule 1014(g)(i)(C).
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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. According to the Exchange, the rule would enable Floor 
Brokers representing split price orders in open outcry to provide 
split-price executions at improved prices on behalf of customers by 
establishing a limited priority rule regarding split-price transactions 
when the bid/ask differential is one minimum trading increment and the 
bid and/or ask represent the quotation of an out-of-crowd participant.
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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 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

    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, 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


[[Page 32173]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2006-18 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-2006-18. 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 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 Number SR-Phlx-2006-18 and should be submitted on or before June 
23, 2006.

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

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder, applicable to a national 
securities exchange, and, in particular with the requirements of 
Section 6(b)(5) of the Act.\16\ The proposed rule change would provide 
a limited exception to the Exchange's split price priority rule by 
allowing a Floor Broker and a contra-side participant in the trading 
crowd to have priority over an out-of-crowd SQT or an RSQT when there 
is a bid/ask differential of one minimum trading increment that is 
established by the quotes of such SQT or RSQT. The Commission believes 
that the proposed rule change should help facilitate better priced 
executions for larger-sized orders on the floor of the Exchange. The 
Commission notes that it has previously approved rule proposals that 
permit an exchange to grant priority to in-crowd participants in open 
outcry auctions on its floor over market participants who are not 
physically present in the crowd.\17\
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    \16\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \17\ See supra note 13.
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    The Exchange has requested accelerated approval of the proposed 
rule change. The Commission finds good cause, consistent with Section 
19(b)(2) of the Act, to approve the proposed rule change, as amended, 
prior to the 30th day after the date of publication of the notice of 
filing thereof in the Federal Register. As noted above, the Exchange's 
proposal yields a result similar to that of CBOE rules previously 
approved by the Commission that permit a Floor Broker and a contra-side 
participant in the trading crowd to have priority in split price 
transactions over out-of-crowd participants when there is a bid/ask 
differential of one trading increment.\18\ Accordingly, the Commission 
believes that it is appropriate to approve the proposed rule change on 
an accelerated basis to allow the Phlx to compete more effectively for 
larger-sized orders in open outcry transactions on the floor of the 
Exchange.
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    \18\ Id.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change, as amended (Phlx-2006-18), is 
hereby approved on an accelerated basis until the expiration of the 
current split price priority pilot program on June 30, 2006.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-8550 Filed 6-1-06; 8:45 am]

BILLING CODE 8010-01-P
