

[Federal Register: June 27, 2006 (Volume 71, Number 123)]
[Notices]               
[Page 36596-36598]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jn06-79]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 54017; File No. SR-Phlx-2006-38]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Extend a Pilot Concerning Priority in Trades Involving Synthetic Option 
Orders

    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 June 8, 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 Phlx. The Exchange 
filed the proposed rule change pursuant to section 19(b)(3)(A) of the 
Act \3\ and Rule 19b-4(f)(6) \4\ thereunder, 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-(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 extend for an additional one-year period a 
pilot concerning Exchange Rule 1033(e), which affords priority to 
synthetic option orders (as defined below) traded in an 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 rule applies to orders for 
100 contracts or more and is subject to a pilot program scheduled to 
expire on June 30, 2006. The Exchange proposes to extend the pilot 
through June 30, 2007.
    The text of the proposed rule change is set forth below. Brackets 
indicate deletions; italics indicate 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

[[Page 36597]]

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 June 30, 
200[6]7, 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, the 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 IV below. The 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 one-year 
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's rules as a synthetic option order,\5\ which by 
virture of the stock component may be difficult to execute without a 
limited exception to current Exchange priority rules. The pilot was 
originally adopted in July 2005 \6\ and was extended for an additional 
six-month period, currently scheduled to expire June 30, 2006.\7\
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    \5\ Exchange Rule 1066(g) defines a 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.
    \6\ See Securities Exchange Act Release No. 52140 (July 27, 
2005), 70 FR 45481 (August 5, 2005) (SR-Phlx-2005-31).
    \7\ See Securities Exchange Act Release No. 53004 (December 22, 
2005), 70 FR 72234 (December 29, 2005) (SR-Phlx-2005-78).
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    Currently, Exchange Rule 1033(e) 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.\8\ 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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    \8\ See Exchange Rule 1080, Commentary .02.
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    The Exchange believes that the pilot, which provides a limited 
exception to the Exchange's priority rules only respecting controlled 
accounts \9\ 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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    \9\ 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, 2007.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \10\ in general, and furthers the objectives of section 
6(b)(5) of the Act \11\ 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 adopting a limited exception to the Exchange's priority 
rules concerning synthetic option orders.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 that is not necessary or appropriate 
in furtherance of the purpose of the Act.

C. Self-Regulatory Organization's Statement on Comment on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

[[Page 36598]]

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\ 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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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    The Exchange requests that the Commission waive the 5-day pre-
filing period and 30-day operative period under Rule 19b-(f)(6)(iii) 
\14\ in order to ensure the continuity of the pilot. The Commission has 
waived the 5-day pre-filing requirement for this proposed rule change. 
In addition, the Commission believes that it is consistent with the 
protection of investors and the public interest to waive the 30-day 
operative delay. \15\ The Commission believes that the waiver of the 
30-day operative delay will allow the Exchange to continue, without 
interruption, the existing operation of its pilot until June 30, 2007.
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    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ For purposes only of waiving the 30-day operative delay 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-2006-38 on the subject line.

Paper Comments

     Send paper comments in triplicate in 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-2006-38. 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 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-2006-38 and should be submitted on or before July 
18, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-5679 Filed 6-26-06; 8:45 am]

BILLING CODE 8010-01-M
