

[Federal Register: July 5, 2006 (Volume 71, Number 128)]
[Notices]               
[Page 38199-38201]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05jy06-89]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54050; File No. SR-Phlx-2006-37]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Extension of a Pilot Program Concerning Split Price 
Priority in Open Outcry

June 27, 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 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 Exchange. 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 proposed 
rule change 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-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 extend, for a one-year period, a pilot program 
(the ``pilot'') set forth in Phlx Rule 1014(g)(i)(C) relating to 
priority on split-price transactions in open outcry.
    Under the pilot, a member with an order for at least 100 contracts 
\5\ who buys (sells) at least 50 contracts at a particular price has 
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. The pilot also establishes 
priority for in-crowd participants in split price transactions 
represented in open outcry over the quotations of participants that are 
not located in the crowd (i.e., out-of-crowd Streaming Quote Traders 
(``SQTs'') \6\ and Remote Streaming Quote Traders (``RSQTs'') \7\) even 
where the market has a bid/ask differential of one minimum trading 
increment.\8\ The current pilot is scheduled to expire June 30, 2006. 
The extended pilot would expire June 30, 2007. The text of the proposed 
rule change is available on the Phlx Web site (http://www.phlx.com), at 

the Exchange's Office of the Secretary, and at the Commission's Public 
Reference Room.\9\
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    \5\ Orders for a size of less than 100 contracts are not 
affected by the current pilot and would not be affected by this 
proposed rule change.
    \6\ An SQT is an Exchange Registered Options Trader (``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. (AUTOM is Phlx's Automated Options 
Market.) An SQT may submit such quotations only while such SQT is 
physically present on the floor of the Exchange. See Phlx Rule 
1014(b)(ii)(A).
    \7\ 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 submit such quotations electronically 
only from off the floor of the Exchange. See Phlx Rule 
1014(b)(ii)(B).
    \8\ 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).
    \9\ The proposed rule change amends the current text of Phlx 
Rule 1014(g)(i)(C) by changing the expiration date from June 30, 
2006 to June 30, 2007.
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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 the pilot 
concerning priority in split-price transactions, 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 
June 30, 2006.
    The pilot was originally adopted in June 2005,\10\ and subsequently 
extended

[[Page 38200]]

in December 2005.\11\ In May 2006, the pilot was expanded to include 
priority for in-crowd participants in both trades of the split price 
transaction where there is a minimum trading increment market, but only 
over RSQTs and out-of-crowd SQTs in such circumstance.\12\
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    \10\ See Securities Exchange Act Release No. 51820 (June 10, 
2005), 70 FR 35759 (June 21, 2005) (SR-Phlx-2005-28).
    \11\ See Securities Exchange Act Release No. 53021 (December 23, 
2005), 70 FR 77435 (December 30, 2005) (SR-Phlx-2005-86).
    \12\ See Securities Exchange Act Release No. 53874 (May 25, 
2006), 71 FR 32171 (June 2, 2006) (SR-Phlx-2006-18).
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    The current pilot, applicable to equity options (including options 
overlying Exchange Traded Fund Shares (``ETFs'')), permits a member 
with an order for at least 100 contracts \13\ 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.\14\
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    \13\ Orders for a size of less than 100 contracts are not 
affected by the current pilot and would not be affected by this 
proposed rule change.
    \14\ See, e.g., Phlx Rule 119(a).
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    For example, where the market is $.25--$.35, a Floor Broker 
representing an order to purchase 100 contracts that 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 effect to that Floor Broker's customer would be a net 
purchase price of $.275 for 100 contracts.
    The pilot, as recently modified,\15\ also affords priority to 
members physically located in the crowd where the market has a bid/ask 
differential of one minimum trading increment and the bid and/or ask 
represent quotations of members located outside of the crowd (i.e., 
out-of-crowd SQTs and RSQTs).\16\ The Exchange believes that this 
provision should enable it to continue to compete for order flow in 
situations where Floor Brokers seek split price executions in open 
outcry when the market consists of RSQT quotations and/or SQT 
quotations where the SQT is located out of that trading crowd with a 
bid/ask differential of one minimum trading increment.
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    \15\ See supra, note 12.
    \16\ Clarified in telephone conference on June 21, 2006, among 
Richard Rudolph, Vice President and Counsel, Phlx; and Ira 
Brandriss, Special Counsel, and Mitra Mehr, Special Counsel, 
Division of Market Regulation, Commission.
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    For example, assume a Floor Broker represents an order to purchase 
100 contracts in a series where the market is $.25--$.30, and both the 
bid and offer represent quotations submitted by out-of-crowd SQTs \17\ 
or RSQTs. Under the pilot, the Floor Broker and contra-side participant 
in the trading crowd are afforded priority over the out-of-crowd SQT or 
RSQT at both $.25 and $.30, even though the bid/ask differential is one 
minimum trading increment ($.05). This would enable the Floor Broker to 
execute a split-price order at a net price ($.275) that improves the 
market. According to Phlx, the effect (and ultimate benefit) to that 
Floor Broker's customer would be a net purchase price of $.275 for 100 
contracts. This provision applies only with respect to quotations 
submitted by out-of-crowd SQTs and RSQTs, and thus does not operate to 
afford priority over, for example, customer or broker-dealer orders or 
in-crowd SQT quotes.
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    \17\ 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.\18\ The pilot therefore 
was modified to include this provision.\19\
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    \18\ 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).
    \19\ See supra, note 12.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \20\ in general, and furthers the objectives of section 
6(b)(5) of the Act \21\ 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, enabling 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.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 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. 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,\22\ 
and Rule 19b-4(f)(6) thereunder.\23\ 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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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally 
does not become operative prior to 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\25\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day pre-operative delay. The Commission 
believes that such waiver is consistent with the protection

[[Page 38201]]

of investors and the public interest because it would allow the Phlx to 
extend its pilot without interruption.\26\ For this reason, the 
Commission designates the proposed rule change to be effective upon 
filing with the Commission.\27\
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    \24\ 17 CFR 240.19b-4(f)(6).
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ At the Exchange's request, the Commission has waived the 
five-day pre-notice filing requirement for ``non-controversial'' 
proposals. See 17 CFR 240.19b-4(f)(6)(iii).
    \27\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the 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-2006-37 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-2006-37. 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-2006-37 and should be submitted on or before July 
26, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-10416 Filed 7-3-06; 8:45 am]

BILLING CODE 8010-01-P
