

[Federal Register: January 11, 2007 (Volume 72, Number 7)]
[Notices]               
[Page 1358-1359]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11ja07-74]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55027; File No. SR-Phlx-2006-53]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change as Modified by 
Amendment No. 1 Thereto, Relating to Assignments in Options Based on 
Root Symbol

December 29, 2006.

I. Introduction

    On August 18, 2006, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``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 to amend Phlx Rule 507, ``Application for 
Assignment in Streaming Quote Options.'' Specifically, Phlx proposes to 
adopt new Commentary .01 to Phlx Rule 507, which would authorize the 
Exchange's Options Allocation, Evaluation and Securities Committee 
(``OAESC''),\3\ to assign trading privileges in options to Streaming 
Quote Traders

[[Page 1359]]

(``SQTs'') \4\ and Remote Streaming Quote Traders (``RSQTs'') \5\ by 
``root symbol'' (as defined more fully below), such that an SQT or RSQT 
may be assigned in only certain series of an option. On November 21, 
2006, the Exchange filed Amendment No. 1 to the proposed rule change. 
The proposed rule change was published for comment in the Federal 
Register on November 29, 2006.\6\ The Commission received one comment 
letter on the proposed rule change.\7\ This order approves the proposed 
rule change as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Phlx By-Law Article X, Section 10-7(a). See also Phlx 
Rule 500.
    \4\ See Phlx Rule 1014(b)(ii)(A).
    \5\ See Phlx Rule 1014(b)(ii)(B).
    \6\ See Securities Exchange Act Release No. 54807 (November 21, 
2006), 71 FR 69173.
    \7\ See letter to Nancy Morris, Secretary, Commission, from 
Christopher Nagy, Chair, SIFMA Options Committee (``SIFMA''), dated 
December 20, 2006. SIFMA does not directly oppose Phlx's quote 
mitigation proposal discussed herein, but instead favors the 
adoption of a comprehensive industry-wide quote mitigation strategy. 
Specifically, SIFMA believes that the adoption of an industry-wide, 
uniform ``holdback timer'' proposal would provide the most effective 
means of quote mitigation. Although, SIFMA expressed concern that a 
lack of uniformity among quote mitigation strategies implemented by 
the various options exchanges may impose a burden on member firms 
and result in confusion among market participants, SIFMA does not 
specifically oppose the adoption of the quote mitigation proposal 
approved by this order. Additional concerns raised in SIFMA's 
December 20, 2006 comment letter relating to other proposed rule 
changes filed by the options exchanges will be more fully addressed 
in any subsequent releases issued by the Commission.
---------------------------------------------------------------------------

II. Description of the Proposal

    The purpose of the proposed rule change is to mitigate quote 
traffic and address quote capacity issues by reducing the number of 
quotations required to be submitted on the Exchange. The proposal would 
permit the OAESC to assign trading privileges to SQTs and RSQTs, upon 
their request, only in specific series of a particular option based on 
the ``root symbol'' of the series, instead of assigning trading 
privileges in all series of such option. Thus, as described below, SQTs 
and RSQTs would be required to submit quotations in fewer series.
    Phlx Rule 507 currently provides the solicitation, application and 
review process to be followed by the OAESC when an SQT or RSQT submits 
an application for assignment in an option. Under Phlx Rule 507, an 
application for assignment must be submitted in writing to the 
Exchange's designated staff and would be required to include, at a 
minimum, the name of the SQT or RSQT applicant and written verification 
from the Exchange's Membership Services Department that such SQT or 
RSQT applicant is qualified as a ROT.
    The Exchange proposes to permit SQT and RSQT applicants to request 
assignment in an option by ``root symbol.'' Today, all assignments are 
by overlying option, meaning the SQT and RSQT applicants that are 
assigned in a particular option are assigned in all series of such 
option. Therefore, the calculation of the percentage of series required 
to be quoted is based on every series listed in such option, thus 
requiring SQTs and RSQTs to quote most series.
    Root symbols are the basic symbols used to identify an option, such 
as, for example, ``ABQ'' for options on fictitious ``ABC Corporation.'' 
The various series of options on ABC Corporation are identified with 
two additional symbols reflecting the expiration month and the strike 
price, which also indicate whether it is a put or call option. ABC 
Corporation may have different root symbols other than ABQ because of 
the number of strike prices (there are not enough letters in the 
alphabet to capture all potential strike prices), the expiration months 
available, and whether any mergers or acquisitions have occurred. Thus, 
an option on the Exchange overlying a single underlying security could 
have several different root symbols.
    The Exchange anticipates that, if options can be assigned by root 
symbol, SQTs and RSQTs may more carefully tailor their requests to the 
specific roots in which they are interested. According to the Exchange, 
SQTs and RSQTs often submit quotes with bid/ask differentials as wide 
as the Exchange's rules permit in series that they have no interest in 
quoting.\8\ The Exchange believes that, as a result, to meet their 
quoting continuity requirements,\9\ SQTs and RSQTs submit continuous 
quotations that are not at or even near the best bid or offer on the 
Exchange, nor the National Best Bid or Offer, resulting in unnecessary 
quote traffic on the Exchange.
---------------------------------------------------------------------------

    \8\ Streaming Quote Options trading on the Exchange's fully 
electronic trading platform for options, Phlx XL, may be quoted 
electronically with a difference not to exceed $5 between the bid 
and offer regardless of the price of the bid. The $5 bid/ask 
differentials only apply to Streaming Quote Options trading on Phlx 
XL and only following the opening rotation in each security. See 
Phlx Rule 1014(c)(i)(A)(2).
    \9\ See Phlx Rule 1014(b)(ii)(D)(1).
---------------------------------------------------------------------------

III. Discussion

    After careful review of the proposal and consideration of the 
comment letter, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\10\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\11\ which 
requires, among other things, that the rules of an exchange be 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.
---------------------------------------------------------------------------

    \10\ In approving this proposed rule change 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).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposal to, upon 
request, assign trading privileges in options to SQTs and RSQTs by 
``root symbol'' would permit the Phlx's traders to select the series of 
options that they are most interested in quoting. This should not only 
reduce the number of series assigned to SQTs and RSQTs by the OAESC, 
but should also reduce the number of quotes submitted by SQTs and 
RSQTs, and therefore should help to mitigate the Exchange's quote 
message traffic and capacity.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-Phlx-2006-53), as modified 
by Amendment No. 1, be, and hereby is approved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).
    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-232 Filed 1-10-07; 8:45 am]

BILLING CODE 8011-01-P
