

[Federal Register: January 18, 2007 (Volume 72, Number 11)]
[Notices]               
[Page 2324-2325]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18ja07-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55080; File No. SR-Phlx-2006-51]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Performance 
Evaluations for Streaming Quote Traders and Remote Streaming Quote 
Traders

January 10, 2007.

I. Introduction

    On November 22, 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 adopt Phlx Rule 510, SQT and 
RSQT Performance Evaluation, to establish performance requirements for 
Streaming Quote Traders (``SQTs'') \3\ and Remote Streaming Quote 
Traders (``RSQTs'').\4\ The proposed rule change was published for 
comment in the Federal Register on December 11, 2006.\5\ The Commission 
received no comments regarding the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Phlx Rule 1014(b)(ii)(A).
    \4\ See Phlx Rule 1014(b)(ii)(B).
    \5\ See Securities Exchange Act Release No. 54859 (December 1, 
2006), 71 FR 71605.
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II. Description of the Proposal

    The purpose of the proposed rule change is to adopt new Phlx Rule 
510 to: (1) Establish performance requirements for SQTs and RSQTs; (2) 
authorize the Exchange to conduct performance evaluations periodically; 
and (3) authorize the Exchange's Options Allocation, Evaluation and 
Securities Committee (``OAESC'') \6\ to take corrective action where 
minimum requirements are not met.
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    \6\ See Phlx By-Law Article X, Section 10-7.
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    Proposed Phlx Rule 510 would provide for monthly performance 
evaluations of SQTs and RSQTs to determine whether they have fulfilled 
performance standards relating to, among other things, quality of 
markets, efficient quote submission to the Exchange (including quotes 
submitted through a third party vendor), competition, observance of 
ethical standards, and administrative factors.
    The proposal would permit the Exchange to consider requests for 
relief from established quote spread

[[Page 2325]]

parameters on the Exchange \7\ and efficiency of quote submission 
through the Specialized Quote Feed (``SQF''), as defined in Phlx Rule 
1080, Commentary .01. Failure to meet established minimum performance 
requirements could result in restriction by the OAESC of additional 
options assignments; suspension, termination, or restriction of an 
existing assignment on one or more options; or suspension, termination, 
or restriction of an SQT's or RSQT's status as such.
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    \7\ See Phlx Rule 1014(c)(i)(A).
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    Phlx Rule 510 would establish specific criteria for each option 
assigned to an SQT or RSQT that would be regularly evaluated by the 
Exchange. First, the Exchange would evaluate the percentage of total 
quotes submitted by the SQT or RSQT that represent the NBBO. If the 
percentage of the total quotes that represent the NBBO is in the lowest 
quartile of all SQTs or RSQTs for two or more consecutive months, this 
may be considered sub-standard performance. Second, the Exchange would 
evaluate the SQT or RSQT's adherence to the Exchange's established 
quoting requirements pursuant to Phlx Rule 1014.\8\ If an SQT or RSQT 
fails to meet the quoting requirements as prescribed by the rule, this 
may be considered sub-standard performance. Third, the Exchange would 
consider the number of requests for quote spread parameter \9\ relief 
for the purposes of evaluating performance standards.
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    \8\ Phlx Rule 1014(b)(ii)(D)(1) provides that an SQT and an RSQT 
shall be responsible to quote continuous, two-sided markets in not 
less than 60% of the series in each option in which such SQT or RSQT 
is assigned, provided that, on any given day, a Directed SQT 
(``DSQT'') or a Directed RSQT (``DRSQT'') (as defined in Phlx Rule 
1080(l)(i)(C)) shall be responsible to quote continuous, two-sided 
markets in not less than 99% of the series listed on the Exchange in 
at least 60% of the options in which such DSQT or DRSQT is assigned. 
Whenever a DSQT or DRSQT enters a quotation in an option in which 
such DSQT or DRSQT is assigned, such DSQT or DRSQT must maintain 
continuous quotations for not less than 99% of the series of the 
option listed on the Exchange until the close of that trading day.
    \9\ Phlx Rule 1034 establishes maximum allowable bid/ask 
differentials on the Exchange.
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    Finally, to evaluate efficient quote submission to the Exchange, 
the Exchange would consider how an SQT or RSQT optimizes the submission 
of quotes through the SQF, as defined in Phlx Rule 1080, by evaluating 
the number of individual quotes per quote ``block'' received by the 
Exchange.\10\ An SQT or RSQT is assigned a number of ports or lines on 
which they can send quote blocks. The number of lines assigned dictates 
the number of blocks that may be sent simultaneously by the SQT or 
RSQT. The number of lines assigned to an SQT or RSQT is generally a 
function of the number of products being quoted, taking into account 
the throughput required to minimize quote latency risk. The Exchange 
intends to evaluate the average number of quotes (1-99) submitted 
within the SQT or RSQT's quote blocks. The number of quotes delivered 
in each block would generally be a measure of the SQT or RSQT's quoting 
efficiency. For example, a firm sending an average of 1 quote in each 
block may be considered inefficient while a firm sending an average of 
99 quotes in each block would be considered very efficient.
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    \10\ A quote ``block'' is a component of the Exhange's SQF 
application that allows for delivery of a set of multiple quotations 
from the SQT or RSQT to the Exchange. Within a single ``block,'' the 
SQT or RSQT can deliver quotes for any number of option series 
ranging from 1 to 99.
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    The Exchange explained that, in general, the expenditure of 
systemic resources required to process an inefficient block is nearly 
equal to the expenditure of systemic resources required to process an 
efficient block. Therefore, an efficient SQT or RSQT can achieve a much 
higher level of quote submission than an inefficient SQT or RSQT using 
nearly the same amount of exchange system resources. The Exchange 
believes that the regular monitoring of quoting efficiency in this 
fashion will result in more efficient quoting on the Exchange (i.e., 
more quotes submitted per block), thus preserving and maximizing 
Exchange system capacity for handling quote traffic.

III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\11\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\12\ 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.
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    \11\ 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).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Exchange's proposal to establish 
performance requirements for SQTs and RSQTs should, among other things, 
encourage Exchange traders to enhance quoting efficiency, preserve 
system capacity, and minimize requests for relief from quote spread 
parameters. Consequently, the proposal should encourage Phlx SQTs and 
RSQTs to strive to improve their performance as market makers on the 
Exchange, as well as help to mitigate the Exchange's quote message 
traffic.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Phlx-2006-51), be, and 
hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-586 Filed 1-17-07; 8:45 am]

BILLING CODE 8011-01-P
