

[Federal Register: May 15, 2007 (Volume 72, Number 93)]
[Notices]               
[Page 27347-27348]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15my07-89]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55729; File No. SR-Phlx-2007-26]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1 
Thereto, Relating to Price Improved Linkage P/A Orders

May 9, 2007.
    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 March 21, 2007, 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, II, 
and III below, which Items have been substantially prepared by the 
Phlx. On May 2, 2007, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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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 clarified that the proposed 
rule change was seeking to permit manual executions of P/A Orders 
that had been price-improved on another exchange and submitted to 
Phlx for execution against the original customer limit order that 
gave rise to the Linkage P/A Order and made minor corrections to the 
rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1034, Minimum Increments, and 
to adopt proposed Phlx Rule 1080(c)(iv)(F), to permit the Exchange to 
execute Linkage Principal Acting as Agent (``P/A'') Orders \4\ that are 
sent to, and price-improved on, another exchange, and subsequently 
presented for execution on the Phlx against customer limit orders on 
the limit order book that give rise to the initial P/A Order, at a 
price other than the minimum trading increment applicable to the 
particular series traded.
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    \4\ A P/A Order is an order under the Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage (``Linkage 
Plan''), for the principal account of a specialist (or equivalent 
entity on another Participant Exchange that is authorized to 
represent Public Customer orders), reflecting the terms of a related 
unexecuted Public Customer order for which the specialist is acting 
as agent. See Phlx Rule 1083(k)(i).
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    The proposed amendment to Phlx Rule 1080(c)(iv)(F) states that such 
orders would be ineligible for automatic execution, and would instead 
be handled manually by the specialist.
    The text of the proposed rule change is available at Phlx, the 
Commission's Public Reference Room, and http://www.phlx.com.


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 permit Exchange 
specialists to execute price-improved P/A Orders against public 
customer limit orders at prices other than the minimum trading 
increment applicable to that particular series so that the customer 
limit order underlying the P/A Order receives the improved price.
    Currently, Phlx Rule 1034, Minimum Increments, generally provides 
that options quoting at $3.00 or higher have a minimum increment of 
$.10, and options quoting under $3.00 have a minimum increment of $.05. 
Options subject to the current ``penny pilot'' may

[[Page 27348]]

be quoted and traded in increments as low as $.01.\5\
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    \5\ See Securities Exchange Act Release No. 55153 (January 23, 
2007), 72 FR 4553 (January 31, 2007) (SR-Phlx-2006-74).
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    The proposed rule change concerns P/A Orders sent from the Exchange 
to another exchange via the Intermarket Option Linkage. When a P/A 
Order sent from the Exchange to another exchange is executed on that 
other exchange, the executed P/A Order is delivered back to the 
specialist electronically, where the specialist is responsible to 
execute the public customer limit order at the execution price of the 
P/A Order on the other exchange.
    Recently, some P/A Orders have been executed on other exchanges at 
improved prices after being submitted to a price-improvement auction 
process on the other exchange. The result is that the executed P/A 
Order is delivered back to the Exchange at a price that is expressed in 
other than the Exchange's minimum trading increment. For example, if 
the Phlx disseminated market in a particular series is 2.10 bid, 2.20 
ask, and another exchange is disseminating a bid price of 2.15, a P/A 
Order to sell an option series would be delivered by the Phlx 
specialist to the other exchange disseminating a limit bid price of 
$2.15. The specialist's P/A Order might be executed in a price-
improving auction at an improved price of $2.17 on the other exchange. 
The P/A Order would be delivered back to the Phlx specialist for 
execution at $2.17. This would be prohibited under current Exchange 
rules, which require an execution at either $2.15 (disadvantaging the 
public customer), or $2.20 (disadvantaging the specialist), because the 
minimum trading increment applicable to the series is $.05.\6\
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    \6\ In this situation, Phlx specialists would execute the 
customer order on the book at the price most favorable to the 
customer.
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    The proposed rule change is intended to eliminate this anomaly by 
providing that a P/A Order that has been sent from the Exchange to, and 
price-improved on, another exchange at a price expressed in other than 
the minimum trading increment currently contained in the rule, and then 
submitted to the Exchange for execution against the original customer 
limit order that gave rise to the P/A Order, may be traded on the 
Exchange at such price. Therefore, in the example above, the specialist 
could fill the public customer order at the P/A Order execution price 
of $2.17.
    The proposed amendment to Phlx Rule 1080(c)(iv)(F) provides that 
such orders would be ineligible for automatic execution and would 
instead be handled manually by the specialist.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ in particular, in that the proposal 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 establishing a rule that provides for accurate 
execution of customer limit orders at improved prices.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2007-26 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-2007-26. 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-2007-26 and should be submitted on or before June 5, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-9260 Filed 5-14-07; 8:45 am]

BILLING CODE 8010-01-P
