

[Federal Register: July 20, 2007 (Volume 72, Number 139)]
[Notices]               
[Page 39875-39877]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20jy07-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56076; File No. SR-Phlx-2007-46]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Priority of Synthetic Option Orders in Open Outcry

July 16, 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 June 26, 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 and 
II, below, which Items have been substantially 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) thereunder,\4\ 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-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 adopt, on a permanent basis, Exchange Rule 
1033(e), which is currently subject to a pilot program (the ``pilot'') 
scheduled to expire June 30, 2007. Exchange Rule 1033(e) affords 
priority to synthetic option orders (as defined below) traded in 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. The Exchange proposes to adopt the rule on a 
permanent basis. 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 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, 2007, s] 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 adopt, on a permanent 
basis, Exchange Rule 1033(e), which facilitates the execution of option 
orders that are represented in the crowd together with a stock 
component, known under the Exchange's rules as synthetic option 
orders,\5\ which by virtue 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\ extended for an 
additional six-month period through June 30, 2006,\7\ and subsequently 
extended for one year, which is scheduled to expire June 30, 2007.\8\
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    \5\ Exchange Rule 1066(g) currently 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 77234 (December 29, 2005) (SR-Phlx-2005-78).
    \8\ See Securities Exchange Act Release No. 54017 (June 19, 
2006), 71 FR 36596 (June 27, 2006) (SR-Phlx-2006-38).
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    Currently, Exchange Rule 1033(e) provides that, if an Exchange 
member who is holding a synthetic option order and is 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

[[Page 39876]]

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 who 
are willing to participate in the synthetic option order at the net 
debit or credit price. The effect of the rule 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. The rule applies only to 
synthetic option orders of 100 contracts or more.
    In addition, the rule 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.\9\ 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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    \9\ See Exchange Rule 1080, Commentary .02.
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    The Exchange believes that Exchange Rule 1033(e), which provides a 
limited exception to the Exchange's priority rules only with respect to 
controlled accounts \10\ 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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    \10\ 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 rule 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.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \11\ in general and furthers the objectives of section 
6(b)(5) of the Act \12\ 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 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 \13\ and Rule 19b-
4(f)(6) thereunder.\14\ 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.\15\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ As required by Rule 19b-4(f)(6)(iii) under the Act, the 
Exchange provided the Commission with written notice of its intent 
to file the proposed rule change, along with a brief description of 
the text of the proposed rule change, at least five business days 
prior to the date of the filing of the proposed rule change.
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    The Exchange requests that the Commission waive the 30-day 
operative period under Rule 19b-4(f)(6)(iii) \16\ in order to ensure 
the continuity of the rule. The Commission believes that it is 
consistent with the protection of investors and the public interest to 
waive the 30-day operative delay.\17\ 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 rule.
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    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ 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-2007-46 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-2007-46. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Phlx. All

[[Page 39877]]

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-2007-46 and should be 
submitted on or before August 10, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-14024 Filed 7-19-07; 8:45 am]

BILLING CODE 8010-01-P
