

[Federal Register: November 15, 2007 (Volume 72, Number 220)]
[Notices]               
[Page 64268-64269]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15no07-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56760; File No. SR-Phlx-2007-40]

 
 Self-Regulatory Organizations; Philadelphia Stock Exchange, 
Inc.; Order Granting Accelerated Approval to a Proposed Rule Change, as 
Modified by Amendment No. 3, Relating to Complex Orders

November 7, 2007.

I. Introduction

    On May 21, 2007, 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 1066, ``Certain Types of Orders 
Defined,'' to revise the definition of ``synthetic option,'' and to 
amend Phlx Rule 1083(c) to modify the definition of ``Complex Trade'' 
as it relates to the Plan for the Purpose of Creating and Operating an 
Intermarket Options Linkage (``Linkage Plan''). The Exchange filed 
Amendment No. 1 to the proposal on September 4, 2007, and withdrew 
Amendment No. 1 on October 1, 2007. The Exchange filed Amendment No. 2 
to the proposal on October 1, 2007, and withdrew Amendment No. 2 on the 
same day. The Phlx filed Amendment No. 3 to the proposal on October 1, 
2007.\3\ The proposed rule change, as modified by Amendment No. 3, was 
published for comment in the Federal Register on October 11, 2007.\4\ 
The Commission received no comments regarding the proposed rule change, 
as amended. This order approves the proposed rule change, as modified 
by Amendment No. 3, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 3 replaces and supersedes the original filing 
and previous amendments in their entirety.
    \4\ See Securities Exchange Act Release No. 56608 (October 3, 
2007), 72 FR 57985.
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II. Description of the Proposal

A. Phlx Rule 1066(g)

    Currently, Phlx Rule 1066(g) defines a ``synthetic option'' as an 
order to buy or sell a stated number of option contracts and the 
underlying stock or Exchange-Traded Fund Share in an amount that would 
offset the options position on a one-for-one basis. The Phlx proposes 
to amend Phlx Rule 1066(g) to define a ``synthetic option'' as an order 
to buy or sell a stated number of units of an underlying stock or a 
security convertible into the underlying stock (``convertible 
security'') coupled with either (i) the purchase or sale of option 
contract(s) on the opposite side of the market representing either the 
same number of units of the underlying stock or convertible security or 
the number of units of the underlying stock or convertible security 
necessary to create a delta neutral position; or (ii) the purchase or 
sale of an equal number of put and call option contracts, each having 
the same exercise price, expiration date, and each representing the 
same number of units of stock as, and on the opposite side of the 
market from, the stock or convertible security portion of the order.
    The revised definition of ``synthetic option'' will permit the 
purchase or sale of options on the opposite side of the market 
representing the number of units of the underlying stock or convertible 
security necessary to create a delta neutral position, rather than 
requiring that the stock and option components of the synthetic option 
order offset each other on a one-for-one basis. The revised definition 
is substantially similar to the definition of ``stock-option order'' 
adopted by other U.S. options exchanges.\5\
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    \5\ See, e.g., Amex Rule 950-ANTE(e)(viii)(1); CBOE Rule 
1.1(ii); and ISE Rule 722(a)(5)(i).
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B. Phlx Rule 1083(c)

    The Phlx also proposes to amend Phlx Rule 1083(c) to revise the 
definition of ``Complex Trade'' for purposes of the Linkage Plan, which 
provides an exception to Trade-Through \6\ liability and Satisfaction 
Order \7\ liability when the transaction that caused the Trade-Through 
was the result of a Complex Trade. The proposed changes to Phlx Rule 
1083(c) are almost identical to changes proposed by the other Linkage 
Plan Participants,\8\ which the Commission is approving in a separate 
order today.\9\
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    \6\ In connection with the Linkage Plan, a ``Trade-Through'' 
means a transaction in an options series at a price that is inferior 
to the National Best Bid or Offer (``NBBO''), but shall not include 
a transaction that occurs at a price that is one minimum quoting 
increment inferior to the NBBO provided a Linkage Order is 
contemporaneously sent to each Participant Exchange disseminating 
the NBBO for the full size of the Participant Exchange's bid (offer) 
that represents the NBBO. See Phlx Rule 1083(t).
    \7\ In connection with the Linkage Plan, a Satisfaction Order is 
an order sent through the Linkage to notify a member of another 
Participant Exchange of a Trade-Through and to seek satisfaction of 
the liability arising from that Trade-Through. See Phlx Rule 
1083(k)(iii).
    \8\ Phlx Rule 1083(c)(ii) refers to ``stock-option orders'' as 
synonymous with ``synthetic option orders'' to be consistent with 
the definitions proposed by the other Linkage Plan Participants.
    \9\ See Securities Exchange Act Release No. 56761 (November 7, 
2007) (order approving File Nos. SR-Amex-2007-65; SR-BSE-2007-45; 
SR-CBOE-2007-64; SR-ISE-2007-44; and SR-NYSEArca-2007-65) (``Complex 
Trade Order'').
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    Specifically, the Phlx proposes to revise Phlx Rule 1083(c) to: (1) 
Provide that the option orders in a Complex Trade may be in a ratio 
equal to or greater than one-to-three (.333) and less than or equal to 
three-to-one (3.0); and (2) add a certain limited type of synthetic 
option order to the definition of Complex Trade. Phlx Rule 1083(c)(ii) 
defines a ``stock-option order'' as an order to buy or sell a stated 
number of units of an underlying stock or a security convertible into 
the underlying stock (``convertible security''), coupled with the 
purchase or sale of option contract(s) on the opposite side of the 
market representing either (A) the same number of units of the 
underlying stock or convertible security; or (B) the number of units of 
the underlying stock or convertible security necessary to create a 
delta neutral position, but in no case in a ratio greater than eight 
option contracts per unit of trading of the underlying stock or 
convertible security established for that series by the Clearing 
Corporation.

[[Page 64269]]

III. Commission Findings and Order Granting Accelerated Approval of the 
Proposed Rule Change, as Amended

    After careful review, the Commission finds that the proposed rule 
change, as amended, 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 a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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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    \10\ In approving the proposed rule change, the Commission 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).
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    The Commission believes that the revised definition of ``synthetic 
option'' could help enable the Phlx to compete with other U.S. options 
exchanges whose definitions of ``stock-option order'' currently permit 
delta neutral positions, thereby increasing the number of markets in 
which customers may execute such orders. The Commission also believes 
that the proposed changes to Phlx Rule 1083(c) will ensure that the 
Phlx's definition of ``Complex Trade'' is consistent with the 
definition of ``Complex Trade'' adopted by the other Linkage Plan 
Participants. The Commission believes that by amending the definition 
of ``Complex Trade'' to include certain stock-option orders, as 
described above, and by providing a consistent definition of ``Complex 
Trade'' in the rules of the exchanges, the proposal may facilitate the 
execution of such Complex Trades.
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. The 
proposal was subject to a 21-day comment period, and the Commission 
received no comments on the proposal. In addition, as described more 
fully above, the revised definition of ``synthetic option'' in Phlx 
Rule 1066(g) is substantially similar to the definition of ``stock-
option order'' adopted by other U.S. options exchanges \12\ and does 
not raise new regulatory issues. Similarly, the proposed changes to 
Phlx Rule 1083(c) are nearly identical to changes proposed by the other 
Linkage Plan Participants that the Commission is approving in a 
separate order.\13\ Accordingly, accelerated approval of the changes to 
Phlx Rule 1083(c) will ensure that the Phlx's definition of ``Complex 
Trade'' is consistent with the definition of ``Complex Trade'' adopted 
by the other Linkage Plan Participants. For these reasons, the 
Commission finds good cause, consistent with Sections 6(b)(5) and 19(b) 
of the Act, to approve the proposal, as amended, on an accelerated 
basis.
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    \12\ See supra note 5.
    \13\ See Complex Trade Order, supra note 9.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Phlx-2007-40), as modified 
by Amendment No. 3, is approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 15 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-22294 Filed 11-14-07; 8:45 am]

BILLING CODE 8011-01-P
