
[Federal Register: April 4, 2008 (Volume 73, Number 66)]
[Notices]               
[Page 18589-18592]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04ap08-117]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57583; File No. SR-Phlx-2008-23]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change as 
Modified by Amendment No. 1 Thereto To Amend the Quarterly Options 
Series Pilot Program To Permit the Listing of Additional Series

March 31, 2008.
    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 27, 2008, the Philadelphia Stock Exchange, Inc. (``Exchange'' 
or ``Phlx'') 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 Exchange. 
On March 28, 2008, the Exchange submitted Amendment No. 1 to the 
proposed rule change. The Exchange has designated this proposal as non-
controversial under section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder,\4\ which renders the proposed rule change 
effective upon filing with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \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 Exchange proposes to amend Phlx Rule 1012, Series of Options 
Open for Trading, to expand the number of series of exchange traded 
fund (``ETF'') options that may be listed pursuant to Phlx's Quarterly 
Option Series (``QOS'') pilot program (the ``Pilot Program'') \5\ and 
to establish a delisting program in connection with the Pilot 
Program.\6\
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    \5\ Phlx's Pilot Program was established in 2007 and 
subsequently extended through July 10, 2008. See Securities Exchange 
Act Release Nos. 55301 (February 15, 2007), 72 FR 8238 (February 23, 
2007) (SR-Phlx-2007-08) (``Pilot Program Release'') and 56030 (July 
9, 2007), 72 FR 38645 (July 13, 2007) (SR-Phlx-2007-42). The 
American Stock Exchange, the Chicago Board Options Exchange 
(``CBOE''), the International Stock Exchange, and NYSEArca (the 
``pilot program exchanges'') have similar pilot programs that 
likewise continue through July 10, 2008.
    \6\ The Phlx proposal is substantially identical to a proposal 
by CBOE. See Securities Exchange Act Release No. 57410 (March 3, 
2008), 73 FR 12483 (March 7, 2008) (SR-CBOE-2007-96). See also 
Securities Exchange Act Release No. 57425 (March 4, 2008), 73 FR 
12783 (March 10, 2008) (SR-ISE-2008-19) (notice of filing and 
immediate effectiveness of a similar proposed rule change by the 
International Securities Exchange).
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    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.phlx.com), at the Exchange's principal office, and 
at the Commission's Public Reference Room.

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 Exchange 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 Exchange 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 amend the Exchange's 
Rule 1012, Series of Options Open for Trading, to permit the Exchange 
to list strike prices for QOS in ETF options that fall within a 
percentage range (30%) above and below the price of the underlying ETF. 
The proposed rule change will allow the Exchange, upon demonstrated 
customer interest, to open additional strike prices of QOS in ETF 
options that are more than 30% above or below the current price of the 
underlying ETF. The proposal will permit the Exchange to list up to 
sixty (60) additional series per expiration month for each QOS in ETF 
options. Additionally, the proposal will establish a delisting program 
for delisting QOS within certain parameters.
    The Pilot Program in Phlx Rule 1012 allows the Exchange to list and 
trade QOS on ETFs that satisfy the applicable listing criteria under 
Phlx rules.\7\ Under the Pilot Program, the Exchange may list QOS in up 
to five currently listed option classes that are either options on ETFs 
or indexes. The Exchange is also permitted to list QOS in any options 
class that is selected by the other pilot program exchanges. QOS trade 
based on calendar quarters that end in March, June, September and 
December. The

[[Page 18590]]

Exchange lists QOS that expire at the end of the next consecutive four 
calendar quarters, as well as the fourth quarter of the next calendar 
year. For example, if the Exchange were trading QOS in iShares Russell 
2000 Index Fund (``IWM'') in the month of April 2008, it would list 
series that expire at the end of the second quarter 2008 (June), third 
quarter 2008 (September), fourth quarter 2008 (December), first quarter 
2009 (March), and fourth quarter 2009 (December).
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    \7\ Phlx Rule 1101A establishes the Pilot Program for index 
options.
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    Phlx now lists QOS in five ETF options: (1) Nasdaq-100 Index 
Tracking Stock (``QQQQ''); (2) IWM; (3) DIAMONDS Trust, Series 1 
(``DIA''); (4) Standard and Poor's Depositary Receipts/SPDRs (``SPY''); 
and (5) Energy Select SPDR (``XLE'').\8\ The average trading volume and 
total volume for QOS in IWM options, QQQQ options, and SPY options 
exceed the volume for QOS in the other ETF options (DIA and XLE) that 
are listed and traded on the Exchange. The chart below provides trading 
volume figures for the fourth quarter in 2007, demonstrating that, in 
all but the month of November, QOS in IWM, along with QOS in QQQQ and 
SPY, were some of the more popular and heavily traded QOS on the 
Exchange.
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    \8\ These are the same options that are listed by the other 
pilot program exchanges.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   October 2007                    November 2007                   December 2007
                           QOS                           -----------------------------------------------------------------------------------------------
                                                                ADV          Total Vol          ADV          Total Vol          ADV          Total Vol
--------------------------------------------------------------------------------------------------------------------------------------------------------
IWM.....................................................           2,090          48,066           3,998          83,952           9,325         177,172
QQQQ....................................................           3,900          89,692           8,043         168,904          15,859         301,320
SPY.....................................................           3,919          90,134           4,697          98,646           5,064          96,210
DIA.....................................................             412           9,478             669          14,042           1,816          34,496
XLE.....................................................             653          15,008           8,967         188,316           3,357          63,776
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    Over time, some of the pilot program exchanges have received 
requests from market participants to add additional strike prices for 
QOS in IWM options that would be outside of the price range for setting 
strikes as provided for under Rule 5.5(e)(3) (hereinafter ``+/-$5 
range'').\9\ Moreover, investors and other market participants have 
advised such exchanges that they are buying and selling QOS in IWM 
options to trade volatility. In order to adequately replicate the 
desired volatility exposure, these market participants need to trade 
several IWM option series, many having strike prices that fall outside 
of the +/-$5 range currently allowed under the QOS rules.
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    \9\ Commentary .08(d) to Phlx Rule 1012 provides that the 
Exchange shall list strike prices for a QOS that are within $5 from 
the closing price of the underlying on the preceding day.
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    Market participants have also advised pilot program exchanges that 
their investment strategies involve trading options tied to a 
particular option ``delta,''\10\ rather than a particular level of the 
underlying security or index. At issue is the fact that delta depends 
on both the relative difference between the level of the underlying 
security or index and the option strike price and time to expiration. 
For example, with IWM trading at $85 per share, the strike price 
corresponding to a ``25-delta'' IWM call (i.e., a call option with a 
delta of 25) with one month to expiration would be 89. However, the 
strike price corresponding to a ``25-delta'' IWM call with 3 months to 
expiration would be 93, and the strike price of a ``25-delta'' call 
with 1 year to expiration would be 106. In short, the +/-$5 range for 
QOS in IWM options is insufficient to satisfy customer demand.
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    \10\ ``Delta'' is a measure of how an option price will change 
in response to a $1 price change in the underlying security or 
index. For example, an ABC option with a delta of ``50'' can be 
expected to change by $0.50 in response to a $1 change in the price 
of ABC.
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    In order to meet such customer demand, the Exchange proposes to 
amend Commentary .08 to Phlx Rule 1012, which governs the Quarterly 
Option Series Pilot Program. Specifically, the Exchange proposes to 
revise Commentary .08 to allow the Exchange to open additional strike 
prices of QOS in ETF options that are within thirty percent (30%) above 
or below the closing price of the underlying on the preceding business 
day. The Exchange also will be permitted to open additional strike 
prices of QOS in ETF options that are more than 30% above or below the 
current price of the underlying ETF, provided that demonstrated 
customer interest exists for such series, as expressed by 
institutional, corporate, or individual customers or their brokers. 
Market-Makers trading for their own account will not be considered when 
determining customer interest under this proposed provision. The 
Exchange will be permitted to list up to sixty (60) additional series 
per expiration month for each QOS in ETF options.
    The Exchange also is proposing to add new paragraph (g) to 
Commentary .08 to Phlx Rule 1012, which will set forth a delisting 
policy. Specifically, with respect to QOS in ETF options, the Exchange 
will, on a monthly basis, review series that are outside a range of 
five strikes above and five strikes below the current price of the 
underlying ETF, and delist series with no open interest in both the put 
and the call series having a strike price that is: (i) Higher than the 
highest strike price with open interest in the put and/or call series 
for a given expiration month; or (ii) lower than the lowest strike 
price with open interest in the put and/or call series for a given 
expiration month.
    To illustrate how the proposed delisting program will work, assume 
that IWM closed at $70 on the day the Exchange conducts the monthly 
review of QOS in ETF options. Series having strike prices above $75 and 
below $65 would be reviewed by the Exchange for possible delisting. 
Assume that the Exchange lists the following QOS in IWM options that 
expire in June 2008:

------------------------------------------------------------------------
         Calls--June 08 Exp                    Puts--June 08 Exp
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     Strike         Open  Interest?        Strike       Open  Interest?
------------------------------------------------------------------------
       62                 No                 62                No
       63                 No                 63               Yes
       64                 Yes                64               Yes
        *                  *                 *                 *
       76                 Yes                76               Yes
       77                 Yes                77               Yes
       78                 Yes                78               Yes
       79                 Yes                79               Yes
       80                 Yes                80               Yes
       81                 Yes                81               Yes
       82                 Yes                82               Yes
       83                 No                 83                No
       84                 No                 84                No
       85                 No                 85               Yes
       86                 Yes                86                No
       87                 Yes                87               Yes
       88                 Yes                88               Yes
       89                 Yes                89                No
       90                 Yes                90                No
       91                 No                 91                No
       92                 No                 92                No
       93                 No                 93                No
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[[Page 18591]]

    The Exchange would delist the first series listed above, as well as 
the last three: $62, $91, $92, and $93. The Exchange would not delist 
the $83 and $84 series because there are series having open interest 
with strike prices higher than these two series. In addition, the 
Exchange would not delist the $63 call series because there is open 
interest in the $63 put series.
    Notwithstanding the proposed delisting policy, customer requests to 
add strikes and/or maintain strikes in QOS in ETF options in series 
eligible for delisting shall be granted.
    Further, in connection with the proposed delisting policy, if the 
Exchange identifies series for delisting, the Exchange shall notify 
other options exchanges with similar delisting policies regarding 
eligible series for listing, and shall work with such other exchanges 
to develop a uniform list of series to be delisted, so as to ensure 
uniform series delisting of multiply listed QOS in ETF options. The 
Exchange expects that the proposed delisting policy for QOS in ETF 
options would be adopted by other options exchanges that have adopted 
the QOS Pilot Program.
    The Exchange represents that it has the necessary systems capacity 
to support new options series that will result from this proposal. 
Further, as proposed, the Exchange notes that this rule change would 
become part of the Pilot Program and, going forward, would be 
considered by the Commission when the Exchange seeks to renew or make 
permanent the Pilot Program in the future.\11\
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    \11\ To the extent the Commission views the proposed rule change 
as an expansion of the Pilot Program, thus triggering the 
requirement under the terms of the Pilot Program Approval Order that 
the Exchange submit a Pilot Program report, the Exchange notes that 
it submitted a report on or about June 26, 2007, in connection with 
its filing to extend the Pilot Program through July 10, 2008. See 
Securities Exchange Act Release No. 56030 (July 9, 2007), 72 FR 
38645 (July 13, 2007) (SR-Phlx-2007-42).
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2. Statutory Basis
    The Exchange believes that because the additional new series can be 
added without presenting capacity problems and because the Exchange has 
proposed a delisting policy with respect to QOS in ETF options, the 
rule proposal is consistent with section 6(b) of the Act \12\ in 
general, and furthers the objectives of section 6(b)(5) of the Act \13\ 
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 to protect 
investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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 solicited or received with respect to the 
proposed rule change.

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

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \14\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\15\ The Exchange has asked the Commission to waive 
the 30-day operative delay to permit the Exchange to immediately 
compete with the other options exchanges that have similarly amended 
their quarterly options series pilot programs.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has fulfilled this requirement.
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    The Commission notes that this proposal is substantially similar to 
a proposed rule change submitted by CBOE, which was approved by the 
Commission following publication for notice and comment, and does not 
raise any new regulatory issues.\16\ Waiving the 30-day operative delay 
will promote, without undue delay, further competition in the options 
market.\17\ For these reasons, the Commission believes that waiving the 
30-day operative delay is consistent with the protection of investors 
and the public interest and designates the proposal operative upon 
filing.
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    \16\ See Securities Exchange Act Release No. 57410, supra note 
6. See also Securities Exchange Act Release No. 57425, supra note 6.
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    The Commission notes that this rule change will become part of the 
Pilot Program and, going forward, its effects will be considered by the 
Commission in the event that the Exchange seeks to renew or make 
permanent the Pilot Program.\18\ Thus, in the Exchange's future reports 
on the Pilot Program, the Exchange should include analysis of (1) the 
impact of the additional series on the Exchange's market and quote 
capacity, and (2) the implementation and effects of the delisting 
policy, including the number of series eligible for delisting during 
the period covered by the report, the number of series actually 
delisted during that period (pursuant to the delisting policy or 
otherwise), and documentation of any customer requests to maintain QOS 
strikes that were otherwise eligible for delisting.
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    \18\ As set forth in the Pilot Program Release, if the Exchange 
were to propose an extension, expansion, or permanent approval of 
the Pilot Program, the Exchange must submit, along with any filing 
proposing such amendments to the program, a report that provides an 
analysis of the Pilot Program covering the entire period during 
which the Pilot Program was in effect. See Pilot Program Release, 
supra note 5. The Pilot Program Release requires the Exchange to 
include in its report, at a minimum: (1) Data and written analysis 
on the open interest and trading volume in the classes for which QOS 
were opened; (2) an assessment of the appropriateness of the option 
classes selected for the Pilot Program; (3) an assessment of the 
impact of the Pilot Program on the capacity of the Exchange, OPRA, 
and market data vendors (to the extent data from market data vendors 
is available); (4) any capacity problems or other problems that 
arose during the operation of the Pilot Program and how the Exchange 
addressed such problems; (5) any complaints that the Exchange 
received during the operation of the Pilot Program and how the 
Exchange addressed them; and (6) any additional information that 
would assist in assessing the operation of the Pilot Program.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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.\19\
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    \19\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change, the 
Commission considers the period to commence on March 28, 2007, the 
date on which the Exchange filed Amendment No. 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 18592]]

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 No. SR-Phlx-2008-23 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-2008-23. 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 such filing also will be available for 
inspection and copying at the principal office of the Exchange. 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-2008-23 and should be 
submitted on or before April 25, 2008.


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-6961 Filed 4-3-08; 8:45 am]

BILLING CODE 8011-01-P
