
[Federal Register: July 10, 2008 (Volume 73, Number 133)]
[Notices]               
[Page 39769-39776]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10jy08-122]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58099; File No. SR-Phlx-2008-50]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change Relating to Complex Orders

July 3, 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 July 1, 2008, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I, II, 
and III below, which Items have been prepared substantially by the 
Phlx. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to add Commentary .08 to Phlx Rule 1080 to 
establish an automated process for handling complex options orders on 
the Phlx's electronic trading platform for options, Phlx XL.\3\
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    \3\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 44612 (August 3, 2004) (order approving File No. SR-
Phlx-2003-59).
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    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 more efficiently 
handle complex orders on the Exchange by establishing rules and systems 
that would enable the Exchange to handle such orders electronically.
Definitions
    The proposed rule change would establish specific definitions 
relevant to the automated handling of complex orders.
Order Types
    Proposed Phlx Rule 1080, Commentary .08(i) would define ``Complex 
Order'' to mean any of the following: a spread order; \4\ a straddle 
order; \5\ a combination order; \6\ a ratio order; \7\ or a collar 
order (risk reversal).\8\
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    \4\ A spread order is an order to buy a stated number of option 
contracts and to sell a stated number of option contracts in a 
different series of the same option and may be bid for or offered on 
a total net debit or credit basis. See Phlx Rule 1066(f)(1).
    \5\ A straddle order is an order to buy a number of call option 
contracts and the same number of put option contracts with respect 
to the same underlying security (in the case of options on a stock 
or Exchange-Traded Fund Share) or the same underlying foreign 
currency (in the case of options on a foreign currency) and having 
the same exercise price and expiration date; or an order to sell a 
number of call option contracts and the same number of put option 
contracts with respect to the same underlying security (in the case 
of options on a stock or Exchange-Traded Fund Share) or the same 
underlying foreign currency (in the case of options on a foreign 
currency) and having the same exercise price and expiration date 
(e.g., an order to buy two XYZ July 50 calls and to buy two XYZ July 
50 puts is a straddle order). In the case of adjusted stock option 
contracts, a straddle order need not consist of the same number of 
put and call contracts if such contracts both represent the same 
number of shares at option. See Phlx Rule 1066(f)(2).
    \6\ A combination order is an order involving a number of call 
option contracts and the same number of put option contracts in the 
same underlying security and representing the same number of shares 
at option (if the underlying security is a stock or Exchange-Traded 
Fund Share) or the same number of foreign currency units (if the 
underlying security is a foreign currency). A combination order 
includes a conversion (generally, buying a put, selling a call and 
buying the underlying stock or Exchange-Traded Fund Share) and a 
reversal (generally, selling a put, buying a call and selling the 
underlying stock or Exchange-Traded Fund Share). In the case of 
adjusted option contracts, a combination order need not consist of 
the same number of shares at option. See Phlx Rule 1066(f)(3).
    \7\ For purposes of this rule, a ``ratio order'' would be 
defined as a spread, straddle or combination order that may consist 
of legs that have a different number of contracts. While a ratio 
order under this proposed rule may consist of legs that have a 
different number of contracts, in order to establish priority 
pursuant to Phlx Rules 1033(d) and (g), the number of contracts must 
differ only by a permissible ratio. A permissible ratio for purposes 
of priority is any ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00). For 
example, a one-to-two (.5) ratio, a two-to-three (.667) ratio, or a 
two-to-one (2.00) ratio is permissible, whereas a one-to-four (.25) 
ratio or a four-to-one (4.0) ratio is not.
    \8\ A collar order (risk reversal) is defined as an order 
involving the sale (purchase) of a call (put) option coupled with 
the purchase (sale) of a put (call) option in equivalent units of 
the same underlying security having a lower (higher) exercise price 
than, and the same expiration date as, the sold (purchased) call 
(put) option.
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Complex Order Strategy
    The term ``Complex Order Strategy'' means any Complex Order 
involving any option series which is priced at a net debit or credit 
(based on the relative prices of each component). The Exchange will 
calculate both a bid price and an offer price for each Complex Order 
Strategy based on the current PBBO (as defined below) for each 
component of the Complex Order and the bid/ask differential for each 
component.
    For example, a Complex Order Strategy might be ``buy one XYZ 
January 20 call, sell one XYZ January 20 put.''

[[Page 39770]]

The system would assign this Complex Order Strategy a specific 
identification number or code that would be used in the system to 
identify this Complex Order Strategy. Hypothetically, the 
identification number for this particular Complex Order Strategy could 
be ``Complex Order Strategy 12345.'' Complex Order Strategy 
12345 would have a bid price and an offer price, as stated 
above, based on the PBBO and the bid/ask differential for each 
component. If an investor wishes to purchase or sell, for example, 10 
Complex Order Strategy 12345, such an investor would be bidding for or 
offering to buy 10 XYZ January 20 calls and sell 10 XYZ January 20 
puts.
Other Definitions
PBBO
    The term ``PBBO'' means the Phlx Best Bid and/or Offer for 
individual option series.
cPBBO
    The term ``cPBBO'' means the best net debit or credit price for a 
Complex Order Strategy based on the PBBO for the individual components 
of such Complex Order Strategy.
NBBO
    The term ``NBBO'' means the National Best Bid and/or Offer for 
individual option series.
cNBBO
    The term ``cNBBO'' means the best net debit or credit price for a 
Complex Order Strategy based on the NBBO for the individual components 
of a Complex Order Strategy.
Phlx XL Participant
    The term ``Phlx XL participant'' includes Streaming Quote Traders 
(``SQTs''), Remote Streaming Quote Traders (``RSQTs''), non-SQT 
Registered Options Traders (``ROTs''), specialists or non-Phlx market 
makers on another exchange; non-broker-dealer customers and non-market-
maker off-floor broker-dealers; and Floor Brokers using the Options 
Floor Broker Management System.
Order Entry
    Under the proposal, Complex Orders would be eligible to be entered 
in increments of $0.01. Non-broker-dealer customers and non-market-
maker off-floor broker-dealers would be permitted to enter Complex 
Orders as Day, Good Till Cancelled (``GTC'') or Immediate or Cancel 
(``IOC''). Exchange SQTs,\9\ RSQTs,\10\ non-SQT ROTs,\11\ specialists 
and non-Phlx market makers on another exchange would be permitted to 
enter Complex Orders as IOC only. Floor Brokers using the Options Floor 
Broker Management System \12\ may enter Complex Orders as Day, GTC, or 
IOC on behalf of non-broker-dealer customers and non-market maker off-
floor broker-dealers, and as IOC only on behalf of broker-dealers or 
affiliates of broker-dealers.
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    \9\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically 
through an electronic interface with AUTOM via an Exchange approved 
proprietary electronic quoting device in eligible options to which 
such SQT is assigned. See Phlx Rule 1014(b)(ii)(A).
    \10\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically through AUTOM in eligible options to which such RSQT 
has been assigned. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange. See Phlx Rule 
1014(b)(ii)(B).
    \11\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT. 
See Phlx Rule 1014(b)(ii)(C).
    \12\ The Options Floor Broker Management System is a component 
of the Exchange's electronic options trading system designed to 
enable Floor Brokers and/or their employees to enter, route and 
report transactions stemming from options orders received on the 
Exchange. The Options Floor Broker Management System also is 
designed to establish an electronic audit trail for options orders 
represented and executed by Floor Brokers on the Exchange, such that 
the audit trail provides an accurate, time-sequenced record of 
electronic and other orders, quotations and transactions on the 
Exchange, beginning with the receipt of an order by the Exchange, 
and further documenting the life of the order through the process of 
execution, partial execution, or cancellation of that order. See 
Phlx Rule 1080, Commentary .06.
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Eligible Complex Orders
    A Complex Order would be eligible to trade on Phlx XL only when 
each component of the Complex Order is open for trading on the 
Exchange. Complex Orders may be executed against the Complex Order Book 
(``CBOOK'') or placed on the CBOOK. Certain Complex Orders will be 
entered into a Complex Order Live Auction (``COLA'') either following a 
Complex Order Opening Process (``COOP'') or when a Complex Order 
improves the cPBBO. Complex Orders would not trade on Phlx XL when: (i) 
The Complex Order is received prior to the opening on the Exchange for 
each component of the Complex Order; (ii) during an opening rotation 
for any component of the Complex Order; (iii) during a trading halt for 
any component of the Complex Order; (iv) when the Exchange's automated 
execution system is disengaged for any component of the Complex Order; 
(v) when the Exchange's Risk Monitor Mechanism \13\ is engaged for any 
component of the Complex Order pursuant to Phlx Rule 1093 that 
represents all or a portion of the PBBO; or (vi) when the Exchange's 
market for any component of the Complex Order is disseminated pursuant 
to Phlx Rule 1082(a)(ii)(B).\14\
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    \13\ The Risk Monitor Mechanism automatically removes a Phlx XL 
participant's quotations from the Exchange's disseminated quotation 
in all series of a particular option once such Phlx XL participant 
executes a maximum volume threshold within a specific time period. 
In the event that the specialist's quote is removed by the Risk 
Monitor Mechanism and there are no other Phlx XL participants 
quoting in the particular option, the system will automatically 
provide two-sided quotes that comply with the Exchange's rules 
concerning quote spread parameters on behalf of the specialist until 
such time as the specialist revises the quotation. See Phlx Rule 
1093(d).
    \14\ If an SQT's or RSQT's (other than a Directed SQT or RSQT) 
quotation size in a particular series in a Streaming Quote Option is 
exhausted or removed by the Risk Monitor Mechanism, such SQT's or 
RSQT's quotation shall be deleted from the Exchange's disseminated 
quotation until the time the SQT or RSQT revises his/her quotation. 
If the Exchange's disseminated size in a particular series in a 
Streaming Quote Option is exhausted at that particular price level, 
and no specialist, SQT, or RSQT has revised their quotation 
immediately following the exhaustion of the Exchange's disseminated 
size at such price level, the Exchange shall automatically provide 
two-sided quotes that comply with the Exchange's rules concerning 
quote spread parameters on behalf of the specialist until such time 
as the specialist revises the quotation, with a size of one 
contract. See Phlx Rule 1082(a)(ii)(B).
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    The Phlx XL system will begin a COOP upon the termination of most 
of the above conditions, except that the Phlx XL system will not engage 
the COOP Timer upon re-opening Complex Order trading when either: (a) 
The Exchange's automated execution system was disengaged and 
subsequently re-engaged, or (b) the Phlx XL Risk Monitor Mechanism was 
engaged and subsequently disengaged for a quote of any component of the 
Complex Order that represents the PBBO. In either event, the Phlx XL 
system will immediately begin the COOP Evaluation (defined below) and 
will not initiate the COOP Timer (defined below).
COOP
    The Phlx XL system will accept pre-opening Complex Orders, and will 
accept Complex Orders prior to re-opening following a halt in trading 
on the Exchange. Complex Orders received prior to the opening or during 
a trading halt will reside on the CBOOK. Once trading in each component 
of a Complex Order has opened (or re-opened following a trading halt), 
the Phlx XL system will initiate a COOP, provided that a COOP will only 
be conducted for any Complex Order Strategy that has a Complex Order 
pending at the opening or re-opening following a trading halt. The COOP 
will be conducted in two

[[Page 39771]]

phases, the ``COOP Timer'' and the ``COOP Evaluation.''
COOP Timer
    A COOP Timer will begin counting a number of seconds during which 
bids and/or offers for a Complex Order Strategy can be received but 
during which Complex Orders may not be traded. The COOP Timer would be 
configurable to a period ranging from 0 to 600 seconds as determined by 
the Exchange and communicated to the Exchange membership via Exchange 
Circular. The purpose of the COOP Timer is to allow a time period for 
the markets trading the components of the Complex Order to conduct 
openings for the components and to establish prices on such markets 
after the opening. The Exchange believes that the COOP Timer should 
thus contribute to fair and orderly markets in Complex Orders on the 
Exchange at the opening or re-opening following a trading halt.
    Multiple Complex Orders that represent the same Complex Order 
Strategy would participate in the COOP Timer. The Exchange will 
establish a maximum number of Complex Order Strategies that can be 
subject to a COOP Timer at any given time. Such maximum number will be 
communicated to the membership by Exchange Circular. The purpose of the 
``maximum number'' proposal is to enable the Exchange to better manage 
system capacity relating to Complex Order Strategies subject to a COOP 
Timer. The system would ``stagger'' COOP Timers when the Phlx XL system 
has received the maximum number of Complex Order Strategies (i.e., 
begin another round of COOP Timers that would include Complex Order 
Strategies that have not yet been the subject of a COOP Timer).
    Complex Orders received during the COOP Timer and COOP Evaluation 
will reside on the CBOOK. Complex Orders will be visible to Phlx XL 
participants during the COOP Timer and COOP Evaluation.
    The Phlx XL system will not engage the COOP Timer upon re-opening 
Complex Order trading when: (a) The Exchange's automated execution 
system was disengaged and subsequently re-engaged, or (b) the Phlx XL 
Risk Monitor Mechanism was engaged and subsequently disengaged. In 
either event, the Phlx XL system will immediately begin the COOP 
Evaluation.
COOP Evaluation
    Upon expiration of the COOP Timer, the Phlx XL system will conduct 
a COOP Evaluation to determine which Complex Order, if any, on the 
CBOOK will be the ``COLA-eligible order'' (as defined below) subject to 
a COLA. The Phlx XL system will establish one single COLA-eligible 
order \15\ for each COLA, against which Phlx XL participants may submit 
bids and offers. The COLA-eligible order, if any, will be identified by 
the Phlx XL system among the following Complex Orders: Market and 
marketable limit Complex Orders (including Complex Orders that cross 
the cPBBO), and Complex Orders that improve the cPBBO.
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    \15\ A single COLA-eligible order would also include multiple 
orders at the same (best) price that are aggregated and treated by 
the system as one COLA-eligible order pursuant to proposed Phlx Rule 
1080, Commentary .08(d)(ii)(B)(2)(b).
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    The purpose of the COOP Evaluation is to enable the system to 
determine, based on a ``snap shot'' of all Complex Orders on the CBOOK, 
the manner in which orders received during that time period will be 
handled. For example, if at the end of the COOP Timer the Phlx XL 
system determines that no market or marketable limit Complex Orders, 
Complex Orders that improve the cPBBO, and/or Complex Orders that cross 
the cPBBO exist on the CBOOK, Complex Orders that were received during 
the COOP Timer will remain on the CBOOK.
COLA-Eligible Order
    On the other hand, if at the expiration of the COOP Timer, the Phlx 
XL system determines that there are market or marketable limit Complex 
Orders (including Complex Orders that cross the cPBBO) and/or Complex 
Orders that improve the cPBBO in the Phlx XL system, the Phlx XL system 
will conduct a COOP Evaluation to determine which of those orders will 
be placed in a COLA as the single ``COLA-eligible order'' for each 
particular Complex Order Strategy, against which Phlx XL participants 
may enter bids and offers. A ``COLA-eligible order'' means a Complex 
Order identified by way of a COOP or that improves the cPBBO respecting 
the specific Complex Order Strategy that is the subject of the Complex 
Order.
     If a single Complex Order exists in the Phlx XL system 
that improves the cPBBO on one side of the market, that order will be 
the COLA-eligible order.
     If multiple Complex Orders exist in the Phlx XL system 
that improve the cPBBO on one side of the market, the Complex Order at 
the best price will be the COLA-eligible order. If there are multiple 
Complex Orders at the best price, the Phlx XL system will treat the 
aggregate size at that price as a single COLA-eligible order. Such 
orders will be executed in the order in which they were received.
     If market and/or marketable limit Complex Orders exist in 
the Phlx XL system on both sides of the market, the Complex Order on 
the side of the market with the larger marketable size will be the 
COLA-eligible order. If the market and/or marketable limit Complex 
Orders have the same size on both sides of the market, the market and/
or marketable limit Complex Orders that represent the larger size 
associated with market orders will be the COLA-eligible order. If the 
size associated with market Complex Orders is the same on both sides of 
the market, the side of the market with the first Complex Order 
establishing the best price will be the COLA-eligible order. The size 
associated with multiple market and marketable limit Complex Orders at 
the same price will be aggregated and treated as one COLA-eligible 
order at the best price by the system. Such orders will be executed in 
the order in which they were received.
     If Complex Orders on opposite sides of the market that 
cross through the mid-point of the cPBBO exist in the Phlx XL system, 
the side of the market that is priced at the greater amount through the 
mid-point of the cPBBO will be the COLA-eligible order. If both sides 
of the market are priced at an equal amount through the mid-point of 
the cPBBO, or are priced at the cPBBO, the side of the market with the 
greater size will be the COLA-eligible order. If both sides of the 
market have the same size, the side of the market that was first to 
submit the best price will be a COLA-eligible order.
     Orders that are not determined to be the COLA-eligible 
order may participate in the COLA pursuant to proposed Phlx Rule 1080, 
Commentary .08(e)(iii), as described below.
     If Complex Orders on opposite sides of the market exist in 
the Phlx XL system that improve the cPBBO but do not cross the mid-
point of the cPBBO, there will be no COLA-eligible order.
    The purpose of these scenarios is to provide a methodology for 
determining which order in the Phlx XL system would qualify as the 
COLA-eligible order; the methodology is intended to reward the 
participant whose COLA-eligible order was either submitted first in 
time or whose COLA-eligible order would create the narrowest spread in 
the cPBBO. The Exchange believes that once a COLA has begun, the person 
submitting the initial COLA-eligible order should be the one to benefit 
from the auction relating to his or her particular COLA-eligible order 
during the COLA. Other Complex Orders

[[Page 39772]]

representing the same Complex Order Strategy on the same side of the 
market as the COLA-eligible order under the scenarios listed above, 
regardless of price, would be entitled to executions only after the 
COLA-eligible order has been executed in full.
    An order that would otherwise be the COLA-eligible order that is 
received in the Phlx XL system during the final ten seconds of any 
trading session would not be the COLA-eligible order.
COLA
    Complex Orders on the CBOOK may be subject to an automated COLA 
process. A COLA may take place (1) following a COOP, or (2) during 
normal trading if the Phlx XL system receives a Complex Order that 
improves the cPBBO.
    If the Phlx XL system identifies the existence of a single COLA-
eligible order following a COOP or by way of receipt during normal 
trading of a Complex Order that improves the cPBBO, such COLA-eligible 
order will initiate a COLA, during which Phlx XL participants may bid 
and offer against the COLA-eligible order pursuant to this rule. COLA-
eligible orders will be executed without consideration of any prices 
that might be available on other exchanges trading the same options 
contracts, unless the Phlx XL participant submitting the COLA-eligible 
order designates the COLA-eligible order as ineligible for execution 
during the COLA at a price that is inferior to the NBBO for the 
individual components of the Complex Order Strategy that is the subject 
of the COLA-eligible order. The purpose of this provision is to provide 
a method for Phlx XL participants, upon request, to protect each 
component of their Complex Order from trading through the NBBO. 
However, an otherwise ``NBBO protected'' COLA-eligible order may not be 
so designated once placed onto the CBOOK.
    Upon the identification of the COLA-eligible order by the Phlx XL 
system, the Exchange will send a broadcast message to Phlx XL 
participants indicating that a COLA has been initiated. The broadcast 
message will identify the Complex Order Strategy, the size of the COLA-
eligible order, and any contingencies, if applicable (e.g., All-or-
None), but will not identify the side of the market or the price of the 
COLA-eligible order. The purpose of this provision is to maintain a 
fair and orderly market for Complex Orders on the Exchange by ensuring 
a ``blind'' auction in the COLA.
COLA Timer
    Once the Phlx XL system has identified a COLA-eligible order 
(either through price-improvement or by way of a COOP), the COLA will 
begin with a timing mechanism (a ``COLA Timer''), which is a 
configurable counting period not to exceed five seconds, during which 
Phlx XL participants may submit bids or offers that improve on the 
cPBBO for the particular Complex Order Strategy. In order to be 
consistent and to avoid confusion, the COLA Timer will be set for the 
same number of seconds for all options trading on the Exchange as 
determined by the Exchange and communicated to the membership via 
Exchange Circular. Complex Orders may be cancelled at any time prior to 
the commencement of a COLA. To ensure the uninterrupted continuity of 
the COLA, the proposed rule would provide that no Complex Order(s) in a 
particular Complex Order Strategy may be cancelled during the COLA for 
that Complex Order Strategy. Such Complex Orders may be cancelled 
following the completion of the COLA for that Complex Order Strategy.
Bidding and Offering in Response to a COLA
    Phlx XL participants may bid and/or offer on either or both side(s) 
of the market during the COLA Timer by submitting one or more 
electronic bids or offers that improve the cPBBO, known as a ``COLA 
Sweep.'' Phlx XL participants may also bid and/or offer electronically 
using limit orders. Such orders would be handled as described below.
    A single Phlx XL participant may submit multiple COLA Sweeps at 
different prices in increments of $0.01 in response to a COLA 
broadcast, regardless of the minimum trading increment applicable to 
the specific series. A COLA Sweep may be for a size that is less than 
the size of the COLA-eligible order, and multiple COLA Sweeps submitted 
by the same Phlx XL participant may be for different sizes at different 
price levels.
    Phlx XL participants may change the size of a previously submitted 
COLA Sweep at the previously submitted COLA price during the COLA 
Timer. In the event that a Phlx XL participant submits multiple COLA 
Sweeps in a particular Complex Order Strategy, the system will use the 
Phlx XL participant's most recently submitted COLA Sweep at each price 
level as that participant's response at that price. The Phlx XL 
participant's most recently submitted COLA Sweep will be included in 
the allocation algorithm described below, unless the newly submitted 
COLA Sweep has a size of zero. A COLA Sweep with a size of zero will 
remove a Phlx XL participant's previously submitted COLA Sweep from the 
COLA at that price level. The purpose of this provision is to reward 
Phlx XL participants that are first to bid or offer during the COLA 
Timer without penalizing them simply because the Phlx XL participant 
changes the size of his/her COLA Sweep. COLA Sweeps will not be visible 
to any participant and will not be disseminated by the Exchange. This 
is to ensure a fair auction during the COLA Timer, such that all 
participants would submit COLA Sweeps at their best price.
    The Exchange's rules regarding exposure of Solicited Transactions 
and orders submitted by Order Entry Firms \16\ acting as agent who wish 
to trade as principal against such orders will apply to complex orders 
trading on Phlx XL.\17\
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    \16\ The term ``Order Entry Firm'' means a member organization 
of the Exchange that is able to route orders to AUTOM. See Phlx Rule 
1080(c)(ii)(A)(1).
    \17\ Under Exchange rules, Order Entry Firms may not execute as 
principal against orders on the limit order book they represent as 
agent unless: (a) Agency orders are first exposed on the limit order 
book for at least three seconds, (b) the Order Entry Firm has been 
bidding or offering on the Exchange for at least three seconds prior 
to receiving an agency order that is executable against such order, 
or (c) the Order Entry Firm proceeds in accordance with the crossing 
rules contained in Phlx Rule 1064. See Phlx Rule 1080(c)(ii)(C)(1). 
Order Entry Firms must expose orders they represent as agent for at 
least three seconds before such orders may be automatically 
executed, in whole or in part, against orders solicited from members 
and non-member broker-dealers to transact with such orders. See Phlx 
Rule 1080(c)(ii)(C)(2).
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Execution of COLA-Eligible Orders
    Upon the expiration of the COLA Timer, COLA Sweeps and/or any 
Complex Orders received during the COLA Timer that improve the cPBBO 
may be executed against the COLA-eligible order (unless the cPBBO is 
inferior to the cNBBO and the Phlx XL participant submitting the COLA-
eligible order has designated the components of the COLA-eligible order 
as ineligible for execution at a price that is inferior to the cNBBO). 
The COLA-eligible order will receive the best price or prices available 
for the Complex Order Strategy represented by the COLA-eligible order. 
The components of a COLA-eligible order may be executed in one cent 
increments, regardless of the minimum quoting increments otherwise 
appropriate to the individual legs of the order. Executions in the COLA 
will comply with the requirements of Phlx Rule 1033(d).\18\
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    \18\ Phlx Rule 1033(d), ``Spread Type Priority,'' states that 
when a member holding a hedge order, as defined in Phlx 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 
hedge order at the total credit or debit with one other member with 
priority over either the bid or the offer established in the 
marketplace that is not better than the bids or offers comprising 
such total credit or debit, provided that the member executes at 
least one option leg at a better price than the established bid or 
offer for that option contract AND no option leg is executed at a 
price outside of the established bid or offer for that option 
contract.

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[[Page 39773]]

Trade Allocation and Priority
    As stated above, COLA-eligible orders, COLA Sweeps, and responsive 
Complex Orders will trade first based on the best price or prices 
available at the end of the COLA Timer. If no COLA Sweeps or responsive 
Complex Orders for the same Complex Order Strategy as the COLA-eligible 
order that improve the initial cPBBO were received during the COLA 
Timer, each component of the COLA-eligible order may trade at the PBBO 
with existing quotes and/or limit orders on the limit order book for 
the individual components of the Complex Order, provided that each 
component is executed such that the components comprise the Complex 
Order Strategy with the correct ratio for the desired net debit or 
credit. Trades pursuant to this paragraph will be allocated in 
accordance with Phlx Rule 1014(g)(vii), and an SQT or RSQT quoting all 
components of the Complex Order will have priority over SQTs and RSQTs 
quoting a single component, but not over customer orders.
    If the markets for the individual components of a Complex Order 
Strategy independently improve during the COLA Timer and match the best 
price of COLA Sweep(s) and/or responsive Complex Order(s), the Phlx XL 
system will execute such COLA Sweep(s) and/or responsive Complex Orders 
before executing the individual components of the Complex Order 
Strategy. A non-broker-dealer customer Complex Order will have priority 
over specialists, SQTs, RSQTs, and off-floor broker-dealers bidding for 
and/or offering any component(s) of the Complex Order Strategy at the 
same price, but not over non-broker-dealer customer orders representing 
any component(s) of the Complex Order Strategy at the same price. The 
purpose of this provision is to encourage Phlx XL participants to 
participate in the Complex Order auction process, in which the Phlx XL 
system will create opportunities for price improvement of the COLA-
eligible order, rather than doing so with individual orders. The 
Exchange believes that the systemic approach using Complex Orders in 
the auction process will foster fair and orderly automated markets for 
Complex Orders, with the potential for price improvement each time the 
automated auction process is engaged.
    If multiple customer Complex Orders, COLA Sweeps, Phlx XL 
participant Complex Orders and/or off-floor broker-dealer Complex 
Orders are eligible for execution against the COLA-eligible order at 
the same net price, the trade will be allocated, subject to the size of 
the COLA-eligible order:
     First, to customer marketable Complex Orders on the CBOOK 
(as defined below) in the order in which they were received;
     Second, to COLA Sweeps on a size pro-rata basis;
     Third, to SQTs, RSQTs, and non-SQT ROTs who have submitted 
IOC Complex Orders that are marketable against the COLA-eligible order, 
on a size pro-rata basis; and
     Fourth, to non-market maker off-floor broker-dealers on a 
size pro-rata basis.
    Executions in the COLA will comply with the requirements of Phlx 
Rule 1033(d), as described above. For allocation purposes, the size of 
a COLA Sweep or responsive Complex Order received during the COLA Timer 
would be limited to the size of the COLA-eligible order. For example, 
if the size of a COLA-eligible order is 100 contracts, and a COLA Sweep 
is received for 500 contracts, the system will calculate the algorithm 
using a size of 100 contracts for the COLA Sweep. The purpose of this 
provision is to prevent artificially inflated COLA Sweep and Complex 
Order sizes intended to increase the size pro rata entitlement 
applicable to the Phlx XL participant submitting the COLA Sweep or 
Complex Order.
    If a COLA-eligible order cannot be filled in its entirety, any 
remaining balance would be placed on the CBOOK unless the COLA-eligible 
order has been submitted with other instructions (i.e., cancel).
Enhanced Specialist Participation
    In the situation where the specialist submits a COLA Sweep during 
the COLA Timer at the same price as other COLA Sweeps that are eligible 
for execution against the COLA-eligible order, after customer 
marketable Complex Orders have been executed against the COLA-eligible 
order, the specialist would be entitled to receive the greater of the 
proportion of the aggregate size at the cPBBO associated with such 
specialist's COLA Sweep, SQT, and RSQT COLA Sweeps, and non-SQT ROT 
Complex Orders on the CBOOK (i.e., size pro rata); or 40% of the 
remainder of the order. The specialist is not entitled to receive an 
allocation that would exceed the size of the specialist's COLA Sweep.
Firm Quote Requirement for COLA-Eligible Orders
    COLA Sweeps in response to a COLA broadcast would represent non-
firm interest that can be modified at any time prior to the end of the 
COLA Timer. At the end of the COLA Timer, a COLA Sweep would be firm 
only with respect to the COLA-eligible order for which it is submitted, 
provided that COLA Sweeps that have size remaining after the COLA-
eligible order is exhausted are also eligible to trade with other 
incoming COLA-eligible orders in the auction queue that are received 
during the COLA Timer after the initial COLA-eligible order has been 
executed in its entirety. Any COLA Sweeps not accepted in whole or in a 
permissible ratio will expire at the end of the COLA Timer.
Complex Orders Resting on the CBOOK
    The proposed rule describes the handling of Complex Orders resting 
on the CBOOK, and incoming electronic Complex Orders that are received 
prior to the expiration of the COLA Timer (collectively, for purposes 
of this rule, ``incoming Complex Orders'') representing the same 
Complex Order Strategy as a COLA-eligible order. At the end of the COLA 
Timer, the Phlx XL system will determine the price and size of COLA 
Sweeps and any orders that were received during the COLA Timer that are 
unrelated to the COLA but nonetheless are eligible to participate in 
the COLA as set forth below.
Same Side of the Market as COLA-Eligible Order
    Incoming Complex Orders that were received during the COLA Timer 
for the same Complex Order Strategy as the COLA-eligible order that are 
on the same side of the market will join the COLA. The original COLA-
eligible order has priority at all price points (i.e., multiple COLA 
Sweep Prices) over the incoming Complex Order(s), regardless of the 
price of the incoming Complex Order. Therefore, the incoming Complex 
Order would not be eligible for execution until the COLA-eligible order 
is executed in its entirety. The purpose of this provision is to 
provide incentive for, and to reward, customers who submit initial 
COLA-eligible orders by systemically completing the COLA for such an 
order. In this manner, the entire order may benefit from COLA Sweeps

[[Page 39774]]

and price-improving orders on the opposite side of the market. The 
Exchange further believes that affording priority to the initial COLA-
eligible order at all price points submitted for the same Complex Order 
Strategy fosters a fair and orderly marketplace, is more 
technologically sound, and will eliminate the potentially disruptive 
effect of other market participants bidding or offering in penny 
increments for the purpose of taking advantage of COLA Sweeps and 
price-improving orders submitted for execution against the original 
COLA-eligible order without having submitted an initial Complex Order 
that improves the cPBBO (and thus becomes a COLA-eligible order).
    Incoming Complex Orders on the same side of the market as a COLA-
eligible order are eligible for execution once the entire COLA-eligible 
order has been executed. Once the COLA-eligible order has been executed 
in its entirety, additional Complex Orders on the same side of the 
market as the COLA-eligible order will be executed (if at all) at each 
price level in the order in which they were received. If such incoming 
Complex Orders are not executed in their entirety, any remaining 
contracts will not be considered a COLA-eligible order and the Phlx XL 
system will place such remaining bids or offers on the CBOOK, subject 
to other instructions. If the incoming Complex Order is not executed in 
its entirety, the system will not initiate a new COLA. Any remaining 
contracts will be placed on the CBOOK, subject to other instructions.
    If no COLA Sweeps or Complex Orders for the same Complex Order 
Strategy as the COLA-eligible order were received during the COLA 
Timer, each component of the COLA-eligible order may trade at the PBBO 
with existing quotes and/or limit orders on the limit order book for 
the individual components of the Complex Order, provided that each 
component is executed such that the components comprise the Complex 
Order Strategy with the correct ratio for the desired net debit or 
credit.
    Trades involving the individual components of a Complex Order would 
be allocated in accordance with Exchange Rule 1014(g)(vii).\19\ An SQT 
or RSQT quoting all components of the Complex Order would have priority 
over SQTs and RSQTs quoting a single component, but not over customer 
orders.
---------------------------------------------------------------------------

    \19\ Phlx Rule 1014(g)(vii) is the allocation algorithm 
applicable to trades executed on Phlx XL.
---------------------------------------------------------------------------

Customer Complex Orders--Opposite Side of the Market
    Incoming customer Complex Orders that are received during the COLA 
Timer on the opposite side of the market from the COLA-eligible order 
with a price equal to or better than the best COLA Sweep Price will be 
executed against the COLA-eligible order (which will be executed in its 
entirety first as described in sub-paragraph (B) above) as follows:
     If such incoming customer Complex Order is a limit order 
at the same price as the best COLA Sweep Price, the incoming Complex 
Order will be executed at the Sweep Price.
     If such incoming Complex Order is a limit order that 
improved the best COLA Sweep Price, the incoming customer Complex Order 
will be executed at the mid-point of the best COLA Sweep Price and the 
limit order price, rounded, if necessary, to the closest minimum 
trading increment to the benefit of the COLA-eligible order.
     If such incoming customer Complex Order is a market order 
or a limit order that crosses the cPBBO, the incoming Complex Order 
will be executed at the mid-point of the cPBBO on the same side of the 
market as the COLA-eligible order and the best Sweep Price, rounded, if 
necessary, to the closest minimum trading increment to the benefit of 
the COLA-eligible order.
     If multiple customer Complex Orders are received on the 
opposite side of the market from the COLA-eligible order, such orders 
will be executed in the order in which they were received at each price 
level.
     If the COLA-eligible order is executed in its entirety and 
there are remaining bids or offers from the incoming Complex Order(s), 
the Phlx XL system will place such bids or offers onto the CBOOK, 
subject to other instructions.
Non-Customer Complex Orders--Opposite Side of the Market
    Incoming non-customer Complex Orders that are received during the 
COLA Timer on the opposite side of the market from the COLA-eligible 
order with a price equal to or better than the best COLA Sweep Price 
will be executed against the COLA-eligible order as follows:
     If such incoming non-customer Complex Order is a limit 
order at the same price as the best COLA Sweep Price, the incoming non-
customer Complex Order will be executed at the Sweep Price.
     If such incoming non-customer Complex Order is a limit 
order that improved the best COLA Sweep Price, the incoming non-
customer Complex Order will be executed at the limit order price.
     If such incoming non-customer Complex Order is a market 
order or a limit order that crosses the cPBBO, the incoming non-
customer Complex Order will be executed at a price of $0.01 better than 
the cPBBO on the same side of the market as the COLA-eligible order.
     If multiple non-customer Complex Orders are received on 
the opposite side of the market from the COLA-eligible order, such 
orders will be executed in the order in which they were received at 
each price level.
     If the COLA-eligible order is executed in its entirety and 
there are remaining bids or offers from the incoming non-customer 
Complex Order(s), the Phlx XL system will place such bids or offers 
onto the CBOOK, subject to other instructions.
    Incoming Complex Orders that were received during the COLA Timer on 
the opposite side of the market from the COLA-eligible order with a 
price inferior to any other COLA Sweep Price(s) will be executed 
against the COLA-eligible order after all interest at the better COLA 
Sweep Price(s) has/have been executed. The system will treat any 
unexecuted remaining contracts in the incoming Complex Order as a new 
Complex Order, and will not initiate a new COLA. Such unexecuted 
remaining contracts will be placed on the CBOOK, subject to other 
instructions.
CBOOK
    Non-broker-dealer customer Complex Orders and non-market marker 
broker-dealer orders are eligible for entry into the CBOOK and may be 
designated as Day or GTC. Complex Orders may be entered onto the CBOOK 
in increments of $0.01. The individual components of a Complex Order 
may be executed in minimum increments of $0.01, regardless of the 
minimum increments applicable to such components. Such orders will be 
placed on the CBOOK by the system when the following conditions exist:
     The Complex Order does not price-improve upon the cPBBO;
     The order is received before the expiration of the COOP;
     When the Complex Order is received during a trading halt 
on the Exchange for any component of the Complex Order;
     When the Complex Order is received while the Exchange's 
automated execution system is

[[Page 39775]]

disengaged for any component of such Complex Order;
     When any component of the Complex Order is a pre-opening 
order; or
     When the Complex Order is received during the final 10 
seconds of the trading session.
    A COLA-eligible order designated as ineligible for execution in the 
COLA at a price that is inferior to the NBBO at the time of execution 
for the individual components of the Complex Order Strategy that is the 
subject of the COLA-eligible order may not be so designated once placed 
onto the CBOOK. Therefore, any Complex Order initially so designated 
would lose this designation once placed onto the CBOOK.
Execution of Complex Orders in the CBOOK
    Complex Orders will be automatically executed against orders on the 
CBOOK in price priority and in time priority at the same price. A 
Complex Order resting on the CBOOK will execute automatically against: 
(i) Quotes or orders on the limit order book for the individual 
components of the order, provided that the Complex Order can be 
executed in full or in a permissible ratio by such quotes or orders 
(allocated in accordance with Phlx Rule 1014(g)(vii), and an SQT or 
RSQT quoting all components of the Complex Order will have priority 
over SQTs and RSQTs quoting a single component, but not over customer 
orders); or (ii) an incoming marketable Complex Order(s) that do(es) 
not trigger a COLA Timer, whichever arrives first.
    An incoming marketable Complex Order that does not trigger a COLA 
Timer will execute in the following order:
     First, against quotes or orders on the limit order book 
for the individual components of the order (provided that the Complex 
Order can be executed in full or in a permissible ratio by such quotes 
or orders). Trades executed pursuant to this provision will be 
allocated in accordance with current Phlx Rule 1014(g)(vii), which sets 
forth the allocation algorithm for electronic trades. An SQT or RSQT 
quoting all components of the Complex Order will have priority over 
SQTs and RSQTs quoting a single component, but not over customer 
orders.
     Second, against non-broker-dealer customer Complex Orders 
and non-market maker broker-dealer Complex Orders resting in the CBOOK 
in price priority and, at the same price, against (i) non-broker-dealer 
customer Complex Orders in the order in which they were received; and 
(ii) non-market-maker broker-dealer Complex Orders on a size pro rata 
basis, provided that any execution pursuant to paragraph (f)(iii)(B)(2) 
complies with the requirements of Phlx Rule 1033(d).\20\
---------------------------------------------------------------------------

    \20\ See note 18, supra.
---------------------------------------------------------------------------

    A non-broker-dealer customer Complex Order will have priority over 
specialists, SQTs, and RSQTs and off-floor broker-dealers bidding for 
and/or offering any component(s) of the Complex Order Strategy at the 
same price, but not over non-broker-dealer customer orders representing 
any component(s) of the Complex Order Strategy at the same price.
Open Outcry
    Phlx members and Phlx XL participants quoting and trading in open 
outcry would not be eligible to participate in the electronic Complex 
Order system. In order to participate, such members and Phlx XL 
participants must submit COLA Sweeps and/or responsive Complex Orders 
electronically.
Phlx XL Strategy Price Protection
    The Exchange recognizes two Complex Order Strategies that could 
cause undue risk to market participants. In order to address these 
strategies, the Exchange has developed a program in the Phlx XL system 
known as Phlx XL Strategy Price Protection (``SPP''). SPP is a feature 
of Phlx XL that prevents certain Complex Order Strategies from trading 
at prices outside of pre-set standard limits. SPP will apply only to 
Vertical Spreads and Time Spreads, as defined below. Vertical Spreads 
have a quantifiable minimum and maximum value. Time Spreads have a 
quantifiable minimum value. SPP ensures that neither of these 
strategies will trade outside of these quantifiable values by more than 
a pre-set amount, as described below.
Vertical Spread
    A Vertical Spread is a Complex Order Strategy consisting of the 
purchase of one call (put) option and the sale of another call (put) 
option overlying the same security that have the same expiration but 
different strike prices. The SPP will calculate the maximum possible 
value of a Vertical Spread by subtracting the value of the lower strike 
price from the value of the higher strike price as between the two 
components. For example, a Vertical Spread consisting of the purchase 
of one January 30 call and the sale of one January 35 call would have a 
maximum value of $5.00. The minimum possible value of a Vertical Spread 
is always zero.
    The SPP will ensure that a Vertical Spread will not trade at a net 
price of less than the minimum possible value (minus a pre-set value 
setting an acceptable range) or greater than the maximum possible value 
(plus a pre-set value setting an acceptable range). The pre-set value 
and acceptable range will be uniform for all options traded on the 
Exchange as determined by the Exchange and communicated to the 
membership by Exchange Circular.
Time Spread
    A Time Spread is a Complex Order Strategy consisting of the 
purchase of one call (put) option and the sale of another call (put) 
option overlying the same security that have different expirations but 
the same strike price. The maximum possible value of a Time Spread is 
unlimited. The minimum possible value of a Time Spread is zero. The SPP 
will ensure that a Time Spread will not trade at a price of less than 
zero, minus a pre-set value setting an acceptable range.
    If the limits set forth above would be violated by an execution, 
the system will place the Complex Order on the CBOOK.
2. Statutory Basis
    The Phlx believes that its proposal is consistent with Section 6(b) 
of the Act,\21\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\22\ 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 establishing a system and rules that permit the automated 
handling of Complex Orders, and providing a price improving auction for 
Complex Orders that is fair, orderly, and results in customers 
receiving timely and quality executions on the Phlx.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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.

[[Page 39776]]

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

    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-2008-50 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2008-50. 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 
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-2008-50 and should be 
submitted on or before July 31, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-15698 Filed 7-9-08; 8:45 am]

BILLING CODE 8010-01-P
