
[Federal Register: August 21, 2008 (Volume 73, Number 163)]
[Notices]               
[Page 49529-49532]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21au08-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58361; File No. SR-Phlx-2008-50]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change Relating to the Electronic 
Handling of Complex Orders

August 14, 2008.

I. Introduction

    On July 1, 2008, 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 
proposal to adopt Phlx Rule 1080, Commentary .08, ``Complex Orders on 
Phlx XL,'' to provide for the electronic handling of certain Complex 
Orders on Phlx XL, the Phlx's electronic trading platform for options. 
The proposed rule change was published for comment in the Federal 
Register on July 10, 2008.\3\ The Commission received no comments 
regarding the proposed rule change. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58099 (July 3, 
2008), 73 FR 39769 (``Notice'').
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II. Description of the Proposal

    The Phlx proposes to adopt Phlx Rule 1080, Commentary .08 to 
provide for the electronic handling of certain Complex Orders on Phlx 
XL.\4\ Phlx members and Phlx XL participants quoting and trading in 
open outcry will be required to submit quotes and/or orders 
electronically to participate in the electronic Complex Order 
system.\5\
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    \4\ The ``Complex Orders'' that may be traded on Phlx XL are 
spread orders, as defined in Phlx Rule 1066(f)(1); straddle orders, 
as defined in Phlx Rule 1066(f)(2); combination orders, as defined 
in Phlx Rule 1066(f)(3); ratio orders; and collar (risk reversal) 
orders. See Phlx Rule 1080, Commentary .08(a)(i).
    \5\ See Phlx Rule 1080, Commentary .08(e)(ix).
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    As described briefly below and in greater detail in the Notice,\6\ 
the proposal establishes a Complex Order Opening Process (``COOP''), a 
Complex Order Book (``CBOOK''), and a Complex Order Live Auction 
(``COLA''). In addition, the proposal includes a Strategy Price 
Protection (``SPP'') feature that will prevent certain Complex Orders 
from trading at prices outside of specified pre-set limits.
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    \6\ See Notice, supra note 3.
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COOP

    After trading has opened in each component of a pending Complex 
Order or re-opened following a trading halt, the Phlx XL system will 
initiate the COOP.\7\ There will be one COOP per Complex Order 
Strategy.\8\ The COOP is composed of two components: (1) The COOP 
Timer, a period ranging from 0 to 600 seconds, as determined by the 
Phlx, during which the Complex Order will not trade; and (2) the COOP 
Evaluation, the period following the conclusion of the COOP Timer 
during which the Phlx XL system will determine which Complex Order on 
the CBOOK, if any, will be eligible for a COLA. Complex Orders received 
during the COOP Timer and the COOP Evaluation will reside on the CBOOK 
and will be visible to Phlx XL participants.\9\
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    \7\ See Phlx Rule 1080, Commentary .08(d)(ii). However, as 
described in greater detail in the Notice, supra note 3, a COOP will 
not be initiated if any of the conditions in Phlx Rule 1080, 
Commentary .08(c)(ii) exist.
    \8\ See Phlx Rule 1080, Commentary .08(d)(i). A ``Complex Order 
Strategy'' is any Complex Order involving any option series that is 
priced at a net debit or credit based on the relative prices of each 
component. See Phlx Rule 1080, Commentary .08(a)(ii).
    \9\ See Phlx Rule 1080, Commentary .08(d)(ii)(A)(3) and (4).
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    At the conclusion of the COOP Timer, the Phlx XL system will 
identify the ``COLA-eligible order,'' \10\ if any, from

[[Page 49530]]

market and marketable limit Complex Orders, including Complex Orders 
that cross the ``cPBBO,'' \11\ and Complex Orders that improve the 
cPBBO, according to the methodology set forth in Phlx Rule 1080, 
Commentary .08(d)(ii)(B)(2). If the system receives no such orders, 
Complex Orders received during the COOP Timer will be placed on the 
CBOOK.\12\
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    \10\ A ``COLA-eligible order'' is a Complex Order (a) identified 
by way of a COOP; or (b) that, upon receipt, improves the cPBBO 
(i.e., the Phlx best net debt or credit price for a Complex Order 
based on the Phlx best bid or offer for the individual components of 
the Complex Order). See Phlx Rule 1080, Commentary .08(e)(i)(B)(1). 
The methodology for determining the COLA-eligible order is described 
in greater detail in the Notice, supra note 3.
    \11\ The cPBBO is the best net debit or credit price for a 
Complex Order based on the Phlx's best bid and/or offer for the 
individual legs of the Complex Order. See Phlx Rule 1080, Commentary 
.08(a)(iv).
    \12\ See Phlx Rule 1080, Commentary .08(d)(ii)(B)(1).
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COLA
COLA Broadcast and Responses
    After identifying a COLA-eligible order, the Phlx will send a 
broadcast notice to Phlx XL participants \13\ indicating that the 
system has initiated a COLA. The broadcast message will identify the 
Complex Order Strategy, and the size of the order and any 
contingencies, but not the side of the market or the price.\14\ During 
the COLA Timer, which will not exceed five seconds, Phlx XL 
participants may bid and/or offer on either or both side(s) of the 
market by submitting one or more bids or offers that improve the cPBBO, 
known as ``COLA Sweeps.'' \15\ COLA Sweeps will not be visible to Phlx 
XL participants or disseminated by the Phlx.\16\ The requirements in 
Phlx Rule 1080(c)(ii)(C) regarding trading as principal with agency 
orders will apply to Complex Orders and COLA Sweeps.\17\ Complex Orders 
for the same Complex Order Strategy as the COLA-eligible order may not 
be cancelled during the COLA.\18\
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    \13\ Under the proposal, Phlx XL participants are Streaming 
Quote Traders (``SQTs''), Remote Streaming Quote Traders 
(``RSQTs''), non-SQT Register Options Traders (``ROTs''), 
specialists and 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. See Phlx Rule 1080, Commentary .08(a)(vii).
    \14\ See Phlx Rule 1080, Commentary .08(e)(ii).
    \15\ See Phlx Rule 1080, Commentary .08(e)(iii) and (iv).
    \16\ See Phlx Rule 1080, Commentary .08(e)(iv)(C).
    \17\ See Phlx Rule 1080, Commentary .08(e)(iv)(D). Phlx Rule 
1080(c)(ii)(C) prohibits an Order Entry Firm from executing as 
principal against an order on the limit order book that it 
represents as agent unless: (a) The agency order is first exposed on 
the limit order book for at least three seconds; (b) the Order Entry 
Firm has been bidding or offering on the Phlx for at least three 
seconds prior to receiving the agency order that is executable 
against such order; or (c) the Order Entry Firm proceeds in 
accordance with the crossing rules in Phlx Rule 1064.
    \18\ See Phlx Rule 1080, Commentary .08(e)(iii).
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Executions and Allocations
    If the system receives no COLA Sweeps or responsive Complex Orders 
during the COLA Timer, the COLA-eligible order may trade at the Phlx 
best bid or offer (``PBBO'') with quotes or orders on the limit order 
book for the components of the Complex Order, provided that the order 
can be executed in the correct ratio and at the desired price.\19\
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    \19\ See Phlx Rule 1080, Commentary .08(e)(vi)(A)(1). An SQT or 
RSQT quoting all components of the Complex Order would have priority 
over SQTs and RSQTs quoting a single component, but would not have 
priority over customer orders. See Phlx Rule 1080, Commentary 
.08(e)(vi)(A)(1).
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    If the system receives responses during the COLA Timer, the COLA-
eligible order and the responsive COLA Sweeps or Complex Orders will 
trade, first, based on the best price or prices available at the end of 
the COLA Timer, with responses at the same price allocated in the 
following sequence: (1) Customer marketable Complex Orders on the 
CBOOK; (2) COLA Sweeps on a size pro-rata basis; (3) SQT, RSQT, and 
non-SQT ROT Immediate or Cancel Complex Orders on a size pro-rata 
basis; and (4) non-market maker off-floor broker-dealers on a size pro-
rata basis.\20\
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    \20\ See Phlx Rule 1080, Commentary .08(e)(v) and (vi)(B)(1)-
(4). If the markets for the individual components of the COLA-
eligible order improve during the COLA Timer and match the best 
price of COLA Sweep(s) and/or responsive Complex Order(s), the 
system will execute the COLA Sweep(s) and/or responsive Complex 
Order(s) before executing the individual components of the COLA-
eligible order. See Phlx Rule 1080, Commentary .08(e)(vi)(A)(2).
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    Executions in the COLA will comply with the complex order priority 
requirements of Phlx Rule 1033(d).\21\ In addition, the COLA's priority 
rules provide that a non-broker-dealer customer's Complex Order will 
have priority over specialists, SQTs, RSQTs, and off-floor broker-
dealers bidding for or offering any components of the Complex Order at 
the same price, but not over non-broker-dealer customer orders for any 
components of the Complex Order at the same price.\22\
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    \21\ See Phlx Rule 1080, Commentary .08(e)(v). Phlx Rule 1033(d) 
provides that when a member holding a hedge order (i.e., a spread, 
straddle, or combination order), 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 the 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 contract and no option leg is 
executed at a price outside of the established bid or offer for that 
option contract.
    \22\ See Phlx Rule 1080, Commentary .08(e)(vi)(A)(3).
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    If the specialist submits a COLA Sweep at the same price as other 
COLA Sweeps, then, after any customer marketable Complex Orders have 
been executed against the COLA-eligible order, the specialist will be 
entitled to receive the greater of: (1) The proportion of the aggregate 
size at the cPBBO associated with the specialist's COLA Sweep, SQT and 
RSQT COLA Sweeps, and non-SQT ROT Complex Orders on the CBOOK; (2) the 
Enhanced Specialist Participation described in Phlx Rule 1014(g)(ii)-
(iv); or (3) 40% of the remainder of the order.\23\
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    \23\ See Phlx Rule 1080, Commentary .08(e)(vi)(C). The 
specialist is not entitled to receive an allocation that would 
exceed the size of the specialist's COLA Sweep. See Phlx Rule 1080, 
Commentary .08(e)(vi)(C)(4).
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    The components of a COLA-eligible order may be executed in one-cent 
increments, regardless of the minimum quoting increments otherwise 
applicable to the individual legs of the order.\24\
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    \24\ See Phlx Rule 1080, Commentary .08(e)(v).
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Treatment of Incoming Orders Received During the COLA
    Incoming Complex Orders on the same side of the market as the COLA-
eligible order that are received during the COLA will join the COLA, 
although the original COLA-eligible order will have priority at all 
price points over any incoming Complex Order, regardless of the price 
of the incoming order.\25\ If the incoming Complex Order is not 
executed in its entirety, any remaining contracts will be placed on the 
CBOOK, subject to other instructions.\26\
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    \25\ See Phlx Rule 1080, Commentary .08(e)(viii)(B).
    \26\ Id.
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    Incoming customer and non-customer Complex Orders on the opposite 
side of the market from the COLA-eligible order that have prices equal 
to or better than the best-priced COLA Sweep may execute against the 
COLA-eligible order or be placed on the CBOOK, subject to other 
instructions, if unexecuted interest remains in the incoming order 
after the COLA-eligible order has been executed in its entirety.\27\ 
Incoming Complex Orders on the opposite side of the market that have a 
price inferior to the COLA Sweep Price(s) will execute against the 
COLA-eligible order after interest at the better COLA Sweep Price(s) 
has been executed. Any unexecuted remaining contracts in the

[[Page 49531]]

incoming Complex Order will be placed on the CBOOK, subject to other 
instructions.\28\
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    \27\ See Phlx Rule 1080, Commentary .08(e)(viii)(C)(1) and (2).
    \28\ See Phlx Rule 1080, Commentary .08(e)(viii)(C)(3).
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CBOOK
    Non-broker-dealer customer and non-market maker broker-dealer 
Complex Orders may be entered on the CBOOK.\29\ An order resting on the 
CBOOK may execute against quotes or orders on the limit order book for 
the individual components of the order or against incoming Complex 
Order(s) that do not trigger a COLA Timer, whichever arrives first.\30\ 
An incoming Complex Order that does not trigger a COLA Timer may 
execute against interest on the limit order book for the individual 
components of the order or against Complex Orders resting on the 
CBOOK.\31\ Complex Orders on the CBOOK may be executed in one-cent 
increments, regardless of the minimum increments applicable to the 
individual components of the Complex Order.\32\ Executions against 
orders on the CBOOK will comply with the complex order priority 
requirements of Phlx Rule 1033(d).\33\ In addition, the CBOOK rules 
provide that a non-broker-dealer customer Complex Order will have 
priority over specialists, SQTs, RSQTs, and off-floor broker-dealers 
bidding for or offering any component(s) of a Complex Order at the same 
price, but not over non-broker-dealer customer orders representing any 
component(s) of the Complex Order at the same price.\34\
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    \29\ See Phlx Rule 1080, Commentary .08(f).
    \30\ See Phlx Rule 1080, Commentary .08(f)(iii)(A).
    \31\ See Phlx Rule 1080, Commentary .08(f)(iii)(B).
    \32\ See Phlx Rule 1080, Commentary .08(f)(i).
    \33\ See Phlx Rule 1080, Commentary .08(f)(iii)(B)(2).
    \34\ See Phlx Rule 1080, Commentary .08(f)(iii)(B)(3).
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SPP
    The SPP is a system feature that will prevent ``Vertical Spreads'' 
\35\ and ``Time Spreads'' \36\ from trading at prices outside of pre-
set standard limits. If an execution would violate these limits, the 
system will place the order on the CBOOK.\37\
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    \35\ 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. See Phlx Rule 1080, 
Commentary .08(g)(i).
    \36\ 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. See Phlx Rule 1080, Commentary 
.08(g)(ii).
    \37\ See Phlx Rule 1080, Commentary .08(g)(iii).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\38\ In particular, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act,\39\ which requires, in 
part, 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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    \38\ 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).
    \39\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal to supplement the trading 
of complex orders on the Phlx's floor with a facility for the 
electronic handling of Complex Orders is consistent with the Act.
    In particular, the Commission finds that the COOP is consistent 
with the Act because it is designed to provide an orderly procedure for 
opening electronic trading in Complex Orders. The Commission also finds 
that the rules for the display of orders on the CBOOK, which will be 
visible to Phlx XL participants, also are consistent with the Act and 
are likely to increase transparency.
    In addition, the Commission finds that the COLA is consistent with 
the Act because it is designed to provide a competitive auction 
process, lasting up to five seconds, that could provide price 
improvement for COLA-eligible orders. During the COLA Timer, Phlx XL 
participants will be able to bid and/or offer on either or both sides 
of the market by submitting COLA Sweeps that improve the cPBBO. At the 
conclusion of the COLA Timer, the COLA-eligible order may execute 
against COLA Sweeps, Complex Orders received during the COLA, or, if 
the Phlx receives no COLA Sweeps or responsive Complex Orders, against 
existing interest on the limit order book for the individual components 
of the Complex Order. A member could elect to forego the COLA by 
sending its order to the Phlx's floor for execution.
    The Commission finds that the Phlx's rules for the allocation of 
trades with Complex Orders are consistent with the Act. Executions of 
Complex Orders through the COLA and the CBOOK will comply with the 
complex order priority requirements of Phlx Rule 1033(d).\40\ The CBOOK 
and COLA rules also provide that non-broker-dealer customer Complex 
Orders will have priority over specialists, SQTs, RSQTs, and off-floor-
broker-dealers bidding for and/or offering any component(s) of the 
Complex Order at the same price, but not over non-broker-dealer 
customer orders representing any component(s) of the Complex Order at 
the same price.\41\ The Commission notes that other options markets 
have comparable priority provisions for complex orders.\42\
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    \40\ See Phlx Rule 1080, Commentary .08(e)(v) and 
(f)(iii)(B)(2). See note 21, supra.
    \41\ See Phlx Rule 1080, Commentary .08 (e)(vi)(A)(3) and 
(f)(iii)(B)(3). In addition, the COLA allocation rules provide that 
if a COLA-eligible order executes against interest in the market for 
the individual components of the order, SQTs and RSQTs quoting all 
components of the Complex Order will have priority over SQTs and 
RSQTs quoting a single component, but not over customer orders. See 
Phlx Rule 1080, Commentary .08(e)(vi)(A)(1).
    \42\ See, e.g., CBOE Rules 6.45A(b)(ii) and 6.45B(b)(ii); and 
ISE Rule 722(b)(2).
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    The COLA rules provide for a specialist participation guarantee 
equal to the greater of: (a) 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); (b) the Enhanced Specialist Participation as described in 
current Phlx Rule 1014(g)(ii) to (iv); or (c) 40% of the remainder of 
the order. In addition, public customer Complex Orders that are 
marketable against the COLA-eligible order will have priority over the 
specialist's participation guarantee and the specialist will not be 
entitled to receive an allocation that would exceed the size of the 
specialist's COLA Sweep.\43\
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    \43\ See Phlx Rule 1080, Commentary .08(e)(vi)(C).
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    The Commission finds that the specialist participation guarantee in 
the COLA is consistent with the Act. The Commission notes that it has 
closely scrutinized exchange rule proposals relating to specialist 
guarantees to determine whether the specialist's participation would 
rise to a level that could have a material adverse impact on quote 
competition within a particular exchange.\44\ Because the current 
proposal would not increase the overall percentage of an order that is 
guaranteed beyond the existing thresholds, the Commission does not 
believe that the proposal will negatively impact quote competition on 
the Exchange for

[[Page 49532]]

Complex Orders. The Commission also notes that it previously approved 
the Enhanced Specialist Participation for the individual components of 
the Complex Order.\45\ To receive an Enhanced Specialist Participation 
in the COLA, the specialist must satisfy the applicable requirements in 
current Phlx Rule 1014(g)(ii) to (iv).
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    \44\ See, e.g., Securities Exchange Act Release No. 43100 (July 
31, 2000), 65 FR 48788 (August 9, 2000).
    \45\ See Securities Exchange Act Release No. 41588 (July 1, 
1999), 64 FR 37185 (July 9, 1999) (order approving File No. SR-Phlx-
98-56).
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    The Commission also notes that Phlx Rule 1080(c)(ii)(C), relating 
to an Order Entry Firm's trading as principal with agency orders, will 
apply to Complex Orders and COLA Sweeps.\46\
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    \46\ See Phlx Rule 1080, Commentary .08(e)(iv)(D).
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    Finally, the Commission finds that the SPP is consistent with the 
Act. It is designed to protect market participants by preventing the 
automatic execution of certain Complex Order Strategies outside of a 
pre-set acceptable price range, which the Phlx will communicate to 
members by Exchange Circular.\47\ The Phlx XL system will place orders 
that would execute outside of the acceptable price range on the CBOOK, 
rather than executing them automatically.\48\
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    \47\ See Phlx Rule 1080, Commentary .08(g)(i)(C).
    \48\ See Phlx Rule 1080, Commentary .08(g)(iii).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\49\ that the proposed rule change (SR-Phlx-2008-50) is approved. 
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    \49\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-19352 Filed 8-20-08; 8:45 am]

BILLING CODE 8010-01-P
