
[Federal Register: November 18, 2008 (Volume 73, Number 223)]
[Notices]               
[Page 68471-68473]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18no08-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58929; File No. SR-Phlx-2008-75]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the NASDAQ OMX PHLX, Inc. 
Relating to the Definition of ``Market for the Underlying Security''

November 12, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 3, 2008, the NASDAQ OMX PHLX, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
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 Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Exchange Rule 1017, Openings in 
Options, to replace references to the ``primary market'' in respect of 
an underlying security with references to the ``market for the 
underlying security.''
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.phlx.com/regulatory/reg_rulefilings.aspx.

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.

[[Page 68472]]

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 clarify the 
circumstances under which the Exchange's electronic trading platform 
for options, Phlx XL,\5\ would initiate an automated opening in a 
particular option series upon receipt of the opening trade or quote in 
the primary market for the underlying security, by more specifically 
defining ``primary market'' in the Exchange's rules.
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    \5\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 44612 (August 3, 2004) (SR-Phlx-2003-59).
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Current Definition of ``Primary Market''

    Currently, Exchange Rule 100(b)31 defines the term ``primary 
market'' in respect of an underlying stock or Exchange-Traded Fund 
Share as the principal market in which the underlying stock or 
Exchange-Traded Fund Share is traded.
    The Exchange believes that the current definition of ``primary 
market'' in respect of an underlying security is not sufficiently 
specific to capture the various marketplaces that might be determined 
to be the ``primary market'' for such underlying security. Because 
underlying securities trade on multiple exchange platforms and various 
Electronic Commerce Networks (``ECNs'') and other venues, the term 
``primary market'' has become increasingly difficult to define in 
determining the principal market in which the underlying stock or 
Exchange-Traded Fund Share is traded. In order to account for this 
respecting openings in options, the Exchange intends to code its 
automated opening system to open trading in options upon receipt of an 
opening price on the ``market for the underlying security,'' as defined 
more specifically below.

Market for the Underlying Security

    The Exchange proposes to amend Exchange Rule 1017 by eliminating 
the requirement that the Phlx XL automated opening system must receive 
an opening price in the ``primary'' market for the underlying security 
in order to open trading in the overlying options, and accordingly, to 
adopt a definition of ``market for the underlying security'' in 
proposed Rule 1017(k). Under the proposal, the term ``market for the 
underlying security'' would mean either the primary listing market, the 
primary volume market (defined as the market with the most liquidity in 
that underlying security for the previous two calendar months), or the 
first market to open the underlying security, as determined by the 
Exchange on an issue-by-issue basis and communicated to members on the 
Exchange's Web site.

Openings in Options

    The Exchange believes that this proposed definition should more 
accurately capture the manner in which the Phlx XL system determines to 
open a particular option series based on the opening trade or quote on 
the primary market in the underlying security.
    Exchange Rule 1017, Openings in Options, currently lists various 
scenarios that take place when a quote or trade has been disseminated 
by the primary market for the underlying security. For example, 
respecting the pre-opening phase of the Phlx XL automated opening 
system, Rule 1017(b) states that the system will calculate an 
Anticipated Opening Price (``AOP'') and Anticipated Opening Size 
(``AOS'') in equity options when a quote or trade has been disseminated 
by the primary market for the underlying security.\6\ Other sections of 
Rule 1017 require an opening quote or trade in the ``primary market'' 
for the underlying security in order to open, and base the timing of 
the opening on the dissemination of such a quote or trade by the 
primary market for the underlying security.\7\
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    \6\ The rule goes on to state generally that an AOP can only be 
calculated when either (A) the specialist's quote has been 
submitted; (B) the quotes of at least two Phlx XL participants have 
been submitted within two minutes of the opening trade or quote on 
the primary market for the underlying security in the case of equity 
options; or (C) if neither the specialist's quote nor the quotes of 
two Phlx XL participants have been submitted within two minutes of 
the opening trade or quote on the primary market for the underlying 
security in the case of equity options, one Phlx XL participant has 
submitted their quote.
    \7\ Rule 1017(b)(iii) provides that the system will open the 
series for trading within a time period not to exceed 5 seconds (as 
determined by the Exchange and disseminated to membership via 
Exchange circular) following: (A) respecting equity options, the 
dissemination of an opening quote or trade in the primary market for 
the underlying security; or (B) respecting index options, following 
the dissemination of a quote or trade by the primary markets for 
underlying securities constituting 100% of the index value.
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    The Exchange has experienced situations where the ``primary 
market'' for the underlying security in a particular series has been 
delayed in disseminating an opening quote or trade when other markets 
for the underlying security for the series have already disseminated an 
opening quote or trade in such underlying security. If the Exchange 
were to limit its definition of ``primary market'' for the underlying 
security to mean the ``principal market in which the underlying stock 
or Exchange-Traded Fund Share is traded,'' it would risk the 
possibility that other options markets with more specific definitions 
of the market in the underlying security whose opening quote or trade 
would initiate an automated opening \8\ could open the particular 
series, while the Exchange could not. This would place (and has placed) 
the Exchange and its market participants at a distinct competitive 
disadvantage concerning openings in options, because market prices for 
options trading on other options exchanges would be established through 
free trading while the Exchange establishes its options pricing on the 
``primary market'' for the underlying security, which may not yet be 
open for the affected series. Exchange participants could thus open an 
option series at an opening price that is inferior to the price 
established in free trade on away markets.
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    \8\ For example, Chicago Board Options Exchange Rule 6.2B, on 
which the instant proposal is based, states, ``[U]nless unusual 
circumstances exists (sic), at a randomly selected time within a 
number of seconds after the opening trade and/or the opening quote 
is disseminated in the market for the underlying security (or after 
8:30 a.m. for index options), the System initiates the opening 
rotation procedure and sends a notice (``Rotation Notice'') to 
market participants. For purposes of this paragraph, the ``market 
for the underlying security'' shall be either the primary listing 
market, the primary volume market (defined as the market with the 
most liquidity in that underlying security for the previous two 
calendar months), or the first market to open the underlying 
security, as determined by the Exchange on a class-by-class basis 
and announced to the membership via Regulatory Circular.''
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    The Exchange believes that the elimination of the term ``primary 
market'' from the rule, together with the proposed definition of 
``market for the underlying security,'' should capture the manner in 
which the Phlx XL system will evaluate underlying prices, thus 
preserving the Exchange's ability to compete with other options 
exchanges respecting openings.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by adopting a definition of ``market for the underlying 
security,'' thus ensuring that

[[Page 68473]]

the Exchange is on an even playing field with competing options 
exchanges concerning openings.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed definition of ``market for 
the underlying security'' should enable Exchange options participants 
to price options promptly and accurately at the opening of trading, 
resulting in narrower spreads and deeper markets on the Exchange.
    The Exchange further believes that the proposed rule change will 
provide it with more flexibility to determine when to permit the Phlx 
XL automated opening system to begin, which should contribute to the 
Exchange's ability to conduct openings in a fairly and orderly manner.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    The proposed rule change is being designated by the Exchange as a 
``non-controversial'' rule pursuant to Section 19(b)(3)(A) \11\ of the 
Act and subparagraph (f)(6) of Rule 19b-4 thereunder,\12\ because the 
proposed rule change: (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 on which it was filed, or such shorter time 
as the Commission may designate if consistent with the protection of 
investors and the public interest, provided that the Exchange has given 
the Commission written notice of its intent to file the proposed rule 
change at least five business days prior to the filing of the proposed 
rule change.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ As required under Rule 19b-4(f)(6)(iii), the Exchange has 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing of the proposed rule change.
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    A proposed rule change filed under Rule 19b-4(f)(6) \14\ normally 
does not become operative for 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \15\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange requests that the 
Commission waive the 30-day operative delay. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. The proposed rule 
change is based on the rules of another self-regulatory 
organization,\16\ and this proposal does not raise any novel issues. In 
addition, the Exchange states that it is being placed at a competitive 
disadvantage because other exchanges are able to open trading in an 
options series at times when the Exchange cannot. Allowing the proposed 
rule change to become operative on filing will ensure that the Exchange 
is on an even playing field with competing options exchanges concerning 
openings. For these reasons, the Commission designates the proposed 
rule change as operative upon filing.\17\
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    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ See Securities Exchange Act Release No. 56600 (October 2, 
2007), 72 FR 57619 (October 10, 2007) (SR-CBOE-2007-88).
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's effect on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2008-75 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-2008-75. 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 will also be available for 
inspection and copying at the principal office of the self-regulatory 
organization. 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-2008-75 and should be submitted on or before December 9, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-27282 Filed 11-17-08; 8:45 am]

BILLING CODE 8011-01-P
