
[Federal Register: November 25, 2008 (Volume 73, Number 228)]
[Notices]               
[Page 71709-71711]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25no08-126]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58949; File No. SR-Phlx-2008-79]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX, Inc. Relating to Reducing the Exposure Time 
for Option Limit Orders to One Second

November 14, 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 10, 2008, 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, II, and III, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 1080(c) to provide 
that: (i) Order Entry Firms \5\ may not execute as principal against 
orders on the limit order book they represent as agent unless such 
agency orders are first exposed on the limit order book for at least 
one (1) second, or the Order Entry Firm has been bidding or offering on 
the Exchange for at least one (1) second prior to receiving an agency 
order that is executable against such order, and (ii) Order Entry Firms 
must expose orders they represent as agent for at least one (1) second 
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.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ The term ``Order Entry Firm'' means a member organization of 
the Exchange that is able to route orders to the Exchange's AUTOM 
system. See Exchange Rule 1080(c)(ii)(A)(1).
---------------------------------------------------------------------------

    The text of the proposed rule change is available on the Exchange's 
Website at http://www.phlx.com/regulatory/reg_rulefilings.aspx.

[[Page 71710]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to reduce the exposure 
time during which Order Entry Firms may not execute as principal 
against orders they represent as agent while continuing to afford the 
opportunity for other market participants to execute at or better than 
the limit order price during such exposure period.
    Rules 1080(c)(ii)(C)(1) and (2) currently provide that an Order 
Entry Firm 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 (3) 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 Rule 1064.\6\
---------------------------------------------------------------------------

    \6\ Exchange Rule 1064 states, in relevant part: ``An Options 
Floor Broker who holds orders to buy and sell the same option series 
may cross such orders, provided that he proceeds in the following 
manner: (i) In accordance with his responsibilities for due 
diligence, pursuant to Rule 155, an Options Floor Broker shall 
request bids and offers for such options series and make all persons 
in the trading crowd aware of his request. (ii) After providing an 
opportunity for such bids and offers to be made, he must bid and 
offer at prices differing by the minimum increment and must improve 
the market by bidding above the highest bid or offering below the 
lowest offer. (iii) If such higher bid or lower offer is not taken, 
he may cross the orders at such higher bid or lower offer by 
announcing by public outcry that he is crossing and giving the 
quantity and price.''
---------------------------------------------------------------------------

    In addition, Order Entry Firms must expose orders they represent as 
agent for at least three (3) 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. Under the proposal, these exposure periods would be reduced to 
one second.
    The Exchange adopted the 3-second exposure period in August, 2006, 
in response to similar functionality already in existence on other 
options exchanges.\7\ The Exchange notes that in adopting the three-
second order handling and exposure period, it recognized that three 
seconds would not be long enough to allow human interaction with the 
orders. Rather, market participants had become sufficiently automated 
that they could react to these orders electronically. In this context, 
the Exchange believes it would be in all market participants' best 
interest to minimize the exposure period to a time frame that continues 
to allow adequate time for market participants to respond 
electronically, as both the order being exposed and the participants 
responding are subject to market risk during the exposure period. In 
this respect, the Exchange states that its experience with the three-
second exposure time period indicates that one second would provide an 
adequate response time. The Exchange does not believe it is necessary 
or beneficial to the orders being exposed to continue to subject them 
to market risk for a full three seconds.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 54298 (August 9, 
2006), 71 FR 47282 (August 16, 2006) (SR-Phlx-2006-41).
---------------------------------------------------------------------------

    The Exchange has numerous market participants that have the 
capability and do opt to respond within a one-second exposure period on 
the Exchange's fully automated trading platform for options, Phlx 
XL.\8\ Recently, the Exchange distributed a survey to members that 
regularly participate in orders executed on Phlx XL that would be 
affected by the proposal. To substantiate that its members could 
receive, process, and communicate a response back to the Exchange 
within one second, the survey asked members to identify how many 
milliseconds it took for (i) a broadcast from the Exchange to reach 
their systems; (ii) their systems to generate responses; and (iii) 
their responses to reach the Exchange. The survey results indicate that 
the time it takes a message to travel between the Exchange and its 
members is not more than 100 milliseconds each way. The survey also 
indicated that it typically takes not more than 50 milliseconds for 
member systems to process the information and generate a response. 
Thus, the survey indicated that it typically takes not more than 250 
milliseconds for members to receive, process, and respond to broadcast 
messages related to the various Mechanisms. Additionally, all 8 members 
that responded to the survey indicated that reducing the exposure 
period to one second would not impair their ability to participate in 
orders affected by the proposal. The Exchange believes that this 
information provides additional support for its assertion that reducing 
the exposure periods from three seconds to one second will continue to 
provide members with sufficient time to ensure effective interaction 
with orders.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 44612 (August 3, 2004) (SR-Phlx-2003-59).
---------------------------------------------------------------------------

    The Exchange is submitting the instant proposal in order to remain 
competitive with other exchanges that have reduced the exposure period 
from 3 seconds to 1 second.\9\ The Exchange believes that reducing its 
order handling and exposure periods from three seconds to one second 
will benefit market participants. The Exchange further believes that 
reducing the time periods to one second will allow it to provide 
investors and other market participants with more timely executions, 
thereby reducing market risk.\10\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release Nos. 57849 (May 22, 
2008), 73 FR 31167 (May 30, 2008) (SR-CBOE-2008-16); and 58224 (July 
25, 2008), 73 FR 44303 (July 30, 2008) (SR-ISE-2007-94).
    \10\ The Exchange believes that the proposed timeframe would 
give market participants sufficient time to respond, compete, and 
provide price improvement for orders. The Exchange also notes that 
electronic systems are readily available to, if not already in place 
for, Exchange members that allow them to respond in a meaningful way 
within the proposed timeframe.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ 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 providing investors with more timely execution of their 
options orders, while ensuring that there is an adequate exposure of 
limit orders in the Exchange's marketplace.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 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

[[Page 71711]]

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

    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 the 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.
    The Exchange has requested accelerated approval of this proposed 
rule change prior to the 30th day after the date of publication of the 
notice in the Federal Register. The Commission is considering granting 
accelerated approval of the proposed rule change at the end of a 15-day 
comment period.

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-2008-79 on the subject line.

Paper Comments

     Send paper comments in triplicate to Florence E. Harmon, 
Acting Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2008-79. 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. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Phlx-2008-79 and should be submitted on or before December 10, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-27897 Filed 11-24-08; 8:45 am]

BILLING CODE 8011-01-P
