[Federal Register Volume 69, Number 132 (Monday, July 12, 2004)]
[Notices]
[Pages 41873-41875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15686]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49968; File No. SR-Phlx-2004-27]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Relating to the Processing of 
Satisfaction Orders Following a Trade-Through Pursuant to the Plan for 
the Purpose of Creating and Operating an Intermarket Option Linkage

July 2, 2004.
    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 April 23, 2004, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared 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 is proposing to amend Exchange Rule 1085 to modify the 
method in which following a Trade-Through,\3\ the Exchange processes 
Satisfaction Orders \4\ pursuant to the Linkage Plan when there is a 
change in the status of the underlying customer order.
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    \3\ A ``Trade-Through'' is a transaction in an options series at 
a price that is inferior to the National Best Bid or Offer. See 
Section 2(29) of the Linkage Plan and Exchange Rule 1083(t).
    \4\ A ``Satisfaction Order'' is defined as an order sent through 
the Options Intermarket Linkage to notify a Participant of a Trade-
Through and to seek satisfaction of the liability arising from that 
Trade-Through. See Section 2(16)(c) of the Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage (``Linkage 
Plan'') and Exchange Rule 1083(k)(iii).
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    The text of the proposed rule change is available at the Exchange 
and at the Commission.

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 had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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 this filing is to enhance the manner in which the 
Phlx processes Satisfaction Orders following a Trade-Through, which 
also is the subject of a recent amendment to the Linkage Plan.\5\ If 
the displayed price that is traded through represents a customer order, 
the Phlx specialist representing that order can send a Satisfaction 
Order requiring the member on the exchange that caused the Trade-
Through to satisfy the customer order.\6\ The proposed rule change 
would modify the manner in which Satisfaction Orders are processed in 
three ways.
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    \5\ See Securities Exchange Act Release No. 49691 (May 12, 
2004), 69 FR 28954 (May 19, 2004) (File No. 4-429) (Notice of filing 
Joint Amendment No. 11 to the Linkage Plan).
    \6\ See Sections 7(a)(ii)(D) and 8(c)(ii) of the Linkage Plan.
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    First, the size of the Satisfaction Order would be limited to the 
lesser of the size of the customer order traded through and the size of 
the transaction that caused the Trade-Through. Currently, Section 
8(c)(ii)(B)(2) of the Linkage Plan and Exchange Rule 1085 permits a 
Satisfaction Order to be submitted for the full size of the customer 
order traded through, regardless of the size of the transaction that 
caused the Trade-Through. Under the proposal, a Satisfaction Order 
would be limited to the lesser of the size of the Verifiable Number of 
Customer Contracts \7\ in the

[[Page 41874]]

disseminated bid or offer that was traded through, or the size of the 
transaction that caused the Trade-Through.
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    \7\ ``Verifiable Number of Customer Contracts'' is defined as 
the number of Customer contracts in the book of a Participant. See 
Section 2(30) of the Linkage Plan. A ``Participant'' is defined as 
an Eligible Exchange whose participation in the Linkage Plan has 
become effective pursuant to Section 4(c) of the Linkage Plan. See 
Section 2(24) of the Linkage Plan. Currently, the Participants in 
the Linkage Plan are the International Securities Exchange, Inc., 
the American Stock Exchange LLC, the Chicago Board Options Exchange, 
Inc., the Pacific Exchange, Inc., the Phlx, and the Boston Stock 
Exchange, Inc.
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    Second, the Exchange proposes to amend its rules concerning the 
cancellation of pending Satisfaction Orders if the underlying customer 
order is executed or canceled. Currently, Exchange Rule 1085 and the 
Linkage Plan \8\ permit a Phlx specialist that sends a Satisfaction 
Order to reject a message from the receiving exchange that the customer 
order has been satisfied (hereinafter, a ``fill'' of that Satisfaction 
Order) if the underlying customer order has been executed on the Phlx 
or has been canceled while the Satisfaction Order is being processed. 
There is, however, no current requirement for the Phlx specialist to 
cancel the pending Satisfaction Order if the underlying customer order 
is executed or canceled. Therefore, the Phlx specialist may send a 
rejection of a fill of a Satisfaction Order that might have been 
avoided if the pending Satisfaction Order had been canceled when the 
underlying customer order was executed or canceled. The proposed rule 
change is intended to address this issue by requiring the exchange that 
sends a Satisfaction Order to cancel such Satisfaction Order when the 
underlying customer order has been executed or canceled.
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    \8\ See Section 8(c)(ii)(C) of the Linkage Plan.
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    Third, as noted above, a specialist that sends a Satisfaction Order 
currently may reject a fill of such Satisfaction Order if the 
underlying customer order is executed or canceled while the 
Satisfaction Order is pending. The proposed rule change would limit the 
circumstances under which the sender of a Satisfaction Order could 
reject a fill of that order when the underlying customer order is 
executed or canceled while the Satisfaction Order is pending. 
Specifically, the sender of the Satisfaction Order would not be 
permitted to reject such a fill when the sender, itself, trades against 
the underlying customer order while the Satisfaction Order is pending. 
The Exchange believes that this provision should ensure that the sender 
of a Satisfaction Order would not be permitted to reject a fill of the 
Satisfaction Order when it executes against the underlying customer 
order for its own account.
2. Statutory Basis
    The Exchange believes that the proposed rule is consistent with 
section 6(b) of the Act,\9\ in general, and furthers the objectives of 
section 6(b)(5) \10\ in particular in that it is designed to perfect 
the mechanisms of a free and open market and the national market 
system, protect investors and the public interest, and promote just and 
equitable principles of trade by providing enhancements to the current 
method of Satisfaction Order processing.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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 [email protected]. Please include 
File Number SR-Phlx-2004-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Phlx-2004-27. 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such 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-2004-27 and should be submitted on or before August 2, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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.\11\ In 
particular, the Commission finds that the proposed rule change is 
consistent with the requirements of section 6(b)(5) of the Act \12\ 
which requires, among other things, that the rules of an exchange be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and to protect investors and the public 
interest. The Commission believes that the proposed rule change should 
facilitate the handling of Satisfaction Orders in an efficient and fair 
manner.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice thereof in the Federal Register. As noted above, the proposed 
rule change incorporates changes into the Phlx Rules that correspond to 
changes made to the Linkage Plan through Joint Amendment No. 11, which 
was published for public comment in the Federal Register on May 19, 
2004.\13\ The Commission

[[Page 41875]]

received no comments in response to publication of Joint Amendment No. 
11. The Commission believes that no new issues of regulatory concern 
are being raised by Phlx's proposed rule change. The Commission 
believes, therefore, that granting accelerated approval of the proposed 
rule change is appropriate and consistent with sections 6 and 19(b) of 
the Act.\14\
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    \13\ See supra note 5.
    \14\ 15 U.S.C. 78f and 78s(b).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-Phlx-2004-27) is approved on 
an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15686 Filed 7-9-04; 8:45 am]
BILLING CODE 8010-01-P