[Federal Register Volume 69, Number 230 (Wednesday, December 1, 2004)]
[Notices]
[Pages 69982-69984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3412]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50728; File No. SR-Phlx-2004-74]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
Philadelphia Stock Exchange, Inc. Relating to $5 Bid/Ask Differentials 
in Options Traded on the Exchange's Electronic Trading Platform, Phlx 
XL

November 23, 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 November 3, 2004, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') submitted to 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. 
On November 10, 2004, the Phlx filed Amendment No. 1 to the proposed 
rule change, which changed the proposal from a filing made pursuant to 
section 19(b)(2) of the Act to a filing made pursuant to section 
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) thereunder.\4\ 
Accordingly, the proposed rule change became effective upon filing of 
Amendment No. 1.\5\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4.
    \5\ The 60-day period within which the Commission may summarily 
abrogate the proposed rule change under section 19(b)(3)(C) of the 
Act commenced on November 10, 2004, the date the Phlx filed 
Amendment No. 1 to the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to adopt new Phlx Rule 1014(c)(i)(A)(2), which 
would relax the quotation spread requirements for Streaming Quote 
Options traded on the Exchange's new electronic trading platform, Phlx 
XL.\6\ Specifically, the proposal would allow Streaming Quote Options 
trading on Phlx XL to be quoted electronically with a difference not to 
exceed $5 between the bid and offer, regardless of the price of the 
bid. The text of the proposed rule change appears below. Proposed 
additions are in italics.
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    \6\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (order approving File No. SR-
Phlx-2003-59).
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* * * * *

Rule 1014

Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders
    (a)-(b) No change.
    (c) In Classes of Option Contracts to Which Assigned--Affirmative 
Obligations. With respect to classes of option contracts to which his 
assignment extends, a Specialist and an ROT, whenever the ROT enters 
the trading crowd in other than a floor brokerage capacity or is called 
upon by a Floor Official or a Floor Broker, to make a market, are 
expected to engage, to a reasonable degree under the existing 
circumstances, in dealing for his own account when there exists, or it 
is reasonably anticipated that there will exist, a lack of price 
continuity, a temporary disparity between the supply of and demand for 
a particular option contract, or a temporary distortion of the price 
relationships between option contracts of the same class. Without 
limiting the foregoing, a Specialist and an ROT is expected to perform 
the following activities in the course of maintaining a fair and 
orderly market:
    (i) Options on Equities (including Exchange-Traded Fund Shares).
    (A)(1) Quote Spread Parameters (Bid/Ask Differentials)--Bidding 
and/or offering so as to create differences of no more than $.25 
between the bid and the offer for each option contract for which the 
prevailing bid is less than $2; no more than of $.40 where the 
prevailing bid is $2 or more but less than $5; no more than $.50 where 
the prevailing bid is $5 or more but less than $10; no more than $.80 
where the prevailing bid is $10 or more but less than $20; and no more 
than $1 where the prevailing bid is $20 or more, provided that the bid/
ask differentials stated above shall not apply to in-the-money series 
where the market for the underlying security is wider than the 
differentials set forth above. For such series, the bid/ask 
differentials may be as wide as the quotation for the underlying 
security on the primary market, or its decimal equivalent rounded up to 
the nearest minimum increment. The Exchange may establish differences 
other than the above for one or more series or classes of options.
    (2) Streaming Quote Options trading on Phlx XL may be quoted 
electronically with a difference not to exceed $5 between the bid and 
offer regardless of the price of the bid. The $5 bid/ask differentials 
only apply to Streaming Quote Options trading on Phlx XL and only 
following the opening rotation in each security (i.e., the bid/ask 
differentials specified in sub-paragraph (c)(i)(A)(1) above shall apply 
during opening rotation). Quotations provided in open outcry in 
Streaming Quote Options may not be made with $5 bid/ask differentials 
and instead must comply with the bid/ask differential requirements 
described in sub-paragraph (c)(i)(A)(1) above and not in this sub-
paragraph (c)(i)(A)(2).
    (B) No change.
    (d)-(h) No change.
    Commentary: No change.
* * * * *

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 reduce the market 
making risk, especially in volatile markets, by relaxing the quotation 
spread requirements for Streaming Quote Options traded on the 
Exchange's new electronic trading platform, Phlx XL. According to the 
Phlx, the primary purpose of the current quote spread requirements set 
forth in Phlx Rule 1014(c)(i)(A) is to help to maintain narrow spreads 
in options. The Phlx believes that these requirements can have the 
unintended consequence of requiring those making markets to quote at 
prices that are unnecessarily narrow, thereby exposing them to great 
risk if markets move quickly.
    The proposed $5 bid/ask differential would apply only to electronic

[[Page 69983]]

quotations submitted in Streaming Quote Options traded on Phlx XL. The 
current bid/ask differential requirements contained in Phlx Rule 
1014(c)(i)(A)(1) would continue to apply to quotations in Streaming 
Quote Options made in open outcry, and to quotations in non-Streaming 
Quote Options.
    The Exchange believes that given the competitive market making 
structure of Phlx XL and the existence of vigorous inter-market 
competition, the mandatory quote spread requirements may not be 
necessary to ensure narrow and competitive spreads in options. In this 
regard, the Phlx believes that the Phlx XL market structure creates 
strong incentives for specialists, Registered Options Traders 
(``ROTs'') and other market participants to disseminate competitive 
prices. The Exchange notes that in Phlx XL, each specialist and 
Streaming Quote Trader quotes independently, and customers, off-floor 
broker-dealers, and ROTs can enter limit orders at prices that improve 
the Exchange's disseminated bid or offer.\7\ The Exchange automatically 
collects this trading interest information, calculates the Phlx best 
bid and offer, and disseminates that value to the Options Price 
Reporting Authority. Accordingly, the Phlx believes that its Phlx XL 
market is competitive, accessible and transparent.
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    \7\ The Phlx clarified this sentence in a telephone 
conversation. Telephone conversation between Richard Rudolph, 
Director and Counsel, Phlx, and Yvonne Fraticelli, Special Counsel, 
Division of Market Regulation, Commission, on November 23, 2004.
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    In addition, the Phlx believes that market participants in Phlx XL 
have strong incentives to quote competitively. The Exchange currently 
allocates incoming orders based on the price and size of orders and 
quotes resting in the book. Under the Exchange's trade allocation rules 
applicable to options trading on Phlx XL, the larger the size of a 
market maker's quote at the best price, the greater the size of the 
allocation he or she receives.\8\ Conversely, if a market participant 
does not quote at the best price, the market participant will not 
participate in any electronic trade allocations. The Phlx believes, 
moreover, that given NBBO protections in place at each exchange, as 
well as under Plan for the Purpose of Creating an Options Intermarket 
Linkage (the ``Linkage Plan''), market participants have even stronger 
incentives to quote at the best price, lest incoming orders be filed 
away. Thus, the Phlx believes that both inter-market and intra-market 
competitive forces provide strong incentives for market participants to 
quote competitively and to enter quotes and orders that improve the 
price and depth of the market.
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    \8\ See Phlx Rule 1014(g)(vii).
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    For these reasons, Phlx proposes to expand the allowable spread in 
Streaming Quote Options traded on Phlx XL to $5 for options quoted 
electronically. The proposed quote spread requirements will apply after 
the opening trading rotation. During the opening trading rotation, 
market makers will be required to quote in accordance with the 
traditional bid/ask width requirements. The $5 quotation requirements 
would become operative immediately following the opening rotation.
2. Statutory Basis
    The Exchange believes that the proposed rule change 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 
prevent fraudulent and manipulative acts and, in general, to protect 
investors and the public interest.
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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 Exchange 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 either solicited or received.

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

    The Exchange has designated the proposed rule change as a ``non-
controversial'' rule change \11\ pursuant to section 19(b)(3)(A) of the 
Act \12\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\13\ 
Consequently, because the foregoing 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, 
and the Phlx provided the Commission with written notice of its intent 
to file the proposed rule change at lease five days prior to the filing 
date, it has become effective pursuant to section 19(b)(3)(A) of the 
Act \14\ and Rule 19b-4(f)(6) thereunder.\15\
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    \11\ See Amendment No. 1.
    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay specified in Rule 19b-
4(f)(6) in order to remain competitive with other exchanges with 
similar rules in effect. In this regard, the Phlx notes that its 
proposal is based on Chicago Board Options Exchange, Inc. (``CBOE'') 
Rule 8.7(b)(iv)(A); \16\ International Securities Exchange, Inc. 
(``ISE'') Rule 803(b)(4); \17\ and Pacific Exchange, Inc. (``PCX'') 
Rule 6.37(b)(1)(G).\18\
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    \16\ See Securities Exchange Act Release No. 50079 (July 26, 
2004), 69 FR 45858 (July 30, 2004) (order approving File No. SR-
CBOE-2004-44).
    \17\ See Securities Exchange Act Release No. 50015 (July 14, 
2004), 69 FR 43872 (July 22, 2004) (order approving File No. SR-ISE-
2003-22).
    \18\ See Securities Exchange Act Release No. 50538 (October 14, 
2004), 69 FR 62105 (October 22, 2004) (notice of filing and 
immediate effectiveness of SR-PCX-2004-89).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\19\ Specifically, the Commission believes that allowing the 
Phlx to implement $5 quotation spread parameters will help the Phlx to 
compete with other options exchanges that have adopted similar rules. 
The Commission believes that the Phlx's proposal raises no new issues 
or regulatory concerns that the Commission did not consider in 
approving the ISE and CBOE proposals. For these reasons, the Commission 
designates that the proposal become operative immediately.
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    \19\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 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 the rule change if it 
appears to the Commission that the action is necessary or appropriate 
in the public interest, for the protection of investors, or would 
otherwise further the purposes of the Act.

[[Page 69984]]

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 [email protected]. Please include 
File Number SR-Phlx-2004-74 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-2004-74. 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 this 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-2004-74 and should be submitted on or before December 22, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3412 Filed 11-30-04; 8:45 am]
BILLING CODE 8010-01-P