[Federal Register Volume 69, Number 233 (Monday, December 6, 2004)]
[Notices]
[Pages 70492-70494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3466]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50751; File No. SR-Phlx-2004-59]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 by the 
Philadelphia Stock Exchange, Inc. Relating to Minor Adjustments in the 
Calculation of the Nasdaq Composite Index[reg]

November 29, 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 October 8, 2004, the Philadelphia Stock Exchange (``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. 
On November 16, 2004, the Phlx filed Amendment No. 1 to the proposed 
rule change.\3\ On November 16, 2004, the Phlx filed Amendment No. 2 to 
the proposed rule change.\4\ The Phlx filed the proposal under Section 
19(b)(3)(A) of the Act,\5\ and Rule 19b-4(f)(6) thereunder,\6\ which 
renders the proposal effective upon filing.\7\ 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\ Amendment No. 1 changed language in the Purpose section of 
the proposal to more accurately reflect the changes Nasdaq is making 
with respect to calculating the settlement values of the component 
securities of the Index, which the Phlx is proposing to copy. 
Amendment No. 1 also included an Exhibit that set forth the comments 
the Phlx received regarding this proposal. Amendment No. 1 replaced 
the original filing in its entirety.
    \4\ Amendment No. 2 made a technical correction to the proposed 
rule change. Amendment No. 2 replaced the proposed rule change, 
including Amendment No. 1, in its entirety.
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 19 CFR 240.19b-4.
    \7\ The Commission considers the 60-day period within which the 
Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act to have commenced on November 16, 
2004, the date the Phlx filed Amendment No. 2 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 make minor adjustments to the manner by which 
the Nasdaq Composite Index[reg] (``Index'') is calculated.\8\ The 
Exchange currently lists and trades full-sized option contracts on the 
Index (``QCX'') and mini-sized option contracts on the Index (``QXE''), 
which are one-tenth the size of QCX contracts.\9\ The Index is a cash-
settled, capitalization-weighted, broad-based, A.M.-settled index 
composed of approximately 3,400 stocks listed and traded on The Nasdaq 
Stock Market, Inc. (``Nasdaq'').
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    \8\ Nasdaq[reg], Nasdaq Composite[reg] and Nasdaq Composite 
Index[reg] are registered trademarks of The Nasdaq Stock Market, 
Inc. (which with its affiliates are the ``Corporations'') and are 
licensed for use by the Phlx. The product(s) described herein have 
not been passed on by the Corporations as to their legality or 
suitability. The product(s) are not issued, endorsed, sold, or 
promoted by the Corporations. The Corporations make no warranties 
and bear no liability with respect to the product(s).
    The Corporations do not guarantee the accuracy and/or 
uninterrupted calculation of the Nasdaq Composite Index[reg] or any 
data included therein. The Corporations make no warranty, express or 
implied, as to results to be obtained by the exchange, owners of the 
product(s), or any other person or entity from the use of the Nasdaq 
Composite Index[reg] or any data included therein. The Corporations 
make no express or implied warranties, and expressly disclaim all 
warranties of merchantiability or fitness for a particular purpose 
or use with respect to the Nasdaq Composite Index or any data 
included therein. Without limiting any of the foregoing, in no event 
shall the Corporations have any liability for any lost profits or 
special, incidental, punitive, indirect, or consequential damages, 
even if notified of the possibility of such damages.
    \9\ See Securities Exchange Act Release No. 48884 (December 5, 
2003), 68 FR 69753 (December 15, 2003) (SR-Phlx-2003-66).
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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 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 make minor 
adjustments to the manner by which the Index is calculated because 
Nasdaq has made certain minor adjustments to the manner of calculating 
the settlement values of the component securities of the Index.
    Nasdaq maintains, compiles, and calculates the Index. The Exchange, 
for its part, provides and maintains the market for QCX and QCE Index 
options. The QCX and QCE options on the Index

[[Page 70493]]

expire on the Saturday following the third Friday of the expiration 
month. Trading in the expiring contract month will normally cease at 
4:15 p.m. (eastern time) on the Thursday immediately prior to 
expiration. Previously, the exercise settlement value of the Index at 
option expiration was calculated by Nasdaq based on the volume-weighted 
opening price (``Nasdaq VWOP'') of the component securities in the 
first four minutes of trading on the business day prior to expiration, 
which would normally be a Friday (``A.M. Settlement'').\10\
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    \10\ Telephone conversation between Mark Salvacion, Director and 
Counsel, Phlx, and Angela Muehr, Attorney, Division of Market 
Regulation (``Division''), Commission, on November 24, 2004 
(clarifying the calculation of the exercise settlement value).
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    Under the new calculation, the exercise settlement value of the 
Index at option expiration will be calculated by Nasdaq based on the 
Nasdaq VWOP of the component securities in the first five minutes of 
trading (or period of time that Nasdaq determines) \11\ on the business 
day prior to expiration. Under the new calculation, Nasdaq will 
independently maintain the trade history of each index component 
beginning with the receipt of the day's first eligible trade in that 
issue and continuing for five minutes.\12\
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    \11\ If Nasdaq determines to change the period of time for 
calculating the VWOP from the first five minutes of trading to 
another period of time, the Exchange will announce the effective 
date of any future change by way of an Exchange memorandum to the 
membership within a reasonable time prior to the implementation of 
such change, but in no event sooner than five business days prior to 
its implementation. Telephone conversation between Mark Salvacion, 
Director and Counsel, Phlx, and Terri Evans, Special Counsel, 
Division, Commission, and Angela Muehr, Attorney, Division, 
Commission on November 18, 2004.
    \12\ Previously, the time period was four minutes.
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    Trade adjustments will be recorded and reflected for each 
component, under the new calculation, until the five-minute window for 
the last component stock closes, or 4 p.m. (previously 10:30 a.m.), 
whichever is sooner. For individual securities, the VWOP value is 
calculated based on the first five minutes of trading in the Nasdaq 
market. For Nasdaq indices, such as the Index, the VWOP value is 
determined by the VWOP and weighting information for each of the 
component securities. The VWOP messages will be disseminated as the 
values are calculated between 9:45 a.m. and 4 p.m. (eastern time).\13\
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    \13\ There are certain instances in which the VWOP value will be 
calculated at a time later than the first five minutes of trading in 
the Nasdaq market. See http://www.nasdaqtrader.com/trader/mds/nasdaqfeeds/nidsspec.pdf. Telephone conversation between Mark 
Salvacion, Director and Counsel, Phlx, and Terri Evans, Special 
Counsel, Division, Commission, and Angela Muehr, Attorney, Division, 
Commission, on November 18, 2004.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\14\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\15\ in particular, in that it 
is designed to promote just and equitable principles of trade, as well 
as to protect investors and the public interest, by establishing a more 
accurate calculation of the Index. The Exchange believes that adjusting 
the calculation of the Index should not raise manipulation concerns and 
should not cause adverse market impact, because the Exchange will 
continue to employ its current surveillance procedures.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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

    The Exchange received several comments in the form of electronic 
mail from Nasdaq on the proposed rule change. Nasdaq's comments were 
limited to, on the one hand, specific line edits on Section 3.a of the 
proposed rule change, and, on the other hand, comments with respect to 
the timing of the implementation of the adjustment to the VWOP 
calculation and the filing of the proposed rule change by the Exchange. 
These comments are available at the Phlx and at the Commission.

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 pursuant to Section 19(b)(3)(A) of the Act 
\16\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\17\ 
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, it 
has become effective pursuant to Section 19(b)(3)(A) of the Act and 
Rule 19b-4(f)(6) thereunder.\18\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ Rule 19b-4(f)(6) under the Act also requires a self-
regulatory organization to give the Commission written notice of its 
intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Phlx complied with this requirement.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay specified in Rule 19b-4(f)(6). The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest.\19\ The Exchange will 
be able, without delay, to conform the manner in which the Index is 
calculated to the adjustments made by Nasdaq for calculating the 
settlement values of the component securities of the Index. For these 
reasons, the Commission designates the proposal 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. 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 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2004-59 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-2004-59. This 
file number should be included on the

[[Page 70494]]

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-2004-59 and should be submitted on or before 
December 27, 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. E4-3466 Filed 12-3-04; 8:45 am]
BILLING CODE 8010-01-P