[Federal Register Volume 69, Number 245 (Wednesday, December 22, 2004)]
[Notices]
[Pages 76817-76822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27939]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50856; File No. SR-Phlx-2004-91]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Establish a Directed Order 
Process for Orders Delivered to the Exchange Via AUTOM

December 14, 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 December 9, 2004, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III 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 proposes to amend Phlx Rule 1080, Philadelphia Stock 
Exchange Automated Options Market (AUTOM) \3\ and Automatic Execution 
System (AUTO-X), and Phlx Rule 1014, Obligations And Restrictions 
Applicable to Specialists And Registered Options Traders, by adopting: 
(1) New Phlx Rule 1080(l), Directed Orders, under which Exchange 
specialists, Streaming Quote Traders (``SQTs'') \4\ and Remove 
Streaming Quote Traders (``RSQTs'') \5\ trading on the Exchange's 
electronic options trading platform, Phlx XL,\6\ would receive Directed 
Orders (as defined below); and (2) Phlx Rule 1014(g)(viii), which would 
set forth the trade allocation algorithm for electronically executed 
and allocated trades involving Directed Orders. Below is the text of 
the proposed rule change. Proposed new language is in italics.
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    \3\ AUTOM is the Exchange's electronic order delivery, routing, 
execution and reporting system, which provides for the automatic 
entry and routing of equity option and index option orders to the 
Exchange trading floor. Orders delivered through AUTOM may be 
executed manually, or certain orders are eligible for AUTOM's 
automatic execution features, AUTO-X, Book Sweep and Book March. 
Equity option and index option specialists are required by the 
Exchange to participate in AUTOM and its features and enhancements. 
Option orders entered by Exchange members into AUTOM are routed to 
the appropriate specialist unit on the Exchange trading floor. See 
Phlx Rule 1080.
    \4\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through an electronic interface 
with AUTOM via an Exchange approved proprietary electronic quoting 
device in eligible options to which such SQT is assigned. See Phlx 
Rule 1014(b)(ii)(A).
    \5\ An RSQT is a participant in the Exchange's electronic 
trading system. ``Phlx XL'', who has received permission from the 
Exchange to trade in options for his own account, and to generate 
and submit option quotations electronically from off the floor of 
the Exchange through AUTOM in eligible options to which such RSQT 
has been assigned.
    \6\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
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Philadephia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)

Rule 1080. (a)-(k) No change.
    (l) Directed Orders. For a one-year pilot period, beginning on the 
date of approval of this Rule by the Securities and Exchange 
Commission, respecting Streaming Quote Options traded on Phlx XL, 
specialists, RSQTs and SQTs may receive Directed orders (as defined in 
this Rule) in accordance with the provisions of this Rule 1080(l).
    (i)(A) The term ``Directed Order'' means any customer order to buy 
or sell which has been directed to a particular specialist, RSQT, or 
SQT by an Order Flow Provider, as defined below. To quality as a 
Directed Order, an order must be delivered to the Exchange via AUTOM.

[[Page 76818]]

    (B) The term ``Order Flow Provider'' (``OFP'') means any member or 
member organization that submits, as agent, customer orders to the 
Exchange.
    (C) The term ``Directed Specialist, RSQT, or SQT'' means a 
specialist, RSQT, or SQT that receives a Directed Order.
    (ii) When the Exchange's disseminated price is the NBBO at the time 
of receipt of the Directed Order, and the Directed Specialist, SQT or 
RSQT is quoting at the Exchange's disseminated price, the Directed 
Order shall be automatically executed and allocated in accordance with 
Rule 1014(g)(viii).
    (iii) When the Exchange's disseminated price is the NBBO, and the 
quotation disseminated by the Directed Specialist, RSQT, or SQT on the 
opposite side of the market from the Directed Order is inferior to the 
NBBO at the time of receipt of the Directed Order, the Directed Order 
shall be automatically executed and allocated to those quotations and 
orders at the NBBO in accordance with Exchange Rule 1014(g)(vii).
    (iv) If the Exchange's disseminated price is not the NBBO at the 
time of receipt of the Directed Order, the Directed Order shall be 
handled by the specialist in accordance with Exchange rules.
Commentary: No change.

Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders

Rule 1014.(a)-(f) No change.
    (g)(i)-(vii) No change.
    (viii) For a one year pilot period, beginning on the date of 
approval of this Rule by the Securities and Exchange Commission, 
Directed Orders (as defined in Rule 1080(l)(i)(A)) that are executed 
electronically shall be automatically allocated as follows:
    (A) First, to customer limit orders resting on the limit order book 
at the execution price.
    (B) Thereafter, contracts remaining in the Directed Order, if any, 
shall be allocated automatically as follows:
    (1) The Directed Specialist (where applicable), shall be allocated 
a number of contracts that is the greater of:
    (a) The proportion of the aggregate size at the NBBO associated 
with such Directed Specialist's quote, SQT and RSQT quotes, and non-SQT 
ROT limit orders entered on the book via electronic interface at the 
disseminated price represented by the size of the Directed Specialist's 
quote;
    (b) The Enhanced Specialist Participation as described in Rules 
1014(g)(ii)-(iv); or
    (c) 40% of the remaining contracts.
    (d) Thereafter, SQTs and RSQTs quoting at the disseminated price, 
and non-SQT ROTs that have placed limit orders on the limit order book 
via electronic interface at the Exchange's disseminated price shall be 
allocated contracts according to the following formula;

Equal percentage based on the Number of         +   Pro rata percentage based      x   Remaining Order Size
 SQTs, RSQTs and Non-SQT ROTs quoting or             on size of SQT, RSQT and
 with limit orders at BBO (Component A)              non-SQT quotes and limit
                                                     orders (Component B)
 

Where:

    Component A: The percentage to be used for Component A shall be an 
equal percentage, derived by dividing 100 by the number of SQTs, RSQTs 
and non-SQTs quoting or with limit orders at the BBO.
    Component B: Size Pro Rata Allocation. The percentage to be used 
for Component B of the allocation algorithm formula is that percentage 
that the size of each SQT, RSQT or non-SQT ROT's quote or limit order 
at the best price represents relative to the total number of contracts 
in the disseminated quote.
    Final Weighting: The final weighting formula shall be determined by 
a three-member special committee of the Board of Governors, chaired by 
the Chairman of the Board, and including the Chairman of the Options 
Committee and one on-floor Governor (the ``Special Committee''), and 
shall be a weighted average of the percentages derived for Components A 
and B multiplied by the size of the incoming order.
    (2)(a) A Directed RSQRT or SQT (where applicable) shall be 
allocated a number of contracts that is the greater of the proportion 
of the aggregate size at the NBBO associated with such Directed SQT or 
RSQT's quote, the specialist's quote, other SQT and RSQT quotes, and 
non-SQT ROT limit orders entered on the book via electronic interface 
at the disseminated price represented by the size of the Directed RSQT 
or SQT's quote at the NBBO, or
    (b) 40% of the remaining contracts.
    (c) Thereafter, the specialist, SQTs and RSQTs (excluding the 
Directed SQT or RSQT) quoting at the disseminated price, and non-SQT 
ROTs that have placed limit orders on the limit order book via 
electronic interface at the Exchange's disseminated price, shall be 
allocated a number of contracts according to the following formula:

Equal percentage based on the number of         +   Pro rata percentage based      x   Remaining Order Size
 SQTs, RSQTs, specialist and Non-SQT ROTs            on size of SQT, RSQT,
 quoting or with limit orders at BBO                 specialist and non-SQT
 (Component A)                                       quotes and limit orders
                                                     (Component B)
 

Where:

    Component A: The percentage to be used for Component A shall be an 
equal percentage, derived by dividing 100 by the number of SQTs, RSQTs 
(other than the Directed SQT or RSQT) specialist and non-SQTs quoting 
or with limit orders at the BBO.
    Component B: Size Pro Rata Allocation. The percentage to be used 
for Component B of the allocation algorithm formula is that percentage 
that the size of each SQT, RSQT RSQTs (other than the Directed SQT or 
RSQT), specialist or non-SQT ROT's quote or limit order at the best 
price represents relative to the total number of contracts in the 
disseminated quote.
    Final Weighting: The final weighting formula shall be determined by 
a three-member special committee of the Board of Governors, chaired by 
the Chairman of the Board, and including the Chairman of the Options 
Committee

[[Page 76819]]

and one on-floor Governor (the ``Special Committee''), and shall be a 
weighted average of the percentages derived for Components A and B 
multiplied by the size of the incoming order.
    (3) If any contracts remain to be allocated after the specialist, 
SQTs, RSQTs and non-SQT ROTs with limit orders on the limit order book 
have received their respective allocations, off-floor broker-dealers 
(as defined in Rule 1080(b)(i)(C)) that have placed limit orders on the 
limit order book which represent the Exchange's disseminated price 
shall be entitled to receive a number of contracts that is the 
proportion of the aggregate size associated with off-floor broker-
dealer limit orders on the limit order book at the disseminated price 
represented by the size of the limit order they have placed on the 
limit order book.
    (C) If the Directed Order is for a size that is greater than the 
Exchange's disseminated size, remaining contracts shall be allocated 
manually accordance with Exchange Rule 1014(g)(v).
    (D) A Directed Specialist, RSQT, or SQT shall not be entitled to 
receive a number of contracts that is greater than the size associated 
with their quotation. Non-SQT ROTs and off-floor broker-dealers shall 
not be entitled to receive a number of contracts that is greater than 
the size associated with their limit order.
    (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 had 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

I. Purpose
    The purpose of the proposed rule change is to expand the appeal of 
Phlx XL by establishing rules that permit specialists, SQTs and RSQTs 
assigned in options trading on the Phlx XL system (``Streaming Quote 
Options'') to receive Directed Orders, and to establish a trade 
allocation algorithm for electronically executed and allocated trades 
involving Directed Orders that rewards Directed Specialists, SQTs and 
RSQTs for attracting such order flow to the Exchange.
    On July 27, 2004, the Commission approved the Exchange's proposed 
rule relating to Phlx Xl, and electronic options trading platform in 
which a new category of Exchange ROT, known as an SQT, is permitted to 
stream proprietary electronic options quotations into the AUTOM System 
in options designated as ``Streaming Quote Options'' (i.e., traded on 
Phlx XL).\7\ Recently, the Exchange filed a proposed rule change to 
expand the scope of Phlx XL by creating a new category of Phlx XL 
market making participant, known as an RSQT, who would be permitted to 
stream quotations in Streaming Quote Options from off the floor of the 
Exchange.\8\ Together with that proposed rule change, the Exchange 
herein proposes to provide a participation guarantee to a Phlx XL 
participant (i.e., a specialist, SQT or RSQT) that receives a Directed 
Order from an Order Flow Provider.
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    \7\ See id.
    \8\ See SR-Phlx-2004-90.
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    Definitions. Proposed Phlx Rule 1080(1)(A) would define the term 
``Directed Order'' to mean any customer order to buy or sell which has 
been directed to a particular specialist, RSQT, or SQT by an Order Flow 
Providers, as defined below. To qualify as a Directed Order, an order 
must be delivered to the Exchange via AUTOM. The term ``Order Flow 
Provider'' (``OFP`) under proposed Phlx Rule 1080(1)(i)(B) would mean 
any member or member organization that submits, as agent, customer 
orders to the Exchange. Proposed Phlx Rule 1080(1)(i)(C) defines the 
term ``Directed Specialist, RSQT, or SQT'' as a specialist, RSQT, or 
SQT that receives a Directed Order.\9\
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    \9\ The word ``Directed'' modifies all three; that is, it is 
referring to a Directed Specialist, Directed SQT and Directed RSQT.
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    NBBO Requirement. The Exchange's AUTOM System currently functions 
to provide automatic executions in Streaming Quote Options only when 
the Exchange's disseminated bid or offer is the National Best Bid or 
Offer (``NBBO'').\10\ Therefore, in order to participate in automatic 
executions of Directed Orders, a Directed Specialist, SQT or RSQT would 
be required to be quoting the NBBO at the time the Directed Order is 
received. The proposed rule change addresses various situations where, 
at the time of receipt of the Directed Order, the Exchange's 
disseminated price is at the NBBO, is not the NBBO, and where the 
Exchange's disseminated price is the NBBO but the Directed Specialist, 
SQT or RSQT is not quoting at the Exchange's disseminated price.
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    \10\ The Exchange's automatic execution features under Phlx XL, 
Book Sweep and Book Match, respectively, are designed to execute 
trades automatically only when the Exchange's disseminated bid or 
offer is at or equal to the NBBO. See Phlx Rules 1080(c)(iii) and 
1080(g)(ii).
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    First, proposed Phlx Rule 1080(l)(ii) would provide that, when the 
Exchange's disseminated price is the NBBO at the time of receipt of the 
Directed Order, and the Directed Specialist, SQT or RSQT is quoting at 
the Exchange's disseminated price, the Directed Order would be 
automatically executed and allocated in accordance with Phlx Rule 
1014(g)(viii), which contains the allocation algorithm for Directed 
Orders described more fully below.
    Second, proposed Phlx Rule 1080(l)(iii) would provide that, when 
the Exchange's disseminated price is the NBBO, and the quotation 
disseminated by the Directed Specialist, RSQT, or SQT on the opposite 
side of the market from the Directed Order is inferior to the NBBO at 
the time of receipt of the Directed Order, the Directed Order would be 
automatically executed and allocated in those quotations and orders at 
the NBBO in accordance with Phlx Rule 1014(g)(vii), which is the trade 
allocation rule applicable to contracts executed on Phlx XL that are 
not Directed Orders.\11\
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    \11\ Phlx Rule 1014(g)(vii) sets forth the allocation algorithm 
applicable to orders that are automatically executed on Phlx XL. 
Phlx Rule 1014(g)(vii) would continue to apply to orders other than 
Directed orders that are automatically executed on Phlx XL. Proposed 
Phlx Rule 1014(g)(viii) would apply to Directed Orders that are 
executed automatically of Phlx XL.
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    Finally, proposed Phlx Rule 1080 (l)(iv) would provide that, when 
the Exchange's disseminated price is not the NBBO at the time of 
receipt of the Directed Order, the Directed Order would be handled 
manually by the specialist in accordance with Exchange rules. In this 
situation, the Directed Specialist, SQT or RSQT would not be entitled 
to receive the participation guarantee contemplated in proposed Phlx 
Rule 1014(g)(viii), discussed more fully below, because that allocation 
algorithm applies only to Directed Orders that are executed 
electronically.
    As stated above, one primary purpose of the proposal is to reward 
Directed Specialists, SQTs and RSQTs for establishing relationships 
with OFPs

[[Page 76820]]

that result in a greater number of orders sent to, and executed on, the 
Exchange. The Exchange believes that the requirement that a Directed 
Order be executed automatically at the NBBO, and that the Directed 
Specialist, SQT or RSQT must be quoting the NBBO at the time of receipt 
of the Directed Order, ensures that the customer order sent by the OFP 
will receive the best price available.
    Trade Allocation. Because one of the main purposes of the proposed 
rule change is to provide incentives and rewards for specialists, SQTs 
and RSQTs who enter into relationships with OFPs that result in the 
delivery of Directed Orders to the Exchange, proposed Phlx Rule 
1080(g)(viii) would provide a participation guarantee to Directed 
Specialists, SQTs and RSQTs who establish such relationships and 
receive Directed Orders in options in which they are assigned.
    Quoting Requirement. In order to be entitled to receive the 
participation guarantee, Directed Specialists, SQTs and RSQTs would 
have to fulfill the quoting requirements contained in Phlx Rule 
1014(b)(ii)(B). Currently, SQTs and RSQTs (as proposed) are responsible 
to quote continuous, two-sided markets in not less than 60% of the 
series in each Streaming quote Option traded on Phlx XL in which such 
SQT is assigned, while the specialists is required to quote continuous, 
two-sided markets in not less than 100% of the series in each Streaming 
Quote Option in which such specialist is assigned.\12\ Like the 
specialist, however, a directed SQT or RSQT would be responsible to 
quote continuous, two-sided markets in not less than 100% of the series 
in each Streaming quote Option in which they receive Directed Orders.
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    \12\ See Phlx Rule 1014(b)(ii)(B).
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    Directed Specialist. Under the proposal, a directed Specialist, 
where applicable, would be allocated a number of contracts that is the 
greater of: (1) The proportion of the aggregate size at the NBBO 
associated with such Directed Specialist's quote, SQT and RSQT quotes, 
and non-SQT ROT limit orders entered on the book via electronic 
interface at the disseminated price represented by the size of the 
directed Specialist's quote (i.e., their size pro rata share); (2) the 
Enhanced Specialist Participation as described in Phlx Rules 
1014(g)(ii)-(iv); \13\ or (3) 40% of the contracts to be allocated.
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    \13\ Phlx Rules 1014(g)(ii)-(iv) govern the Enhanced Specialist 
Participation, under which the specialist is entitled to receive a 
guaranteed number of contracts in situations where the specialist is 
on parity (i.e., simultaneously bidding or offering at the same 
price) with one or more ``controlled accounts,'' defined in Phlx 
Rule 1014(g)(i)(A) to include any account controlled by or under 
common control with a broker-dealer. If three or more controlled 
accounts are on parity with the specialist, the specialist is 
entitled to receive 30% of the contracts to be allocated. If two 
controlled accounts are on parity with the specialist, the 
specialist is entitled to receive 40%, and if only one controlled 
account is on parity with the specialist, the specialist is entitled 
to receive 60%.
    Another Enhanced Specialist Participation program on the Phlx, 
originally adopted in May 1994 and embodied in current Phlx Rule 
1014(g)(iii), is designed to encourage the establishment of new 
specialist units to trade options classes that have never been 
listed on the Exchange. See Securities Exchange Act Release No. 
34109 (May 25, 1994), 59 FR 28570 (June 2, 1994) (SR-PHLX-93-29). 
For a period of six months following the commencement of trading in 
such a new options class, the new specialist unit is entitled to 50% 
of an order when one controlled account is on parity with the 
specialist, and 40% when two or more controlled accounts are on 
parity with the specialist.
    Under Phlx Rule 1014(g)(iv), a specialist who develops and 
trades a new product is entitled to receive an enhanced Special 
Participation of 40% when three or more controlled accounts are on 
parity , and 60% if fewer than three controlled accounts are on 
parity. Currently, in either of these situations, if a customer is 
on parity, the customer may not receive a smaller participation than 
any other crowd participant, including the specialist.
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    Directed SQT or RSQT. A Directed RSQT or SQT, where applicable, 
would be allocated a number of contracts that is the greater of: (1) 
Their size pro rata share; or (2) 40% of the contracts to be allocated.
    Allocation of Remaining Contracts. Remaining contracts (after the 
Directed Specialist, SQT or RSQT has received their respective 
allocation) would be allocated in accordance with a formula contained 
in the rule that substantially tracks the trade allocation formula for 
contracts executed and allocated automatically in Streaming Quote 
Options that do not involve Directed Orders. Specifically, part of the 
contracts remaining after customer orders are filled and after the 
Directed Specialist, SQT or RSQT has received their guaranteed 
participation would be allocated on an equal basis among remaining 
participants on parity, and part of the contracts allocated on a size 
pro rata basis, and on a weighted basis to be determined by the special 
ad hoc subcommittee appointed by the Board.\14\
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    \14\ See Securities Exchange Act Release No. 50788 (December 3, 
2004), 69 FR 71860 (December 10, 2004) (SR-Phlx-2004-57).
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    In the case of a trade allocation involving a Directed Specialist, 
contracts remaining after customer orders at the execution price are 
executed, and after the Directed Specialist is allocated their 
guaranteed number of contracts (the ``Remaining Order Size'') would be 
allocated according to the following formula:

Equal percentage based on the Number of         +   Pro rata percentage based      x   Remaining Order Size
 SQTs, RSQTs and Non-SQT ROTs quoting or             on size of SQT, RSQT and
 with limit orders at BBO (Component A)              non-SQT quotes and limit
                                                     orders (Component B)
 

    The percentage to be used for Component A would be an equal 
percentage, derived by dividing 100 by the number of SQTs, RSQTs or 
non-SQTs quoting or with limit orders at the BBO. The percentage to be 
used for Component B of the allocation algorithm formula is the 
percentage that the size of each SQT, RSQT or non-SQT ROT's quote or 
limit order at the best price represents relative to the total number 
of contracts in the disseminated quote.
    In the case of a trade allocation involving a Directed SQT or RSQT, 
contracts remaining after customer orders at the execution price are 
executed, and after the Directed SQT or RSQT is allocated their 
guaranteed number of contracts (the Remaining Order Size), would be 
allocated among the specialist, SQTs or RSQTs (excluding the Directed 
SQT or RSQT) quoting at the disseminated price, and non-SQT ROTs that 
have placed limit orders on the limit order book via electronic 
interface at the Exchange's disseminated price according to the 
following formula:

[[Page 76821]]



Equal percentage based on the number of         +   Pro rata percentage based      x   Remaining Order Size
 SQTs, RSQTs, specialist and Non-SQT ROTs            on size of SQT, RSQT,
 quoting or with limit orders at BBO                 specialist and non-SQT
 (Component A)                                       quotes and limit orders
                                                     (Component B)
 

    The percentage to be used for Component A would be an equal 
percentage, derived by dividing 100 by the number of SQTs, RSQTs (other 
than the Directed SQT or RSQT), specialist and non-SQTs quoting or with 
limit orders at the BBO. The percentage to be used for Component B of 
the allocation algorithm formula is the percentage that the size of 
each SQT, RSQT (other than the Directed SQT or RSQT), specialist or 
non-SQT ROT's quote or limit order at the best price represents 
relative to the total number of contracts in the disseminated quote.
    In each situation, the final weighting formula as among Component A 
and Component B would be determined by a three-member special committee 
of the Board of Governors, chaired by the Chairman of the Board, and 
including the Chairman of the Options Committee and one on-floor 
Governor, and shall be a weighted average of the percentages derived 
for Components A and B multiplied by the size of the incoming order.
    Off-Floor Broker-Dealers. If any contracts remain to be allocated 
after the specialist, SQTs, RSQTs or non-SQT ROTs with limit orders on 
the limit order book have received their respective allocations, off-
floor broker-dealer (as defined in Phlx Rule 1080(b)(i)(C)) that have 
placed limit orders on the limit order book at the disseminated price 
would be allocated contracts on a size pro rata basis.
    Orders for a size greater than the Exchange's disseminated size. 
Proposed Phlx Rule 1014(g)(viii)(C) would establish that, if the 
Directed Order is for a size that is greater than the Exchange's 
disseminated size, remaining contracts would be allocated in accordance 
with Phlx Rule 1014(g)(v).\15\
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    \15\ Phlx Rule 1014(g)(v) sets forth the rules and contract 
allocation algorithm for trades that are executed in the trading 
crowd.
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    Quotation and limit order size. Proposed Phlx Rule 1014(g)(viii)(D) 
would provide that a Directed Specialist, RSQT, or SQT would not be 
entitled to receive a number of contracts that is greater than the size 
associated with their quotation. Non-SQT ROTs and off-floor broker-
dealers shall not be entitled to receive a number of contracts that is 
greater than the size associated with their limit order.
    One-Year Pilot Basis. The proposal would be effective on a one-year 
pilot basis, beginning on the date of Commission approval of proposed 
Phlx Rules 1080(1) and 1014(g)(viii).\16\
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    \16\ The Exchange notes that another options exchange has filed 
a proposed rule change to establish a ``preferred'' market maker 
order type, which would afford participation grantees to such 
``preferred'' market maker, on a one-year pilot basis. See 
Securities Exchange Act Release No. 50732 (November 23, 2004), 69 FR 
69967 (December 1, 2004) (SR-CBOE-2004-71).
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    The Exchange believes that the participation guarantees included in 
proposed Phlx Rule 1014(g)(viii) should reward specialist, SQTs and 
RSQTs that actively engage in marketing activities and establish 
relationships with OFPs that generate Directed Orders sent to the 
Exchange by such OFPs. The Exchange expects such marketing activities 
and relationships would result in additional order flow to the 
Exchange, thus adding depth and liquidity to the Exchange's markets, 
and enabling the Exchange to continue to compete effectively with other 
options exchanges for order flow.

2. Statutory Basis

    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act\18\ in particular, in that it is designed to perfect 
the mechanism 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 permitting specialists, SQTs and 
RSQTs trading options on Phlx Xl participants to receive Directed 
Orders, and by encouraging the capture of order flow on the Exchange by 
rewarding Directed Order recipients with a participation guarantee in 
trades involving Directed Orders.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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 solicited or received with respect to the 
proposed rule change.

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 with 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 it 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.

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-2004-91 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 rever to File Number SR-Phlx-2004-91. 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

[[Page 76822]]

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 
Reverence 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 publicly available. All submissions should refer to 
File Number SR-Phlx-2004-91 and should be submitted on or before 
January 12, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
J. Lynn Taylor,
Assistant Secretary.
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    \19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 04-27939 Filed 12-21-04; 8:45 am]
BILLING CODE 8010-01-M