[Federal Register Volume 69, Number 247 (Monday, December 27, 2004)]
[Notices]
[Pages 77295-77307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28149]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No.34-50877; File No. SR-Phlx-2004-90]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to Remote 
Streaming Quote Traders

December 17, 2004.
    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 December 9, 2004, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange

[[Page 77296]]

Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by Phlx. 
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 240.19-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to amend the Exchange's rules to establish a new 
category of option market-making participant on the Exchange, a Remote 
Streaming Quote Trader (``RSQT''). An RSQT would be defined as a 
Registered Options Trader (``ROT'') that is a member or member 
organization with no physical trading floor presence who has received 
permission from the Exchange to generate and submit option quotations 
electronically through AUTOM in eligible options to which such RSQT has 
been assigned. The Exchange is also proposing to amend various Exchange 
rules to apply to and govern RSQTs.
    The text of the proposed rule change is set forth below. Brackets 
indicate deletions; italics indicates new text.
    Obligations and Restrictions Applicable to Specialists and 
Registered Options Traders Rule 1014. (a) General. Transactions of a 
Specialist and a Registered Options Trader (ROT) should constitute a 
course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market, and those members should not 
enter into transactions or make bids or offers that are inconsistent 
with such a course of dealings.
    (b) ROT. (i) An ROT is a regular member or a foreign currency 
options participant of the Exchange located on the trading floor who 
has received permission from the Exchange to trade in options for his 
own account. For purposes of this Rule 1014, the term ``ROT'' shall 
include a Streaming Quote Trader, and a Remote Streaming Quote Trader, 
as defined below.
    Each ROT electing to engage in Exchange options transactions shall 
be assigned by the Exchange one or more classes of options, and 
Exchange options transactions initiated by such ROT on the Floor for 
any account in which he had an interest shall to the extent prescribed 
by the Exchange be in such assigned classes.
    (ii) (A) Streaming Quote Trader (``SQT''). An SQT is an 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. An SQT may only submit 
such quotations while such SQT is physically present on the floor of 
the Exchange.
    (B) Remote Streaming Quote Trader (``RSQT''). An RSQT is an ROT 
that is a member or member organization with no physical trading floor 
presence who has received permission from the Exchange to generate and 
submit option quotations electronically through AUTOM in eligible 
options to which such RSQT has been assigned.
    Notwithstanding the provisions of sub-paragraph (b)(i) above, an 
RSQT may only submit such quotations electronically from off the floor 
of the Exchange. No person who is either directly or indirectly 
affiliated with an RSQT shall submit quotations as a specialist, SQT, 
RSQT or non-SQT ROT in options in which such affiliated RSQT is 
assigned. An RSQT may only trade in a market making capacity in classes 
of options in which he is assigned.
    (C) Non-SQT ROT. A non-SQT ROT is an ROT who is neither an SQT nor 
an RSQT.
    ([B]D) Market Making Obligations Applicable in Streaming Quote 
Options. In addition to the other requirements for ROTs set forth in 
this Rule 1014, an SQT and an RSQT shall be responsible to quote 
continuous, two-sided markets in not less than 60% of the series in 
each Streaming Quote Option (as defined in Rule 1080(k)) in which such 
SQT or RSQT is assigned, provided that a Directed SQT or RSQT (as 
defined in Rule 1080(l)(i)(C)) shall 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 (as 
defined in Rule 1080(l)(i)(A)). The specialist shall be responsible 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.
    (1) During a six month period commencing on the date of the initial 
deployment of Phlx XL (the ``initial six-month period''), any SQT or 
RSQT assigned in a Streaming Quote Option (and the specialist assigned 
in such Streaming Quote Option) may submit electronic quotations with a 
size of fewer than 10 contracts for a period of sixty days after such 
option begins trading as a Streaming Quote Option. Beginning on the 
sixty-first day after such option begins trading as a Streaming Quote 
Option, SQTs, RSQTs and the specialist assigned in such Streaming Quote 
Option shall submit electronic quotations with a size of not less than 
10 contracts.
    (2) During a six month period commencing on the first day following 
the expiration of the initial six-month period, any SQT or RSQT 
assigned in a Streaming Quote Option (and the specialist assigned in 
such Streaming Quote Option) may submit electronic quotations with a 
size of fewer than 10 contracts for a period of thirty days after such 
option begins trading as a Streaming Quote Option. Beginning on the 
thirty-first day after such option begins trading as a Streaming Quote 
Option, SQTs, RSQTs and the specialist assigned in such Streaming Quote 
Option shall submit electronic quotations with a size of not less than 
10 contracts.
    (3) Thereafter, any SQT or RSQT assigned in a Streaming Quote 
Option that is newly deployed on Phlx XL (and the specialist assigned 
in such Streaming Quote Option) shall submit electronic quotations with 
a size of not less than 10 contracts beginning on the date on which 
such Streaming Quote Option begins trading on Phlx XL.
    [An SQT may only submit such quotations while such SQT is 
physically present on the floor of the Exchange.]
    ([C]E) Non-SQT ROTs Trading Streaming Quote Options. These 
requirements are applicable on a per option basis depending upon the 
percentage of volume a non-SQT ROT transacts electronically (i.e., by 
way of placing limit orders on the limit order book that are executed 
electronically and allocated automatically in accordance with Rule 
1014(g)(vii)) versus in open outcry. With respect to making this 
determination, the Exchange will monitor the non-SQT ROT's trading 
activity every calendar quarter to determine whether they exceed the 
thresholds established in this sub-paragraph (C). If a non-SQT ROT 
exceeds the threshold established below, the obligations contained in 
sub-paragraph (C)(2) will be effective the next calendar quarter.
    For a period of 90 days commencing immediately after an option 
begins trading as a Streaming Quote Option, the provisions of sub-
paragraph (C)(1) below shall govern trading in that Streaming Quote 
Option.
    (1) No change.
    (2)(a) and (b) No change.
    (c) Continuous Open Outcry Quoting Obligation: In response to any 
request for quote by a Floor Broker, specialist, Floor Official, [or 
other ROT (including an] SQT or other non-SQT ROT [)], non-SQT ROTs 
must provide a two-sided market complying with the quote spread 
parameter requirements contained in

[[Page 77297]]

Rule 1014(c)(i). During a six month period commencing on the date of 
the initial deployment of Phlx XL (the ``initial six-month period''), 
for a period of sixty days commencing immediately after an option 
begins trading as a Streaming Quote Option, such non-SQT ROTs may 
provide such quotations with a size of fewer than 10 contracts. 
Beginning on the sixty-first day after such option begins trading as a 
Streaming Quote Option, such quotations shall be for a size of at least 
10 contracts. During a six month period commencing on the first day 
following the expiration of the initial six-month period, such non-SQT 
ROT may provide such quotations with a size of fewer than 10 contracts 
for a period of thirty days after such option begins trading as a 
Streaming Quote Option. Beginning on the thirty-first day after such 
option begins trading as a Streaming Quote Option, such quotations 
shall be for a size of at least 10 contracts. Thereafter, such non-SQT 
ROTs shall provide such quotations with a size of not less than 10 
contracts beginning on the date on which such Streaming Quote Option 
begins trading on Phlx XL.
    (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 (except 
an RSQT) 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)-(ii) No change.
    (d) In Classes of Option Contracts Other Than Those Which 
Appointed. With respect to classes of option contracts other than those 
to which his appointment extends, an ROT (other than an RSQT), whenever 
he 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, 
shall undertake the obligations specified in paragraph (c) of this 
rule. Furthermore, an ROT should not:
    (i) Individually or as a group, intentionally or unintentionally, 
dominate the market in option contracts of a particular class; or
    (ii) Effect purchases or sales on the floor of the Exchange except 
in a reasonable and orderly manner.
    (iii) Be conspicuous in the general market or in the market in a 
particular option.
    (e)-(f) No change.
    (g) Equity Option and Index Option Priority and Parity
    (i)-(iv) No change.
    (v) Allocation of the Remainder of the Order Among Specialists and 
ROTs on Parity. After the application of Rule 1014(g)(i) to an 
Initiating Order, the Remainder of the Order shall be allocated by the 
Allocating Participant (as defined in Rule 1014(g)(vi)) as follows:
    (A) Entitlement. ROTs and specialists on parity are entitled to 
their Defined Participation (as described below), subject to: (1) Any 
Waiver, as described below; and (2) rounding, as described below.
    (B) Size. The term ``stated size'' [in relation to a crowd 
participant and] in respect of an order or electronic quotation shall 
mean:
    (1) In the case of orders handled manually by the specialist: 
(a)(i) If a crowd participant (including the specialist) has actually 
stated a size (``Actual Size''), such crowd participant's stated size 
shall be his or her Actual Size;
    (ii) if the specialist, an SQT or RSQT is disseminating an 
electronic quotation at the Exchange's disseminated price in a 
particular series at the time of the execution of an Initiating Order 
in such series, such specialist, SQT or RSQT's disseminated size at the 
Exchange's disseminated price shall be his or her Actual Size, and such 
specialist, SQT and/or RSQT shall be deemed a ``crowd participant'' for 
purposes of this Rule 1014(g)(v);
    (b)-(c) No change.
    (2) No change.
    (C) No change.
    (D) Waiver. (1) An[y] ROT (other than an RSQT) or specialist may, 
in his or her sole discretion, offer to waive, in whole or in part, any 
part of a trade to which they were entitled to be allocated (an ``Offer 
to Waive'').
    (a)-(c) No change.
    (E)-(G) No change.
    (vi) In order to facilitate timely tape reporting of executed 
trades, it is the duty of the persons identified below to allocate, 
match and time stamp manually executed trades as well as to submit the 
matched trade to the appropriate person at the respective specialist 
post immediately upon execution:
    ([i]a) In a trade involving a floor broker, the floor broker shall 
so do, provided that a floor broker may delegate this responsibility to 
the specialist (or an assistant to the specialist under the 
specialist's direct supervision) if the specialist agrees to accept 
such responsibility, and, in the event of such delegation, the 
specialist (or an assistant to the specialist under the specialist's 
direct supervision) shall do so:
    ([ii]b) In all other cases where the specialist is a participant 
(i.e., where there is no floor broker), the specialist (or an assistant 
to the specialist under the specialist's direct supervision) shall do 
so;
    ([iii]c) in any other case (i.e., where there is no floor broker 
and no specialist is involved), the largest on-floor participant shall 
do so (for example, where several Registered Options Traders are 
involved)[:]; and
    ([iv]d) if there is only one seller and one buyer (no floor broker 
and no specialist is involved), the seller shall do so (for example, 
where only two Registered Options Traders are involved) , unless either 
the seller or the buyer is an RSQT, in which case the on-floor 
participant in the transaction shall do so.
    The person responsible for trade allocation (the ``Allocating 
Participant'') shall, for each trade allocated by such Allocating 
Participant, circle his or her badge identification number on the trade 
tickets, identifying himself or herself as the Allocating Participant 
in the particular trade. If the Allocating Participant is not a 
participant in the trade to be allocated, he/she shall identify 
himself/herself by initiating the trade tickets. In the case of a trade 
in which a Floor Broker is the Allocating Participant, such Floor 
Broker shall allocate the trade using the Options Floor Broker 
Management System.
    (vii) Allocation of Automatically Executed Trades in Streaming 
Quote Options. Solely with respect to Streaming Quote Options approved 
by the Exchange to be traded on Phlx XL [by Streaming Quote Traders 
(``SQTs'')] pursuant to Exchange Rule 1080(k), after public customer 
market and marketable limit orders have been executed, trades 
automatically executed in such options shall be allocated automatically 
in the following manner:
    (A) If the specialist, an SQT, RSQT or a non-SQT ROT that has 
placed a limit order on the limit order book (``Phlx XL Participant'') 
is quoting alone at the disseminated price and their quote is not 
matched by another Phlx XL

[[Page 77298]]

participant prior to execution, such Phlx XL Participant shall be 
entitled to receive a number of contracts up to the size associated 
with his/her quotation.
    (B) Parity. Quotations entered electronically by the specialist, an 
RSQT or an SQT that do not cause an order resting on the limit order 
book to become due for execution may be matched at any time by 
quotations entered electronically by the specialist and/or other SQTs 
and RSQTs, and by ROT limit orders entered via electronic interface and 
shall be deemed to be on parity, subject to the requirement that orders 
of controlled accounts must yield priority to customer orders as set 
forth in Rule 1014(g)(i)(A).
    (1) (a)-(e) No change. (2)-(4) No change.
    (h) No change.
Commentary
    .01 An ROT electing to engage in Exchange Options transactions is 
designated as a specialist on the Exchange for all purposes under the 
Securities Exchange Act of 1934 and the rules and regulations 
thereunder with respect to options transactions initiated and effected 
by him on the floor in his capacity as an ROT. For purposes of this 
commentary, the term ``transactions initiated and effected on the 
floor'' shall not include transactions initiated by an ROT off the 
floor, but which are considered ``on-floor'' pursuant to Commentaries 
.07 and .08 of Rule 1014. Similarly, an RSQT electing to engage in 
Exchange Options transactions is designated as a specialist on the 
Exchange for all purposes under the Securities Exchange Act of 1934 and 
the rules and regulations thereunder with respect to options 
transactions initiated and effected by him in his capacity as an ROT.
    However, in order for an ROT (other than an RSQT) to receive 
specialist margin treatment for off-floor orders in any calendar 
quarter, the ROT must execute the greater of 1,000 contracts or 80% of 
his total contracts that quarter in person (not through the use of 
orders) and 75% of his total contracts that quarter in assigned 
options. The off-floor orders for which an ROT receives specialist 
margin treatment shall be subject to the obligations of Rule 1014(a) 
and, in general, be effected for the purpose of hedging, reducing risk 
of, or rebalancing positions of the ROT. An ROT is responsible for 
evidencing compliance with these provisions. The Options Committee may 
exempt one or more classes of options from this calculation.
    .02 No change.
    .03 The Exchange has determined for purposes of paragraph (c) of 
this Rule that, except for unusual circumstances, at least 50% of the 
trading activity in any quarter (measured in terms of contract volume) 
of an ROT (other than an RSQT) shall ordinarily be in classes of 
options to which he is assigned. Temporarily undertaking the 
obligations of paragraph (c) at the request of a member of the 
Committee on Options in non assigned classes of options shall not be 
deemed trading in non assigned option contracts.
    The Exchange may, in computing the percentage specified herein, 
assign a weighting factor based upon relative inactivity to one or more 
classes or series of option contracts.
    .04 No change.
    .05 (a) Assignment in non-Streaming Quote Options. With respect to 
options that are not eligible to be traded by SQTs and RSQTs (``non-
Streaming Quote Options''), the Exchange will assign an ROT to act in 
one or more classes of option contracts. In making such assignments, 
the Exchange shall give attention to (i) the preference of applicants; 
(ii) assuring that financial resources available to an ROT enable him 
to satisfy the obligations set forth in Rule 1014 with respect to each 
class of option contracts to which he is assigned; (iii) the 
applicant's expertise in options trading; and (iv) the applicant's 
prior market performance. The Exchange may suspend or terminate any 
assignment of an ROT under this Rule and may make additional 
assignments whenever, in the Exchange's judgment, the interests of a 
fair and orderly market are best served by such action.
    (b) Assignment in Streaming Quote Options. The Options Allocation, 
Evaluation and Securities Committee (``OAESC'') or its designee shall 
assign SQTs and RSQTs in one or more Streaming Quote Options in 
accordance with Rule 507. An SQT or RSQT may be assigned to (and thus 
submit quotes electronically in) any option traded on Phlx XL for which 
they are approved by the OAESC.
    [up to all of the options located within a specified physical zone 
on the Exchange Options Floor (an ``SQT Zone'') provided that such SQT 
is physically present in such SQT Zone. Each member organization must 
have at least one SQT physically present in each SQT Zone in which such 
member organization submits electronic quotations. The number and 
location of SQT Zones will be determined by the Options Committee. 
Initially, there will be one single SQT Zone encompassing the entire 
options floor. In the event the Options Committee determines to change 
the number and/or location of SQT Zones, the effectiveness of any such 
change shall be conditioned upon its having been approved by the 
Securities and Exchange Commission pursuant to Section 19(b) of the 
Securities Exchange Act of 1934, as amended, and the rules and 
regulations thereunder.]
    (c) Non-Electronic Orders. In the event that a Floor Broker or 
specialist presents a non-electronic order in a[n option] Streaming 
Quote Option in which an RSQT is assigned, and/or in which an SQT 
assigned in such Streaming Quote Option is not a crowd participant, 
[but which is traded in the SQT Zone where such SQT is located,] such 
SQT and/or RSQT may not participate in trades stemming from such a non-
electronic order unless such non-electronic order is executed at the 
price quoted by the non-crowd participant SQT and/or RSQT at the time 
of execution. The specialist and/or SQTs participating in a trading 
crowd may, in response to a verbal request for a market by a floor 
broker, state a bid or offer that is different than their 
electronically submitted bid or offer, provided that such stated bid or 
offer is not inferior to such electronically submitted bid or offer, 
except when such stated bid or offer is made in response to a floor 
broker's solicitation of a single bid or offer as set forth in Rule 
1033(a)(ii). For purposes of this Rule, an SQT or non-SQT ROT shall be 
deemed to be participating in a crowd if such SQT is, at the time an 
order is represented in the crowd, physically located in a specific 
``Crowd Area.'' A Crowd Area shall consist of a specific physical 
location marked with specific, visible physical boundaries on the 
options floor, as determined by the Options Committee. An SQT or non-
SQT ROT who is physically present in such Crowd Area may engage in 
options transactions in assigned issues as a crowd participant in such 
a Crowd Area, provided that such SQT or non-SQT ROT fulfills the 
requirements set forth in this Rule 1014. An SQT or non-SQT ROT shall 
be deemed to be participating in a single Crowd Area.
    .06 An RSQT shall be required to maintain information barriers that 
are reasonably designed to prevent the misuse of material, non-public 
information with any affiliates that may conduct a brokerage business 
in options assigned to the RSQT or act as a specialist or market maker 
in any security underlying options assigned to the RSQT, and otherwise 
comply with the requirements of Rule 1020 regarding restrictions on the 
flow of privileged

[[Page 77299]]

information between the affiliate and the specialist organization.
    .07 No change.
    .08 An off-Floor order for an account in which a member has an 
interest is to be treated as an on-Floor order if it is executed by the 
member who initiated it.
    In addition to transactions originated on the Floor by an ROT for 
an account in which he has an interest, the following transactions are 
considered on-Floor trading:
    (a)-(b) No change.
    (c) Any transaction for the account of an RSQT.
    .09 Orders given out by an ROT to commission brokers--An on-Floor 
order given by an ROT [Trader] to a commission broker, for an account 
in which the ROT has [I]an interest, is subject to all the Rules 
restricting ROTs. When an ROT gives out such an order on the Floor to 
another member, the order must be so marked to indicate that it is for 
an account in which the ROT has [i]an interest, unless it is exempt 
from this Rule, in order that the other member may know whether it may 
be entitled to priority or parity.
    .10 RESERVED [Orders given out by an ROT to specialists--An on-
Floor order given to a specialist by an ROT for an account in which he 
has an interest may not have the privilege of a ``Stop'' and it is 
subject to the provisions of paragraphs (d) and (e) of this Rule. In 
addition, such order which establishes or increases a position is 
subject to the provisions of Commentary .12 of this Rule.]
    .11 Pair-offs before opening--An ROT cannot acquire a ``long'' 
option by pairing off with a sell order before the opening, unless all 
off-Floor bids at that price are filled.
    .12 The number of ROT[']s in a trading crowd who are establishing 
or increasing a position may temporarily be limited when, in the 
judgment of two Floor Officials, the interests of a fair and orderly 
market are served by such limitation.
    .13 Within each quarter an ROT must execute in person, and not 
through the use of orders, a specified number of contracts, such number 
to be determined from time to time by the Committee on Options.
    .14-.17 No change.
    .18 RESERVED
Openings In Options
    Rule 1017. (a)--(d) No change.
    (e) With respect to Streaming Quote Options, SQTs and RSQTs may 
participate in opening transactions by submitting electronic quotations 
to interact with opening orders.
    (f) This Rule 1017 shall be effective as a pilot, which will expire 
180 days following the initial deployment of the Exchange's electronic 
options trading platform, Phlx XL.
Commentary
    .01 Pre-Opening. (i) Prior to the opening of the underlying 
security on the primary market, the specialist shall:
    (A) determine from Floor Brokers, and from orders resting on the 
limit order book, the size and prices of those orders which are near 
the previous closing prices of those options in which the specialist is 
assigned.
    (B) consider markets from ROTs in the crowd in addition to 
electronic quotations submitted by SQTs and RSQTs (``SQT/RSQT 
Quotations'').
    (C) determine the specialist's own quote in each series.
    (ii) No change.
    .02 No change.
    .03 Opening Price. (a) No change.
    (b) (i)-(v) No change.
    (vi) Once the opening trade price in a series has been disseminated 
to OPRA, the specialist, ROTs, RSQTs and SQTs trading such series shall 
be required to fulfill their respective quoting obligations under Rule 
1014.
    (c) No change.
    (d) The specialist will not open a series if one of the following 
conditions is met:
    (i) The opening price is not within an acceptable range, as 
described in Commentary .03(a) above, unless a specific exemption is 
given by a Floor Official in the interest of a fair and orderly market;
    (ii) The opening trade would leave a market order imbalance (i.e., 
there are more market orders to buy or to sell for the particular 
series than can be satisfied by the market orders, limit orders and 
specialist, [or] SQT and RSQT quotations on the opposite side).
    (iii) No change.
    (e) If one of the conditions described in sub-paragraphs (d)(i)-
(iii) above is met, the specialist will request bids and offers from 
ROTs in the crowd and, in the case of Streaming Quote Options, SQTs and 
RSQTs that are assigned in the option. Such ROTs, RSQTs and/or SQTs 
shall respond to such a request immediately. The opening will be 
delayed until responses to the specialist's request have been received 
and the consequent opening price is deemed by a Floor Official to be 
compatible with a fair and orderly market.
    (f) No change.
Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)
    Rule 1080. (a)-(b) No change.
    (c) * * *
    (i)-(ii) No change.
    (iii) Book Sweep. Book Sweep is a feature of AUTOM which, when 
engaged, does the following:
    (A) Respecting non-Streaming Quote Options, when the bid or offer 
generated by the Exchange's Auto-Quote system (or by a proprietary 
quoting system provided for in Commentary .02 of this Rule called 
``Specialized Quote Feed'' or ``SQF''), matches or crosses the 
Exchange's best bid or offer in a particular series as established by 
an order on the limit order book, orders on the limit order book in 
that series will be automatically executed and allocated among crowd 
participants signed onto the Wheel. If Book Sweep is not engaged at the 
time the Auto-Quote or SQF bid or offer matches or crosses the 
Exchange's best bid or offer represented by a limit order on the book, 
the specialist may manually initiate the Book Sweep feature. Book Sweep 
shall be engaged when AUTO-X is engaged, and shall be disengaged when 
AUTO-X is disengaged in accordance with Rule 1080(c)(iv) and Rule 
1080(e). Eligible orders on the limit order book will be automatically 
executed up to the size associated with the quote that matches or 
crosses such limit orders.
    (B) Respecting Streaming Quote Options, when the bid or offer 
generated by the Exchange's Auto-Quote system, SQF, or by an SQT or 
RSQT (as defined in Rule 1014(b)(ii)) matches or crosses the Exchange's 
best bid or offer in a particular series as established by an order on 
the limit order book, orders on the limit order book in that series 
will be automatically executed and automatically allocated in 
accordance with Exchange rules. If Book Sweep is not engaged at the 
time the Auto-Quote, SQF, RSQT or SQT bid or offer matches or crosses 
the Exchange's best bid or offer represented by a limit order on the 
book, the specialist, RSQT, or SQT may manually initiate the Book Sweep 
feature.
    (iv) No change.
    (d)-(e) No change.
    (f) No change.
    (g) AUTO-X Contra-Party Participation--The contra-side to 
automatically executed orders may be: (i) A Wheel Participant; or (ii) 
a booked customer limit order.
    (A) No change.
    (B) Book Match--For purposes of this sub-paragraph, the contra-side 
to

[[Page 77300]]

automatically executed inbound marketable orders shall be a limit order 
on the book or specialist, RSQT and/or SQT electronic quotes 
(``electronic quotes'') at the disseminated price where: (1) the 
Exchange's disseminated size includes limit orders on the book and/or 
electronic quotes at the disseminated price; and (2) the disseminated 
price is the National Best Bid or Offer. This feature is called Book 
Match.
    (h)-(j) No change.
    (k) Electronic Streaming Quotations. The Options Committee may, on 
an issue-by-issue basis, determine the specific issues in which 
[Streaming Quote Traders (``]SQTs[''), as defined in Exchange Rule 
1014(b)(ii)] may generate and submit option quotations if such SQT is 
physically present on the Exchange floor, and RSQTs may generate and 
submit option quotations from [on] off the floor of the Exchange, 
electronically [through an electronic interface with AUTOM, via an 
Exchange approved proprietary electronic quoting device]. Such issues 
shall be known as ``Streaming Quote Options.''
Commentary
    .01 (a)-(b) No change.
    (i) No change.
    (ii) Respecting non-Streaming Quote Options, [S]specialists [and 
SQTs, respectively,] determine which model to select per option and may 
change models during the trading day. Each pricing model requires the 
specialist [and SQT, respectively,] to input various parameters, such 
as interest rates, volatilities (delta, vega, theta, gamma, etc.) and 
dividends. [Respecting non-Streaming Quote Options, t]The specialist 
may, but is not required to: (a) consult with and/or (b) agree with the 
trading crowd in setting these parameters or selecting a model, but the 
members of the trading crowd are not required to provide input in these 
decisions, and in all cases, the specialist has the responsibility and 
authority to make the final determination.
    (c)-(d) No change.
    .02-.07 No change.
Firm Quotations
    Rule 1082. (a) Definitions.
    (i) No change.
    (ii) The term ``disseminated size'' shall mean with respect to the 
disseminated price for any quoted options series:
    (A) Respecting non-Streaming Quote options (as defined in Rule 
1080(k)), at least the sum of the size associated with: (1) Limit 
orders; and (2) specialists' quotations generated by Auto-Quote or 
Specialized Quote Feed as described in Rule 1080, Commentary .01 (which 
represents the collective quotation size of the specialist and any ROTs 
bidding or offering at the disseminated price unless an ROT has 
expressly indicated otherwise in a clear and audible manner).
    (B) respecting Streaming Quote Options, at least the sum of the 
size associated with limit orders, specialists' quotations, [and 
Streaming Quote Traders'] SQTs' quotations, and RSQTs' (as defined in 
Rule 1014(b)(ii)(B)) quotations.
    (C) (1) If an SQT or RSQT's (other than a Directed SQT or RSQT) 
quotation size in a particular series in a Streaming Quote Option is 
exhausted, such SQT or RSQT's quotation shall be deleted from the 
Exchange's disseminated quotation until the time the SQT or RSQT 
revises his/her quotation.
    (2) If the Exchange's disseminated size in a particular series in a 
Streaming Quote Option is exhausted at that particular price level, and 
[the Exchange shall disseminate the next best available quotation. If] 
no specialist, [or] SQT or RSQT has revised their quotation immediately 
following the exhaustion of the Exchange's disseminated size at such 
price level, the Exchange shall automatically disseminate the 
specialist's most recent disseminated price prior to the time of such 
exhaustion with a size of one contract.
    (iii)-(iv) No change.
    (b) (i) No change.
    (ii) With respect to Streaming Quote Options, in the event an SQT, 
RSQT or specialist in a Streaming Quote Option has electronically 
submitted on the Exchange bids or offers for a Streaming Quote Option, 
each such SQT, RSQT or specialist member shall be considered a 
``responsible broker or dealer'' for that bid or offer, up to the size 
associated with such responsible broker or dealer's bid or offer.
    (c)-(d) No change.
Commentary
    .01 No change.
    .02 Locked Markets. In the event that an SQT, RSQT, and/or 
specialist's electronically submitted quotations in Streaming Quote 
Options interact with the electronically submitted quotations of other 
SQTs, RSQTs and/or the specialist, resulting in the dissemination of a 
``locked'' quotation (e.g., $1.00 bid--$1.00 offer), the following 
shall occur:
    (a) The Exchange will disseminate the locked market and both 
quotations will be deemed ``firm'' disseminated market quotations;
    (b) A ``counting period'' of one second will begin during which 
SQTs, RSQTs and/or specialists whose quotations are locked may 
eliminate the locked market. Provided, however, that in accordance with 
subparagraph (a) above, such SQT, RSQT and/or specialist shall be 
obligated to execute orders at their disseminated quotation. During the 
``counting period'' SQTs and specialists located in the Crowd Area in 
which the option that is the subject of the locked market is traded 
will continue to be obligated to respond to Floor Brokers as set forth 
in Rule 1014, Commentary .05(c), and will continue to be obligated for 
one contract in open outcry to other SQTs, non-SQT ROTs, and 
specialists. If at the end of the one-second counting period the 
quotations remain locked, the locked quotations will automatically 
execute against each other in accordance with the allocation algorithm 
set forth in Rule 1014(g)(vii).
    The quotation that is locked may be executed by an order during the 
one-second counting period.
    .03 Crossed Markets. The Exchange will not disseminate an 
internally crossed market (e.g., $1.10 bid, $1.00 offer). If an SQT, 
RSQT or specialist electronically submits a quotation in a Streaming 
Quote Option (``incoming quotation'') that would cross an existing 
quotation (``existing quotation''), the Exchange will: (i) change the 
incoming quotation such that it locks the existing quotation; (ii) send 
a notice to the SQT, RSQT or specialist that submitted the existing 
quotation indicating that its quotation was crossed; and (iii) send a 
notice to the specialist, [or] SQT or RSQT that submitted the incoming 
quotation, indicating that its quotation crossed the existing quotation 
and was changed. Such a locked market shall be handled in accordance 
with Commentary .01 above. During the one-second counting period, if 
the existing quotation is cancelled subsequent to the time the incoming 
quotation is changed, the incoming quotation will automatically be 
restored to its original terms.
Application for Assignment in Streaming Quote Options
    Rule 507. (a) When a Streaming Quote Option, as defined in Rule 
1080(k), is to be assigned or reassigned by the Committee, the 
Committee will solicit applications from all eligible Streaming Quote 
Traders (``SQTs'') and Remote Streaming Quote Traders (``RSQTs''), as 
defined in Rule 1014(b)(ii).
    (b)(i) An application for assignment in Streaming Quote Options 
shall be submitted in writing to the Exchange's designated staff and 
shall include, at a minimum, the name of the SQT or RSQT applicant and 
written verification

[[Page 77301]]

from the Exchange's Membership Services Department that such SQT or 
RSQT applicant is qualified as a Registered Options Trader.
    (ii) No application for assignment in Streaming Quote Options shall 
be approved by the Committee without written certification signed by an 
officer (Vice President or above) of the Exchange's Financial 
Automation Department indicating that (A) the SQT or RSQT applicant has 
sufficient technological ability to support his/her continuous quoting 
requirements as set forth in Rule 1014(b)(ii), and (B) the SQT or RSQT 
applicant has successfully completed, or is scheduled to complete, 
testing of its quoting system with the Exchange.
    (iii) (A) This Rule 507 places no limit on the number of qualifying 
ROTs that may become SQTs or RSQTs; any applicant that is qualified as 
an ROT in good standing, and that satisfies the technological readiness 
and testing requirements described in sub-paragraph (b)(ii) above, 
shall be approved as an SQT. However, based on system constraints, 
capacity restrictions or other factors relevant to the maintenance of a 
fair and orderly market, the Board may defer, for a period to be 
determined in the Board's discretion, approval of qualifying 
applications for SQT or RSQT status pending any action required to 
address the issue of concern to the Board. The Board may not defer a 
determination of the approval of the application of any SQT or RSQT 
applicant or place any limitation(s) on access to Phlx XL on any SQT or 
RSQT applicant unless the basis for such limitation(s) or deferral have 
been objectively determined by the Board, subject to Securities and 
Exchange Commission approval or effectiveness pursuant to a rule change 
filing under Section 19(b) of the Securities Exchange Act of 1934, as 
amended. The Committee shall provide written notification to any SQT or 
RSQT applicant whose application is the subject of such limitation(s) 
or deferral, describing the objective basis for such limitation(s) or 
deferral.
    (B) In addition to the above requirements, an RSQT applicant must 
demonstrate to the Committee that it has:
    (1) Significant market-making and/or specialist experience in a 
broad array of securities;
    (2) Superior resources, including capital, technology and 
personnel;
    (3) Demonstrated history of stability, superior electronic 
capacity, and superior operational capacity;
    (4) Proven ability to interact with order flow in all types of 
markets;
    (5) Existence of order flow commitments;
    (6) Willingness to accept allocations as an RSQT in options 
overlying 400 or more securities; and
    (7) Willingness and ability to make competitive markets on the Phlx 
and otherwise to promote the Phlx in a manner that is likely to enhance 
the ability of the Phlx to compete successfully for order flow in the 
options it trades.
    (c)-(d) No change.
    (e) If an SQT or RSQT seeks to withdraw from acting as such in a 
Streaming Quote Option, it should so notify the Committee at least 
three business days prior to the desired effective date of such 
withdrawal.
    (f) During the first six months of the Exchange's program to allow 
SQTs and RSQTs to submit electronic option quotations, an SQT or RSQT 
applicant member or member organization that has, for at least the 
immediately preceding twelve months: (i) been a member of the Exchange; 
and (ii) maintained a continuous presence as an ROT in the trading 
crowd associated with the Streaming Quote Option(s) that are the 
subject of the application, shall be guaranteed an assignment in the 
Streaming Quote Option, provided that such member organization has 
satisfied the requirements set forth in paragraph (b)(ii) of this Rule 
507. SQT and RSQT applicants that have been granted trading privileges 
in Streaming Quote Options pursuant to this Rule 507(f) shall not be 
required to re-apply for such privileges after the initial six-month 
period.
    (g) No change.
Amendments to Option Floor Procedure Advices
A-12 Opening Rotations and SORT Procedures
    It is the responsibility of the Specialist to arrange the price at 
which an option series opens and re-opens on the Exchange. Unless a 
specific exemption is given by a Floor Official, an opening transaction 
in an equity option series may only be arranged at a price that does 
not fall outside of the previous session's closing quote in the option 
by more than the differential between the closing sale in the 
underlying security and the opening sale in the underlying security.
    The Specialist must accept and include in the opening for equity 
options all market orders which are placed on the book five minutes or 
more prior to the opening of the underlying security, unless exempted 
by a Floor Official. Market orders have precedence over limit orders at 
an opening regardless of account type (i.e. customer, firm, market 
maker, specialist) except that a limit order to buy which is at a 
higher limit than the price at which the option is to be opened and a 
limit order to sell which is at a lower limit than the price at which 
the option is to be opened are to be treated as market orders in 
connection with an opening (PHLX Rule 1017). Limit orders at the 
opening price are afforded participation on the opening in accordance 
with the Exchange's parity/priority rule (PHLX Rule 1014).
    Openings and re-openings in options are to be conducted by way of 
rotation procedures or by way of SORT procedures, as provided by 
Exchange Rule 1047. Rotation procedures allow a brief period of auction 
pricing for each option series during which bids and offers, including, 
with respect to Streaming Quote Options, bids and offers submitted 
electronically by SQTs and/or RSQTs, and transactions for that option 
class may normally only occur in that series. SORT procedures allow, 
but do not require, a Specialist in any series for which no opening 
interest to buy or sell has been received to open such series with a 
quote without prior auction pricing. To ensure that buy and sell 
interests are properly represented in those series in which received, 
Specialists must follow the procedures below:
    (i)-(iii) No change.
    FINE SCHEDULE No change.
B-3 Trading Requirements
    (a) An ROT (other than an RSQT) is required to trade in person, and 
not through the use of orders, the greater of 1,000 contracts or 50% of 
his contract volume on the Exchange each quarter. Also, at least 50% of 
an ROT's trading activity in each quarter must be in assigned options. 
No application by an ROT to change options assignments will be approved 
unless such ROT is in compliance with the above requirements at the 
time the application for change is made.
    FINE SCHEDULE No change.
    (b) For any calendar quarter, in addition to the requirements of 
paragraph (a) above, in order for an ROT (other than an RSQT) to 
receive specialist margin treatment for off-floor orders in accordance 
with Rule 1014, Commentary .01, the ROT must execute the greater of 
1,000 contracts or 80% of his total contracts that quarter in person 
(not through the use of orders) and 75% of his total contracts that 
quarter in assigned options. Violations of this

[[Page 77302]]

trading requirement are subject to Business Conduct Committee review.
B-6 Priority of Options Orders for Equity Options and Index Options by 
Account Type
(EQUITY OPTION AND INDEX OPTION ONLY)
    Section A-D No change.
Section E
    Allocation of the Remainder of the Order Among Specialist and ROTs 
on Parity. After the application of this Advice to an Initiating Order, 
the Remainder of the Order shall be allocated by the Allocating 
Participant (as defined in Rule 1014(g)(vi)) as follows:
    (A) No change.
    (B) Size. The term ``stated size'' [in relation to a crowd 
participant and] in respect of an order or electronic quotation shall 
mean:
    (1) In the case of orders handled manually by the specialist:
    (a)(i) If a crowd participant (including the specialist) has 
actually stated a size (``Actual Size''), such crowd participant's 
stated size shall be his or her Actual Size;
    (ii) if the specialist, an SQT or RSQT is disseminating an 
electronic quotation at the Exchange's disseminated price in a 
particular series at the time of the execution of an Initiating Order 
in such series, such specialist, SQT or RSQT's disseminated size at the 
Exchange's disseminated price shall be his or her Actual Size, and such 
specialist, SQT and/or RSQT shall be deemed a ``crowd participant'' for 
purposes of this Advice;
    (b)-(c) No change.
    (2) No change.
    (C) No change.
    (D) Waiver. (1) Any ROT (other than an RSQT) or specialist may, in 
his or her sole discretion, offer to waive, in whole or in part, any 
part of a trade to which they were entitled to be allocated (an ``Offer 
to Waive'').
    (a)-(c) No change.
    (E)-(G)
    Section F No change.
    FINE SCHEDULE No change.
F-7 [Bids and Offers] Size of Exchange's Disseminated Bid or Offer
    [All bid and offer prices shall be general ones and shall not be 
specified for acceptance by particular members.
    In the absence of a stated size to any bid or offer voiced or 
displayed on the Options Floor, the person responsible for such bid and 
offer is deemed to be quoting for one contract, except in those 
instances where predetermined volume guarantees are provided for the 
facilitation of specific account types. Floor traders (Specialists and 
ROTs) are, however, required to trade more than one contract in 
connection with the execution of a customer order pursuant to Advice A-
11.]
    The size of any disseminated bid or offer by the Exchange shall be, 
with respect to the disseminated price for any quoted options series, 
equal to:
    (a) Respecting non-Streaming Quote options (as defined in Rule 
1080(k), at least the sum of the size associated with: (1) Limit 
orders; and (2) specialists' quotations generated by Auto-Quote or 
Specialized Quote Feed as described in Rule 1080, Commentary .01 (which 
represents the collective quotation size of the specialist and any ROTs 
bidding or offering at the disseminated price unless an ROT has 
expressly indicated otherwise in a clear and audible manner).
    (b) respecting Streaming Quote Options, at least the sum of the 
size associated with limit orders, specialists' quotations, [and] SQTs' 
quotations, and RSQTs' quotations.

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

    In its filing with the Commission, 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. 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 establish a new 
category of Exchange market-making participant on the Phlx XL trading 
platform--the RSQT.

Definitions

    Proposed Phlx Rule 1014(b)(ii)(C) would define a ``non-SQT ROT'' as 
an ROT who is neither a Streaming Quote Trader (``SQT'') \3\ nor an 
RSQT. Proposed Phlx Rule 1014(b)(ii)(B) would define an RSQT as an ROT 
that is a member \4\ or member organization \5\ with no physical 
trading floor presence who has received permission from the Exchange to 
generate and submit option quotations electronically through AUTOM in 
eligible options to which such RSQT has been assigned. An RSQT could be 
an individual or a member organization, whereas an SQT must be an 
individual. Under the Exchange's rules, such member or member 
organization must have a natural person or person associated with that 
member organization who is a permit holder.\6\
---------------------------------------------------------------------------

    \3\ An SQT is an 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 Exchange Rule 1014(b)(ii)(A).
    \4\ The term ``member'' means a holder of a permit which has not 
been terminated in accordance with the By-Laws and the rules of the 
Exchange. See Exchange By-Law Article I, Section 1-1(p).
    \5\ The term ``member organization'' means a corporation, 
partnership (general or limited), limited liability partnership, 
limited liability company, business trust, or similar organization, 
transacting business as a broker or a dealer in securities and which 
has the status of a member organization. See Exchange By-Law Article 
I, Section 1-1(q).
    \6\ See Exchange Rule 908(b).
---------------------------------------------------------------------------

    Proposed Phlx Rule 1014(b)(ii)(B) would also make clear that, 
although an RSQT is a new category of ROT, an RSQT may only submit such 
quotations electronically from off the floor of the Exchange.\7\ 
Further, the rule would prohibit any person who is either directly or 
indirectly affiliated with an RSQT to be a specialist, RSQT, SQT, or 
non-SQT ROT in options in which such affiliated RSQT is assigned. The 
purpose of this provision is to prevent multiple affiliated parties 
from quoting electronically in the same option and thus receiving 
multiple automatic allocations for the same or affiliated beneficial 
account owners. Finally, an RSQT may trade in a market-making capacity 
only in classes of options in which he is assigned, because the RSQT is 
an ROT with market-making obligations.
---------------------------------------------------------------------------

    \7\ Exchange Rule 1014 defines an ROT as a regular member or a 
foreign currency options participant of the Exchange located on the 
trading floor. Notwithstanding this provision, an RSQT would be 
permitted only to submit electronic quotations from off the floor of 
the Exchange.
---------------------------------------------------------------------------

Appointment of RSQTs

    Currently, the Options Allocation, Evaluation and Securities 
Committee (``OAESC'') \8\ has the authority to appoint on-floor SQTs 
under Exchange Rule 507 and to assign SQTs in one or more Streaming 
Quote Options.\9\ The

[[Page 77303]]

proposed amendments to Phlx Rule 507 would authorize the OAESC to 
appoint and assign RSQTs in one or more Streaming Quote Options in a 
similar fashion to the current practice of assigning SQTs in Streaming 
Quote Options. Proposed Phlx Rule 507 would set forth the solicitation, 
application, and review process to be followed by the OAESC in 
appointing RSQTs.
---------------------------------------------------------------------------

    \8\ The OAESC has jurisdiction over the allocation, retention, 
and transfer of the privileges to deal in all options to, by, and 
among members on the options and foreign currency options trading 
floors. See Exchange By-Law Article X, Section 10-7. See also 
Exchange Rule 500.
    \9\ Streaming Quote Options are the specific issues in which 
SQTs may generate and submit option quotations from on the floor of 
the Exchange. See Exchange Rule 1080(k). The proposed rule change 
would expand the definition of Streaming Quote Options to include 
those issues in which RSQTs may submit electronic quotations from 
off the floor of the Exchange.
---------------------------------------------------------------------------

    The current requirements for SQT applicants for assignment in 
Streaming Quote Options would apply to RSQT applicants as well. 
Specifically, RSQTs would be required to submit an application for 
assignment in writing to the Exchange, and the proposed amendments to 
Phlx Rule 507(b)(ii) would mandate that no application for assignment 
as an RSQT in Streaming Quote Options would be approved by the OAESC 
without written certification signed by an officer (Vice President or 
above) of the Exchange's Financial Automation Department \10\ 
indicating that the RSQT applicant has sufficient technological ability 
to support his/her continuous quoting requirements as set forth in Phlx 
Rule 1014(b)(ii) and the RSQT applicant has successfully completed, or 
is scheduled to complete, testing of its quoting system with the 
Exchange.
---------------------------------------------------------------------------

    \10\ The Exchange's Financial Automation Department is 
responsible for the design, development, implementation, testing, 
and maintenance of the Exchange's automated trading systems, 
surveillance systems, and back office systems. It is also 
responsible for monitoring the quality of performance and 
operational readiness of such systems, in addition to user training 
and validation of user technology as it pertains to such users' 
interface with the Exchange's systems.
---------------------------------------------------------------------------

    The Exchange expects to approve and appoint RSQTs who demonstrate 
additional qualifications that would serve to enhance the overall 
business of the Exchange. Accordingly, in addition to the above 
requirements, an RSQT applicant must demonstrate to the OAESC that it 
has: (1) Significant market-making and/or specialist experience in a 
broad array of securities; (2) superior resources, including capital, 
technology, and personnel; (3) demonstrated history of stability, 
superior electronic capacity, and superior operational capacity; (4) 
proven ability to interact with order flow in all types of markets; (5) 
existence of order flow commitments; (6) willingness to accept 
assignments as an RSQT in options overlying 400 or more securities; and 
(7) willingness and ability to make competitive markets on Phlx and 
otherwise to promote Phlx in a manner that is likely to enhance the 
ability of Phlx to compete successfully for order flow in the options 
it trades.\11\ ``Willingness to promote Phlx'' includes assisting in 
meeting and educating market participants, maintaining communications 
with member firms in order to be responsive to suggestions and 
complaints, responding to suggestions and complaints, and other like 
activities.
---------------------------------------------------------------------------

    \11\ This is similar to Chicago Board Options Exchange, Inc. 
(``CBOE'') Rule 8.92.
---------------------------------------------------------------------------

    The Exchange represents that it intends to use the final factor 
listed above to take into consideration which of the applicants would 
best be able to enhance the competitiveness of the Exchange. The 
Exchange would not apply this factor in any way to restrict, either 
directly or indirectly, RSQTs' activities as market makers or 
specialists on other exchanges or to restrict how RSQTs handle orders 
held by them in a fiduciary capacity to which they owe a duty of best 
execution.
    The Exchange would use the factor relating to the existence of 
order flow commitments to evaluate existing order flow commitments 
between the RSQT applicant and order flow providers. A future change 
to, or termination of, any such commitments would not be used by the 
Exchange at any point in the future to terminate or take remedial 
action against an RSQT. Furthermore, the Exchange would not take 
remedial action solely because orders subject to any such commitments 
were not subsequently routed to the Exchange. As part of the approval 
of an RSQT, the Exchange would be permitted to place conditions on the 
approval based on the operations of the applicant and the number of 
options in which the RSQT applicant may be assigned. Additionally, an 
RSQT would not be permitted to transfer its approval to act as an RSQT 
unless permitted to do so by the Exchange.
    The proposed amendments to Phlx Rule 507(b)(iii) would clarify 
that, as in the case of SQTs, the Exchange's Board of Governors may 
defer qualifying applications for RSQT status, based on system 
constraints, capacity restrictions, or other factors relevant to the 
maintenance of a fair and orderly market. The basis for such deferral, 
however, would be required to have been objectively determined by the 
Board, subject to Commission approval or effectiveness pursuant to a 
filing under Section 19(b) of the Act, as amended. In such an event, 
the OAESC would be required to provide written notification to any SQT 
or RSQT applicant whose application is the subject of such 
limitation(s) or deferral, describing the objective basis for such 
limitation(s) or deferral.

RSQT Obligations

    An RSQT would be responsible to quote continuous, two-sided markets 
in not less than 60% of the series in each Streaming Quote Option in 
which such RSQT is assigned.\12\ RSQTs' obligation would increase, 
however, for RSQTs who receive Directed Orders (as defined in Phlx Rule 
1080(l)(i)(A)).\13\ Specifically, a Directed RSQT (as defined in Phlx 
Rule 1080(l)(i)(C)) would be responsible to quote continuous, two-sided 
markets in not less than 100% of the series in each Streaming Quote 
Option in which such Directed RSQT receive Directed Orders.
---------------------------------------------------------------------------

    \12\ For example, if an RSQT is assigned in one Streaming Quote 
Option that includes five series (A, B, C, D, and E), such RSQT 
would be required to quote continuous, two-sided markets in three of 
those series in order to fulfill the 60% quoting requirement. If 
such an RSQT initially submits quotations in series A, B, and C, and 
the size associated with the quotation in Series A is exhausted, 
such SQT would be required either to refresh its quotation in Series 
A while continuing to submit quotations in Series B and C, or to 
submit new quotations in any three of the five series, in order to 
fulfill the 60% quoting requirement.
    \13\ See SR-Phlx-2004-73.
---------------------------------------------------------------------------

    RSQT quotations would be subject to the same minimum size 
requirement as that imposed on SQTs. Current Phlx Rule 1014(b)(ii)(B) 
allows SQTs to stream electronic quotations with a minimum size of one 
contract for a period of time following the deployment of an option as 
a Streaming Quote Option trading on Phlx XL, after which such quotation 
must be for a minimum of 10 contracts. The rule would be amended to 
impose the same minimum size requirements on RSQTs and renumbered as 
Phlx Rule 1014(b)(ii)(D).

ROT Obligations and RSQTs

    Exchange Rule 1014 and the commentaries thereto impose certain 
rights and obligations on ROTs. Because of the unique nature of an RSQT 
(i.e., participating as an Exchange market maker from off the floor of 
the Exchange), the proposal would amend various sections of the 
Commentary to Phlx Rule 1014 to clarify the obligations that would 
apply to RSQTs.
    First, for clarity, Commentary .01 to Phlx Rule 1014 would be 
amended to state that an RSQT electing to engage in Exchange options 
transactions is designated as a specialist on the Exchange for all 
purposes under the Act and the rules and regulations thereunder with 
respect to options

[[Page 77304]]

transactions initiated and effected by him in his capacity as an 
ROT.\14\
---------------------------------------------------------------------------

    \14\ See Section 11(b) of the Act, 15 U.S.C. 78k(b), and Rule 
11b-1 thereunder, 17 CFR 240.11b-1.
---------------------------------------------------------------------------

    Commentary .01 also imposes certain minimum ``in-person'' trading 
requirements applicable to ROTs in order to preserve specialist margin 
treatment. Because RSQTs submitting electronic quotations from off the 
floor of the Exchange could not possibly fulfill the ``in-person'' 
requirement, the Exchange proposes to amend Commentary .01 to exclude 
RSQTs from this requirement.
    Similarly, Commentary .03 requires that at least 50% of the trading 
activity in any quarter (measured in terms of contract volume) of an 
ROT must ordinarily be in classes of options to which he is assigned. 
RSQTs may only submit electronic quotations from off the floor in 
options in which they are assigned (resulting in 100% of their 
quarterly trading activity measured in terms of contract volume). 
Therefore, the Exchange proposes to amend Commentary .03 to exclude 
RSQTs from the 50% obligation, because it does not make sense to apply 
such a requirement.
    The Exchange also proposes to adopt Commentary .06 to Phlx Rule 
1014. Commentary .06 requires RSQTs to maintain information barriers 
that are reasonably designed to prevent the misuse of material, non-
public information with any affiliates that may conduct a brokerage 
business in options assigned to the RSQT or act as a specialist or 
market maker in any security underlying options assigned to the RSQT, 
and otherwise comply with the requirements of Phlx Rule 1020 regarding 
restrictions on the flow of privileged information between the 
affiliate and the specialist organization.
    Commentary .08 currently describes certain ROT transactions that 
are deemed ``on-floor'' trading for purposes of the rule. The Exchange 
proposes to adopt Commentary .08(c) to deem any transaction for the 
account of an RSQT as on-floor trading in order to ensure that RSQTs 
may effect off-floor transactions in their market maker accounts as for 
purposes of margin treatment.
    As a housekeeping matter, the Exchange proposes to delete 
Commentary .10 to Phlx Rule 1014, relating to orders given out by an 
ROT to specialists. The purpose of this proposal is to remain 
consistent with the Exchange's current proposed rule change relating to 
limit order display, which requires ROTs who wish to place limit orders 
on the limit order book to do so electronically via interface with the 
AUTOM System.\15\ An ROT can no longer ``give out'' an order to a 
specialist but instead must place the order on the limit order book 
electronically, thus obviating the need for Commentary .10.
---------------------------------------------------------------------------

    \15\ See SR-Phlx-2004-73.
---------------------------------------------------------------------------

Trade Allocation

    Currently, Exchange Rule 1014(g)(vii) governs the allocation of 
trades executed in Streaming Quote Options traded on Phlx XL. The 
proposed rule change would afford RSQTs the same entitlement to receive 
contracts under the algorithm described in the rule as SQTs.
    Phlx Rule 1014(g)(vii)(A) currently provides that, if one Phlx XL 
Participant (including the specialist, an SQT, or a non-SQT ROT) is 
quoting alone at the disseminated price and his quote is not matched by 
another Phlx XL Participant prior to execution, such Phlx XL 
Participant would be entitled to receive a number of contracts up to 
the size associated with his/her quote. The proposed rule change would 
expand the definition of ``Phlx XL Participant'' to include an RSQT.
    Currently, Phlx Rule 1014(g)(vii)(B) governs the automatic 
allocation algorithm that applies to orders or electronic quotes in 
Streaming Quote Options that result in automatic executions when two or 
more Phlx XL Participants have quotes or booked limit orders at the 
Exchange's disseminated price.\16\ Under current Exchange rules, orders 
in Streaming Quote Options traded on Phlx XL for 5 contracts or fewer 
are allocated first to the specialist, provided that the specialist is 
quoting at the Exchange's disseminated price. Other Phlx XL 
Participants quoting at the execution price are entitled to receive 
contracts under the algorithm contained in Exchange Rule 
1014(g)(vii)(B)(1)(b), which includes a weighted percentage of 
contracts to be allocated among Phlx XL Participants on parity 
(including the specialist) on an equal basis and a weighted percentage 
of contracts to be allocated among Phlx XL Participants on parity on a 
size pro rata basis.\17\ The proposed rule change would include RSQTs 
in this algorithm applicable to orders for greater than 5 contracts. 
The algorithm in Phlx Rule 1014(g)(vii)(B)(1)(b) would not apply to a 
Directed Specialist, SQT, or RSQT. The algorithm applicable to Phlx XL 
trades that involve a Directed Specialist, SQT, or RSQT is contained in 
Phlx Rule 1080(l).\18\
---------------------------------------------------------------------------

    \16\ Phlx Rules 119, 120, and 1014(g) are the general rules 
concerning the establishment of parity and priority in the execution 
of orders on the options floor. The trade allocation algorithm in 
Phlx Rule 1014(g)(vii) generally does not contemplate that price-
time priority applies to quotes and orders in Streaming Quote 
Options. Accordingly, Phlx Rule 1014(g)(vii)(B)(3) states that, 
notwithstanding the first sentence of Phlx Rule 1014(g)(i), neither 
Phlx Rule 119(a)-(d) and (f), nor Phlx Rule 120 (insofar as it 
incorporates those provisions by reference) shall apply to the 
allocation of automatically executed trades in Streaming Quote 
Options.
    \17\ See Securities Exchange Act Release No. 50788 (December 3, 
2004), 69 FR 71860 (December 10, 2004) (SR-Phlx-2004-57).
    \18\ See SR-Phlx-2004-91.
---------------------------------------------------------------------------

Trade Allocation of Non-Electronic Orders

    The proposed rule change would provide that current rules 
applicable to out-of-crowd SQTs regarding participation in non-
electronic orders traded in the crowd would apply to RSQTs as well. 
Specifically, RSQTs would not be permitted to participate in trades 
stemming from such a non-electronic order unless the order is executed 
at the price quoted by the RSQT at the time of execution.
    The proposal would further clarify the allocation algorithm to be 
applied by the person responsible to allocate such orders by adding a 
new definition of ``Actual Size'' to Phlx Rule 1014(g)(v)(B), the 
Exchange's rule governing the allocation of orders traded in the crowd. 
Specifically, if the specialist, an SQT, or RSQT is disseminating an 
electronic quotation at the Exchange's disseminated price in a 
particular series at the time of the execution of an order in such 
series, such specialist, SQT, or RSQT's disseminated size at the 
Exchange's disseminated price would be his or her Actual Size. Actual 
Size is the number of contracts for each crowd participant on which the 
person responsible for allocating the trade (``Allocating 
Participant'') bases allocation of the order among crowd participants 
on parity. The purpose of this provision is to establish a definition 
of Actual Size for specialists, out-of crowd SQTs, and RSQTs whose 
electronically submitted quotations are on parity with other crowd 
participants. Because the rest of Phlx Rule 1014(g)(v) refers to 
allocation of orders to ``crowd participants'' on parity, such 
specialist, SQT, and/or RSQT would be deemed a crowd participant for 
purposes of this rule.
    The Exchange proposes to amend Phlx Rule 1014(g)(v)(D) which 
permits any ROT or specialist to, in his or her sole discretion, offer 
to waive, in whole or in part, any part of a trade to which he was 
entitled to be allocated (``Offer to Waive''). The proposed rule change

[[Page 77305]]

would exclude RSQTs from the provisions of the rule. An RSQT would not 
be permitted to waive any part of a trade to which he is entitled to be 
allocated. Because an RSQT is not physically present on the floor of 
the Exchange, it would be impractical to permit an RSQT to offer to 
waive all or a portion of his entitlement, since he could not verbalize 
such an offer and would not be able to communicate such an offer to 
waive electronically. Furthermore, the crowd participants would have no 
means to communicate their acceptance or rejection of such an offer to 
waive. Therefore, as a practical matter, the Exchange proposes to 
exclude RSQTs from the provisions contained in Phlx Rule 1014(g)(v)(D).
    Finally, the proposal would amend Exchange Rule 1014(g)(vi), which 
describes who must function as the Allocating Participant in non-
electronic orders executed in the crowd. Generally, the Floor Broker 
representing the order or the specialist is required to be the 
Allocating Participant. Current Phlx Rule 1014(g)(vi)(iii), however, 
states that where there is no floor broker and no specialist is 
involved in the transaction, the largest participant must be the 
Allocating Participant. The rule would be amended to provide that the 
largest on-floor participant must be the Allocating Participant, 
because if an RSQT or out-of-crowd SQT is the largest participant, it 
is virtually impossible to allocate the order from another crowd on the 
floor or from a remote location off the floor. Similarly, current Phlx 
Rule 1014(g)(vi)(iv) states that if there is only one seller and one 
buyer (no Floor Broker and no specialist is involved) the seller must 
be the Allocating Participant. However, if the seller is an RSQT (and 
thus not on the floor of the Exchange), the RSQT could not allocate the 
order in the crowd. Accordingly, the Exchange proposes to amend Phlx 
Rule 1014(g)(vi)(iv) to provide that, if the seller or the buyer is an 
RSQT, the on-floor participant in the transaction would be required to 
be the Allocating Participant.\19\ This provision would now cover each 
trading situation.
---------------------------------------------------------------------------

    \19\ The Exchange believes that it is more practical to require 
the on-floor participant to allocate the transaction, because the 
RSQT is not physically present on the floor of the Exchange.
---------------------------------------------------------------------------

    As a housekeeping matter, Phlx Rule 1014(g)(vi)(i)-(iv) would be 
renumbered for consistency with the numbering of other Exchange rules.

Elimination of ``SQT Zones''

    Currently, Commentary .05(b) to Phlx Rule 1014 provides that an SQT 
may be assigned to (and thus submit quotes electronically in) all of 
the options located within a specified physical zone on the Exchange 
Options Floor (``SQT Zone''), provided that such SQT is physically 
present in such SQT Zone. Each member organization must currently have 
at least one SQT physically present in each SQT Zone in which such 
member organization submits electronic quotations. The number and 
location of SQT Zones will be determined by the Options Committee.
    Currently, the entire Exchange floor is considered one SQT Zone. 
Therefore, the proposed rule change would delete the rule concerning 
SQT Zones and establish that an SQT or RSQT may be assigned to (and 
thus submit quotes electronically in) any option traded on Phlx XL for 
which they are approved by the Exchange. The elimination of this 
provision would allow SQTs and RSQTs to stream electronic quotations 
floor-wide without consideration of physical boundaries. SQTs would 
continue to be required to be physically present on the Exchange floor 
in order to submit electronic quotations in Streaming Quote Options. 
Because the entire exchange has been considered one SQT Zone, this 
deletion would have no practical effect. The Exchange no longer 
envisions dividing the options trading floor into various SQT Zones.

RSQT Participation in Openings

    Phlx Rule 1017 currently permits SQTs to participate in opening 
transactions by submitting electronic quotations to interact with 
opening orders. Under the proposed rule change, RSQTs would be 
permitted to participate in openings in the same manner as SQTs. 
Commentary .01 to Phlx Rule 1017 currently requires specialists to 
consider markets from ROTs in the crowd in addition to electronic 
quotations submitted by SQTs prior to the opening of the underlying 
security on the primary market. Phlx Rule 1017 would be amended to 
require specialists to consider RSQT quotations in the pre-opening 
period. Phlx Rule 1017 would also be amended to require RSQTs to 
fulfill their quoting requirements under Phlx Rule 1014, as discussed 
above, once the opening trade price in a series has been disseminated 
to the Option Price Reporting Authority. Finally, if the specialist 
determines that a series will not open due to an opening price that is 
not within an acceptable range or an order imbalance, the specialist 
currently requests bids and offers from ROTs in the crowd and, in the 
case of Streaming Quote Options, SQTs. Phlx Rule 1017 would be amended 
to provide that the specialist would also request bids and offers from 
RSQTs that are assigned in the option. As with the current rules 
applicable to ROTs and SQTs, RSQTs would be required to respond to such 
a request immediately. The opening would be delayed until responses to 
the specialist's request have been received and the consequent opening 
price is deemed by a Floor Official to be compatible with a fair and 
orderly market.

Book Sweep

    Currently, Exchange Rule 1080(c)(iii)(B) governs a feature of AUTOM 
known as ``Book Sweep'' as it relates to Streaming Quote Options 
trading on Phlx XL. When the specialist or an SQT has engaged the Book 
Sweep feature, and when such a specialist or SQT submits a quotation 
that locks or crosses a limit order on the book that represents the 
Exchange's best bid or offer, such limit order would be executed 
automatically up to the size associated with the specialist or SQT's 
quotation and would be automatically allocated in accordance with 
Exchange rules. Book Sweep functions only in situations where the 
Exchange's disseminated best bid or offer is represented by a limit 
order on the limit order book and such bid or offer is or is equal to 
the National Best Bid/Offer (``NBBO''). The proposed rule change would 
amend Phlx Rule 1080(c)(iii)(B) to state that an RSQT quotation would 
also initiate the Book Sweep Function under these conditions. The 
specialist, RSQT, or SQT may manually initiate the Book Sweep feature 
by sending a manual quote in situations where the specialist, SQT, or 
RSQT's automatic generation of electronic quotations is suspended due 
to, for example, a system malfunction. Eligible orders on the limit 
order book would be automatically executed up to the size associated 
with the quote that matches or crosses such limit orders. Orders on the 
limit order book are not eligible for Book Sweep when the NBBO is 
crossed (i.e., 2.10 bid, 2 offer).

Book Match

    Book Match is a feature of AUTOM that currently provides automatic 
executions for inbound AUTOM-delivered customer and off-floor broker-
dealer \20\ orders against customer limit

[[Page 77306]]

orders on the book. Phlx Rule 1080(g) states that in Streaming Quote 
Options the contra-side to automatically executed inbound eligible 
orders can be a limit order on the book or specialist and/or SQT 
electronic quotes (``electronic quotes'') at the disseminated price, 
where the Exchange's disseminated size includes a limit order on the 
book and/or electronic quotes at the disseminated price. Phlx Rule 1080 
would be amended to provide that the contra-side to an inbound eligible 
order can be an RSQT electronic quote. As with Book Sweep, Book Match 
would not be engaged when the Exchange's disseminated price represented 
by a limit order on the book is not the NBBO. In these situations, 
incoming orders would be subject to manual handling by the specialist.
---------------------------------------------------------------------------

    \20\ Exchange Rule 1080(b)(i)(C) defines an ``off-floor broker-
dealer'' as a broker-dealer that delivers orders from off the floor 
of the Exchange for the proprietary account(s) of such broker-
dealer, including a market maker located on an exchange or trading 
floor other than the Exchange's trading floor who elects to deliver 
orders via AUTOM for the proprietary account(s) of such market 
maker.
---------------------------------------------------------------------------

Additional Amendment to Phlx Rule 1080

    Phlx Rule 1080, Commentary .01(b)(ii) would be amended in order to 
clarify that the specialist determines which options pricing model to 
select per option in non-Streaming Quote Options only. Respecting 
Streaming Quote Options, each specialist, SQT, and RSQT is a 
``responsible broker or dealer'' (as described below) for his 
proprietary electronic quotation. Therefore, each specialist, SQT, and 
RSQT may select the options pricing model that is appropriate for him.

Firm Quotations

    Exchange Rule 1082, Firm Quotations, would be amended in a number 
of ways to capture the firm quote requirements applicable to RSQTs. 
First, Phlx Rule 1082(a)(ii)(B), which currently defines the Exchange's 
``disseminated size'' respecting Streaming Quote Options as at least 
the sum of the size associated with limit orders, specialists' 
quotations, and SQT quotations, would be amended to expand the 
definition of disseminated size to include RSQT quotations. Second, the 
proposed amended Phlx Rule 1082 would be applied to RSQT quotations in 
Streaming Quote Options in the same manner as it is applied to SQT 
quotations. Specifically:
     If an SQT or RSQT's (other than a Directed SQT or RSQT's) 
quotation size in a particular series in a Streaming Quote Option is 
exhausted, such RSQT's quotation would be deleted from the Exchange's 
disseminated quotation until the time the RSQT revises his/her 
quotation.
     If the Exchange's disseminated size in a particular series 
in a Streaming Quote Option is exhausted at that particular price 
level, and no specialist, SQT, or RSQT has revised their quotation 
immediately following the exhaustion of the Exchange's disseminated 
size, the Exchange would automatically disseminate the specialist's 
most recent disseminated price (which was that particular price level) 
prior to the time of such exhaustion with a size of one contract.
     In the event an SQT, RSQT, or specialist in a Streaming 
Quote Option has electronically submitted on the Exchange bids or 
offers for a Streaming Quote Option, each such SQT, RSQT, or specialist 
member would be considered a ``responsible broker or dealer'' for that 
bid or offer, up to the size associated with such responsible broker or 
dealer's bid or offer.
     In the event that an RSQT bid or offer locks another Phlx 
XL Participant's electronic bid or offer, a ``counting period'' of one 
second would begin during which Phlx XL Participants, including the 
RSQT whose quotation is locked, may eliminate the locked market. 
Provided, however, that such RSQT (and any Phlx XL Participant whose 
electronic bid or offer is locked with another electronic bid/offer) 
would be required to execute orders at their disseminated quotation.
     In the event of a crossed market (i.e., 1.10 bid, 1 offer) 
wherein an incoming quotation crosses an existing quotation, the 
Exchange would: (i) Change the incoming quotation such that it locks 
the existing quotation; (ii) send a notice to the SQT, RSQT, or 
specialist that submitted the existing quotation indicating that its 
quotation was crossed; and (iii) send a notice to the specialist, SQT, 
or RSQT that submitted the incoming quotation, indicating that its 
quotation crossed the existing quotation and was changed. Such a locked 
market is handled in accordance with the rules relating to locked 
quotations as stated above.

Amendments to Option Floor Procedure Advices

    In addition to the proposed amendments to Exchange rules, the 
Exchange also proposes amendments to certain Exchange Option Floor 
Procedure Advices (``OFPAs'') in order to make them applicable to 
RSQTs. The Exchange proposes to amend OFPA A-12, Opening Rotations and 
SORT Procedures, to clarify that bids and offers may be submitted by 
RSQTs during opening rotations.\21\ The Exchange also proposes 
amendments to OFPA B-3, Trading Requirements, which includes the same 
``in-person'' trading requirement applicable to ROTs that is included 
in current Commentary .01 to Phlx Rule 1014 and the same obligation for 
ROTs to conduct 50% of their quarterly trading activity in assigned 
options contained in Commentary .03 to such Phlx Rule. Because, as 
stated above, the in-person requirement and the 50% quarterly volume 
requirement in assigned issues would not apply to RSQTs, OFPA B-3 would 
be amended to exclude RSQTs from those requirements.
---------------------------------------------------------------------------

    \21\ Rotation procedures allow a brief period of auction pricing 
for each option series during which bids and offers, including, with 
respect to Streaming Quote Options, bids and offers submitted 
electronically by SQTs (and, under the proposal, RSQTs), and 
transactions for that option class may normally only occur in that 
series. See Exchange Rule 1047 and OFPA A-12.
---------------------------------------------------------------------------

    OFPA B-6, Priority of Options Orders for Equity Options and Index 
Options by Account Type, includes the same trade allocation algorithm 
for orders represented in the crowd by Floor Brokers and specialists as 
contained in Phlx Rule 1014(g)(v). Therefore, the Exchange proposes to 
amend the provisions in Section E of OFPA B-6 relating to Actual Size 
and Waiver that are identical to the proposed amendments to Phlx Rule 
1014(g)(v).
    Finally, the Exchange proposes to amend OFPA F-7, Bids and Offers, 
in a number of ways. As a housekeeping matter, the Exchange proposes to 
delete the paragraphs in current OFPA F-7 that provide that all bid and 
offer prices are general and shall not be specified for acceptance by 
particular members and, that in the absence of a stated size to any bid 
or offer voiced or displayed on the Options Floor, the person 
responsible for such bid and offer is deemed to be quoting for one 
contract. The purpose of this provision is to make OFPA F-7 consistent 
with another Exchange proposal relating to the acceptance by particular 
members of Directed Orders \22\ and to make it consistent with Phlx 
Rule 1014(g)(v) and OFPA B-6, each of which addresses crowd 
participants' ``stated size'' differently. The Exchange proposes to 
further amend OFPA F-7 to define the Exchange's disseminated size as 
defined in proposed Phlx Rule 1082(a)(ii). Finally, in order to more 
specifically describe the content of proposed amended OFPA F-7, the 
Exchange proposes to change the title from ``Bids and Offers'' to 
``Size of Exchange's Disseminated Bid or Offer.''
---------------------------------------------------------------------------

    \22\ See SR-Phlx-2004-91.
---------------------------------------------------------------------------

Summary

    The Exchange believes that its proposal to adopt rules respecting 
RSQTs is an important step forward in

[[Page 77307]]

the evolution of the Exchange's trading systems towards more electronic 
trading of options on the Exchange via Phlx XL.
1. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \23\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \24\ in particular, in that it is designed to 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanisms of a free and open market and a national 
market system, and to protect investors and the public interest, by 
allowing a new category of market maker, the RSQT, to quote 
competitively from off the floor of the Exchange, thereby increasing 
the depth and liquidity in the Exchange's markets, and allowing the 
Exchange to remain competitive for order flow by adding additional 
liquidity to the Exchange's markets, enhancing the ability of order 
flow providers to fulfill their duty of best execution on behalf of 
their customers.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b).
    \24\ 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 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

    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 Phlx consents, the Commission shall: (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-2004-90 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-2004-90. 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 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-2004-90 and should be submitted on or before January 18, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-28149 Filed 12-23-04; 8:45 am]
BILLING CODE 8010-01-P