[Federal Register Volume 70, Number 14 (Monday, January 24, 2005)]
[Notices]
[Pages 3417-3420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-217]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51036; File No. SR-Phlx-2004-92]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendments 
No. 1 and 2 Thereto by the Philadelphia Stock Exchange, Inc. Relating 
To Adopting Phlx Rule 1017, Openings in Options, on a Permanent Basis

January 13, 2005.
    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 15, 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 and II below, which Items have been prepared by Phlx. On 
December 28, 2004, Phlx filed Amendment No. 1 to the proposed rule 
change.\3\ On January 12, 2005, Phlx filed Amendment No. 2 to the 
proposed rule change.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons and is approving the

[[Page 3418]]

proposed rule change, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original proposed rule change 
in its entirety.
    \4\ In Amendment No. 2, Phlx proposes to clarify the 
specialist's requirement to give precedence to orders entrusted to 
him as an agent in any option in which he is registered. 
Specifically, Phlx represents that the specialist is required to 
give precedence to orders entrusted to him as an agent in any option 
in which he is registered before executing at: (i) The same price; 
(ii) a lower bid; or (iii) a higher offer, any purchase or sale in 
the same option for an account in which he has an interest. The 
Exchange's Market Surveillance Department conducts surveillance for 
violations of this requirement. Therefore, if a specialist intends 
to trade for his own account on the opening, the specialist must 
first be sure that he does not trade ahead of any orders (as agent). 
Otherwise, he would be subject to possible disciplinary action, 
regardless of when such an order is received (i.e., in this 
circumstance, after the underlying security opens but prior to the 
opening in the underlying security). See, e.g., Phlx Rule 1019.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to adopt, on a permanent basis, Phlx Rule 1017, 
Openings in Options, which is currently subject to a 180-day pilot 
scheduled to expire January 28, 2005. The text of the proposed rule 
change is available at the principal office of the Exchange and at the 
Commission's Public Reference Room.

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, as 
amended, and discussed any comments it received. The text of these 
statements may be examined at the places specified in Item III 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
    In July 2004, the Commission approved the Exchange's proposal to 
adopt rules applicable to the Exchange's electronic trading platform 
for options, Phlx XL.\5\ Among the rules approved was Phlx Rule 1017, 
which describes in detail the process for openings in options on the 
Exchange. Phlx Rule 1017, which was approved on pilot basis, addresses 
the opening process in three main parts: the pre-opening, the opening 
rotation, and the specialist's calculation of the price of the opening 
trade of the session in a given series. The purpose of this proposed 
rule change, as amended, is to assure the continuity of the Exchange's 
rules relating to openings by adopting Phlx Rule 1017 on a permanent 
basis.
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    \5\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
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    Phlx Rule 1017 is intended to provide for an orderly and efficient 
process for the opening of an option and for re-opening following a 
trading halt. First, the sections of Phlx Rule 1017 concerning pre-
openings are intended to describe which orders and quotes the 
specialist in a particular option is required to accept and consider 
prior to the opening in a given series and when the specialist must 
accept and include market orders in the opening. Specifically, prior to 
the opening, the specialist determines from Floor Brokers, and from 
orders resting on the limit order book, the size and prices of orders 
which are near the previous closing prices of those options in which 
the specialist is assigned. Also, in addition to establishing the 
specialist's own quote in the series, the specialist considers markets 
from Registered Options Traders (``ROTs'') in the crowd and, respecting 
Streaming Quote Options traded on Phlx XL, considers electronic 
quotations submitted by Streaming Quote Traders (``SQTs''). This 
enables the specialist to ascertain orders and quotes on both sides of 
the market for a series to determine the opening price for that series.
    Because openings on the Exchange are not currently automated, there 
is no ``broadcast'' of opening limit orders and quotes on the Phlx XL. 
The participants, however, have access to market information necessary 
to ascertain bids and offers in the pre-opening phase. Specialists are 
able to view the entire limit order book, including orders resting on 
the book from the previous trading session and any orders submitted 
before the opening, on their on-floor screens (known as the X-Station). 
Specialists are also able to view all electronically submitted quotes 
in Phlx XL options. SQTs have the same view of the limit order book and 
their own quotes but not those of other SQTs. Non-SQT ROTs are able to 
view the current on-floor displayed market, whether generated by a pre-
opening quote or by limit orders at the then-best bid or offer. All in-
crowd SQTs and the specialist, together with non-SQT ROTs in the crowd, 
are able to ascertain all in-crowd verbal bids and offers. Following 
the pre-opening phase, the specialist conducts an opening rotation.\6\
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    \6\ A trading rotation is a series of very brief time periods 
during each of which bids, offers, and transactions in only a 
single, specified option contract can be made. See Phlx Rule 1047, 
Commentary .01.
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    Phlx Rule 1017 provides that the opening price is the price at 
which the specialist determines that the greatest number of contracts 
will trade, as long as such opening price falls within an acceptable 
range to be determined by the Exchange's Options Committee.\7\ An 
acceptable range is determined as a percentage of the lowest bid as the 
lower boundary of the acceptable range and as a percentage of the 
highest offer as the upper boundary of the acceptable range. For 
example, such an acceptable range may be established as 75% of the 
lowest bid and 125% of the highest offer. Once determined by the 
Exchange's Options Committee, such an acceptable range would be 
announced to the Exchange's membership via regulatory circular.\8\ The 
Exchange believes that the establishment of such bright-line parameters 
defining an acceptable opening price range provides specialists with 
clear guidance on the amount by which the opening price may differ from 
the lowest bid and highest offer. In the interest of a fair and orderly 
market, a Floor Official may provide a specific exemption from the 
established acceptable range in a particular series.
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    \7\ The Options Committee has general supervision of the 
dealings of members on the equity and index options trading floor, 
and of the premises of the Exchange immediately adjacent thereto, 
and has supervision of the activities on the equity and index 
options trading floor of specialists, assistant specialists, 
registered option traders, floor brokers, or other types of market-
makers. See Phlx By-Law Article X, Section 10-20.
    \8\ This provision in the proposed rule is based on Chicago 
Board Options Exchange, Inc. (``CBOE'') Rule 6.2B(e)(ii).
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    Commentary .03(b) to Phlx Rule 1017 includes further limitations on 
the opening price to be determined by the specialist. First, if two or 
more prices would satisfy the criteria for determining the opening 
price, the price which would leave the fewest number of contracts 
resting on the limit order book is selected as the opening price. If 
there are still two or more prices that would satisfy such criteria, 
the price which is closest to the previous session's closing price is 
selected as the opening price. Complex orders and contingency orders do 
not participate in opening rotations or in the determination of an 
opening price.
    Once the specialist determines the opening price, the Exchange 
disseminates the opening trade price to the Option Price Reporting 
Authority (``OPRA''). At this point, the series is open for trading. 
Once the opening trade price in a series has been disseminated to OPRA, 
the specialist, ROTs, and SQTs trading such series are required to 
fulfill their respective quoting obligations under Phlx Rule 1014.
    The rule also includes circumstances in which a specialist would 
not open a series. Specifically, the specialist would not open a series 
if it is not within an acceptable range, as described above, unless a 
specific exemption is given by a Floor Official in the interest of a 
fair and orderly market, or 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,

[[Page 3419]]

limit orders, and specialist or SQT quotations on the opposite side). 
For purposes of this provision, ``market orders'' include those limit 
orders that are treated as market orders in accordance with Phlx Rule 
1017(b) (i.e., orders at a limited price order to buy which is at a 
higher price than the price at which the option is to be opened and a 
limited price order to sell which is at a lower price than the price at 
which the option is to be opened) and market-on-opening orders. In such 
a circumstance, the specialist requests bids and offers from ROTs in 
the crowd and, in the case of Streaming Quote Options, from SQTs that 
are assigned in the option. Such ROTs and/or SQTs are required to 
respond to such a request immediately. The series could not open 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.
    Finally, Phlx Rule 1017 addresses the situation in which there are 
no orders in a particular series when the underlying security opens. In 
such a situation the Exchange would disseminate quotations in such 
series via the Exchange's Auto-Quote or Specialized Quote Feed upon the 
opening in the underlying security.
    Phlx Rule 1017 was adopted as a 180-day pilot, which is scheduled 
to expire on January 28, 2005.\9\ The proposal would adopt Phlx Rule 
1017 on a permanent basis by deleting Phlx Rule 1017(f), which 
describes the pilot. The Exchange represents that it has received no 
negative comments or complaints since the Commission's approval of the 
pilot.
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    \9\ See supra, note 5.
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2. Statutory Basis
    The Exchange believes that its proposal, as amended, is consistent 
with Section 6(b) of the Act \10\ in general and furthers the 
objectives of Section 6(b)(5) of the Act \11\ in particular in that it 
is designed to perfect the mechanisms of a free and open market and the 
national market system, protect investors and the public interest and 
promote just and equitable principles of trade by establishing 
permanent rules relating to openings on the Exchange that provide for 
an orderly and efficient process for the opening of an option, and for 
re-opening following a trading halt.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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, as 
amended, 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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the amended 
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-2004-92 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-2004-92. 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 the Phlx. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Phlx-2004-92 and should be submitted on or before 
February 14, 2005.

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

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder, applicable to a national 
securities exchange,\12\ and, in particular, with the requirements of 
Section 6(b) of the Act \13\ and the rules and regulations thereunder. 
The Commission finds that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act \14\ in that it is designed 
to perfect the mechanisms of a free and open market and the national 
market system, protect investors and the public interest and promote 
just and equitable principles of trade.
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    \12\ In approving this rule, the Commission notes that it has 
considered its impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission believes that the proposed rule change 
establishes permanent rules governing the opening procedures on options 
that should provide a reasonable process by which Phlx participants 
would access and participate in the opening rotations and re-opening 
following a trading halt. The Commission also believes that the 
proposed rules governing the opening procedures on options should 
provide transparency to all market participants with respect to the 
manner in which an opening price is determined on the Exchange.
    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\15\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of the notice of the filing 
thereof in the Federal Register. The Commission notes that the Exchange 
represents that it has received no negative comments or complaints 
since the Commission approved the Phlx XL opening procedures on a pilot 
basis. Further, accelerating approval of the instant proposed rule 
change will ensure that the Phlx XL opening procedures will continue to 
operate without any undue interruption when the pilot period ends on 
January 28, 2005.
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    \15\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the

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proposed rule change and Amendments No. 1 and 2 thereto (SR-Phlx-2004-
92) are hereby approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E5-217 Filed 1-21-05; 8:45 am]
BILLING CODE 8010-01-P