[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Notices]
[Pages 4180-4185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-324]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51064; File No. SR-Phlx-2004-73


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval to a Proposed 
Rule Change and Amendments No. 1 and 2 Thereto To Require the Immediate 
Display of Customer Options Limit Orders

January 21, 2005.
    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 November 3, 2004, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in items I, II, and III, below, which items have been 
substantially prepared by the Exchange. Phlx filed Amendment No. 1 to 
the proposed rule change on January 13, 2005,\3\ and filed Amendment 
No. 2 to the proposed rule change on January 19, 2005.\4\ The 
Commission is publishing this notice to solicit comment on the proposed 
rule change, as amended, from interested persons, and at the same time 
is granting accelerated approval to the proposed rule change, as 
amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 1, dated January 13, 2005, submitted by 
Richard S. Rudolph, Director and Counsel, Phlx (``Amendment No. 
1''). In Amendment No. 1, Phlx proposes clarifying language to be 
included in the previously submitted proposed rules.
    \4\ See Amendment No. 2, dated January 19, 2005, submitted by 
Richard S. Rudolph, Director and Counsel, Phlx (``Amendment No. 
2''). In Amendment No. 2, Phlx proposes a minor modification to the 
previously submitted proposed rules.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to amend Phlx Rules 1014, 1063 and 1080, and to 
delete Option Floor Procedure Advice A-1, to: (1) Reflect that the 
Exchange's Automated Options Market (``AUTOM'') System,\5\ and not the 
specialist, will immediately display the full price and size of any 
limit order that establishes the Exchange's disseminated price or 
increases the size of the Exchange's disseminated bid or offer, subject 
to certain exemptions; and (2) establish new rules that require 
Exchange Registered Options Traders (``ROTs'') and Floor Brokers to 
place limit orders on the limit order book electronically.
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    \5\ AUTOM is the Exchange's electronic order delivery, routing, 
execution and reporting system, which provides for the automatic 
entry and routing of equity option and index option orders to the 
Exchange trading floor. Orders delivered through AUTOM may be 
executed manually, or certain orders are eligible for AUTOM's 
automatic execution features: AUTO-X, Book Sweep, and Book Match. 
Equity option and index option specialists are required by the 
Exchange to participate in AUTOM and its features and enhancements. 
Option orders entered by Exchange members into AUTOM are routed to 
the appropriate specialist unit on the Exchange trading floor. See 
Phlx Rule 1080.
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    The text of the proposed rule change, as amended, follows. 
Additions are in italics. Deletions are in [brackets].
* * * * *
Rule 1014. Obligations and Restrictions Applicable to Specialists and 
Registered Options Traders
    (a)-(h) No Change.
    Commentary:
    .01-.17 No change.
    .18. An ROT who wishes to place a limit order on the limit order 
book must submit such a limit order electronically.
* * * * *
Rule 1063. Responsibilities of Floor Brokers
    (a)-(e) No change.
    Commentary:
    .01. A Floor Broker who wishes to place a limit order on the limit 
order book must submit such a limit order electronically through the 
Options Floor Broker Management System.
* * * * *
Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM) 
and Automatic Execution System (AUTO-X)
    (a)-(b) No change
    (c) AUTO-X. * * *
    (i)-(iii) No change.
    (iv) Except as otherwise provided in this Rule, in the following 
circumstances, an order otherwise eligible for automatic execution will 
instead be manually handled by the specialist:
    (A)-(C) No change.
    (D) When the [specialist posts] Exchange's best [a] bid or offer is 
represented by a limit order on the book [that is better than the 
specialist's own bid or offer] (except with respect to orders eligible 
for ``Book Sweep'' as described in Rule 1080(c)(iii) above, and ``Book 
Match'' as described in Rule 1080(g)(ii) below);
    (E)-(H) No change.
    (d)-(k) No change.
    Commentary:
    .01 No change.
    .02 The Electronic Order Book is the Exchange's automated 
[specialist] limit order book, which automatically routes all 
unexecuted AUTOM orders to the book and displays orders real-time in 
order of price/time priority. [Orders not delivered through AUTOM may 
also be entered onto the Electronic Order Book.]
    (a)(i) Except as provided in sub-paragraph (a)(ii) below, the AUTOM 
System will immediately display the full price and size of any limit 
order that establishes the Exchange's disseminated price or increases 
the size of the Exchange's disseminated bid or offer.
    (ii) The AUTOM System will not display:
    (A) An order executed upon receipt;
    (B) An order where the customer who placed it requests that it not 
be displayed, and upon representation of such order in the trading 
crowd the Floor Broker announces in public outcry the information 
concerning the order that would be displayed if the order were subject 
to being displayed;
    (C) A customer limit order for which, immediately upon receipt, a 
related order for the principal account of the specialist, reflecting 
the terms of the customer order, is routed to another options exchange;
    (D) Orders received before or during a trading rotation, however, 
such limit orders will be displayed immediately upon conclusion of the 
applicable rotation if they represent the Exchange's best bid or offer;

[[Page 4181]]

    (E) The following order types as defined in Rule 1066: Contingency 
Orders; One-Cancels-the-Other Orders; Hedge Orders (e.g., spreads, 
straddles, combination orders); Synthetic Options;
    (F) Immediate or Cancel (``IOC'') orders.
    (b) Limit orders may only be placed on the limit order book by: (i) 
An ROT via electronic interface with AUTOM pursuant to Rule 1014, 
Commentary .18; (ii) a Floor Broker using the Options Floor Broker 
Management System (as described in Commentary .06 below); or (iii) the 
AUTOM System for eligible customer and off-floor broker-dealer limit 
orders.
    (c) A limit order to be executed manually by the specialist 
pursuant to Rule 1080(c)(iv) will be displayed automatically by the 
AUTOM System until such limit order is executed or cancelled. If such 
limit order is partially executed, the AUTOM System will automatically 
display the actual number of contracts remaining in such limit order.
    .03 No change.
    .04 ROT Limit Orders. * * *
    Not later than ten days following approval by the Securities and 
Exchange Commission of the rules applicable to the Exchange's 
electronic trading platform, Phlx XL, the Exchange will commence the 
initial deployment of Phlx XL by allowing specialists and ROTs who are 
Streaming Quote Traders (``SQTs,'' as defined in the Phlx XL rules) to 
submit electronic quotations in Streaming Quote Options (as defined in 
the Phlx XL rules), and ROTs who are not SQTs to submit limit orders 
onto the limit order book via electronic interface with AUTOM [or 
manually through a Floor Broker or the Specialist]. Eligible incoming 
orders and quotations will automatically execute against quotations of 
specialists and SQTs and orders of ROTs in accordance with the 
functionality of the Phlx XL system, as set forth in the Phlx XL rules.
    * * *
    .05-.07 No change.
* * * * *
Option Floor Procedure Advices--A-1: Reserved
[Responsibility of Displaying Best Bids and Offers
    (a) A Specialist shall use due diligence to ensure that the best 
available bid and offer is displayed for those option series in which 
he is assigned.
    Bids and offers for the Specialist's own account, bids and offers 
on the book, and bids and offers established in the crowd are deemed 
available for display purposes.
    (b) After voicing a bid/offer, the Floor Broker or ROT shall use 
due diligence to inform the Specialist when s/he is no longer bidding/
offering at that price. Specifically, the Floor Broker or ROT must 
immediately inform the Specialist when s/he is ``out'' of that bid/
offer, including due to an execution or departure from the crowd.
    FINE SCHEDULE (Implemented on a two-year running calendar basis)
A-1
1st Occurrence--$250.00
2nd Occurrence--$500.00
3rd Occurrence--$1,000.00
4th Occurrence and Thereafter Sanction is discretionary with Business 
Conduct Committee]
* * * * *

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

    In its filing with the Commission, the Phlx included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in item III below. The Phlx has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change, as amended, is to 
establish Phlx rules that reflect the immediate, automatic display of 
limit orders (with certain exemptions as described below), and to 
require that Phlx ROTs and Floor Brokers who wish to place limit orders 
on the limit order book do so electronically.
    Currently, Exchange Options Floor Procedure Advice (``OFPA'') A-
1\6\ requires the specialist to use due diligence to ensure that the 
best available bid and offer is displayed for those option series in 
which he is assigned, including limit orders that represent the 
Exchange's best bid or offer. However, due to the recently enhanced 
display functionality of the AUTOM System, the Exchange is proposing to 
remove this responsibility from the specialist and to fully automate 
that process. Accordingly, the proposal would delete OFPA A-1 in its 
entirety.
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    \6\ See Securities Exchange Act Release Nos. 21760 (February 14, 
1985), 50 FR 7248 (February 21, 1985) (SR-Phlx-84-13); 39754 (March 
13, 1998), 63 FR 13901 (March 23, 1998) (SR-Phlx-97-53); and 44537 
(July 11, 2001), 66 FR 37511 (July 18, 2001) (SR-Phlx-2001-36).
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    The Exchange also proposes to adopt Commentary .02(a) to Phlx Rule 
1080 to provide generally that the AUTOM System will immediately\7\ 
display the full price and size of any limit order that establishes the 
Exchange's disseminated price or increases the size of the Exchange's 
disseminated bid or offer. The proposal would delete the current 
provision in Commentary .02 that states that orders not delivered 
through AUTOM may also be entered onto the Electronic Order Book, 
because this can no longer be done manually.
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    \7\ The Exchange represents that, for the purposes of this rule, 
``immediately'' display means that the AUTOM System will display 
eligible orders not subject to an exemption automatically and 
instantaneously upon receipt. Telephone call between Rick Rudolph, 
Director and Counsel, Phlx, and Nathan Saunders, Attorney, Division 
of Market Regulation (``Division''), Commission, November 8, 2004.
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    Consistent with the full automation of the display of limit orders 
on the limit order book, the Exchange proposes to adopt Commentary 
.02(b) to clarify that limit orders may be placed on the limit order 
book only by: (i) An ROT via electronic interface with AUTOM pursuant 
to Phlx Rule 1080, Commentary .18;\8\ (ii) a Floor Broker using the 
Options Floor Broker Management System pursuant to Phlx Rule 1063, 
Commentary .01;\9\ or (iii) the AUTOM System for eligible customer and 
off-floor broker-dealer limit

[[Page 4182]]

orders.\10\ In conjunction with this rule, the Exchange proposes to 
adopt Commentary .18 to Phlx Rule 1014, to require an ROT who wishes to 
place a limit order on the limit order book to submit such a limit 
order electronically, and Commentary .01 to Phlx Rule 1063, to 
establish that a Floor Broker who wishes to place a limit order on the 
limit order book must submit such a limit order electronically through 
the Options Floor Broker Management System. The proposed rule change 
would delete the provision currently contained in Commentary .04 to 
Phlx Rule 1014 that an ROT may place a limit order onto the limit order 
book manually through a Floor Broker or the specialist.
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    \8\ In November, 2002, the Commission approved the Exchange's 
proposal to allow on-floor, in-crowd ROTs to place electronic price 
improving limit orders on the limit order book via electronic 
interface with AUTOM (``ROT Access''). See Securities Exchange Act 
Release No. 46763 (November 1, 2002), 67 FR 68898 (November 13, 
2003) (SR-Phlx-2002-04). The rules governing ROT Access were amended 
in July 2004 in the Phlx XL proposal by eliminating the requirement 
that ROT limit orders placed on the limit order book under ROT 
Access be price-improving limit orders. See Securities Exchange Act 
Release No. 50100 (July 27, 2004), 69 FR 46612 (August 3, 2004) (SR-
Phlx-2003-59).
    \9\ The Options Floor Broker Management System is a component of 
AUTOM designed to enable Floor Brokers and/or their employees to 
enter, route and report transactions stemming from options orders 
received on the Exchange. The Options Floor Broker Management System 
also is designed to establish an electronic audit trail for options 
orders represented and executed by Floor Brokers on the Exchange, 
such that the audit trial provides an accurate, time-sequenced 
record of electronic and other orders, quotations and transactions 
on the Exchange, beginning with the receipt of an order by the 
Exchange, and further documenting the life of the order through the 
process of execution, partial execution, or cancellation of that 
order. See Phlx Rule 1080, Commentary .06.
    \10\ Off-floor broker-dealers may deliver limit orders for entry 
onto the limit order book via AUTOM. See Phlx Rule 1080(b)(i)(C). 
The Exchange represents that orders that are not eligible for 
routing through the AUTOM System would be rejected and sent back 
either (a) to the firm that submitted the order, for reentry, or (b) 
to the Floor Broker who submitted the order, to be represented using 
the Options Floor Broker Management System. Telephone call between 
Rick Rudolph, Director and Counsel, Phlx, and Nathan Saunders, 
Attorney, Division, Commission, November 8, 2004.
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    Additionally, because the specialist would no longer have the 
ability to post a limit order, the Exchange proposes to amend Phlx Rule 
1080(c)(iv)(D), which currently provides that an order otherwise 
eligible for automatic execution is instead handled manually by the 
specialist ``when the specialist posts a bid or offer that is better 
than the specialist's own bid or offer.'' Currently, Phlx Rule 
1080(c)(iv)(D) states that the specialist will handle an order 
otherwise eligible for automatic execution manually in this situation, 
except with respect to orders eligible for Book Sweep, where an 
automatic execution occurs when a contra-side quotation that matches a 
limit order on the book results in an execution at the NBBO,\11\ and 
Book Match, where an automatic execution occurs when an inbound contra-
side order that matches a limit order on the book results in an 
execution at the NBBO.\12\ To accurately reflect that the specialist 
can no longer ``post'' a bid or offer (as described above), the 
Exchange proposes to amend Phlx Rule 1080(c)(iv)(D) to provide that an 
order otherwise eligible for automatic execution would instead be 
handled manually by the specialist when the Exchange's best bid or 
offer is represented by a limit order on the book. While generally a 
limit order on the book would be eligible for automatic execution by 
way of Book Match or Book Sweep, Phlx Rule 1080(c)(iv)(D) is still 
necessary, because the specialist still would handle an order manually 
when a ROT or a Floor Broker in the trading crowd verbally announces to 
the specialist that he/she intends to trade against the limit order on 
the book representing the Exchange's best bid or offer. While the 
specialist no longer has the ability to ``post'' a limit order on the 
limit order book, the specialist would continue to have the ability to 
execute such an order, once it is placed on the limit order book 
electronically, against the ROT or Floor Broker's order, by pointing 
and clicking on the limit order on the book and entering the contra-
side account number against which the limit order on the book will 
trade.
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    \11\ See Phlx Rule 1080(c)(iii).
    \12\ See Phlx Rule 1080(g)(ii).
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    The proposed rule change also includes in Commentary .02(c) a 
provision that limit orders to be executed manually by the specialist 
pursuant to Phlx Rule 1080(c)(iv) \13\ would be displayed automatically 
by the AUTOM system until the limit order is executed or cancelled. If 
a limit order is partially executed, the AUTOM System would 
automatically display the actual number of contracts remaining in the 
limit order.
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    \13\ Phlx Rule 1080(c)(iv) enumerates a variety of circumstances 
under which orders otherwise eligible for automatic execution are 
instead handled manually by the specialist.
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    Finally, the proposed rule change would establish certain 
exemptions, or partial exemptions, to the limit order display rule. The 
proposed exemptions provide that AUTOM will not display: (a) Limit 
orders executed upon receipt; (b) a limit order where the customer who 
placed it requests that it not be displayed, and upon representation of 
such order in the trading crowd the Floor Broker announces in public 
outcry the information concerning the order that would be displayed if 
the order were subject to being displayed; (c) a customer limit order 
for which, immediately upon receipt, a related order for the principal 
account of the specialist, reflecting the terms of the customer order, 
is routed to another options exchange; (d) a limit order received 
before or during a trading rotation \14\ (however, such limit orders 
will be displayed immediately upon conclusion of the applicable 
rotation if they represent the Exchange's best bid or offer); (e) 
certain contingent and complex order types defined in Phlx Rule 1066, 
as discussed more fully below; and (f) immediate or cancel limit 
orders.
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    \14\ During a trading rotation, the specialist attempts to find 
the opening price and until the opening price is established, there 
is no disseminated market. Once the trading rotation ends and 
regular trading begins, limit orders received before or during the 
trading rotation that are not executed at the opening price and 
remain on the limit order book will be displayed if they represent 
the Exchange's best bid or offer.
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    Generally, Phlx has proposed exemptions or partial exemptions for 
certain types of contingent and complex orders because these order 
types, by definition, are priced in a way that is dependent on a 
condition or another variable, such that displaying the price of such 
an order without the other information would not accurately reflect 
that trading interest.
    Contingency Orders (Phlx Rule 1066(c)): These orders are contingent 
upon a condition being satisfied, and are not executable until the 
prerequisite condition is satisfied. Phlx Rule 1066(c) contains the 
following types of contingency orders eligible for delivery via AUTOM 
that would not be immediately displayed under the proposal: stop (stop-
loss), stop-limit, all-or-none, market-on-close, and cancel-replacement 
orders.
    Stop (Stop-Loss) and Stop Limit Orders (Phlx Rule 1066(c)(1)): 
These orders are not executable until the market reaches a specified 
price that ``elects'' the order, at which point they convert to a 
market order. As such, they are not available to trade and have no 
standing in the quoted markets until the specified price is reached. A 
trade or a quote can be the ``triggering'' event for the election of a 
stop order. Because they convert to market orders upon the triggering 
event, stop orders cannot then be subject to the display requirement.
    A stop-limit order is not ``triggered'' until the option contract 
trades or is bid (offered) at or above (below) the stop price, at which 
point it converts to a limit order. As such, a stop-limit order has no 
standing in the quoted markets until the specified price trigger is 
reached. Once triggered, the stop-limit order converts to a limit 
order, and thus would be subject to display.
    All-or-None Orders (Phlx Rule 1066(c)(4)): While an all-or-none 
order can be a limit order, instructions require the order be executed 
in its entirety or not at all. The Commission's Display Rule, 
applicable to customer limit orders received in the equity market, also 
provides an exemption for all-or-none orders.\15\
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    \15\ See 17 CFR 240.11Ac1-4(c)(7).
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    Market-on-Close Orders (Phlx Rule 1066(c)(6)): These orders may 
have a limit price attached, but are not eligible for representation 
until the close of trading is imminent. Regardless of the time at which 
a market-on-close order is entered, the floor broker is required to 
hold such an order, and is precluded from representing it, until as 
near as

[[Page 4183]]

possible to the close of trading. Furthermore, because representation 
and execution of these orders must occur on or as near to the close of 
trading as possible, it would be difficult if not impossible to 
determine whether members met an appropriate display standard for such 
orders.
    Cancel-Replacement Order (Phlx Rule 1066(c)(7)): A cancel-
replacement order is a contingency order consisting of two or more 
parts which require the immediate cancellation of a previously received 
order prior to the replacement of a new order with new terms and 
conditions. If the previously placed order is already filled partially 
or in its entirety, the replacement order is automatically canceled or 
reduced by the number of contracts partially filled. AUTOM would not 
immediately display all parts of the cancel-replacement order, but 
rather would display only the order that remains after the previously 
received order is cancelled.
    In addition to contingency orders, the Exchange also proposes to 
establish an exemption for one-cancels-the-other orders, hedge orders 
and synthetic options.
    One-Cancels-the-Other Orders (Phlx Rule 1066(e)): A one-cancels-
the-other order is comprised of two or more orders treated as a 
collective unit. The execution of any one of the component orders 
cancels the other(s). If the specialist cannot execute any of the 
orders upon receipt, then none can be displayed or booked as doing so 
could result in the approximate simultaneous execution of more than one 
component order, in direct contravention of the primary order 
condition.
    Hedge Orders (Phlx Rule 1066(f)) and Synthetic Options (Phlx Rule 
1066(g)): Hedge orders (e.g., spreads, straddles, and combination 
orders) and synthetic options are orders that specify instructions to 
trade more than one options series or product as a package, typically 
(with respect to hedge orders) at a specified net debit or credit, as 
opposed to a specific limit price for each leg involved. Therefore, 
there is no specified limit price for each series involved to display 
in the quotes. Moreover, the Options Price Reporting Authority 
(``OPRA'') does not accept complex order quotes at net prices. 
Therefore, these orders would not be displayed. Each component of these 
complex orders is, in essence, itself contingent on the ability to 
execute the other components of the order. Since there is no guarantee 
that all components will become executable at the same time, if at all, 
the immediate display of all components could result in the execution 
of less than all components of the order.
    Immediate or Cancel Orders: An immediate or cancel order is a 
market or limit order which is to be executed in whole or in part as 
soon as such order is represented in the trading crowd. Any portion not 
executed is to be cancelled, which means it cannot be displayed. An 
immediate or cancel order shares most of the same characteristics of an 
all-or-none order, which is exempt from the Commission's Display 
Rule.\16\ Given the similarity between these order types, the Exchange 
believes that immediate or cancel orders should also be exempt from the 
requirements of the Exchange's limit order display rule.
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    \16\ See supra note 15 and accompanying text.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \17\ in general, and furthers the objectives of section 
6(b)(5) of the Act \18\ in particular, in that it is designed to 
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 
establishing rules requiring the immediate automated display of limit 
orders on the Exchange, and by requiring ROTs and Floor Brokers to 
place limit orders on the book electronically, which should enhance 
transparency on the Exchange and should enhance the Exchange's ability 
to provide an electronic audit trail respecting the immediate display 
of limit orders.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether they are 
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-2004-73 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-2004-73. 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 such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2004-73 and should be submitted on or before 
February 18, 2005.

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

    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 
\19\ and, in particular, the requirements of section 6(b)(5) of the 
Act,\20\ which requires, among other

[[Page 4184]]

things, that the rules of an exchange be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. Specifically, the Commission believes that the 
immediate display of customer options limit orders that improve the 
price or size of the best disseminated Phlx quote should promote 
transparency and enhance the quality of executions of customer limit 
orders on the Phlx.
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    \19\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
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    The proposed amendments to Phlx rules introduce requirements for 
limit order display that are comparable to the requirements of the 
Commission's Display Rule, Rule 11Ac1-4 under the Act,\21\ which is 
applicable to customer limit orders received in the equity market. The 
Exchange has represented that immediate display of limit orders by the 
AUTOM system means that eligible limit orders will be displayed 
automatically and instantaneously, as soon as the order is received on 
the Exchange. Proposed commentaries .02(b) to Phlx Rule 1080, .18 to 
Phlx Rule 1014, and .01 to Phlx Rule 1063 provide that the only way 
limit orders may be sent to the Exchange will be electronically via 
AUTOM, either by an ROT via electronic interface with AUTOM, by a Floor 
Broker via the Options Floor Broker Management System component of 
AUTOM, or by off-floor broker-dealers who transmit orders via AUTOM. 
Thus, under Phlx's system, all limit orders subject to display must be 
delivered electronically to the Exchange, and would then be displayed 
automatically and instantaneously.
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    \21\ 17 CFR 249,11Ac1-4.
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    The Commission believes that the Exchange's proposal to exempt all-
or-none and immediate or cancel orders from the Phlx's limit order 
display rule is reasonable since these order types are either identical 
or substantially similar to order types exempt from the Commission's 
Display Rule.
    The Commission also believes that it is consistent with the Act for 
the Phlx to exempt from the limit order display requirements under its 
rules stop-limit and stop or stop-loss orders. These orders are 
contingent orders that are subject to a particular triggering event 
and, thus, are not available for execution until the triggering event 
occurs. A stop-loss order becomes a market order when triggered and 
thus is not subject to the Phlx's limit order display rule because such 
an order would then be immediately executable. A stop-limit order 
becomes a limit order when the triggering event occurs. This limit 
order would be subject to display under the Phlx's rules.
    Cancel-replacement orders may be reduced in size if the order 
intended to be cancelled and replaced has already been filled partially 
or in its entirety. Thus, a cancel-replacement order would not be 
immediately displayed, but would be subject to display only after any 
necessary adjustments were made as a result of the contingency.
    Market-on-close orders may not be represented, displayed or booked 
until as near as possible to the close of trading, and, therefore, the 
Commission believes it is reasonable to exempt such orders from the 
Phlx's limit order display rule. Hedge orders (e.g., spread, straddle, 
and combination orders), synthetic options and one-cancels-the-other 
orders are complex orders with more than one component and, thus are 
not suitable for display.
    In addition, during a trading rotation, Phlx systems attempt to set 
an opening price for the series. Until that opening price is 
established, there is no disseminated market. Therefore, it is 
reasonable to exempt orders received during a trading rotation from the 
Exchange's limit order display rule. The Commission notes, however, 
that once the trading rotation ends, any orders not executed would then 
be subject to display.
    Finally, the Exchange proposes to exempt from its limit order 
display rule customer limit orders for which, immediately upon receipt, 
a related order for the principal account of the specialist, reflecting 
the terms of the customer order, is routed to another options exchange. 
The Commission believes it is reasonable to exempt such orders since 
they are subject to execution upon receipt at the other options 
exchange. Moreover, the Exchange represents that if the order delivered 
to the other options exchange were canceled, in whole or in part, by 
the other exchange, then, immediately upon receipt of the cancellation 
notice, the original customer order would be subject to the Exchange's 
limit order display rule and automatically displayed.\22\
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    \22\ Telephone conversation between Richard S. Rudolph, Director 
and Counsel, Phlx, and Nathan Saunders, Attorney, Division, 
Commission, January 14, 2005.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the proposal is published in 
the Federal Register, pursuant to Section 19(b)(2) of the Act.\23\ The 
Commission notes that the proposed rule change, which provides for 
immediate display of limit orders that better the Exchange's 
disseminated quote, is substantially identical to the proposals filed 
by the Chicago Board Options Exchange (``CBOE'') \24\ and the American 
Stock Exchange (``Amex''),\25\ although the form of Phlx's proposed 
rule differs slightly.\26\ Phlx also proposes several exemptions to its 
limit order display rule. The Commission notes that these exemptions, 
discussed above, are substantially identical to exemptions proposed by 
CBOE and Amex in their options limit order display proposals. The Amex 
and CBOE proposals were recently noticed for full 21-day comment 
periods.\27\ No comments were received on the CBOE or Amex proposal.
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ See Securities Exchange Act Release No. 49916 (June 25, 
2004), 69 FR 40422 (July 2, 2004) (SR-CBOE-2004-35).
    \25\ See Securities Exchange Act Release No. 50188 (August 12, 
2004), 69 FR 51495 (August 19, 2004) (SR-Amex-00-27).
    \26\ CBOE and Amex seek to place an affirmative display 
obligation on their Designated Primary Market-makers and Specialists 
respectively, whereas Phlx's proposed rule provides for automatic 
display via the AUTOM system.
    \27\ See supra notes 24 and 25.
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    Accelerated approval of the proposed rule change will permit the 
Exchange to implement the proposal in an expeditious manner, i.e., 
simultaneously with the implementation of the similar proposals by 
CBOE, Amex and the Pacific Exchange, Inc. (``PCX''), which we also 
approve today.\28\ The Commission, therefore, believes that good cause 
exists, consistent with section 6(b)(5) \29\ and section 19(b) \30\ of 
the Act, to accelerate approval of the proposed rule change.
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    \28\ See Securities Exchange Act Release Nos. 51063 (January 21, 
2005) (order approving SR-CBOE-2004-35); 51062 (January 21, 2005) 
(order approving SR-Amex-00-27); and 51061 (January 21, 2005) (order 
approving SR-PCX-00-15).
    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 15 U.S.C. 78s(b).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\31\ that the proposed rule change, as amended (File No. SR-Phlx-
2004-73), be approved on an accelerated basis.
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    \31\ Id.


[[Page 4185]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-324 Filed 1-27-05; 8:45 am]
BILLING CODE 8010-01-P