[Federal Register Volume 70, Number 118 (Tuesday, June 21, 2005)]
[Notices]
[Pages 35759-35762]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3194]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51820; File No. SR-Phlx-2005-28]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendment No. 1 Thereto Relating to Split Price Priority

June 10, 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 April 28, 2005, 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 the Phlx. On May 23, 2005, 
the Exchange amended the proposed rule change (``Amendment No. 1'').\3\ 
The Exchange filed the proposal pursuant to Section 19(b)(3)(A) of the 
Act,\4\ and Rule 19b-4(f)(6) thereunder,\5\ which renders the proposal 
effective upon filing with the Commission.\6\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made a few technical 
corrections to the purpose section and the rule text of the proposed 
rule change and marked the box on the cover page of Form 19b-4 to 
indicate that the proposed rule change is subject to a pilot 
program.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ The Exchange requested the Commission to waive the five-day 
pre-filing notice requirement and the 30-day operative delay, as 
specified in Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to adopt new Phlx Rule 1014(g)(i)(C) governing 
purchase or sale priority for orders of 100 option contracts or more. 
The proposed rule would afford priority to members that purchase (sell) 
fifty or more contracts at a particular price at the next lower 
(higher) price in purchasing (selling) the equivalent number of 
contracts in the same series. Such priority would only apply to orders 
that represent the same transaction or order as the previous purchase 
(sale), and would only apply to transactions in equity options and 
options overlying Exchange Traded Fund Shares (``ETFs'') that are 
effected in open outcry. The proposal is subject to a pilot program 
until December 31, 2005.
    The text of the proposed rule change, as amended, is set forth 
below. Proposed new language is in italics.
* * * * *

Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders

    Rule 1014. (a)-(f) No change.
    (g) Equity Option and Index Option Priority and Parity
    (i) (A)-(B) No change.
    (C) Purchase or sale priority for orders of 100 contracts or more. 
If a member purchases (sells) 50 or more option contracts of a 
particular series at a particular price or prices, he shall, at the 
next lower (higher) price have priority in purchasing (selling) up to 
the equivalent number of option contracts of the same series that he 
purchased (sold) at the higher (lower) price or prices, but only if his 
bid (offer) is made promptly and the purchase (sale) so effected 
represents the opposite side of a transaction with the same order or 
offer (bid) as the earlier purchase or purchases (sale or sales). The 
Options Committee may increase the ``minimum qualifying order size'' 
above 100 contracts for all products under its jurisdiction. 
Announcements regarding changes to the minimum qualifying order size 
shall be made via an Exchange circular. This paragraph shall only apply 
to transactions in equity options and options overlying Exchange Traded 
Fund Shares (``ETFs'') and only to such transactions that are effected 
in open outcry.
    (ii)-(vii) No change.
    (h) No change.
    Commentary: .01-.18 No change.

[[Page 35760]]

    .19 Floor brokers are able to achieve split price priority in 
accordance with Rule 1014(g)(i)(C), provided, however, that a floor 
broker who bids (offers) on behalf of a non-market-maker Phlx member 
broker-dealer (``Phlx member BD'') must ensure that the Phlx member BD 
qualifies for an exemption from Section 11(a)(1) of the Exchange Act or 
that the transaction satisfies the requirements of Exchange Act Rule 
11a2-2(T), otherwise the floor broker must yield priority to orders for 
the accounts of non-members.
* * * * *

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. The text of these statements may be examined at the places 
specified in Item IV below. The Phlx has prepared summaries, set forth 
in Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change, as amended, is to 
establish rules that would facilitate the execution of large orders, 
which by virtue of their size and the need to execute them at multiple 
prices may be difficult to execute without a limited exception to 
current Exchange priority rules.
    The proposed rule change, adopting Rule 1014(g)(i)(C), would 
establish a new priority rule regarding open outcry split price 
transactions in equity options and options overlying ETFs generally to 
permit a member who is responding to an order \7\ for at least 100 
contracts \8\ who buys (sells) at least 50 contracts at a particular 
price to have priority over all others in purchasing (selling) up to an 
equivalent number of contracts of the same order at the next lower 
(higher) price without being required to yield to existing customer 
interest in the limit order book. Absent this proposed rule, such 
orders would be required to yield priority.\9\
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    \7\ Clarification provided in telephone conference call on June 
8, 2005, among Richard Rudolph, Vice President and Counsel, Phlx, 
and Ira Brandriss, Special Counsel, Ann Leddy, Special Counsel, and 
Mitra Mehr, Staff Attorney, Division of Market Regulation 
(``Division''), Commission (``June 8th Telephone Conference'').
    \8\ Orders for a size of less than 100 contracts would not be 
affected by this proposed rule.
    \9\ See, e.g., Phlx Rule 119(a).
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    For example, when a floor broker (``Floor Broker'') is representing 
a customer's order for 100 contracts and a member executes a purchase 
of 50 of those contracts at a price of $.30, the member would have 
priority over all market participants to purchase the remaining 50 
contracts in the order at $.25.\10\ Two trades would be reported to the 
tape, one a purchase of 50 contracts at $.30, and the other a purchase 
of 50 contracts at $.25. The effect to the customer would be a net 
purchase price of $.275 for 100 contracts. The Exchange believes that 
the proposal should lead to more aggressive quoting by crowd 
participants, which in turn could lead to better executions. A crowd 
participant might be willing to trade at a better price for a portion 
of an order if he/she were assured of trading with the balance of the 
order at the next pricing increment. As a result, Floor Brokers 
representing orders in the trading crowd might receive better-priced 
executions.
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    \10\ Clarification provided in June 8th Telephone Conference.
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    Under the proposal, the Exchange's Options Committee \11\ would 
have the ability to increase the minimum qualifying order size to a 
number larger than 100 contracts. Any changes, which would have to 
apply to all products under the committee's jurisdiction, would be 
announced to the membership via an Exchange Circular.
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    \11\ The Options Committee has general supervision of the 
dealings of members on the options trading floor. See Phlx By-Law 
Article X, Section 10-20.
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    One possible limitation on the ability of crowd participants to use 
the split price priority rule is the current requirement that orders 
for controlled accounts \12\ must yield priority to orders for customer 
accounts. Using the example above, if the $.25 represents orders for 
customer accounts, those orders would have priority over orders for 
controlled accounts at $.25. This means that a holder of a controlled 
account who is willing to trade at $.30 and $.25 may be unwilling to 
trade at the price of $.30 if he/she cannot trade the balance of the 
order at $.25 because of the requirement to yield to orders for 
customer accounts. The Exchange believes that this jeopardizes the 
member's willingness to execute the first part of the order at a price 
of $.30 (using the above example), thereby potentially making it 
difficult to achieve price improvement for the Floor Broker's customer 
on the Phlx.\13\ Instead, the order might trade at another exchange 
that has no impediments, i.e., no customer interest at those price 
levels. Accordingly, one significant purpose of this proposal is to 
adopt a limited exception to the existing priority requirement 
concerning controlled accounts.
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    \12\ A controlled account includes any account controlled by or 
under common control with a broker-dealer. Customer accounts are all 
other accounts. Equity option and index option orders of controlled 
accounts are required to yield priority to customer orders when 
competing at the same price. Orders of controlled accounts generally 
are not required to yield priority to other controlled account 
orders. See Phlx Rule 1014(g)(i)(A).
    \13\ Clarification provided in June 8th Telephone Conference.
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    The Exchange believes that it would be reasonable to make a limited 
exception to the rule requiring controlled accounts to yield priority 
to non-controlled accounts in order to allow split price trading. In 
this regard, the proposed exception would be similar in operation to 
the current limited ``spread-type'' priority exception \14\ under 
Exchange rules. This exception (which is established in the rules of 
many options exchanges) was intended to facilitate the trading of 
spread, or ``hedge'' order,\15\ which by virtue of their multi-legged 
composition could be more difficult to trade without a limited 
exception to the priority rule for one of the legs. The purpose behind 
the proposed split-price priority exception is the same--to bring about 
the execution of large orders, which by virtue of their size and the 
need to execute them at multiple prices may be difficult to execute 
without a limited exception to the priority rules. The proposed 
exception would operate in the same manner as the hedge order exception 
by allowing a member effecting a trade that betters the market to have 
priority on the balance of that trade at the next pricing increment, 
even if there are orders in the book at the same price.
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    \14\ Currently, a member that executes at least one option leg 
of a spread order at a better price than the established bid or 
offer for that option contract, and no option leg of the spread 
order is executed at a price outside of the established bid or offer 
for that option contract, has priority over all other orders at the 
same price. See Phlx Rule 1033(d).
    \15\ The Exchange defines a ``hedge order'' as any spread type 
order for the same account. See Phlx Rule 1066(f).
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    In order to address potential concerns regarding Section 11(a) of 
the Act,\16\ the Exchange proposes to adopt new Commentary .19 to Phlx 
Rule 1014. Section 11(a) of the Act generally prohibits members of 
national securities exchanges from effecting transactions for the 
member's own account, absent an exemption. Under the proposal, there

[[Page 35761]]

could be situations where because of the proposed limited exception to 
customer priority, orders on behalf of members could trade ahead of 
orders of nonmembers in violation of Section 11(a). Proposed Commentary 
.19 would make clear that Floor Brokers may avail themselves of the 
split-price priority rule, but that they would be obligated to ensure 
compliance with Section 11(a). Specifically, a Floor Broker bidding 
(offering) on behalf of a Phlx member broker-dealer that is not a 
specialist or Registered Options Trader (``ROT'') on the Exchange would 
be required to ensure that the order he/she represents qualifies for an 
exemption from Section 11(a)(1) of the Act or that the transaction 
satisfies the requirements of Rule 11a2-2(T) \17\ under the Act.\18\ 
Otherwise, the Floor Broker would be required to yield priority to 
order(s) for the account(s) of non-members.
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    \16\ 15 U.S.C. 78k(a).
    \17\ 17 CFR 240.11a2-2T. Rule 11a2-2T generally states that a 
member of a national securities exchange (the ``initiating member'') 
may not effect a transaction on that exchange for its own account, 
the account of an associated person, or an account with respect to 
which it or an associated person thereof exercises investment 
discretion unless:
    (i) The transaction is executed on the floor, or through use of 
the facilities, of the exchange by a member (the ``executing 
member'') which is not an associated person of the initiating 
member;
    (ii) the order for the transaction is transmitted from off the 
exchange floor;
    (iii) neither the initiating member nor an associated person of 
the initiating member participates in the execution of the 
transaction at any time after the order for the transaction has been 
so transmitted; and
    (iv) in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person 
thereof exercises investment discretion, neither the initiating 
member nor any associated person thereof retains any compensation in 
connection with effecting the transaction; provided, however, that 
this condition shall not apply to the extent that the person or 
persons authorized to transact business for the account have 
expressly provided otherwise by written contract referring to 
Section 11(a) of the Act and this section executed on or after March 
15, 1978, by each of them and by such exchange member or associated 
person exercising investment discretion.
    \18\ The Exchange notes that there are other exemptions from the 
requirements of Section 11(a).
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2. Statutory Basis
    The Exchange believes that its proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \19\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \20\ 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 a limited priority rule regarding split-price 
transactions.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change, as amended, does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, it 
has become effective pursuant to Section 19(b)(3)(A) of the Act,\21\ 
and Rule 19b-4(f)(6) thereunder.\22\ At any time within 60 days of the 
filing of the proposed rule change the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\23\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ The effective date of the original proposal is April 28, 
2005, and the effective date of the amendment is May 23, 2005. For 
purposes of calculating the 30-day operative delay and the 60-day 
period within which the Commission may summarily abrogate the 
proposed rule change under Section 19(b)(3)(C) of the Act, the 
Commission considers that period to commence on May 23, 2005, the 
date the Exchange filed Amendment No. 1 to the proposed rule change. 
See 15 U.S.C. 78s(b)(3)(C).
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    A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally 
does not become operative prior to 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the five-day pre-filing notice requirement and 
the 30-day operative delay.\25\ The Commission believes that such 
waiver is consistent with the protection of investors and the public 
interest because it would allow the Phlx to implement immediately a 
rule similar to rules already in place at other options exchanges and 
thus would permit the Exchange to be better able to compete for larger-
sized orders. For these reasons, the Commission designates the proposed 
rule change, as amended, to be effective upon filing with the 
Commission.\26\
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    \24\ 17 CFR 240.19b-4(f)(6).
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Phlx-2005-28 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-28. 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

[[Page 35762]]

information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Phlx-2005-28 and should be submitted on or before July 
12, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3194 Filed 6-20-05; 8:45 am]
BILLING CODE 8010-01-P