[Federal Register Volume 70, Number 150 (Friday, August 5, 2005)]
[Notices]
[Pages 45480-45481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4229]



[[Page 45480]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52175; File No. SR-Phlx-2005-26]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Amendments to the Exchange's Trade-Through and Locked 
Markets Rules

July 29, 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 26, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in items I, II, and III below, which 
items have been prepared by the Phlx. On July 21, 2005, the Phlx filed 
Amendment No. 1 to the proposed rule change.\3\ 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\ See Form 19b-4 dated July 21, 2005 (``Amendment No. 1''). In 
Amendment No. 1, the Phlx revised the rule text to use terms 
consistent with Phlx's current rules and to be consistent with the 
language of the Plan for the Purpose of Creating and Operating an 
Intermarket Option Linkage, and made clarifying changes in the 
description of the substance of the proposed rule change and the 
purpose of statutory basis sections.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend two of its rules relating to the Plan 
for the Purpose of Creating and Operating an Intermarket Option Linkage 
(``Plan'').\4\ Specifically, Phlx Rule 1083(t) concerning the 
definition of ``Trade-Through'' would be amended to reflect that a 
Participant in the Plan (``Participant Exchange'') \5\ may trade an 
order at a price that is one-tick inferior to the National Best Bid or 
Offer (``NBBO'') if a Linkage Order \6\ is transmitted to the 
Participant Exchange(s) that are disseminating the NBBO to satisfy all 
interest at the NBBO price (``trade and ship'').
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    \4\ See Securities Exchange Act Release Nos. 44482 (June 27, 
2001), 66 FR 35470 (July 5, 2001) (Amendment to Plan to Conform to 
the Requirements of Securities Exchange Act Rule 11Ac1-7); 43573 
(November 16, 2000), 65 FR 70851 (November 28, 2000) (Order 
approving the Phlx as a Participant in the Plan); and 43086 (July 
28, 2000), 65 FR 48023 (August 4, 2000) (Approval of the Plan).
    \5\ Phlx Rule 1083(o) defines a ``Participant Exchange'' as a 
registered national securities exchange that is a party to the Plan.
    \6\ The term ``Linkage Order'' means an Immediate or Cancel 
order routed through the Linkage as permitted under the Plan. There 
are three types of Linkage Orders:
    (i) ``Principal Acting as Agent (``P/A'') Order,'' which is an 
order for the principal account of a specialist (or equivalent 
entity on another Participant Exchange that is authorized to 
represent Public Customer orders), reflecting the terms of a related 
unexecuted Public Customer order for which the specialist is acting 
as agent;
    (ii) ``Principal Order,'' which is an order for the principal 
account of an Eligible Market Maker and is not a P/A Order; and
    (iii) ``Satisfaction Order,'' which is an order sent through the 
Linkage to notify a member of another Participant Exchange of a 
Trade-Through and to seek satisfaction of the liability arising from 
that Trade-Through.
    See Phlx Rule 1083(k).
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    The Phlx further proposes to amend Phlx Rule 1086, Locked and 
Crossed Markets, to provide that the rule requiring an Eligible Market 
Maker \7\ or a member other than an Eligible Market Maker, that locks 
or crosses a market to unlock/uncross the market does not apply to the 
situation where an Eligible Market Maker or a member other than an 
Eligible Market Maker, books an order that would lock a market and 
contemporaneously sends through the Linkage \8\ a P/A Order or 
Principal Order to such other market for the full size of the bid or 
offer that was locked (``book and ship''). The text of the proposed 
rule change is available on the Phlx's Web site (http://www.phlx.com), 
at the Phlx's Office of the Secretary, and at the Commission's Public 
Reference Room.
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    \7\ Phlx Rule 1083(e) defines an ``Eligible Market Maker'' as, 
with respect to an Eligible Option Class, a specialist or Registered 
Options Trader (``RoT'') that:
    (i) Is assigned to, and is providing two-sided quotations in, an 
Eligible Option Class; (ii) is in compliance with the requirements 
of Rule 1087 (concerning the limitation on Principal Order access); 
(iii) is participating in the Exchange's AUTOM system in such 
Eligible Option Class; and (iv) has a clearing arrangement with a 
clearing firm that is a member of the exchange to which such 
specialist or ROT sends a Linkage Order.
    \8\ Phlx Rule 1083(j) defines ``Linkage'' as the systems and 
data communications network that link electronically the Participant 
Exchanges for the purposes specified in the Plan.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Phlx included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it 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 is to provide that (i) a 
Participant Exchange may trade an order at a price that is one-tick 
inferior to the NBBO provided a Linkage Order is contemporaneously 
transmitted to the NBBO market(s) to satisfy all interest at the NBBO 
price; and (ii) an Eligible Market Maker or a member other than an 
Eligible Market Maker may book an order that would lock a market if a 
Linkage Order is sent contemporaneously through the Linkage for the 
full size of the bid or offer that was locked.
i. Trade and Ship
    The proposed amendment to Phlx Rule 1083(t) would exclude the trade 
and ship concept from the definition of ``Trade-Through.'' \9\ Under 
trade and ship, any execution received from the NBBO market must 
(pursuant to agency obligations) be reassigned to the customer order 
that is underlying the Linkage Order that was transmitted to ``take 
out'' the NBBO market.
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    \9\ ``Trade-Through'' means a transaction in an options series 
at a price that is inferior to the NBBO. See Phlx Rule 1083(t).
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    Trade and Ship Example. Participant Exchange A is disseminating an 
offer of $2.00 for 100 contracts. Participant Exchange B is 
disseminating the national best offer of $1.95 for 10 contracts. No 
other market is at $1.95. Participant Exchange A receives a 100-
contract customer buy order to pay $2.00. Under this proposal, 
Participant Exchange A could execute 90 contracts (or 100 contracts) of 
the customer order at $2.00 provided Participant Exchange A 
simultaneously transmits a 10-contract P/A Order to Participant 
Exchange B to pay $1.95. Assuming an execution is obtained from 
Participant Exchange B, the customer would receive an execution to buy 
10 contracts at $1.95 and 90 contracts at $2.00 (if the customer order 
was originally filled in its entirety at $2.00, an adjustment would be 
required to provide the customer with the $1.95 price for 10 contracts 
reflecting the P/A Order execution). Under this proposal, this would 
not be deemed a Trade-Through.
ii. Book and Ship
    Currently, Phlx Rule 1086, Locked and Crossed Markets, requires an 
Eligible Market Maker or a member other than an Eligible Market Maker 
that

[[Page 45481]]

creates a locked market or a crossed market to unlock or uncross the 
market. The proposed amendment to Phlx Rule 1086 would provide that the 
provisions of this rule relating to locked markets would not apply in 
situations where an Eligible Market Maker or a member other than an 
Eligible Market Maker books an order that would lock a market and 
contemporaneously sends through the Linkage a P/A Order or Principal 
Order for the full size of the bid or offer that was locked.
    Book and Ship Example. Participant Exchange A is disseminating a 
$1.85-$2.00 market. Participant Exchange B is disseminating a $1.80-
$1.95 market. The $1.95 offer is for 10 contracts. No other market is 
disseminating an offer of $1.95. Participant Exchange A receives a 
customer order to buy 100 contracts at $1.95. Under this proposal, 
Participant Exchange A could book 90 contracts of the customer buy 
order at $1.95 provided Participant Exchange A simultaneously 
transmitted a 10-contract P/A Order to Participant Exchange B to pay 
$1.95. Assuming an execution is obtained from Participant Exchange B, 
the customer would receive an execution to buy 10 contracts and the 
rest of the customer's order will be displayed as a $1.95 bid on 
Participant Exchange A. The national best offer would likely be $2.00. 
As proposed, this would not be deemed a ``locked'' market for purposes 
of the Plan.
2. Statutory Basis
    The Phlx believes that the proposed rule change 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 the proposed 
rule change is designed to perfect the mechanism of a free and open 
market and a national market system, protect investors and the public 
interest, and promote just and equitable principles of trade.
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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 Phlx does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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

    No written comments were solicited or received.

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 the Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, 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-2005-26 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-2005-26. 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-2005-26 and should be submitted on or before August 26, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-4229 Filed 8-4-05; 8:45 am]
BILLING CODE 8010-01-P