[Federal Register Volume 70, Number 150 (Friday, August 5, 2005)]
[Notices]
[Pages 45481-45483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4231]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52140; File No. SR-Phlx-2005-31]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Priority in 
Trades Involving Synthetic Option Orders

July 27, 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 April 29, 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 Phlx. On June 10, 2005, 
Phlx filed Amendment No. 1 to the proposed rule change.\3\ On July 15, 
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 proposed rule change, as amended, on an accelerated 
basis, for a pilot period expiring on December 31, 2005.
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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 technical change to 
the filing.
    \4\ Amendment No. 2 replaced the original filing in its 
entirety.

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[[Page 45482]]

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

    Phlx proposes to amend Phlx Rule 1033(e) to afford priority to 
synthetic option orders\5\ traded in open outcry over bids and offers 
in the trading crowd but not over bids and offers of public customers 
on the limit order book and not over crowd participants willing to 
participate in the synthetic option order at the net debit or credit 
price. The proposed rule change, as amended, would apply to orders for 
100 contracts or more and would be subject to a pilot program expiring 
on December 31, 2005. The text of the proposed rule change is set forth 
below. Italics indicate new text:
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    \5\ Phlx Rule 1066(g) defines a synthetic option order as an 
order to buy or sell a stated number of option contracts and buy or 
sell the underlying stock or Exchange-Traded Fund Share in an amount 
that would offset (on a one-for-one basis) the option position. For 
example:
    (1) Buy-write: an example of a buy-write is an order to sell one 
call and buy 100 shares of the underlying stock or Exchange-Traded 
Fund Share.
    (2) Synthetic put: an example of a synthetic put is an order to 
buy one call and sell 100 shares of the underlying stock or 
Exchange-Traded Fund Share.
    (3) Synthetic call: an example of a synthetic call is an order 
to buy (or sell) one put and buy (or sell) 100 shares of the 
underlying stock or Exchange-Traded Fund Share.
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* * * * *

Bids and Offers--Premium

    Rule 1033. (a)-(d) No change.
    (e) Synthetic Option Orders. When a member holding a synthetic 
option order, as defined in Rule 1066, and bidding or offering on the 
basis of a total credit or debit for the order has determined that the 
order may not be executed by a combination of transactions at or within 
the bids and offers established in the marketplace, then the order may 
be executed as a synthetic option order at the total credit or debit 
with one other member, provided that, the member executes the option 
leg at a better price than the established bid or offer for that option 
contract, in accordance with Rule 1014. Subject to a pilot expiring 
December 31, 2005, synthetic option orders in open outcry, in which the 
option component is for a size of 100 contracts or more, have priority 
over bids (offers) of crowd participants who are bidding (offering) 
only for the option component of the synthetic option order, but not 
over bids (offers) of public customers on the limit order book, and not 
over crowd participants that are willing to participate in the 
synthetic option order at the net debit or credit price.
    (f)-(i) No change.
* * * * *

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 on the proposed rule 
change. 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
    Phlx proposes to amend rules that would facilitate the execution of 
synthetic option orders \6\ that are represented in the crowd, which 
the Exchange believes may be difficult to execute without a limited 
exception to current Exchange priority rules by virtue of the stock 
component. Currently, Phlx Rule 1033(e) provides that if an Exchange 
member holding a synthetic option order and bidding or offering on a 
net debit or credit basis determines that such synthetic option order 
cannot be executed at the net debit or credit against the established 
bids and offers in the crowd, such Exchange member may execute the 
synthetic option order with one other crowd participant, provided that 
the option portion of the synthetic option order is executed at a price 
that is better than the established bid or offer for the option. Thus, 
if the desired net debit or credit amount cannot be achieved by way of 
executing against the established bids and offers in the crowd, the 
member may elect to trade at the desired net debit or credit amount 
with one other member, provided that there is price improvement for the 
option component of the synthetic option order.
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    \6\ Id.
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    The Exchange proposes to amend Phlx Rule 1033(e) to afford 
synthetic option orders priority over bids or offers of the trading 
crowd but not over bids or offers of public customers on the limit 
order book and not over crowd participants that are willing to 
participate in the synthetic option order at the net debit or credit 
price. The effect of the proposal is that a crowd participant bidding 
or offering for the synthetic option order would have priority over 
other crowd participants that are bidding or offering only for the 
option component of the order. Currently, such crowd participant does 
not have such priority. The proposal would apply only to synthetic 
option orders of 100 contracts or more.
    In addition, the proposal provides that Exchange members bidding 
and offering for synthetic option orders of 100 contracts or more would 
not have priority over bids and offers of public customers on the limit 
order book.\7\ Therefore, if Exchange members of the trading crowd wish 
to trade a synthetic option order that is marketable against public 
customer orders on the limit order book, public customers would have 
priority. Multiple public customer orders at the same price would be 
accorded priority based on time.
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    \7\ See Phlx Rule 1080, Commentary .02.
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    The Exchange believes that the proposed rule change, as amended, 
providing a limited exception to the Exchange's priority rules only 
with respect to controlled accounts \8\ competing at the same price, 
should enable Phlx Floor Brokers representing synthetic option orders 
to provide best executions to customers placing such orders. The 
Exchange also believes that the proposed rule change, as amended, 
should enable the Exchange to provide liquid markets and compete for 
order flow in such orders.
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    \8\ A controlled account includes any account controlled by or 
under common control with a broker-dealer. Customer accounts are all 
other accounts. 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).
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    As stated above, the proposed rule change would apply only to 
synthetic option orders in which the option component is for a size of 
100 contracts or more that are represented in the trading crowd in open 
outcry, and would be subject to a pilot program expiring on December 
31, 2005.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ 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 adopting a

[[Page 45483]]

limited exception to the Exchange's priority rules concerning synthetic 
option orders.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 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-2005-31 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-31. 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 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-2005-31 and should be submitted on or before August 26, 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 is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange,\11\ and, in particular, with the requirements of section 6(b) 
of the Act \12\ 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,\13\ which requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market, and to protect investors and 
the public interest. The Commission notes that the priority rules with 
respect to the execution of synthetic option orders on other options 
exchanges are similar to the Phlx's proposed rule change.\14\ In 
general, such rules serve to reduce the risk of incomplete or 
inadequate executions of synthetic option orders by allowing the 
synthetic option orders to have priority over bids and offers of crowd 
participants who are bidding or offering only for the option component 
of the synthetic option order but only subject to restrictions such as 
those proposed by Phlx. For example, the proposed rule change would 
continue to protect the priority of public customer orders on the limit 
order book. In addition, Phlx's proposed rule change protects the 
priority of crowd participants who are willing to participate in the 
synthetic option order at the net debit or credit price.
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    \11\ 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).
    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ See, e.g., Securities Exchange Act Release Nos. 20294 
(October 17, 1983), 48 FR 49114 (October 24, 1983) (approving SR-
CBOE-83-4); 47959 (May 30, 2003), 68 FR 34441 (June 9, 2003) 
(approving SR-CBOE-2002-05); 44955 (October 18, 2001), 66 FR 53819 
(October 24, 2001) (approving SR-ISE-2001-18); and 46646 (October 
11, 2002), 67 FR 64428 (October 18, 2002) (approving SR-ISE-2002-
20).
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    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act,\15\ for approving the proposed rule change, as amended, 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 
proposed rule change is similar to Chicago Board Options Exchange Rule 
6.45A(b)(iii) and International Stock Exchange Rule 722,\16\ which were 
previously approved by the Commission after notice and comment, and 
therefore does not raise any new regulatory issues.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ See supra note 14.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\17\ that the proposed rule change, as amended (SR-Phlx-2005-31), is 
hereby approved on an accelerated basis for a pilot period to expire on 
December 31, 2005.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-4231 Filed 8-4-05; 8:45 am]
BILLING CODE 8010-01-P