[Federal Register Volume 70, Number 152 (Tuesday, August 9, 2005)]
[Notices]
[Pages 46255-46257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4272]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52187; File No. SR-Phlx-2005-32]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Participation Guarantees for Floor Brokers Representing 
Crossing and Facilitation Orders

August 1, 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 July 22, 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. The Exchange 
filed the proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ and 
Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 Exchange Rule 1064 concerning the 
guaranteed participation to which a Floor Broker is entitled with 
respect to equity options when seeking to execute crossing and 
facilitation transactions. Under the current rule, after requesting a 
market from the trading crowd, a Floor Broker seeking to cross an order 
for equity options that he or she is holding with another order, or, in 
the case of a public customer order, with a facilitation order from the 
firm from which the public customer order originated, is entitled to a 
guaranteed participation of 20% when the order trades at a price that 
matches the price given by the trading crowd in response to the initial 
request for a market, and 40% when the order trades at a price that 
improves upon that price. The proposed rule change would entitle the 
Floor Broker to a 40% guarantee in both cases. The proposed rule change 
would also clarify that the corresponding guaranteed participation to 
which a specialist is entitled would continue to be a percentage that, 
combined with the percentage that the Floor Broker crossed, is no more 
than 40% of the original order. The text of amended Exchange Rule 1064 
is set forth below. Brackets indicate deletions; italics indicate new 
text.

Crossing, Facilitation and Solicited Orders

    Rule 1064. (a)-(d) No change.
    Commentary:
    .01 No change.
    .02 Firm Participation Guarantees.
    (i)-(ii) No change.
    (iii) The percentage of the order which a Floor Broker is entitled 
to cross, after all public customer orders that were (1) on the limit 
order book and then (2) represented in the trading crowd at the time 
the market was established have been satisfied, is determined as 
follows:
    (A) With respect to orders for equity options, [: (i) 2] 40% of the 
remaining contracts in the order if the order is traded at or between 
the best bid or offer given by the crowd in response to the Floor 
Broker's initial request for a market [; or (ii) 40% of the remaining 
contracts in the order if the order is traded between the best bid or 
offer given by the crowd in response to the Floor Broker's initial 
request for a market].
    (B) With respect to orders for index options, 20% of the remaining 
contracts in the order. (iv)-(v) No change.
    (vi) If a trade pursuant to this Commentary occurs when the 
specialist is on parity with one or more controlled accounts, then the 
Enhanced Specialist Participation which is established pursuant to 
Exchange Rule 1014(g)(ii)-(iv) shall apply only to the number of 
contracts remaining after the following orders have been satisfied: 
Those public customer orders which trade ahead of the cross 
transaction, and any portion of an order being crossed against the 
original order being represented by the Floor Broker.
    (A) Respecting orders for index options, [T] the Enhanced 
Specialist Participation may only be 20% of the original order after 
customer orders have been executed for orders crossed pursuant to this 
paragraph (vi) unless

[[Page 46256]]

the Floor Broker has chosen to cross less than its 20% entitlement, in 
which case the Enhanced Specialist Participation will be a percentage 
that combined with the percentage the firm crossed is no more than 40% 
of the original order.
    (B) Respecting orders for equity options, the specialist shall not 
be entitled to receive the Enhanced Specialist Participation after 
customer orders have been executed for orders crossed pursuant to this 
paragraph (vi) unless the Floor Broker has chosen to cross less than 
its 40% entitlement, in which case the Enhanced Specialist 
Participation will be a percentage that combined with the percentage 
the firm crossed is no more than 40% of the original order.
    If the trade occurs at a price other than the specialist's 
disseminated bid or offer, the specialist is entitled to no guaranteed 
participation.
    (vii)-(x) No change.
    .03 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, 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 enable the Exchange 
to remain competitive with other exchanges by revising the current 
participation guarantee applicable to Exchange Floor Brokers that 
engage in crossing and facilitation transactions in equity options 
traded on the Exchange. Currently, Exchange Rule 1064, Commentary 
.02(iii) provides that, respecting orders for equity options, a Floor 
Broker is entitled to a participation guarantee of 20% of the remaining 
contracts (after all public customer orders that were on the limit 
order book and represented in the trading crowd at the time the market 
was established have been satisfied) if the order is traded at the best 
bid or offer (``BBO'') given by the crowd in response to the Floor 
Broker's initial request for a market, or 40% of the remaining 
contracts if the order is traded between the best bid or offer given by 
the crowd in response to the Floor Broker's initial request for a 
market.
    The proposal would provide that, respecting orders for equity 
options, the Floor Broker is entitled to cross, after all public 
customer orders that were on the limit order book and represented in 
the trading crowd at the time the market was established have been 
satisfied, 40% of the remaining contracts in the order if the order is 
traded at or between the best bid or offer given by the crowd in 
response to the Floor Broker's initial request for a market.
    Current Commentary .02(vi) to Rule 1064 entitles the specialist to 
an Enhanced Specialist Participation \5\ with respect to orders for 
equity options of 20% of the original order size when the Floor Broker 
crosses 20% of the order at the trading crowd's price. If the Floor 
Broker improves upon the crowd's price and takes its 40% entitlement, 
the specialist is not entitled to an Enhanced Specialist Participation. 
The proposed amendments to Commentary .02(vi) to the rule would clarify 
that the specialist also may not be entitled to an Enhanced Specialist 
Participation if the Floor Broker crosses the order at the trading 
crowd's price, and that, respecting orders for both index and equity 
options, the Enhanced Specialist Participation when combined with the 
amount of the order the Floor Broker crosses may not exceed 40%.
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    \5\ Exchange Rules 1014(g)(ii)-(iv) establish the Enhanced 
Specialist Participation.
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    Respecting index options, the Enhanced Specialist Participation 
would remain unchanged. The specialist would, in most instances, be 
entitled to receive an Enhanced Specialist Participation of 20%,\6\ 
because the Floor Broker may only cross 20% of the order regardless of 
the price.\7\ Respecting equity options, the effect of the proposed 
rule change would be that specialists are generally not entitled to the 
Enhanced Specialist Participation (because the Floor Broker typically 
would take its 40% guaranteed amount) unless the Floor Broker crosses 
less than 40% of the order. The proposed rule text would clearly 
indicate this limitation.
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    \6\ See current Exchange Rule 1064, Commentary .02(vi) and 
proposed Exchange Rule 1064, Commentary .02(vi)(A).
    \7\ See Exchange Rule 1064, Commentary .02(iii)(B).
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    The Exchange believes that the proposed rule change will enable the 
Exchange to compete for order flow in crossing and facilitation orders 
with other options exchanges that currently have similar rules in 
place.\8\
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    \8\ See Chicago Board Options Exchange, Incorporated Rule 
6.74(d), American Stock Exchange LLC Rule 950(d), Commentary .02, 
and Pacific Exchange, Inc. Rule 6.47(b).
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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 
promote just and equitable principles of trade, 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, by providing Floor Brokers and Exchange crowd participants 
with rules setting forth guidelines regarding the percentage of 
crossing and facilitation orders in equity and index options to which 
Floor Brokers are entitled.
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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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change 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 after the date of filing or such shorter time as the Commission 
may designate, it has become effective pursuant to Section 19(b)(3)(A) 
of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\13\ 
However, Rule 19b-4(f)(6)(iii)\14\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The

[[Page 46257]]

Exchange provided the Commission with written notice of its intent to 
file this proposed rule change at least five business days prior to the 
date of filing the proposed rule change. In addition, the Exchange has 
requested that the Commission waive the 30-day pre-operative delay. The 
Commission believes that waiving the 30-day pre-operative delay is 
consistent with the protection of investors and the public interest 
because it would allow the Exchange to remain competitive with other 
exchanges that currently have similar rules in effect. For the reasons 
stated above, the Commission designates the proposal to become 
operative immediately.\15\
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ Id.
    \15\ For purposes only of waiving the pre-operative delay for 
this proposal, the Commission has considered the impact of the 
proposed rule on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    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 the furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the 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-2005-32 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-2005-32. 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 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-2005-32 and should be submitted on or before August 
30, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-4272 Filed 8-8-05; 8:45 am]
BILLING CODE 8010-01-P