[Federal Register Volume 70, Number 172 (Wednesday, September 7, 2005)]
[Notices]
[Pages 53263-53264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4855]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52344; File No. SR-Phlx-2005-33]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change, and Amendments No. 1 and 2 
Thereto, Relating to Sending Principal Orders Via the Intermarket 
Options Linkage

August 26, 2005.

I. Introduction

    On May 6, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change seeking to amend Phlx Rule 1087, Limitation on 
Principal Order \3\ Access, relating to the Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage (``Linkage Plan'') 
\4\ and related rules. On May 11, 2005, the Phlx submitted Amendment 
No. 1 to the proposed rule change. On July 8, 2005, the Exchange 
submitted Amendment No. 2. The proposed rule change, as amended, was 
noticed for comment in the Federal Register on July 27, 2005.\5\ The 
Commission received no comments on the proposed rule change. This order 
approves 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\ A ``Principal Order'' is an order for the principal account 
of an eligible market maker that does not relate to a customer order 
the market maker is holding. See Section 2(16)(b) of the Linkage 
Plan.
    \4\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
options market linkage (``Linkage'') proposed by the American Stock 
Exchange, LLC, Chicago Board Options Exchange, Inc., and the 
International Stock Exchange, Inc. See Securities Exchange Act 
Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). 
Subsequently, the Phlx, the Pacific Exchange, Inc. and the Boston 
Stock Exchange, Inc. joined the Linkage Plan. See Securities 
Exchange Act Release Nos. 43573 (November 16, 2000), 65 FR 70851 
(November 28, 2000); 43574 (November 16, 2000), 65 FR 70850 
(November 28, 2000); and 49198 (February 5, 2004), 69 FR 7029 
(February 12, 2004).
    \5\ See Securities Exchange Act Release No. 52072 (July 20, 
2005), 70 FR 43495 (July 27, 2005).
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II. Description

    The purpose of this proposed rule change, as amended, is to 
implement proposed Joint Amendment No. 17 to the Linkage Plan. Joint 
Amendment No. 17, together with this proposed rule change, would 
establish a de minimis exception to the ``80/20 Test'' set forth

[[Page 53264]]

in Section 8(b)(iii) of the Linkage Plan and Phlx Rule 1087.
    Section 8(b)(iii) of the Linkage Plan provides that Eligible Market 
Makers should send Principal Orders through the Linkage on a limited 
basis and not as a primary aspect of their business. The 80/20 Test 
implements this policy in the Linkage Plan and Phlx Rule 1087 by 
prohibiting a specialist or registered options trader (``ROT'') from 
sending Principal Orders in an eligible option class if, in the last 
calendar quarter, the specialist or ROT's Principal Order contract 
volume is disproportionate to the specialist or ROT's contract volume 
executed against customer orders in its own market.
    The Exchange believes that applying the 80/20 Test has resulted in 
anomalies for ROTs with limited volume in an eligible option class. In 
particular, if a ROT has very little overall trading volume in an 
option, the execution of one or two Principal Orders during a calendar 
quarter could result in the ROT failing to meet the 80/20 Test. This 
would then prohibit the ROT from using the Linkage to send Principal 
Orders in that options class for the following calendar quarter. The 
Exchange believes that it is not the intent of the Linkage Plan and 
Exchange rules to prohibit ROTs with limited volume from sending 
Principal Orders through the Linkage in these circumstances since such 
trading clearly is not ``a primary aspect of their business.'' 
Accordingly, the proposed rule change seeks to establish a de minimis 
exception from the 80/20 Test in Phlx Rule 1087 for specialists and 
ROTs that have total contract volume of less than 1,000 contracts in an 
option class for a calendar quarter.

III. Discussion

    After careful review, 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.\6\ 
In particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act \7\ 
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 believes 
that the proposed rule change will increase the availability of Linkage 
to members of the Participants by limiting the applicability of the 80/
20 Test in situations where market makers have minimal trading volume 
in a particular options class.
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    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that the Exchange does not believe that 
it is necessary to bar market makers with limited volume from sending 
Principal Orders through the Linkage, as such trading does not raise 
concerns that a member is sending such orders as ``a primary aspect of 
their business.'' The Commission believes that the de minimis exemption 
from the 80/20 Test proposed by the Exchange for market makers that 
have a total contract volume of less than 1,000 contracts in an options 
class for a calendar quarter should ensure that specialists and ROTs 
with relatively low volume in a particular options class can send a 
reasonable number of Principal Orders without being barred from using 
the Linkage by application of the 80/20 Test in the following calendar 
quarter.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-Phlx-2005-33), as amended, is 
approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-4855 Filed 9-6-05; 8:45 am]
BILLING CODE 8010-01-P