[Federal Register Volume 71, Number 105 (Thursday, June 1, 2006)]
[Notices]
[Pages 31251-31253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-8484]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53870; File No. SR-Phlx-2006-27]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to the Extension of the Exchange's Directed Order 
Flow Pilot Program

May 25, 2006.
    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, 2006, 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 Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal on an accelerated basis, for a pilot period through May 27, 
2007.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to extend, for an additional one year period, a 
pilot program concerning Exchange Rule 1080, Phlx Automated Options 
Market (AUTOM) \3\ and Automatic Execution System (AUTO-X), and 
Exchange Rule 1014, Obligations And Restrictions Applicable To 
Specialists And Registered Options Traders. Specifically the pilot 
program covers: (1) Exchange Rule 1080(l), Directed Orders, under which 
Exchange specialists, Streaming Quote Traders (``SQTs'') \4\ and Remote

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Streaming Quote Traders (``RSQTs'') \5\ trading on the Exchange's 
electronic options trading platform, Phlx XL,\6\ receive Directed 
Orders (as defined below); and (2) Exchange Rule 1014(g)(viii), which 
sets forth the trade allocation algorithm for electronically executed 
and allocated trades involving Directed Orders. This proposal is in 
connection with a pilot program that is currently scheduled to expire 
on May 27, 2006.\7\
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    \3\ AUTOM is the Exchange's electronic order delivery, routing, 
execution and reporting system, which provides for the automatic 
entry and routing of equity option and index option orders to the 
Exchange trading floor. Orders delivered through AUTOM may be 
executed manually, or certain orders are eligible for AUTOM's 
automatic execution features, AUTO-X, Book Sweep and Book Match. 
Equity option and index option specialists are required by the 
Exchange to participate in AUTOM and its features and enhancements. 
Option orders entered by Exchange members into AUTOM are routed to 
the appropriate specialist unit on the Exchange trading floor. AUTOM 
is today more commonly referred to as Phlx XL. See Exchange Rule 
1080.
    \4\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through an electronic interface 
with AUTOM via an Exchange approved proprietary electronic quoting 
device in eligible options to which such SQT is assigned. See 
Exchange Rule 1014(b)(ii)(A).
    \5\ An RSQT is a participant in the Exchange's electronic 
trading system, Phlx XL who has received permission from the 
Exchange to trade in options for his own account, and to generate 
and submit option quotations electronically from off the floor of 
the Exchange through AUTOM in eligible options to which such RSQT 
has been assigned.
    \6\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
    \7\ See Securities Exchange Act Release No. 51759 (May 27, 
2005), 70 FR 32860 (June 6, 2005) (SR-Phlx-2004-91) (``Pilot Program 
Approval Order'').
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    The text of the proposed rule change is set forth below. Brackets 
indicate deletions; italics indicates new text
* * * * *

Philadelphia Stock Exchange Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X)

    Rule 1080. (a)-(k) No change.
    (l) Directed Orders. For a one-year pilot period, beginning on May 
28, 2006 [the date of approval of this Rule by the Securities and 
Exchange Commission], respecting Streaming Quote Options traded on Phlx 
XL, specialists, RSQTs and SQTs may receive Directed Orders (as defined 
in this Rule) in accordance with the provisions of this Rule 1080(l).
* * * * *

Obligations And Restrictions Applicable To Specialists And Registered 
Options Traders

    Rule 1014. (a)-(f) No change.
    (g)(i)-(vii) No change.
    (viii) For a one year pilot period, beginning on May 28, 2006 [the 
date of approval of this Rule by the Securities and Exchange 
Commission], Directed Orders (as defined in Rule 1080(l)(i)(A)) that 
are executed electronically shall be automatically allocated as 
follows:
* * * * *

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 Exchange 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 III below. The Exchange 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 Exchange proposes to extend, for an additional one-year period, 
a pilot program that allows specialists, SQTs, and RSQTs assigned in 
options that trade on Phlx XL to receive directed orders (``Directed 
Orders'') \8\ from a member or member organization (``Order Flow 
Provider'' or ``OFP'') \9\ that submits, as agent, the customer order 
to the Exchange through AUTOM, and establishes a trade allocation 
algorithm for Directed Orders that are electronically executed and 
allocated to reward such Directed Specialists, SQTs and RSQTs with a 
participation guarantee for attracting such order flow to the 
Exchange.\10\ The proposed rule is subject to a pilot program scheduled 
to expire on May 27, 2006. The Exchange proposes that the extended 
pilot expire on May 27, 2007.
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    \8\ See Exchange Rule 1080(l)(i)(A).
    \9\ See Exchange Rule 1080(l)(i)(B).
    \10\ See Exchange Rule 1080(1). The word ``Directed'' modifies 
all three; that is, it is referring to a Directed Specialist, 
Directed SQT and Directed RSQT.
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    Pursuant to Rule 1080(l), OFPs must transmit Directed Orders to a 
particular specialist, SQT or RSQT through AUTOM. If the Exchange's 
disseminated best bid or offer is at the National Best Bid or Offer 
when the Directed Order is received, the Directed Order is 
automatically executed on Phlx XL and allocated to the orders and 
quotes represented in the Exchange's quotation. A Directed Specialist, 
SQT or RSQT will receive a participation allocation pursuant to Rule 
1014(g)(viii) if the Directed Specialist, SQT or RSQT was quoting at 
the NBBO at the time that the Directed Order was received.\11\ 
Otherwise, the automatic execution will be allocated to those 
quotations and orders at the NBBO pursuant to Rule 1014(g)(vii).\12\ 
When the Exchange is not quoting at the NBBO, the Directed Order will 
be manually handled by the specialist in accordance with the Exchange's 
rules.
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    \11\ See Exchange Rule 1080(l)(ii).
    \12\ See Exchange Rule 1080(l)(iii).
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    The Exchange believes that the pilot program rewards specialists, 
SQTs and RSQTs for actively engaging in marketing activities and 
establishing relationships with OFPs that generate Directed Orders sent 
to the Exchange by such OFPs. The Exchange believes that the pilot 
program will result in additional order flow to the Exchange, thus 
adding depth and liquidity to the Exchange's markets, and enabling the 
Exchange to continue to compete effectively with other options 
exchanges for order flow.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \13\ in general, and furthers the 
objectives of section 6(b)(5) of the Act \14\ 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 permitting specialists, SQTs, and 
RSQTs trading options on Phlx XL to receive Directed Orders, and by 
encouraging the capture of order flow on the Exchange by rewarding 
Directed Order recipients with a participation guarantee in trades 
involving Directed Orders.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The Exchange has not solicited, and does not intend to solicit 
comments on the proposed rule change.

III. 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 and whether the pilot time frame is 
appropriate. Comments may be submitted by any of the following methods:

[[Page 31253]]

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-2006-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2006-27. 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 Exchange. 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-2006-27 and should be submitted on or before June 
22, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    The Exchange has asked the Commission to approve the proposed rule 
change on an accelerated basis for an additional year so that the pilot 
program may continue uninterrupted. After careful consideration, the 
Commission finds that the proposed rule change is consistent with the 
requirements of section 6 of the Act \15\ and the rules and regulations 
thereunder applicable to a national securities exchange \16\, and, in 
particular, the requirements of section 6(b)(5) of the Act.\17\ Section 
6(b)(5) requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, 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. The Commission notes that the 
current pilot was approved on a one-year basis to give the Commission 
an opportunity to evaluate the impact of the pilot program on the 
options markets to determine whether it would be beneficial to 
customers and to the options markets as a whole before approving any 
request for permanent approval of the pilot program. The Commission 
believes that a one-year extension of the pilot period would provide 
the Commission with additional time to continue evaluate the Exchange's 
Directed Order program.
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    \15\ 15 U.S.C. 78f.
    \16\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \17\ 15.U.S.C. 78f(b)(5).
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    The Exchange has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
believes that granting accelerated approval of the proposed rule change 
would allow the pilot program to continue without disruption while the 
Commission and the Exchange continue to review the pilot program's 
impact on the options market. Accordingly, the Commission finds good 
cause, consistent with section 19(b)(2) of the Act,\18\ for approving 
the proposed rule change prior to the thirtieth day after publication 
of notice thereof in the Federal Register.
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    \18\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Phlx-2006-27), which 
institutes the pilot program through May 27, 2007, is hereby approved 
on an accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-8484 Filed 5-31-06; 8:45 am]
BILLING CODE 8010-01-P