[Federal Register Volume 72, Number 196 (Thursday, October 11, 2007)]
[Notices]
[Pages 57985-57986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-19937]



[[Page 57985]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56608; File No. SR-Phlx-2007-40]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
3, Relating to the Definition of ``Complex Trade''

October 3, 2007.
    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 May 21, 2007, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I, II, 
and III below, which Items have been prepared substantially by the 
Phlx. The Exchange filed Amendment No. 1 to the proposal on September 
4, 2007, and withdrew Amendment No. 1 on October 1, 2007. The Exchange 
filed Amendment Nos. 2 and 3 to the proposal on October 1, 2007, and 
withdrew Amendment No. 2 on the same day.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified by Amendment No. 3, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 3 replaces and supersedes the previously filed 
proposed rule change in its entirety.
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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 Phlx Rule 1066, ``Certain Types of 
Orders Defined,'' to revise the definition of ``synthetic option,'' and 
to amend Phlx Rule 1083(c) to change the definition of ``Complex 
Trade'' as it relates to the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage (the ``Linkage Plan'').\4\
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    \4\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating the Linkage 
proposed by the American Stock Exchange LLC, Chicago Board Options 
Exchange, Incorporated, and International Securities Exchange, LLC 
(``ISE''). See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000). Subsequently, Phlx, Pacific 
Exchange, Inc. (n/k/a NYSE Arca, Inc.), and 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).
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    The text of the proposed rule change is available at Phlx, the 
Commission's Public Reference Room, and http://www.phlx.com.

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, first, to amend Phlx 
Rule 1066(g) by adopting a new definition of ``synthetic option order'' 
to address strategies for synthetic option orders that often require a 
delta neutral position among the various components of the synthetic 
option order instead of the current requirement that such components 
offset one another on a one-for-one basis. The proposed definition is 
consistent with the definition of ``stock-option order'' adopted by 
other U.S. options exchanges.\5\ A further purpose of the proposed rule 
change is to add a certain type of synthetic option order (as described 
more fully below) to the definition of ``Complex Trade'' in Phlx Rule 
1083 so that such an order that resulted in a Trade-Through \6\ would 
qualify for an exception to Trade-Through and Satisfaction Order \7\ 
liability under the Exchange's Rules and for purposes of the Linkage 
Plan. The proposed changes to the definition of ``Complex Trade'' in 
Phlx Rule 1083 conform the Phlx's proposed definition of ``Complex 
Trade'' to the revised definition proposed by other Linkage Plan 
Participants.\8\
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    \5\ See, e.g., ISE Rule 722(a)(5)(i).
    \6\ ``Trade-Through'' means a transaction in an options series 
at a price that is inferior to the National Best Bid or Offer 
(``NBBO''), but shall not include a transaction that occurs at a 
price that is one minimum quoting increment inferior to the NBBO 
provided a Linkage Order is contemporaneously sent to each 
Participant Exchange disseminating the NBBO for the full size of the 
Participant Exchange's bid (offer) that represents the NBBO. See 
Phlx Rule 1083(t).
    \7\ A Satisfaction Order 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)(iii).
    \8\ See Securities Exchange Act Release No. 56555 (September 27, 
2007) (File Nos. SR-Amex-2007-65; SR-BSE-2007-45; SR-CBOE-2007-64; 
SR-ISE-2007-44; and SR-NYSEArca-2007-65).
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Synthetic Option Order
    Currently, Rule 1066(g), ``Synthetic Option,'' 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.
    The proposed rule change would re-define ``synthetic option order'' 
to mean an order to buy or sell a stated number of units of an 
underlying stock or a security convertible into the underlying stock 
(``convertible security'') coupled with either (i) the purchase or sale 
of option contract(s) on the opposite side of the market representing 
either the same number of units of the underlying stock or convertible 
security or the number of units of the underlying stock or convertible 
security necessary to create a delta neutral position; or (ii) the 
purchase or sale of an equal number of put and call option contracts, 
each having the same exercise price, expiration date, and each 
representing the same number of units of stock as, and on the opposite 
side of the market from, the stock or convertible security portion of 
the order.
Complex Trade
    The proposal would also amend Phlx Rule 1083 to revise the 
definition of ``Complex Trade'' for purposes of the Linkage Plan, which 
provides an exception to Trade-Through and Satisfaction Order liability 
when the transaction that caused the Trade-Through was the result of a 
``Complex Trade.'' \9\
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    \9\ See Phlx Rule 1085(b)(7). The Exchange notes that the other 
Participants in the Linkage Plan have filed proposed rule changes to 
adopt the same definition of ``Complex Trade.'' See supra, note 8.
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    Specifically, the Exchange proposes first to modify the portion of 
the definition of ``Complex Trade'' that deals with ratio spreads to 
mean the execution of an order in an options series in conjunction with 
the execution of one or more related orders(s) in different options 
series in the same underlying security occurring at or near the same 
time in a ratio that is equal to or greater than one-to-three (.333) 
and less than or equal to three-to-one (3.0) and for the purpose of 
executing a particular investment strategy.
    Secondly, the Exchange proposes to include a certain limited type 
of

[[Page 57986]]

synthetic option order in the definition of Complex Trade to afford an 
exception from Trade-Through liability in the case of the execution of 
a synthetic option order \10\ to buy or sell a stated number of units 
of an underlying stock or a security convertible into the underlying 
stock (``convertible security''), coupled with the purchase or sale of 
option contract(s) on the opposite side of the market representing 
either (A) the same number of units of the underlying stock or 
convertible security; or (B) the number of units of the underlying 
stock or convertible security necessary to create a delta neutral 
position, but in no case in a ratio greater than eight (8) option 
contracts per unit of trading of the underlying stock or convertible 
security established for that series by the Clearing Corporation.
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    \10\ The proposed text of Phlx Rule 1083(c)(ii) refers to 
``stock-option orders'' as synonymous with ``synthetic option 
orders'' in order to be consistent with the definitions proposed by 
the other Linkage Plan Participants.
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    The Exchange believes that the proposed rule change should provide 
consistency in the Exchange's rules with rules proposed by the other 
Linkage Plan Participants.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\12\ 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 modernizing the Exchange's rules.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 will 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

    No written comments were either 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 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 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-2007-40 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-2007-40. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
am and 3 pm. 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-2007-40 and should be submitted on 
or before November 1, 2007.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-19937 Filed 10-10-07; 8:45 am]
BILLING CODE 8011-01-P