[Federal Register Volume 75, Number 142 (Monday, July 26, 2010)]
[Notices]
[Pages 43597-43606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-18159]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62519; File No. SR-Phlx-2010-79]


Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing of Proposed Rule Change Relating to the Establishment of NASDAQ 
OMX PSX as a Platform for Trading NMS Stocks

July 16, 2010.
    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 June 8, 2010, NASDAQ OMX PHLX, Inc. (the ``Exchange'' or ``PHLX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III 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.
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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 the 
Substance of the Proposed Rule Change

    PHLX is filing a proposed rule change to establish NASDAQ OMX PSX, 
a new electronic platform for trading NMS stocks. The text of the 
proposed rule change is available at http://nasdaqomxphlx.cchwallstreet.com, on the Commission's Web site at http://www.sec.gov, at the Exchange's principal office, and at the 
Commission's Public Reference Room. PHLX will implement the proposed 
rule change as soon as practicable following approval by the 
Commission.

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 IV 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
a. Introduction and Background
    PHLX proposes to introduce NASDAQ OMX PSX (``PSX'' or the 
``System''), a new fully integrated order display and execution system 
for all NMS stocks (as defined in SEC Rule 600(b)(47) under Regulation 
NMS).\3\ Like the NASDAQ Market Center and the NASDAQ OMX BX Equities 
System, PSX will be an open-access, fully electronic system that 
accommodates diverse business models and trading preferences, using 
technology to aggregate and display liquidity and make it available for 
execution. PSX will not list stocks, but rather will trade only stocks 
listed on other exchanges.
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    \3\ 17 CFR 242.600(b)(47).
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    PSX will allow PSX Participants to enter unlimited orders at 
multiple price levels. Orders of all PSX Participants will be 
integrated and displayed via data feeds to Participants and other data 
subscribers. PSX Participants will be able to access the aggregated 
trading interest of all other PSX Participants in accordance with non-
discretionary order execution algorithms. In contrast with most 
markets, which use a price-time algorithm, however, PSX will use a 
price-display-pro rata size algorithm. Incoming orders will be 
allocated first to resting orders with the best price. As among orders 
with the same price, incoming orders will be allocated first to resting 
Displayed Orders and then to resting Non-Displayed Orders. As among 
Displayed Orders at the same price or Non-Displayed Orders at the same 
price, incoming orders will be

[[Page 43598]]

allocated among resting orders pro rata based on the size of the 
resting orders.\4\
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    \4\ The allocation methodology for odd-lot orders is discussed 
in greater detail below.
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    Existing PHLX rules that apply to members and member organizations 
with respect to their activities on PSX are listed in Rule 3202. In 
addition, two existing PHLX rules, Rule 160 and Rule 188, are being 
deleted and their content moved into the new 3300 series.\5\
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    \5\ Proposed Rules 3301(a), 3305(a)(1), 3309.
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b. System Access
    PSX will be open to all member organizations of PHLX that comply 
with the rules governing PSX.\6\ There will not be separate classes of 
membership. Specifically, unlike the NASDAQ Market Center, PSX will not 
have a separate class of market makers. Accordingly, PHLX expects that 
all PSX Participants will participate on consistent terms by entering 
orders into PSX for the purpose of posting available liquidity and 
accessing that liquidity.
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    \6\ Through a separate filing, PHLX will amend Rule 604 to 
require all member organizations trading on PSX to register 
representatives and principals in accordance with rules similar to 
those governing registration of associated persons of members of the 
NASDAQ Stock Market. PHLX will, at a later date, amend its rules 
governing registration of associated persons of member organizations 
that trade options but not cash equities through PHLX, to reflect 
consistent registration standards being developed by various self-
regulatory organizations in consultation with the Commission.
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    As provided in proposed Rule 3223, however, PSX will make its 
facilities available to any electronic communications network (``ECN'') 
or alternative trading system (``ATS'') that (i) wishes to use PSX as a 
means to display the best prices and sizes of orders entered into the 
ECN or ATS by subscribers of the ECN or ATS, if the ECN or ATS so 
chooses or is required by SEC Rule 301(b)(3) to display a subscriber's 
order, and (ii) allow any PHLX member organization the electronic 
ability to effect a transaction with such priced orders that is 
equivalent to the ability to effect a transaction with other orders 
displayed by PSX. Any such ECN or ATS would be required to comply with 
the terms and conditions of PSX Rule 3223.\7\
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    \7\ Specifically, the ATS or ECN must be a PHLX member 
organization, enter into and comply with applicable agreements, 
agree that PHLX may disseminate the ECN's or ATS's best priced 
orders, demonstrate that it is compliance with applicable regulatory 
requirements, and accept automated executions against orders that it 
enters into the System.
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    Participants will gain access to PSX via direct or indirect 
electronic linkages utilizing the Financial Information Exchange, or 
FIX, protocol, as well as proprietary RASH and OUCH protocols. Each 
protocol is already used and widely accepted by market participants in 
the NASDAQ Market Center and the NASDAQ OMX BX Equities System, and may 
be used by Participants for order entry, modification and cancellation, 
and message transmittal for all securities traded through PSX. 
Participants will have the ability to establish connectivity to PSX 
directly or through third-party connectivity providers, including a 
range of extranets and service bureaus. All of the communications 
protocols will be publicly available to allow Participants and services 
bureaus to develop their own front-end software.
    As provided in proposed Rule 3211, Participants must execute all 
applicable agreements with PHLX (including the NASDAQ OMX U.S. Services 
Agreement \8\); maintain membership in, or access arrangements with a 
participant of, a clearing agency registered with the Commission that 
maintains facilities through which PSX compared trades may be settled; 
comply with all applicable rules and operating procedures of PHLX and 
the Commission in the use of the System; maintain the physical security 
of the equipment located on the Participant's premises to prevent the 
improper use or access to PHLX systems, including unauthorized entry of 
information into PSX; accept and settle each PSX trade that PSX 
identifies as having been effected by such Participant, or if 
settlement is to be made through another clearing member, guarantee the 
acceptance and settlement of such identified PSX trade by the clearing 
member on the regularly scheduled settlement date; and input accurate 
information into the System, including, but not limited to, whether the 
member organization acted in a principal, agent, or riskless principal 
capacity. Each PSX Participant will be under a continuing obligation to 
inform PHLX of noncompliance with any of its registration requirements, 
and must make such reports to PHLX as it may require.\9\ In addition, 
each Participant must provide such information relating to a specific 
PHLX rule, SEC rule, or term of a joint industry plan as PHLX 
regulatory staff may request.\10\ PHLX may impose on Participants such 
temporary restrictions on order entry as PHLX may determine to be 
necessary to protect the integrity of PSX or other PHLX systems.\11\ In 
addition to proposed rules specific to the operation of PSX, member 
organizations must comply with existing PHLX rules governing member 
conduct, to the extent that they are relevant to trading on PSX. PHLX 
rules applicable to activities of member organizations on PSX are 
listed in proposed rule 3202.
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    \8\ http://www.nasdaqtrader.com/content/AdministrationSupport/AgreementsTrading/nasdaq_access_agreement.pdf.
    \9\ Proposed Rules 3211(b), 3216.
    \10\ Proposed Rule 3225.
    \11\ Proposed Rule 3211(c).
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    Failure by a PSX Participant to comply with any of the rules or 
registration requirements applicable to PSX shall subject such 
Participant to censure, fine, suspension or revocation of its 
registration as a PSX Participant, or any other fitting penalty under 
the rules of the Exchange.\12\ In accordance with the procedures of 
PHLX's Disciplinary Rules (Rules 960.1 through 960.12), PHLX may 
suspend, condition, limit, prohibit or terminate the authority of a 
Participant to enter orders in one more securities for violations of 
applicable requirements or prohibitions, or may terminate access to the 
System if a Participant fails to meet standards of eligibility or to 
pay for services rendered.\13\
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    \12\ Proposed Rule 3228(a).
    \13\ Proposed Rules 3221, 3222.
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    PHLX disclaims liability for any losses, damages or other claims 
arising from the use of PSX; however, it may compensate users for 
losses directly resulting from PSX's actual failure to correctly 
process an order, message, or other data, in an amount not to exceed 
the larger of $500,000 per month or the amount of recovery obtained by 
PHLX under any applicable insurance policy.\14\
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    \14\ Proposed Rule 3226. Accordingly, existing PHLX Rule 652(a) 
is not applicable to activity on PSX.
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    When it commences operation, PSX will allow sponsored access in 
accordance with rules identical to those currently in effect at the 
NASDAQ Stock Market (``NASDAQ''), which are reflected in proposed Rule 
3211(d). When NASDAQ implements recently approved rules governing 
sponsored access,\15\ PSX will adopt and implement identical rules to 
govern sponsored access. Under the current rules, a Sponsored 
Participant may obtain authorized access to PSX only if such access is 
authorized in advance by one or more member organizations as follows:
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    \15\ Securities Exchange Act Release No. 61345 (January 13, 
2010), 75 FR 32631 (January 20, 2010) (SR-NASDAQ-2008-104). If 
NASDAQ's rules are superseded by rules adopted by the Commission, 
then both NASDAQ and PSX will operate in accordance with such rules.
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     Sponsored Participants must enter into and maintain 
customer agreements with one or more Sponsoring Member

[[Page 43599]]

Organizations, establishing proper relationship(s) and account(s) 
through which the Sponsored Participant may trade on PSX. Such customer 
agreement(s) must incorporate the following Sponsorship Provisions:
     The Sponsoring Member Organization must acknowledge and 
agree that:
     All orders entered by a Sponsored Participant and any 
person acting on behalf of or in the name of such Sponsored Participant 
and any executions occurring as a result of such orders are binding in 
all respects on the Sponsoring Member Organization; and
     The Sponsoring Member Organization is responsible for any 
and all actions taken by a Sponsored Participant and any person acting 
on behalf of or in the name of such Sponsored Participant.
     A Sponsoring Member Organization must comply with the PHLX 
Certificate of Incorporation, Bylaws, Rules and procedures with regard 
to PSX, and a Sponsored Participant must comply with the PHLX 
Certificate of Incorporation, Bylaws, Rules and procedures with regard 
to PSX, as if the Sponsored Participant were a PHLX Member 
Organization.
     A Sponsored Participant must maintain, keep current and 
provide to the Sponsoring Member Organization a list of individuals 
authorized to obtain access to PSX on behalf of the Sponsored 
Participant.
     A Sponsored Participant must familiarize its authorized 
individuals with all of the Sponsored Participant's obligations and 
assure that they receive appropriate training prior to any use or 
access to PSX.
     A Sponsored Participant may not permit anyone other than 
authorized individuals to use or obtain access to PSX.
     A Sponsored Participant must take reasonable security 
precautions to prevent unauthorized use or access to PSX, including 
unauthorized entry of information into PSX, or the information and data 
made available therein. A Sponsored Participant must understand and 
agree that it is responsible for any and all orders, trades and other 
messages and instructions entered, transmitted or received under 
identifiers, passwords and security codes of authorized individuals, 
and for the trading and other consequences thereof.
     A Sponsored Participant must acknowledge its 
responsibility to establish adequate procedures and controls that 
permit it to effectively monitor its employees', agents', and 
customers' use and access to PSX for compliance with the terms of the 
Sponsorship Provisions.
     A Sponsored Participant must pay when due all amounts, if 
any, payable to the Sponsoring Member Organization, PSX, or any other 
third parties that arise from the Sponsored Participant's access to and 
use of PSX. Such amounts include, but are not limited to applicable 
exchange and regulatory fees.
     The Sponsoring Member Organization must provide PHLX with 
a Notice of Consent acknowledging its responsibility for the orders, 
executions and actions of its Sponsored Participants.
     The Sponsored Participant and its Sponsoring Member 
Organization must have entered into and maintained a User Agreement 
with PHLX. The Sponsoring Member Organization must designate the 
Sponsored Participant by name in its User Agreement as such.
c. Trading of Securities Pursuant to Unlisted Trading Privileges
    With the launch of PSX, PHLX will not resume its listings business. 
PSX will, however, trade all NMS stocks on an unlisted trading 
privileges (``UTP'') basis; accordingly, all securities that it trades 
will be registered under Section 12(a) of the Act unless they are 
subject to an exemption by the Commission that allows them to be listed 
on a national securities exchange in the absence of such registration. 
As provided by SEC Rule 12f-5,\16\ PHLX may extend unlisted trading 
privileges to any security for which PHLX has in effect rules providing 
for transactions in such class or type of security.\17\ Accordingly, to 
support UTP trading of all NMS stocks, existing PHLX Rule 803 is being 
amended in several respects. First, Rule 803(o) will clearly state that 
PHLX will not list any securities, and that provisions of Rules 800 
through 868 that permit listings will not be effective until PHLX files 
a proposed rule change under Section 19(b)(2) of the Act to amend its 
rules to make any changes needed to comply with SEC Rule 10A-3 \18\ and 
to incorporate additional qualitative listing standards, and such 
proposed rule change is approved by the Commission. Second, PHLX is 
adopting new standards for securities linked to the performance of 
indexes and commodities (including currencies) and managed fund shares, 
to reflect the fact that PHLX may engage in UTP trading of these 
securities,\19\ and is modifying Rule 803(f) (Other Securities) to 
adopt continued listing standards that would be applicable to 
securities listed under that provision if PHLX resumed its listing 
business and that contain provisions that are complementary to the new 
standards for securities linked to commodities. Third, PHLX is deleting 
current Rules 803(m) and (n), which contain standards for index-linked 
exchangeable notes and index-linked securities; these security types 
are covered more comprehensively by the adoption of a standard for 
securities linked to the performance of indexes and commodities 
(including currencies). Fourth, PHLX is deleting certain restrictions 
in Rule 803(o) on the activities of market makers, since PSX's market 
structure will not allow for a class of market makers.
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    \16\ 17 CFR 240.12f-5.
    \17\ Notably, with respect to new derivative securities products 
(as defined in SEC Rule 19b-4(e), 17 CFR 240.19b-4(e)) trading on 
the Exchange, Rule 803(o) requires the distribution of an 
information circular that includes information on the (1) the 
special risks of trading the new derivative securities product 
(``NDSP''); (2) the Exchange's rules that will apply to the NDSP, 
including the suitability rule (proposed Rule 763); (3) information 
about the dissemination of value of the underlying assets or 
indexes; and (4) the risk of trading during the period from 9 a.m. 
to 9:30 a.m. and from 4 p.m. to 5 p.m. due to the lack of 
calculation or dissemination of the underlying index value, the 
Intraday Indicative Value, the Indicative Optimized Portfolio Value 
or other comparable estimate of the value of a share of the NDSP. 
Rule 803(o) also requires that members and member organizations 
adhere to applicable prospectus delivery requirements of the 
Securities Act of 1933, and requires that the Exchange enter into 
comprehensive surveillance sharing agreements with markets trading 
components of the index or portfolio on which the NDSP is based to 
the same extent as the listing market of the NDSP.
    \18\ 17 CFR 240.10A-3.
    \19\ Rule 803(m) and (n) (as proposed to be amended). As with 
other standards, however, PHLX will not list these securities until 
the filing and approval of a proposed rule change to authorize such 
listing.
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    PHLX is also adopting Rule 3230 to establish additional rules to 
govern UTP trading of Commodity-Related Securities on PSX. The term 
``Commodity-Related Security'' includes any security that is issued by 
a trust, partnership, commodity pool or similar entity that invests, 
directly or through another entity, in any combination of commodities, 
futures contracts, options on futures contracts, forward contracts, 
commodity swaps, or other related derivatives, or the value of which is 
determined by the value of commodities, futures contracts, options on 
futures contracts, forward contracts, commodity swaps, or other related 
derivatives. The term ``commodity'' has the meaning given to it under 
the Commodity Exchange Act. The rule provides that members and member 
organizations must provide all purchasers of a newly issued Commodity-
Related Security a prospectus for such Commodity-Related

[[Page 43600]]

Security.\20\ The rule further provides that unless otherwise noted, a 
Commodity-Related Security is eligible for trading during all PSX 
market sessions (i.e. from 9 a.m. through 5 p.m.) if member 
organizations comply with Rule 3231 when accepting Commodity-Related 
Security orders for execution in the pre-market session (9 a.m. through 
9:30 a.m.) or post-market session (4 p.m. through 5 p.m.).
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    \20\ Provisions from the corresponding NASDAQ rule, Rule 4630, 
that govern the conduct of market makers in Commodity-Related 
Securities have been omitted because PSX will not have market 
makers.
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    Rule 3231 provides that no member organization may accept an order 
from a customer for execution in the pre-market session or post-market 
session without disclosing to such customer that extended hours trading 
involves material trading risks, including the possibility of lower 
liquidity, high volatility, changing prices, unlinked markets, an 
exaggerated effect from news announcements, wider spreads and any other 
relevant risk. The absence of an updated underlying index value or 
intraday indicative value is an additional trading risk in extended 
hours for Derivative Securities Products (as defined in Rule 3100). 
With these changes, as well as the adoption of the other rules 
contained in this filing, PHLX believes that it will have rules in 
place to allow the UTP trading of all NMS stocks.
d. Entry and Processing of Orders
    Only orders for NMS stocks may be entered and executed through 
PSX.\21\ PSX is the only venue on the Exchange for the entry and 
execution of orders in NMS stocks.\22\ Participants may submit multiple 
orders at multiple price levels, which PSX will manage and display, 
consistent with the parameters of each order.\23\ PSX will time-stamp 
each order upon receipt, although as discussed below, the time stamp 
does not determine the order's ranking for execution purposes.\24\ The 
System does not allow Participants to display orders on an attributable 
basis.\25\ However, orders may be entered either as Displayed Orders, 
in which case they will be displayed as individual orders, each with an 
identical anonymous identifier, in market data disseminated by PSX 
concerning resting orders, or may be entered as Non-Displayed Orders, 
in which case they will not be displayed but nevertheless remain 
available for potential execution against incoming orders.\26\
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    \21\ Proposed Rule 3305(a)(1).
    \22\ Id.
    \23\ Proposed Rule 3306.
    \24\ Id.
    \25\ Proposed Rule 3301(a).
    \26\ Proposed Rule 3301(e).
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    Displayed Orders will be displayed to Participants through a system 
book feed. In addition, the aggregate size of all orders at the best 
price to buy and sell resident in the System will be transmitted for 
display to the appropriate network processor unless the aggregate size 
is less than one round lot.\27\ However, Non-Displayed Orders and 
reserve size will not be displayed.\28\
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    \27\ Proposed Rule 3306(c)(1) and (2).
    \28\ Proposed Rule 3306(c)(3).
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    Marketable orders are directed to resting orders for execution. 
Non-marketable orders are made available for execution by incoming 
orders, and either displayed or not displayed, as directed by the 
entering party. Upon entry of a marketable order, PSX will identify the 
order(s) against which the incoming order will be executed, based on 
the algorithm described below. The System will automatically execute 
against such orders and send the relevant Participant(s) an execution 
report.
e. Order Types and Time-in-Force Designations
    An order may be of a size up to 999,999 shares \29\ and must 
indicate whether it is a buy, long sale, or short sale.\30\ The minimum 
increment for orders priced at $1.00 or above will be $0.01.\31\ The 
minimum increment for orders priced below $1.00 will be $0.0001.\32\ 
All orders are firm and automatically executable for their displayed 
and non-displayed size in the System.\33\ The System will operate from 
9 a.m. through 5 p.m. Eastern Time, and except as noted below, all 
orders types and times-in-force may be entered during that period.\34\ 
PSX will not have any specialized opening or closing processes. Rather, 
the System will be open for order entry at 9 a.m., and will immediately 
start processing orders as they are entered.\35\
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    \29\ Proposed Rule 3301(g).
    \30\ Proposed Rule 3305.
    \31\ Proposed Rule 3213(a).
    \32\ Id.
    \33\ Proposed Rule 3213(b).
    \34\ Proposed Rules 3217 and 3306(a)(3).
    \35\ Proposed Rule 3302.
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    The following order types will be available in PSX: \36\
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    \36\ Proposed Rule 3301(e) and (f).
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     ``Limit Orders'' are orders to buy or sell a stock at a 
specified price or better.
     ``Pegged Orders'' are orders that, after entry, have their 
price automatically adjusted by the System in response to changes in 
either the PSX inside bid or offer or the best bid or offer in the 
national market system, as appropriate. A Pegged Order can specify that 
its price will equal the inside quote on the same side of the market 
(``Primary Peg''), the opposite side of the market (``Market Peg''), or 
the midpoint of the national best bid and offer (``Midpoint Peg''). A 
Pegged Order may have a limit price beyond which the order shall not be 
executed. In addition, the Primary Peg and Market Peg Orders may also 
establish their pricing relative to the appropriate bids or offers by 
the selection of one or more offset amounts that will adjust the price 
of the order by the offset amount selected. A Midpoint Peg Order is 
priced based upon the national best bid and offer, excluding the effect 
that the Midpoint Peg Order itself has on the inside bid or inside 
offer. Midpoint Peg Orders will never be displayed. A Midpoint Peg 
Order may be executed in sub-pennies if necessary to obtain a midpoint 
price. A Pegged Order may be entered only between 9:30 a.m. and 4 
p.m.\37\
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    \37\ Proposed Rule 3305(a)(1)(C).
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     ``Minimum Quantity Orders'' are orders that require that a 
specified minimum quantity of shares be obtained, or the order is 
cancelled. Minimum Quantity Orders may only be entered with a time-in-
force designation of System Hours Immediate or Cancel.
     ``Intermarket Sweep Orders'' or ``ISOs'' are limit orders 
that are executed by the System at multiple price levels, without 
consideration of protected quotations of other market centers within 
the meaning of Rule 600(b) of Regulation NMS under the Act.\38\ 
Simultaneously with the routing of an ISO to the System, one or more 
additional limit orders, as necessary, must be routed by the entering 
party to execute against the full displayed size of any protected bid 
or protected offer (as defined in Rule 600(b) of Regulation NMS under 
the Act) in the case of a limit order to sell or buy with a price that 
is superior to the limit price of the limit order identified as an ISO. 
These additional routed orders must also be identified as ISOs.
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    \38\ 17 CFR 242.600(b).
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     ``Price to Comply Orders'' are orders that if, at the time 
of entry, would lock or cross the quotation of an external market, the 
order will be priced to the current low offer (for bids) or to the 
current best bid (for offers) and displayed at a price one minimum 
price increment lower than the offer (for bids) or higher than the bid 
(for offers). The displayed and undisplayed prices of a Price to Comply 
order may be adjusted once or multiple times depending upon the method 
of order entry and changes

[[Page 43601]]

to the prevailing national best bid or offer.
     ``Post-Only Orders'' are orders that if, at the time of 
entry, would lock an order on the System, the order will be re-priced 
and displayed by the System to one minimum price increment (i.e., $0.01 
or $0.0001) below the current low offer (for bids) or above the current 
best bid (for offers).
     ``Non-Displayed Orders'' are limit orders that are not 
displayed in the System, but nevertheless remain available for 
potential execution against all incoming orders until executed in full 
or cancelled. All orders that are not designated as Non-Displayed 
Orders will be displayed, but without attribution to the entering 
Participant.
     In addition to the any of the foregoing designations, an 
order may also be designated as a ``Reserve Order.'' Reserve Orders 
have both a round-lot displayed size and an additional non-displayed 
share amount. Both the displayed and non-displayed portions of the 
Reserve Order are available for potential execution against incoming 
orders. If the round-lot displayed portion of a Reserve Order is 
reduced to less than a normal unit of trading, the System will 
replenish the display portion from reserve up to at least a single 
round-lot amount.
    The following times-in-force will be available in PSX.\39\ Except 
as noted above in connection with Minimum Quantity Orders, any time-in-
force may be combined with any order type.
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    \39\ Proposed Rule 3301(h).
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     ``System Hours Immediate or Cancel'' or ``SIOC'' means 
that if, after entry into the System, an order (or a portion thereof) 
is not marketable, the order (or unexecuted portion thereof) will be 
canceled and returned to the entering Participant.
     ``System Hours Day'' or ``SDAY'' means that if, after 
entry into the System, an order is not fully executed, the order (or 
the unexecuted portion thereof) will remain available for potential 
display and/or execution from 9 a.m. until 5 p.m. Eastern Time on the 
day it was submitted unless cancelled by the entering party.
     ``System Hours Expire Time'' or ``SHEX'' means that if, 
after entry into the System, an order is not fully executed, the order 
(or the unexecuted portion thereof) will remain available for potential 
display and/or execution for the amount of time specified by the 
entering Participant (up until 5 p.m. on the day entered) unless 
canceled by the entering Participant.
     ``Good-til-market close'' or ``GTMC'' means that if, after 
entry into the System, an order is not fully executed, the order (or 
unexecuted portion thereof) will remain available for potential display 
and/or execution until cancelled by the entering party, or until 4 
p.m., after which it shall be returned to the entering party. GTMC 
orders entered after 4 p.m. will be treated as SIOC orders.
f. Execution of Transactions
    Incoming orders that are not marketable against posted interest in 
the System book will be cancelled or posted to the book, depending on 
the time-in-force for the order.\40\ Incoming marketable orders are 
executed against orders on the book, and the posted orders are 
decremented accordingly.\41\ To determine the allocation of incoming 
marketable orders against orders on the book, the System uses a price/
display/pro-rata allocation to size that is designed to encourage 
Participants to display large orders in transparent markets, thereby 
enhancing the quality of price discovery processes.\42\ The algorithm 
executes trading interest in the System in the following order:
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    \40\ Proposed Rule 3301(h).
    \41\ Proposed Rule 3307(a)(2).
    \42\ Proposed Rule 3307(a)(1).
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     Price--Better priced trading interest will be executed 
ahead of inferior-priced trading interest.
     Display--Displayed Orders at a particular price with a 
size of at least one round lot will be executed ahead of Non-Displayed 
Orders, the reserve portion of Reserve Orders, and odd-lot orders at 
the same price. Thus, an order receives priority to the extent of the 
Participant's willingness to display liquidity: Undisplayed liquidity 
receives lower priority.
     Pro-Rata Allocation to Size Among Displayed Orders With a 
Size of One Round Lot or More--As among equally priced Displayed Orders 
with a size of at least one round lot, the System will allocate round 
lot portions of incoming executable orders to displayed trading 
interest within the System pro rata based on the size of the Displayed 
Orders. Portions of an order that would be executed in a size other 
than a round lot if they were allocated on a pro rata basis will be 
allocated for execution against available displayed trading interest on 
the basis of a random function that assigns probability of execution 
based on the size of displayed interest. For example, if Displayed 
Orders to buy at 10 reside on the PSX book with sizes of 6,000 
(Participant A) and 4,000 (Participant B), and an incoming order to 
sell 1,100 at 10 comes into the System, the System will allocate 600 
shares of the incoming order to Participant A and 400 shares of the 
incoming order to Participant B. The remaining 100 shares of the 
incoming order will be allocated on the basis of a random function that 
assigns a 60% probability of executing the 100 shares to Participant A 
and a 40% probability to Participant B.
     Displayed Odd-Lot Orders--As among equally priced 
Displayed Orders with a size of less than one round lot, the System 
will allocate incoming orders based on the size of the Displayed 
Orders, but not in pro rata fashion. Thus, a resting order with a size 
of 90 shares would get filled in full before an order with a size of 50 
shares. If there are two or more odd lot orders of equal size, the 
System will determine the order of execution on the basis of a random 
function that assigns each order an equal probability of execution.
     Pro-Rata Allocation to Size Among Non-Displayed Interest 
With a Size of One Round Lot or More--As among equally priced Non-
Displayed Orders and the reserve portion of Reserve Orders 
(collectively, ``non-displayed interest'') with a size of at least one 
round lot, the System will allocate round lot portions of incoming 
executable orders to non-displayed interest within the System pro rata 
based on the size of non-displayed interest. Portions of an order that 
would be executed in a size other than a round lot if they were 
allocated on a pro rata basis will be allocated for execution against 
available non-displayed interest on the basis of a random function that 
assigns probability of execution based on the size of non-displayed 
interest.
     Non-Displayed Odd-Lot Orders--As among equally priced Non-
Displayed Interest with a size of less than one round lot, the System 
will allocate incoming orders based on the size of the Non-Displayed 
Interest, but not in pro rata fashion. Thus, a larger odd-lot order 
would be filled before a smaller odd-lot order. If there are two or 
more odd lot orders of equal size, the System will determine the order 
of execution on the basis of a random function that assigns each order 
an equal probability of execution.
    An incoming order with a price that crosses the price of a posted 
order will execute at the price of the posted order. Accordingly, any 
potential price improvement resulting from an execution in the System 
will accrue to taker of liquidity.\43\ For example, if a buy order 
resides on the PSX book at 10 and an incoming sell order priced at 9 
comes into the System, the orders will

[[Page 43602]]

execute at 10, with the seller getting $1.00 price improvement.
---------------------------------------------------------------------------

    \43\ Proposed Rule 3307(a)(3).
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g. Reporting, Clearance and Settlement; Anonymity
    As provided by Rule 3309, executions occurring as a result of 
orders matched on PSX shall be reported by PHLX to an appropriate 
consolidated transaction reporting system. The System will identify 
trades executed pursuant to an exception to or exemption from Rule 611 
of Regulation NMS in accordance with specifications approved by the 
operating committee of the relevant national market system plan for an 
NMS stock. If a trade is executed pursuant to both the ISO exception of 
Rule 611(b)(5) or (6) of Regulation NMS and the self-help exception of 
Rule 611(b)(1) of Regulation NMS, such trade shall be identified as 
executed pursuant to the ISO exception. PHLX will promptly notify PSX 
Participants of all executions of their orders as soon as the Exchange 
is notified that such executions have taken place.
    For each execution, PSX will submit a transaction report using 
PHLX's existing ``X'' market identifier. The transaction reports 
produced by the System will indicate the price and size of the 
transaction, but will not reveal contra party identities.\44\ PHLX will 
reveal a Participant's identity in the following circumstances: (i) 
When National Securities Clearing Corporation (``NSCC'') ceases to act 
for a Participant, or the Participant's clearing firm, and NSCC 
determines not to guarantee the settlement of the Participant's trades; 
(ii) for regulatory purposes or to comply with an order of an 
arbitrator or court; (iii) if both Participants to the transaction 
consent; or (iv) unless otherwise instructed by a member organization, 
PHLX will reveal to a member organization, no later than the end of the 
day on the date an anonymous trade was executed, when the member 
organization's order has been decremented by another order submitted by 
that same member organization.
---------------------------------------------------------------------------

    \44\ Proposed Rule 3310.
---------------------------------------------------------------------------

    Transactions will be cleared and settled through NSCC and 
Depository Trust Corporation (``DTC''), using an exchange omnibus 
account established at NSCC.\45\ All Participants must be members of 
NSCC, or clear their trades through a clearing firm that is both a 
member organization of PHLX and a member of NSCC. Member organizations 
failing to maintain the required clearing arrangements may be removed 
from access to PSX until such time as a clearing arrangement is 
reestablished.\46\ If a Participant, or a clearing member acting on a 
Participant's behalf, is reported as constituting a side of a System 
trade, the Participant or the clearing member must honor the trade on 
the scheduled settlement date.\47\
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    \45\ Proposed Rule 3218. In the event that a registered clearing 
agency other than NSCC began offering continuous net settlement 
services, participants would also be permitted to use that clearing 
agency rather than NSCC.
    \46\ Proposed Rule 3228.
    \47\ Proposed Rule 3227.
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h. Trading Halts and Clearly Erroneous Transactions
    PSX's provisions on trading halts will mirror those of the NASDAQ 
Market Center, but will include only those provisions pertinent to 
securities traded on an unlisted trading privileges basis.
     PSX may halt trading on PSX of a security listed on 
another exchange: (i) During a trading halt imposed by such exchange to 
permit the dissemination of material news; or (ii) when such exchange 
imposes a trading halt in that security because of an order imbalance 
or influx (``operational trading halt'').\48\
---------------------------------------------------------------------------

    \48\ Proposed Rule 3100(a)(1).
---------------------------------------------------------------------------

     PSX may halt trading in an index warrant whenever 
regulatory staff concludes that such action is appropriate in the 
interests of a fair and orderly market and to protect investors. Among 
the factors that may be considered are the following: (i) Trading has 
been halted or suspended in underlying stocks whose weighted value 
represents 20% or more of the index value; (ii) the current calculation 
of the index derived from the current market prices of the stocks is 
not available; or (iii) other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present.\49\
---------------------------------------------------------------------------

    \49\ Proposed Rule 3100(a)(2).
---------------------------------------------------------------------------

     In the case of trust shares, index fund shares, managed 
fund shares or trust issued receipts, a series of commodity-related 
securities, securities representing interests in unit investment trusts 
or investment companies, or any other derivative security 
(collectively, ``Derivatives Security Products'') for which an 
underlying index, indicative optimized portfolio value, intraday 
indicative value, net asset value, disclosed portfolio, or other 
comparable estimate of the value of a share is disseminated, PSX will 
halt trading if there is a temporary interruption in the calculation or 
wide dissemination of the value. PSX will maintain the trading halt 
until such time as trading resumes in the listing market.\50\ Trading 
may continue in the case of interruptions that occur outside of regular 
market hours. However, if an interruption occurs or continues during 
regular market hours and a halt is called by the listing market, or if 
a halt occurs after the close of regular market hours and continues the 
following day, the affected security will be halted and remain halted 
until the listing market resumes trading.\51\
---------------------------------------------------------------------------

    \50\ Proposed Rule 3100(a)(3).
    \51\ Proposed Rule 3100(b).
---------------------------------------------------------------------------

     PSX will halt trading in a Derivative Security Product for 
which a net asset value or disclosed portfolio is disseminated if staff 
becomes aware that the net asset value or disclosed portfolio is not 
being disseminated to all market participants at the same time. The 
halt will remain in effect until the listing market resumes 
trading.\52\
---------------------------------------------------------------------------

    \52\ Proposed Rule 3100(a)(3).
---------------------------------------------------------------------------

     Following the initiation of an operational trading halt, 
PSX Participants may immediately resume order entry and trading.\53\ In 
other cases, Participants must wait until PSX releases the security for 
resumed trading, at a time announced by PSX through Web sites and wire 
services.\54\
---------------------------------------------------------------------------

    \53\ Proposed Rule 3100(a)(1).
    \54\ Proposed Rule 3100(c)(2).
---------------------------------------------------------------------------

     During a pilot period ending on December 10, 2010, if a 
primary listing market issues an individual stock trading pause in any 
of the securities covered by the pilot, the Exchange will pause trading 
in that security until trading has resumed on the primary listing 
market. If, however, trading has not resumed on the primary listing 
market and ten minutes have passed since the individual stock trading 
pause message has been received from the responsible single plan 
processor, the Exchange may resume trading in such stock. The 
securities covered by the pilot are those stocks included in the S&P 
500[supreg] Index.
     PSX will also halt trading upon SEC request, including in 
accordance with standing requests for ``circuit breaker''market-wide 
halts in the event of a major market break.\55\
---------------------------------------------------------------------------

    \55\ PLHX [sic] Rule 133. As a result of precipitous declines in 
the prices of certain securities on May 6, 2010, the Commission and 
the national securities exchanges are currently evaluating the 
advisability of modifying marketwide rules on trading halts due to 
extraordinary market volatility, such as those reflected in PHLX 
Rule 133. PHLX will modify Rule 133 to maintain consistency with 
corresponding rules of other exchanges as soon as consensus is 
reached concerning the appropriate marketwide standard.
---------------------------------------------------------------------------

    PHLX will adopt a rule to govern breaking of clearly erroneous 
transactions.\56\
---------------------------------------------------------------------------

    \56\ Proposed Rule 3312. The proposed PSX rule is identical to 
the rules recently adopted by NASDAQ and other exchanges to provide 
a consistent and comprehensive framework for reviewing and breaking 
trades. As a result of precipitous declines in the prices of certain 
securities on May 6, 2010, however, the Commission and the national 
securities exchanges are currently evaluating the advisability of 
further changes to clearly erroneous rules. PHLX will modify its 
clearly erroneous rule to maintain consistency with the 
corresponding NASDAQ Stock Market rule as soon as consensus is 
reached concerning the appropriate marketwide standard.

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[[Page 43603]]

    As was true for XLE, PHLX's former cash equity trading platform, 
appeals from determination regarding trades made by PHLX staff will be 
made to the Options Trade Review Committee (``OTRC''), a committee of 
industry and non-industry experts established under the PHLX By-Laws. 
As reflected in Section 10-10 of the By-Laws, 20% of the members of the 
OTRC must represent PHLX member organizations, but no more than 50% of 
the committee's members may be employed by firms that are market makers 
or that derive more than 10% of their revenues from market making. This 
is identical to the compositional requirements of NASDAQ's Market 
Operations Review Committee, which performs a comparable function under 
NASDAQ rules.\57\
---------------------------------------------------------------------------

    \57\ By-Laws of The NASDAQ Stock Market LLC, Article III, 
Section 6.
---------------------------------------------------------------------------

i. Regulation NMS Compliance
    As provided in Rules 3301(a) and 3306(c)(4), with respect to the 
operation of PSX, PHLX will implement such systems, procedures, and 
rules as are necessary to render it capable of meeting the requirements 
for automated quotations,\58\ and immediately to identify its 
quotations as manual whenever it has reason to believe it is not 
capable of displaying automated quotations. PHLX will adopt policies 
and procedures for notifying member organizations and other trading 
centers that it has reason to believe it is not capable of displaying 
automated quotations or, once manual, that it has restored the ability 
to display automated quotations and is preparing to identify its 
quotation as automated. In addition, PHLX will adopt policies and 
procedures for responding to notices that it receives from other 
trading centers indicating that they have elected to use the ``self-
help'' exception of Rule 611(b)(1) of Regulation NMS under the Act.\59\
---------------------------------------------------------------------------

    \58\ As defined in Rule 600(b) of Regulation NMS under the Act, 
17 CFR 242.600(b), the term ``quotation''includes the ``bid price or 
the offer price communicated by a member of a national securities 
exchange * * * to any broker or dealer, or to any customer, at which 
it is willing to buy or sell one or more round lots of an NMS 
security, either as principal or agent.'' Thus, the term 
``quotation''includes orders entered into the System by PSX 
Participants, notwithstanding the fact that PSX will not have market 
makers with obligations to maintain continuous two-sided quotations. 
Under Rule 602 of Regulation NMS, brokers and dealers are required 
to communicate to a national securities exchange or national 
securities association their best bids, best offers, and quotation 
sizes. By displaying orders communicated to it by its members and 
complying with the requirements for automation described in Rule 
600(b)(3), PSX will display ``automated quotations'' within the 
meaning of that rule, and therefore its best bid and best offer will 
constitute ``protected quotations'' entitled to trade-through 
protection under Regulation NMS.
    \59\ 17 CFR 242.611(b)(1).
---------------------------------------------------------------------------

    PSX will not route orders to other market centers. Rather, to 
ensure compliance with Regulation NMS, PSX Rule 3305 provides that in 
addition to such other designations as may be chosen by a Participant, 
all orders that are not entered with a time in force of ``System Hours 
Immediate or Cancel'' \60\ must be designated as an Intermarket Sweep 
Order, a Pegged Order, a Price to Comply Order, or a Post-Only Order, 
and all orders will be processed in a manner that avoids trading 
through protected quotations and avoids locked and crossed markets. 
Specifically, any orders that are entered into the System that would 
lock or cross another order in the System will be executed to avoid a 
lock or cross.\61\
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    \60\ A ``System Hours Immediate or Cancel'' order is an 
immediate or cancel order that may be entered between 9 a.m. and 5 
p.m. Eastern Time, PSX's hours of operation. If a System Hours 
Immediate or Cancel order (or a portion thereof) is not marketable, 
the order (or unexecuted portion thereof) is canceled and returned 
to the entering Participant.
    \61\ Proposed Rule 3213(c). In addition, as discussed below, 
members may enter orders that are re-priced if they would lock or 
cross so as to avoid executing.
---------------------------------------------------------------------------

     A System Hours Immediate or Cancel Order is compliant with 
Regulation NMS because it will not, by its terms, execute or post at a 
price that would result in a trade-through of a protected quotation or 
lock or cross another market.
     A Pegged Order is compliant with Regulation NMS because it 
is continually re-priced to avoid locking or crossing.
     In entering an Intermarket Sweep Order, the Participant 
represents that it is simultaneously routing one or more additional 
limit orders, as necessary, to execute against the full displayed size 
of any protected bid or offer (as defined in Rule 600(b) of Regulation 
NMS) in the case of a limit order to sell or buy with a price that is 
superior to the limit price of the order identified as an Intermarket 
Sweep Order.\62\ These additional routed orders must also be identified 
as Intermarket Sweep Orders. As provided by Regulation NMS, PSX will 
automatically execute orders identified as Intermarket Sweep Orders. 
Member organizations will be responsible for ensuring that their use of 
Intermarket Sweep Orders complies with Regulation NMS, and PHLX's T+1 
surveillance program, administered by the Financial Industry Regulatory 
Authority (``FINRA'') under a regulatory services agreement (the 
``FINRA RSA'') will monitor member organizations' use of Intermarket 
Sweep Orders.
---------------------------------------------------------------------------

    \62\ Proposed Rule 3301(f)(6).
---------------------------------------------------------------------------

     If, at the time of entry, a Price to Comply Order would 
lock or cross the quotation of an external market, the order will be 
priced to the current low offer (for bids) or to the current best bid 
(for offers) but displayed at a price one minimum price increment lower 
than the offer (for bids) or higher than the bid (for offers). Thus, an 
incoming order priced to execute against the displayed price will 
receive the superior undisplayed price.\63\ The displayed and 
undisplayed prices of a Price to Comply order may be adjusted once or 
multiple times depending upon the method of order entry and changes to 
the prevailing national best bid/best offer.\64\
---------------------------------------------------------------------------

    \63\ For example, if the national best bid and best offer is 
$9.97 x $10.00, and a participant enters a price to comply order to 
buy 10,000 shares at $10.01, the order will display at $9.99, but 
will reside on the System book at $10.00. If a seller then enters an 
order at $9.99, it will execute at $10.00, up to the full 10,000 
shares of the order. Proposed Rule 3301(f)(8).
    \64\ Proposed Rule 3301(f)(8).
---------------------------------------------------------------------------

     If, at the time of entry, a Post-Only Order would lock an 
order on the System, the order will be re-priced and displayed by the 
System to one minimum price increment (i.e., $0.01 or $0.0001) below 
the current low offer (for bids) or above the current best bid (for 
offers).\65\
---------------------------------------------------------------------------

    \65\ For example, if the System best bid and best offer is $9.97 
x $10.00, and a participant enters a Post-Only Order to buy at 
$10.01, the order will be repriced and displayed at $9.99. If a 
seller enters an order at $9.96, the order will be repriced and 
displayed at $9.98. Proposed Rule 3301(f)(10).
---------------------------------------------------------------------------

    By requiring all orders to be entered with one of these 
designations, PSX will ensure that all orders will either be priced or 
cancelled in a manner consistent with avoidance of trade-throughs and 
locked and crossed markets, or will execute as Intermarket Sweep Orders 
along with other Intermarket Sweep Orders sent to protected quotes. 
Because PSX will not route to other market centers,\66\ its policies 
and procedures under Rule 611(a) under Regulation NMS \67\ will 
contemplate reliance on information provided by the NASDAQ Market 
Center for purposes of determining whether another trading center is 
experiencing a failure, material delay, or

[[Page 43604]]

malfunction of its systems or equipment within the meaning of Rule 
611(b)(1).\68\
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    \66\ Proposed Rule 3305(b).
    \67\ 17 CFR 242.611(a).
    \68\ 17 CFR 242.611(b)(1).
---------------------------------------------------------------------------

    Rule 3213(c)(2) contains PSX's rules adopted pursuant to SEC Rule 
610(d) under Regulation NMS \69\ with respect to inter-market locks and 
crosses. Although the System-enforced requirements with respect to 
order entry and execution generally prevent locked and crossed markets, 
adoption of the rule is needed to comply with the requirements of Rule 
610(d) and to provide a clear rule barring conduct that could evade the 
System-enforced requirements, such as entry of an incorrectly marked 
Intermarket Sweep Order. Terms used in the rule have the meanings 
assigned to them by Rule 600 under Regulation NMS.\70\ Subject to 
certain exceptions, the Rule 3213(c) provides that member organizations 
shall reasonably avoid displaying, and shall not engage in a pattern or 
practice of displaying any quotations \71\ that lock or cross a 
protected quotation, and any manual quotations that lock or cross a 
quotation previously disseminated pursuant to an effective national 
market system plan. Exceptions exist for instances where (i) the 
locking or crossing quotation was displayed at a time when the trading 
center displaying the locked or crossed quotation was experiencing a 
failure, material delay, or malfunction of its systems or equipment; 
(ii) the locking or crossing quotation was displayed at a time when a 
protected bid was higher than a protected offer in the NMS stock; (iii) 
the locking or crossing quotation was an automated quotation, and the 
Exchange member organization displaying such automated quotation 
simultaneously routed an Intermarket Sweep Order to execute against the 
full displayed size of any locked or crossed protected quotation; and 
(iv) the locking or crossing quotation was a manual quotation that 
locked or crossed another manual quotation, and the Exchange member 
organization displaying the locking or crossing manual quotation 
simultaneously routed an Intermarket Sweep Order to execute against the 
full displayed size of the locked or crossed manual quotation. If a 
member organization displays a manual quotation that locks or crosses a 
quotation previously disseminated pursuant to an effective national 
market system plan, such member organization shall promptly either 
withdraw the manual quotation or route an Intermarket Sweep Order to 
execute against the full displayed size of the locked or crossed 
quotation.
---------------------------------------------------------------------------

    \69\ 17 CFR 242.610(d).
    \70\ 17 CFR 242.600.
    \71\ As defined in SEC Rule 600, the term ``quotation''includes 
an order.
---------------------------------------------------------------------------

j. Regulatory Framework
    Under the FINRA RSA, FINRA will provide a range of regulatory 
services, including T+1 surveillance, investigation, and enforcement 
with respect to PHLX rules, arbitration services, and membership 
services. PHLX will perform other regulatory services, such as real-
time market surveillance, using personnel employed by NASDAQ OMX or one 
of its subsidiaries, including PHLX. NASDAQ OMX, PHLX, NASDAQ, and 
NASDAQ OMX BX (PHLX, NASDAQ, and NASDAQ OMX BX collectively, the ``SRO 
Subsidiaries'') are parties to a regulatory services agreement (the 
``Intercompany RSA'') pursuant to which employees and contractors of 
each party (``Personnel'') may perform regulatory services for each of 
the SRO Subsidiaries. All regulatory services performed for PHLX under 
the Intercompany RSA are subject to the direction, authority, and 
oversight of PHLX's chief regulatory officer (``CRO'') and the 
regulatory oversight committee (``ROC'') of its Board of Governors. All 
Personnel are subject to the jurisdiction, authority and oversight of 
the CRO and ROC of PHLX to the extent of the services that they provide 
to PHLX. Notwithstanding the FINRA RSA and the Intercompany RSA, PHLX 
retains ultimate legal responsibility for, and control of, functions 
performed for PHLX under such agreements.
    Under the FINRA RSA, FINRA will conduct T+1 market surveillance and 
examine member organizations to monitor compliance with applicable PHLX 
and SEC rules. Moreover, many aspects of compliance with PSX rules, 
such as avoidance of locked and crossed markets and trade throughs, 
will be enforced by the System itself. PHLX will periodically test 
operations of PSX to determine that the System is operating in 
accordance with applicable rules.
    PSX will operate out of the same New York metropolitan data center 
as the NASDAQ Market Center and the NASDAQ OMX BX Equities System, but 
will use equipment that is separate from the equipment used by those 
exchanges. In addition, PSX will have a backup data center in the 
Washington, DC metropolitan area. To ensure sufficient capacity with 
respect to the System, PHLX developed a baseline forecast of volume of 
usage, which will be updated regularly based on actual volumes. The 
System will use NASDAQ OMX's flexible INET technology, which is easily 
scalable to higher volumes through the addition of more equipment in 
the data center. The System will be protected from unauthorized access 
through the same robust firewall protections already in use at NASDAQ 
OMX's data centers.
    As provided in proposed Rules 3401-3407, PSX will adopt rules 
implementing a version of the Order Audit Trail System (``OATS''). PHLX 
believes that as an affiliate of NASDAQ, it should ensure that its 
regulatory requirements are generally consistent with those of NASDAQ. 
Accordingly, PHLX member organizations that are also FINRA members must 
comply with the FINRA OATS rules requiring daily reporting of audit 
trail information for transactions in securities listed on NASDAQ. In 
addition, as provided in NASDAQ rules, PHLX member organizations that 
are not FINRA members must compile and maintain audit trail information 
for securities listed on NASDAQ, but are required to transmit this 
information to FINRA only if requested.\72\ Similarly, if PHLX resumes 
operations as a listing market in the future, the rule will require all 
member organizations to maintain audit trail information for securities 
listed on PHLX, and to transmit the information to FINRA upon request, 
but would not require daily OATS reporting for such securities. As is 
true with respect to NASDAQ, OATS data will be used by PHLX for 
regulatory purposes only.\73\
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    \72\ Proposed Rule 3405.
    \73\ See Securities Exchange Act Release No. 53128 (January 13, 
2006); 71 FR 3350 (January 23, 2006) (File No. 10-131).
---------------------------------------------------------------------------

    Finally, PHLX is adopting rules addressing recommendations to 
customers (also known as suitability) and best execution and 
interpositioning, based on NASD Rules 2310 and 2320.\74\ Member 
organizations would become subject to these rules by virtue of having 
public customers, and brokers with public customers are required to be 
members of FINRA; accordingly, adoption of these rules by PHLX could be 
seen as unnecessary. However, PHLX believes that the requirements of 
these rules are sufficiently important that they should be reinforced 
through explicit inclusion in the PHLX rulebook.
---------------------------------------------------------------------------

    \74\ Proposed Rules 763 and 764.
---------------------------------------------------------------------------

k. Affiliation With NASDAQ Execution Services, LLC
    Although PSX will not route to other market centers, it will 
receive orders routed to it by other market centers, including NASDAQ. 
Nasdaq Execution Services, LLC (``NES'') is the approved outbound 
routing facility of NASDAQ for cash equities. Rules 4751 and 4758

[[Page 43605]]

of NASDAQ establish the conditions under which NASDAQ is permitted to 
own and operate NES in its capacity as a facility of NASDAQ that routes 
orders from NASDAQ to other market centers. These conditions include 
requirements that: (1) NES is operated and regulated as a facility of 
NASDAQ; (2) NES will not engage in any business other than as an 
outbound router for NASDAQ and any other activities as approved by the 
Commission; \75\ (3) the primary regulatory responsibility for NES lies 
with an unaffiliated self-regulatory organization; (4) use of NES for 
outbound routing is optional for other NASDAQ members; and (5) NASDAQ 
will not route orders to an affiliated exchange, such as PHLX, unless 
they check the NASDAQ book prior to routing.
---------------------------------------------------------------------------

    \75\ Because only NASDAQ members may enter orders into NASDAQ, 
it also follows that routing by NES is conducted only with respect 
to orders of NASDAQ members.
---------------------------------------------------------------------------

    In connection with PHLX's resumption of equity trading pursuant to 
this filing, NASDAQ will file a proposed rule change to modify the last 
of these conditions to allow it to route all forms of orders, including 
Directed Orders, to PSX during a twelve-month pilot period. Directed 
Orders are orders that route directly to other exchanges on an 
immediate-or-cancel basis without first checking the NASDAQ book for 
available liquidity. In order to appropriately address concerns 
previously raised by the Commission regarding the potential for 
conflicts of interest and informational advantages that may arise from 
the use of affiliated members to route orders between exchanges owned 
by a common parent, PHLX is proposing certain restrictions and 
undertakings.
    In order to manage the concerns raised by the Commission regarding 
conflicts of interest in instances where a member firm is affiliated 
with an exchange to which it is routing orders, PHLX notes that, with 
respect to orders routed to PHLX by NES in its capacity as a facility 
of NASDAQ, NES is subject to independent oversight and enforcement by 
FINRA, an unaffiliated SRO that is NES's designated examining 
authority. In this capacity, FINRA is responsible for examining NES 
with respect to its books and records and capital obligations and also 
has the responsibility for reviewing NES's compliance with intermarket 
trading rules such as SEC Regulation NMS. In addition, under the FINRA 
RSA, FINRA staff will review NES's compliance with PHLX's rules through 
FINRA's examination program. FINRA and PHLX \76\ will also monitor NES 
for compliance with PHLX's trading rules, subject, of course, to SEC 
oversight of the regulatory program of PHLX and FINRA. PHLX will, 
however, retain ultimate responsibility for enforcing its rules with 
respect to NES.
---------------------------------------------------------------------------

    \76\ Personnel performing real-time oversight of equity trading 
on NASDAQ will also perform similar functions with respect to PSX. 
Such work is performed pursuant to the Intercompany RSA under the 
direction, authority, and oversight of PHLX's CRO and the ROC of its 
Board of Governors.
---------------------------------------------------------------------------

    Furthermore, in order to minimize the potential for conflicts of 
interest, PHLX and FINRA will collect and maintain all alerts, 
complaints, investigations and enforcement actions in which NES (in its 
capacity as a facility of NASDAQ, routing orders to PSX) is identified 
as a participant that has potentially violated applicable SEC or PHLX 
rules. PHLX and FINRA will retain these records in an easily accessible 
manner in order to facilitate any potential review conducted by the 
SEC's Office of Compliance Inspections and Examinations. FINRA will 
then provide a report to the PHLX's CRO, on at least a quarterly basis, 
which (i) quantifies all alerts (of which PHLX and FINRA become aware) 
that identify NES as a participant that has potentially violated PHLX 
or SEC rules and (ii) quantifies the number of all investigations that 
identify NES as a participant that has potentially violated PHLX or SEC 
rules.\77\
---------------------------------------------------------------------------

    \77\ PHLX, FINRA, and SEC staff may agree going forward to 
reduce the number of applicable or relevant surveillances that form 
the scope of the agreed upon report.
---------------------------------------------------------------------------

    In order to address the Commission's concerns about potential for 
information advantages that could place an affiliated member of an 
exchange at a competitive advantage vis-[agrave]-vis other non-
affiliated members, PHLX is proposing Rule 985(c)(2). Rule 985(c)(2) 
will require the implementation of policies and procedures that are 
reasonably designed to prevent NES from acting on non-public 
information regarding PHLX systems prior to the time that such 
information is made available generally to all members of such entity 
performing inbound routing functions. These policies and procedures 
would include systems development protocols to facilitate an audit of 
the efficacy of these policies and procedures.
    Specifically, new Rule 985(c)(2) shall provide as follows:

    The NASDAQ OMX Group, Inc., which owns NASDAQ Execution 
Services, LLC and the Exchange, shall establish and maintain 
procedures and internal controls reasonably designed to ensure that 
NASDAQ Execution Services, LLC does not develop or implement changes 
to its system on the basis of non-public information regarding 
planned changes to Exchange systems, obtained as a result of its 
affiliation with the Exchange, until such information is available 
generally to similarly situated members and member organizations of 
the Exchange in connection with the provision of inbound routing to 
the Exchange.

    In addition, NASDAQ Rule 4758 provides that NES will establish and 
maintain procedures and internal controls reasonably designed to 
adequately restrict the flow of confidential and proprietary 
information between NASDAQ and its facilities (including the NES), and 
any other entity (including PHLX). The Exchange believes these measures 
will effectively address the concerns identified by the Commission 
regarding the potential for informational advantages favoring NES vis-
[agrave]-vis other non-affiliated PHLX members.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\78\ in general, and with 
Section 6(b)(1) and (b)(5) of the Act,\79\ in particular, in that the 
proposal enables the Exchange to be so organized as to have the 
capacity to be able to carry out the purposes of the Act and to comply 
with and enforce compliance by members, member organizations, and 
persons associated with members and member organizations with 
provisions of the Act, the rules and regulations thereunder, and the 
rules of the Exchange; and is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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. PSX will operate in 
accordance with the high standards that PHLX believes to be in evidence 
at all of NASDAQ OMX's exchanges, providing its Participants with 
opportunities to trade NMS stocks through a fair, open, and well-
regulated market. Furthermore, PHLX believes that PSX's price-size 
allocation methodology will promote further development of the national 
market system by encouraging Participants to display liquidity, thereby 
contributing more fully to price discovery and

[[Page 43606]]

providing a counterbalance to increased use of dark trading venues.
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    \78\ 15 U.S.C. 78f.
    \79\ 15 U.S.C. 78f(b)(1), (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    PHLX does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. As a new entrant into the market for 
executions of NMS stocks, PSX will further enhance competition in this 
space.

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

    Written comments were neither solicited nor 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 (1) 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 the self-regulatory organization 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 proposal 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 No. SR-Phlx-2010-79 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-Phlx-2010-79. 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing will also 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 No. SR-Phlx-2010-79 and should be 
submitted on or before August 16, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\80\
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    \80\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18159 Filed 7-23-10; 8:45 am]
BILLING CODE 8010-01-P