[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Notices]
[Pages 5518-5522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01483]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68689; File No. SR-Phlx-2013-03]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Amend Exchange Rules 507 and 1014 To 
Establish Remote Streaming Quote Trader Organizations

January 18, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on January 4, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
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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[[Page 5519]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Commission a proposal to amend Phlx 
Rules 507 (Application for Approval as an SQT or RSQT and Assignment in 
Options) and 1014 (Obligations and Restrictions Applicable to 
Specialists and Registered Options Traders) to establish that member 
organizations may qualify to be Remote Streaming Quote Trader 
Organizations with which as many as three Remote Streaming Quote 
Traders may be affiliated.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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
    The purpose of the proposed rule change is to amend Phlx Rules 507 
and 1014 to establish that member organizations may qualify to be 
Remote Streaming Quote Trader Organizations (``RSQTOs'') with which as 
many as three Remote Streaming Quote Traders may be affiliated.
Background
    Remote Streaming Quote Traders (``RSQTs'') are, along with 
specialists, one of several types of Registered Option Traders 
(``ROTs'') on the Exchange. ROTs are market makers that include 
Streaming Quote Traders (``SQTs''),\3\ RSQTs,\4\ Directed Streaming 
Quote Traders (``DSQTs''), and Directed Remote Streaming Quote Traders 
(``DRSQTs'') \5\ (SQTs, DSQTs, and DRSQTs are together known as the 
``Other Streaming Quote Traders'').
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    \3\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically in 
eligible options to which such SQT is assigned. An SQT may only 
submit such quotations while such SQT is physically present on the 
floor of the Exchange. See Rule 1014(b)(ii)(A).
    \4\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically in eligible options to which such RSQT has been 
assigned. An RSQT may only submit such quotations electronically 
from off the floor of the Exchange. See Rule 1014(b)(ii)(B).
    \5\ A DSQT is an SQT and a DRSQT is an RSQT that receives a 
Directed Order. Exchange Rule 1080(l)(i)(A) defines Directed Order 
as any customer order (other than a stop or stop-limit order as 
defined in Rule 1066) to buy or sell which has been directed to a 
particular specialist, RSQT, or SQT by an Order Flow Provider and 
delivered to the Exchange via its electronic quoting, execution and 
trading system.
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    Rule 507 is one of the numerous rules administered by the Exchange 
that deal with allocation and assignment of securities (the 
``Allocation and Assignment Rules''). The Allocation and Assignment 
Rules generally describe the process for: Application for becoming and 
appointment of specialists; allocation of classes of options to 
specialist units and individual specialists; application for becoming 
and approval of SQTs and RQTs and assignment of options to them; and 
performance evaluations. The Allocation and Assignment Rules also 
indicate, among other things, under what circumstances new allocations 
to specialists and assignments to Streaming Quote Traders may not be 
made.\6\
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    \6\ See, for example, Supplementary Material .01 to Rule 506 
(specialist may not apply for a new allocation for a period of six 
months after an option allocation was taken away from the specialist 
in a disciplinary proceeding or an involuntary reallocation 
proceeding). See also Commentaries .01 to .05 to Rule 507 setting 
forth procedures regarding the Maximum Number of Quoters (``MNQ'') 
allowed in equity options.
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    Rule 1014 is the principal rule that deals with the obligations and 
restrictions that are applicable to specialists and Registered Option 
Traders. Rule 1014 states that, in addition to other requirements, on a 
daily basis RSQTs and Other Streaming Quote Traders are responsible to 
quote two-sided markets in not less than a specified percentage of 
options assigned by the Exchange at the request of such traders,\7\ 
unless specifically exempted from such quoting (market-making) 
responsibility.
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    \7\ Regarding RSQT and Other Streaming Quote Trader quoting 
obligations, see Rule 1014(b)(ii)(D)(1). Regarding specialist 
quoting obligations, see Rule 1014(b)(ii)(D)(2). See also Rule 1014 
generally.
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Remote Streaming Quote Trader Organizations and Affiliated Remote 
Streaming Quote Traders
    Rule 507 discusses the process of applying for approval as an RSQT 
or SQT on the Exchange and assignment of options to them. Under Rule 
507, RSQTs are actually Exchange member organizations while SQTs are 
Exchange members; therefore, options are assigned to RSQTs as firms 
(member organizations) and to SQTs as individual members (permit 
holders). The criteria for successfully applying to be an RSQT or an 
SQT is currently, with two exceptions, the same for both types of 
streaming quoters: (1) Significant market-making and/or specialist 
experience in a broad array of securities; (2) superior resources, 
including capital, technology and personnel; (3) demonstrated history 
of stability, superior electronic capacity, and superior operational 
capacity; (4) proven ability to interact with order flow in all types 
of markets; and (5) willingness and ability to make competitive markets 
on the Exchange and otherwise to promote the Exchange in a manner that 
is likely to enhance the ability of the Exchange to compete 
successfully for order flow in the options it trades (together the 
``readiness requirements'').\8\ Only RSQTs need to demonstrate two 
additional criteria for successful approval as remote streaming 
quoters: (1) Existence of order flow commitments; and (2) willingness 
to accept allocations as an RSQT in options overlying 400 or more 
securities.\9\ The Exchange continues to believe that the existence of 
order floor commitments and the willingness to accept options 
allocations overlying hundreds of securities are criteria that belong 
at the firm level. As such, the Exchange proposes that all of the 
current RSQT application criteria will become the application criteria 
for RSQTOs (the ``RSQTO readiness requirements''), and all of the 
current SQT application criteria will become application criteria for 
both RSQTs and SQTs.\10\
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    \8\ See Rule 507(a)(i)(A) through (D) and (G) and Rule 
507(a)(ii).
    \9\ See Rule 507(a)(i)(E) and (F). See also 1014(b)(ii)(B), 
which indicates that an RSQT is an ROT that is a member with no 
physical trading floor presence who has received permission from the 
Exchange to generate and submit option quotations electronically.
    \10\ See proposed Rule 507(a)(ii). RSQTs will, in addition, have 
to demonstrate that they have an ongoing affiliation with an 
Exchange-approved RSQTO. Rule 507(a)(ii)(F).

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[[Page 5520]]

The Proposal
    Proposed Rule 507 adds the concept of RSQTOs, which does not 
currently exist in Exchange rules. Any member organization of the 
Exchange in good standing that satisfies the RSQTO readiness 
requirements will be approved as an RSQTO.\11\ No limit is placed on 
the number of member organizations that may become RSQTOs. Moreover, as 
many as three RSQT applicants affiliated with an RSQTO may be approved 
as an RSQT, to the extent that each such RSQT applicant is qualified as 
an ROT in good standing, and satisfies the five readiness requirements 
that are set out in Rule 507. The Exchange would continue to assign 
options to RSQTs, but these RSQTs would no longer be corporate entities 
but would be as many as three individual members per each Exchange-
approved RSQTO. Rule 507 would continue to indicate that there is no 
limit on the number of qualifying ROTs that may be approved as RSQTs, 
as long as the applicants are qualified as ROTs in good standing and 
satisfy the readiness requirements.\12\
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    \11\ RSQTOs may also be referred to as Remote Market Maker 
Organizations (``RMOs'') and RSQTs may also be referred to as Remote 
Market Markers (``RMMs''). Proposed Rule 507(a).
    \12\ Rule 507 provides, however, that based on system 
constraints, capacity restrictions or other factors relevant to the 
maintenance of a fair and orderly market, the Board may defer, for a 
period to be determined in the Board's discretion, approval of 
qualifying applications for SQT or RSQT status pending any action 
required to address the issue of concern to the Board; where the 
basis for such deferral has been objectively determined by the 
Board, subject to Commission approval or effectiveness pursuant to a 
rule change filing under Section 19(b) of the Act.
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    The process for applying for RSQTO and applying for and assigning 
options to RQSTs and SQTs is set out in Rule 507. The Exchange proposes 
in subsection (b)(i) that each RSQTO application is submitted to the 
Exchange's designated staff in writing (electronically or otherwise as 
specified by the Exchange) in a form and/or format prescribed by the 
Exchange and shall include, at a minimum: (1) The name of the RSQTO 
applicant, (2) the appropriate Exchange account number, and (3) the 
name of each RSQT associated with the RSQTO applicant. The Exchange 
proposes to also add that each RSQT application, in addition to other 
currently-requested minimum information,\13\ state the name of the 
RSQTO with whom the RSQT is affiliated. If the Exchange does not have 
applications from SQTs or RSQTs for assignment in a particular option 
or options that it desires to assign or reassign, the Exchange may 
request such applications.\14\
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    \13\ Other minimum information required of RSQT and SQT 
applicants includes: (1) The name of the SQT or RSQT applicant, (2) 
the appropriate Exchange account number, and (3) the requested start 
date for each option applied for. Rule 507(b)(i).
    \14\ The Exchange is deleting obsolete language from 507(b)(i) 
that it request (solicit) applications for all assignments, as such 
language is no longer necessary or desirable in light of the updated 
application process.
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    The Exchange also clarifies in subsection (b)(ii) of Rule 507 that 
the technological readiness and testing requirements are applicable to 
RSQTO applicants just as they are applicable to RSQTs and SQTs. Thus, 
no application for being RSQTO or assignment in an option will be 
approved without verification that: (1) The RSQTO, SQT or RSQT 
applicant has sufficient technological ability to support his/her 
continuous quoting requirements as set forth in Rule 1014(b)(ii), and 
(2) the RSQTO, SQT or RSQT applicant has successfully completed, or is 
scheduled to complete, testing of its quoting system with the Exchange.
    The Exchange also proposes in subsection (a) of Rule 507 a 
procedure to facilitate the process of RSQTs (currently, member 
organizations) to convert to an RSQTO structure with associated RSQTs. 
Upon approval of the proposal establishing RSQTOs and Exchange 
notification via OTA of such approval, each member organization 
operating as an RSQT pursuant this rule will automatically be deemed an 
RSQTO. After this designation the RSQTO will have twenty one (21) days 
to notify the Exchange of no more than three RSQTs to be affiliated 
with the RSQTO (the ``Conversion Period''), each of whom is an ROT in 
good standing and satisfies the technological readiness and testing 
requirements described in sub-paragraph (b)(ii) of Rule 507.
    After the Conversion Period, per proposed subsection (a) of Rule 
507 a member organization that is not currently qualified as an RSQTO 
may apply to the Exchange to be an RSQTO with up to three affiliated 
RSQTs. Each RSQTO application shall be submitted to the Exchange's 
designated staff in writing (electronically or otherwise as specified 
by the Exchange) in a form and/or format prescribed by the Exchange and 
shall include, at a minimum, the name of the RSQTO applicant, the 
appropriate Exchange account number, and the name of each RSQT 
affiliated with the RSQTO applicant (the ``Application Process''). The 
purpose for the sequential Conversion Period followed by the 
Application Process is to use the Exchange's current administrative 
process to ensure an accurate conversion from the existing RSQT 
methodology to the proposed RSQTO concept with three associated 
RSQTs.\15\
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    \15\ There are currently 28 member organizations that will be 
converted to RSQTOs pursuant to this proposal.
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    Subsection (d) of Rule 507 indicates that once an RSQTO, SQT or 
RSQT is approved for initial assignment in an option, he may not 
withdraw from such option assignment for ten (10) or fewer business 
days after the effective date of assignment. However, the Exchange may, 
in exceptional circumstances, approve withdrawal from an option 
assignment in ten (10) or fewer business days. If an RSQTO, SQT or RSQT 
seeks to withdraw from assignment in an option, it should so notify the 
Exchange at least one business day prior to the desired effective date 
of such withdrawal.
    Finally, market makers may appeal if they believe that the 
Exchange's determination in respect of Rule 507 was improper.\16\ The 
current appeal rights provided in subsection (e) of Rule 507 are not 
changed. Thus, an appeal to the Exchange's Board of Directors 
(``Board'') from a decision of the Exchange may be requested by a 
member or member organization interested therein by filing with the 
Secretary of the Exchange written notice of appeal within ten (10) days 
after the decision has been rendered. Any appeal from a decision 
pursuant to Rule 507 shall be heard by a special committee of the Board 
composed of three (3) Directors, of whom at least one (1) shall be an 
Independent Director.\17\
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    \16\ Decision concerning applications for assignment in options 
shall be in writing and shall be distributed to all applicants. 
Proposed Rule 507(c).
    \17\ Rule 507(e) states also that the person requesting review 
shall be permitted to submit a written statement to and/or appear 
before this special committee. The Secretary of the Exchange shall 
certify the record of the proceeding, if any and the written 
decision and shall submit these documents to the special committee. 
The special committee's review of the action shall be based solely 
on the record, the written decision and any statement submitted by 
the person requesting the review. The special committee shall 
prepare and deliver to such person a written decision and reasons 
therefore. If the special committee affirms the action, the action 
shall become effective ten (10) days from the date of the special 
committee's decision. There shall be no appeal to the Board of 
Directors from any decision of the special committee.
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Restrictions Applicable to Remote Streaming Quote Traders and Remote 
Streaming Quote Trader Organizations
    Rule 1014 describes, among other things, certain electronic quoting 
obligations via the Exchange's electronic

[[Page 5521]]

quoting and trading system,\18\ as well as restrictions, pertaining to 
the current market makers on the Exchange. One of these restrictions in 
Rule 1014 indicates that no person who is either directly or indirectly 
affiliated with an RSQT (``affiliated RSQT'') is allowed to submit 
quotations as a specialist, SQT, RSQT or non-SQT ROT in options in 
which such affiliated RSQT is assigned.\19\ In light of customer 
requests, the establishment of RSQTOs and inherent RSQT affiliation(s), 
and established quoting procedures, the Exchange proposes to clarify 
the quoting restriction applicable to RSQTs.
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    \18\ The Exchange's electronic quoting and trading system, which 
has been denoted in Exchange rules as XL II, XL and AUTOM, has been 
updated with recent enhancements and configurations. See Exchange 
Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 2009) 
(SR-Phlx-2009-32) (approval order regarding current electronic 
quoting and trading system known as XL II).
    \19\ See Rule 1014(b)(ii)(B).
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    In particular, the Exchange proposes to amend subsection (b)(ii)(B) 
of Rule 1014 to remove the provision that states that no person who is 
either directly or indirectly affiliated with an RSQT shall submit 
quotations as a specialist, SQT, RSQT or non-SQT ROT in options in 
which such affiliated RSQT is assigned. This allows more than one RSQT 
to submit a quote in an assigned option, to the extent that each RSQT 
applies for and is approved as an RSQT affiliated with an RSQTO 
pursuant to Rule 507. The Exchange notes that this proposal does not 
otherwise affect the quoting responsibilities of RSQTs or other aspects 
of Rule 1014.\20\ The Exchange also proposes to clarify subsection 
(b)(ii)(A) of Rule 1014 to state that an SQT may only trade in a market 
making capacity in classes of options in which the SQT is assigned.\21\
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    \20\ The proposed rule change will not, for example, impact the 
allocation received by a Directed RSQT or Directed SQT pursuant to 
rule 1014(viii)(B)(2). Thus, if an order is directed to a member 
organization that has more than one affiliated SQT or RSQT assigned 
in an option, only one SQT or RSQT may receive an allocation as 
Directed RSQT or Directed SQT, and the remaining non-Directed market 
makers will simply receive the standard RSQT or SQT allocation. Each 
RSQT and SQT would need to maintain Directed SQT and Directed RSQT 
quoting requirements because it is possible that they could receive 
a Directed Order, albeit only one market maker could be Directed per 
order.
    \21\ The language regarding when an SQT may trade in a market 
making capacity is exactly the same as what is currently applicable 
to RSQTs. See Rule 1014(b)(ii)(B).
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    The Exchange represents that it has an adequate surveillance 
program in place for options that are quoted and traded on the Exchange 
and intends to continue application of those program procedures as 
necessary.\22\ The Exchange also represents that it has the systems 
capacity to continue to support quoting and trading options subsequent 
to the effectiveness of this proposal.
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    \22\ Additionally, the Exchange is a member of the Intermarket 
Surveillance Group (``ISG'') under the Intermarket Surveillance 
Group Agreement, dated June 20, 1994. ISG members generally work 
together to coordinate surveillance and investigative information 
sharing in the stock and options markets. Moreover, the major 
futures exchanges are affiliated members of the ISG, which allows 
for the sharing of surveillance information for potential 
intermarket trading abuses.
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    The Exchange believes that the proposed rule change establishing 
RSQTOs and affiliated RSQTs and enabling the submission of more than 
one quotation in the same option class should encourage competition, 
create additional trading opportunities and outlets and increase the 
depth of markets, and promote a more robust system with specific 
standards for member organizations that are RSQTOs, electronic market 
makers that are affiliated with RSQTOs as RSQTs, and floor-based SQTs. 
This should lead to tighter, more efficient markets to the benefit of 
market participants including public investors that engage in trading 
and hedging on the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \23\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \24\ 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 enabling approval of RSQTOs with whom as many as three 
RSQTs may be affiliated, and enabling multiple quotes in the same 
option.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its rule change proposal does not 
engender unfair discrimination among specialists, specialist units, 
SQTs and RSQTs in that it proposes to amend rules and procedures that 
are equally applicable to all members and member organizations at the 
Exchange. Moreover, the Exchange believes that the proposal will 
promote a more robust system with specific standards for member 
organizations that are RSQTOs, electronic market makers that are 
affiliated with RSQTOs as RSQTs, and floor-based SQTs. By engendering 
more competition among market makers, the proposal may also lead to 
tighter, more efficient markets to the benefit of market participants 
including public investors that engage in trading and hedging on the 
Exchange.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. To the contrary, the proposal 
further promotes competition on the Exchange which should lead to 
tighter, more efficient markets to the benefit of market participants 
including public investors that engage in trading and hedging on the 
Exchange, and thereby make the Exchange a desirable market vis a vis 
other options exchanges.

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 45 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 the Exchange consents, the Commission shall: (a) By order approve 
or disapprove 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 email to [email protected]. Please include 
File Number SR-Phlx-2013-03 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.


[[Page 5522]]


All submissions should refer to File Number SR-Phlx-2013-03. This file 
number should be included on the subject line if email 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 
10:00 a.m. and 3:00 p.m. 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-2013-03 and should be 
submitted on or before February 15, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01483 Filed 1-24-13; 8:45 am]
BILLING CODE 8011-01-P