[Federal Register: June 15, 2004 (Volume 69, Number 114)]
[Notices]
[Page 33442-33453]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jn04-115]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49832; File No. SR-Phlx-2003-59]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendments No. 1, 2, 3, 4, and 5 by the Philadelphia Stock
Exchange, Inc. Relating to the Exchange's New Electronic Trading
Platform, ``Phlx XL''
June 8, 2004.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 3, 2003, the Philadelphia Stock Exchange, Inc.
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. On December 9, 2003, December 11, 2003, January 28, 2004, and
May 11, 2004, the Exchange filed Amendments No. 1, 2, 3, and 4,
respectively, to the proposed rule change.\3\ On June 4, 2004, the
Exchange filed Amendment No. 5 to the proposed rule change.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letters from Richard S. Rudolph, Director and Counsel,
Phlx, to Nancy J. Sanow, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated December 9, 2004
(``Amendment No. 1''); December 11, 2003 (``Amendment No. 2'');
January 28, 2004 (``Amendment No. 3''); and May 10, 2004, replacing
Form 19b-4 in its entirety (``Amendment No. 4'').
\4\ See letter from Richard S. Rudolph, Director and Counsel,
Phlx, to Deborah Lassman Flynn, Assistant Director, Division,
Commission, dated June 3, 2004 (``Amendment No. 5''). In Amendment
No. 5, the Exchange (i) amended certain proposed rules, (ii) removed
a sentence from the purpose section of the notice, and (iii)
committed to: (A) correct any technical drafting and/or typographic
errors or omissions contained in the proposed rule change, and (B)
provide a more detailed description of the procedures by which the
opening price on Phlx XL would be established.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to adopt new rules for the implementation of its
new electronic trading platform for options known as ``Phlx XL.'' The
text of the proposed rule change, as amended, is available at the
Office of the Secretary, the Phlx, at the Commission, and on the
Commission's Web site, http://www.sec.gov.
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. 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 adopt rules regarding
the Exchange's new electronic trading platform, Phlx XL. The proposal
would permit certain on-floor Exchange members, as described below, to
submit streaming electronic option quotations via electronic interface
with the Exchange's Automated Options Market (``AUTOM'') System.\5\
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\5\ AUTOM is the Exchange's electronic order delivery, routing,
execution and reporting system, which provides for the automatic
entry and routing of equity option and index option orders to the
Exchange trading floor. Orders delivered through AUTOM may be
executed manually, or certain orders are eligible for AUTOM's
automatic execution features, AUTO-X, Book Sweep and Book Match.
Equity option and index option specialists are required by the
Exchange to participate in AUTOM and its features and enhancements.
Option orders entered by Exchange members into AUTOM are routed to
the appropriate specialist unit on the Exchange trading floor. See
Phlx Rule 1080.
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Implementation and Deployment
The Exchange represents that it will begin the initial rollout of
Phlx XL on an issue-by-issue basis, beginning with the first of
approximately 10 issues included in the initial rollout not later than
10 days following the Commission's approval of the proposed rules
applicable to Phlx XL. The Exchange plans to expand the deployment of
Phlx XL to include the Top 120 equity options within 8 months of the
initial deployment, and the Exchange expects to roll out Phlx XL for
all options floor wide not later than December 31, 2005.\6\
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\6\ In January 2004, the Exchange submitted a proposal to modify
the timing of the deployment of the ROT Access feature of its
Automated Options Market (AUTOM) system in light of the Exchange's
proposal to introduce Phlx XL. See Securities Exchange Act Release
No. 49151 (January 29, 2004), 69 FR 6010 (February 9, 2004) (SR-
Phlx-2004-01). Specifically, if Phlx XL is not deployed floor-wide
for all options by April 30, 2005, the Exchange has committed to
ensure that, as of that date, the AUTOM system automatically
executes eligible incoming orders in options that are not then
Streaming Quote Options (as defined below) against Phlx Price
Improving ROT and specialist price improving orders and orders
matching such price-improving orders entered via the electronic
interface with AUTOM, as described in Commentary .04 to Phlx Rule
1080.
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Streaming Quote Options
Proposed Phlx Rule 1080(k) would provide that the Exchange's
Options Committee \7\ may, on an issue-by-issue basis, determine the
specific issues in which Streaming Quote Traders (``SQTs''), as defined
in Phlx Rule 1014(b)(ii), may generate and submit option quotations
electronically through an electronic interface with AUTOM via an
Exchange approved proprietary electronic quoting device. Such issues
would be known as ``Streaming Quote Options.''
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\7\ The Options Committee has general supervision of the
dealings of members on the equity and index options trading floor,
and of the premises of the exchange facility immediately adjacent
thereto. It is responsible to make or recommend for adoption, and
administer such rules as it may deem necessary for the convenient
and orderly transaction of business upon the equity and index
options trading floor. The Committee has supervision of the
activities on the equity and index options trading floor of
specialists, assistant specialists, registered option traders, floor
brokers, and other types of market-makers. See Exchange By-Law
Article X, Section 10-19.
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Streaming Quote Traders and Quoting Requirements
The proposed rules would provide that the term Registered Options
Trader (``ROT'') would include an SQT. An SQT would be defined in
proposed Phlx Rule 1014(b)(ii) as an ROT who has received permission
from the Exchange to generate and submit option quotations
electronically through an electronic interface with AUTOM via an
Exchange approved proprietary electronic quoting device in eligible
options to which such SQT is assigned. With respect to Streaming Quote
Options (defined below) to which an SQT is assigned, such SQT would be
responsible to quote continuous, two-
[[Page 33443]]
sided markets in not less than 60% of the series in each Streaming
Quote Option (as defined in proposed Phlx Rule 1080(k)) in which such
SQT is assigned. The specialist assigned in a Streaming Quote Option,
however, would be required to quote continuous, two-sided markets in
100% of the series in each assigned option.\8\ ROTs who are not SQTs
would continue to be responsible to fulfill all of the requirements for
ROTs set forth in Phlx Rule 1014.
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\8\ For example, if an SQT is assigned in one Streaming Quote
Option that includes five series (A, B, C, D, and E), such SQT would
be required to quote continuous, two-sided markets in three of those
series in order to fulfill the 60% quoting requirement. If such an
SQT initially submits quotations in series A, B, and C, and the size
associated with the quotation in Series A is exhausted, such SQT
would be required either to refresh its quotation in Series A while
continuing to submit quotations in Series B and C, or to submit new
quotations in any three of the five series, in order to fulfill the
60% quoting requirement.
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Proposed Phlx Rule 1014(b)(ii)(B) would set forth the minimum
quotation size for specialists and SQTs in Streaming Quote Options
traded on Phlx XL. Specifically, the proposed rule would provide that,
during a six-month period commencing on the date of the initial
deployment of Phlx XL (the ``initial six-month period''), the
specialist and any SQT assigned in a Streaming Quote Option would be
permitted temporarily to submit electronic quotations with a size of
fewer than 10 contracts for a period of 60 days after such option
begins trading as a Streaming Quote Option. Beginning on the sixty-
first day after such option begins trading as a Streaming Quote Option,
SQTs and the specialist assigned in such Streaming Quote Option would
be required to submit electronic quotations with a size of not less
than 10 contracts.
Subsequently, during a six-month period commencing on the first day
following the expiration of the initial six-month period, the
specialist and any SQT assigned in a Streaming Quote Option would be
permitted to submit electronic quotations with a size of fewer than 10
contracts for a period of 30 days after such option begins trading as a
Streaming Quote Option. Beginning on the thirty-first day after such
option begins trading as a Streaming Quote Option, SQTs and the
specialist assigned in such Streaming Quote Option would be required to
submit electronic quotations with a size of not less than 10 contracts.
Thereafter, the specialist and any SQT assigned in a Streaming
Quote Option that is newly listed and deployed on Phlx XL would be
required to submit electronic quotations with a size of not less than
10 contracts beginning on the date on which such Streaming Quote Option
begins trading on Phlx XL. The purpose of this provision is to enable
SQTs and the specialist in a Streaming Quote Option, during the initial
stages of deployment of Phlx XL, to quote with a size of less than ten
contracts so that such SQTs and specialists may determine over this
period of time that their quotation systems and models function
properly and reliably, and to make necessary changes, if any, during
this time in order to manage their risk while providing fair and
orderly markets in the Streaming Quote Option. The ten-contract minimum
quotation size obligation would apply only to an SQT or specialist's
undecremented quote.\9\ An SQT would be permitted to submit electronic
quotations only while such SQT is physically present on the floor of
the Exchange.
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\9\ For example, if a specialist or SQT electronically submits a
quotation with a size of 10 contracts, and three of those contracts
are executed (leaving a disseminated quotation size of seven
contracts), such specialist or SQT would be permitted continue to
disseminate that electronic quotation with a size representing the
remaining 7 contracts. If, however, such specialist electronically
submits a revised quotation, such revised quotation would be
required to be for a size of 10 contracts.
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Under Phlx XL, SQTs and the specialist would be able to quote
verbally in open outcry in response to a request for a market, or to
quote electronically (or submit orders electronically) by use of an
Exchange-approved quoting device.
Non-SQT ROTs trading Streaming Quote Options would be required to
quote verbally in response to a request for a market, and would
continue to have the ability to place limit orders electronically
directly onto the limit order book through electronic interface with
AUTOM.\10\ A non-SQT ROT would not, however, have the same continuous,
electronic quoting requirements as an SQT trading the same Streaming
Quote Option, unless such non-SQT ROT would trade in excess of a
specified number of contracts electronically (i.e., by way of placing
limit orders on the book that are executed via Book Match or Book
Sweep, as described more fully below) in a given calendar quarter.
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\10\ See Phlx Rule 1080, Commentary .04.
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With respect to non-SQT ROTs in Streaming Quote Options, the
proposed rule would require that, during the initial six-month period,
for a period of sixty days commencing immediately after an option
begins trading as a Streaming Quote Option, such non-SQT ROTs may
provide such quotations with a size of fewer than 10 contracts.
Beginning on the sixty-first day after such option begins trading as a
Streaming Quote Option, such quotations would be required to be for a
size of at least 10 contracts. During a six month period commencing on
the first day following the expiration of the initial six-month period,
such non-SQT ROTs may provide such quotations with a size of fewer than
10 contracts for a period of thirty days after such option begins
trading as a Streaming Quote Option. Beginning on the thirty-first day
after such option begins trading as a Streaming Quote Option, such
quotations would be required to be for a size of at least 10 contracts.
Thereafter, such non-SQT ROTs would be required to provide such
quotations with a size of not less than 10 contracts beginning on the
date on which such Streaming Quote Option begins trading on Phlx XL.
The same size requirements set forth for non-SQT ROTs in open
outcry (as set forth in the preceding paragraph) would apply to non-SQT
ROTs who are required to submit electronic quotations in a Streaming
Quote Option for which a non-SQT ROT transacts more than 20% of his/her
contract volume in a Streaming Quote Option electronically (i.e., by
way of placing limit orders on the limit order book that are executed
electronically and allocated automatically in accordance with proposed
Phlx Rule 1014(g)(vii)) versus in open outcry during any calendar
quarter.
The Exchange proposes to establish additional obligations for non-
SQT ROTs trading Streaming Quote Options who do not apply to become
SQTs but nonetheless would be required to submit electronic quotations
because of the percentage of contracts in Streaming Quote Options they
trade electronically. Specifically, if a non-SQT ROT trading a
Streaming Quote Option transacts more than 20% of its contract volume
electronically in an assigned option that is a Streaming Quote Option
during any calendar quarter, such non-SQT ROT would be required to
submit continuous two-sided electronic quotations in a designated
percentage of series within the Streaming Quote Option (depending on
the total Exchange volume traded electronically in such Streaming Quote
Option), beginning with the commencement of the following calendar
quarter. The following schedule would apply:
[[Page 33444]]
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Electronic
Percent of overall streaming quote option volume quoting
transacted on the exchange during the previous quarter percent (% of
that was transacted electronically series)
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50 or Below............................................. 20
51-75................................................... 40
Above 75................................................ 60
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For example, if 83% of the total volume on the Exchange in a
particular Streaming Quote Option is transacted electronically, non-SQT
ROTs in such Streaming Quote Option would be required to maintain
continuous quotations in 60% of the series. The Exchange will monitor
on a calendar quarter basis the percentage of contracts transacted
electronically on the Exchange in each particular Streaming Quote
Option for the purpose of adjusting the applicable electronic quoting
percentage during the next succeeding calendar quarter.
Proposed Phlx Rule 1014(b)(ii)((C)(1)(d) would clarify that any
volume transacted electronically by a non-SQT ROT (i.e., limit orders
placed on the limit order book that are executed via Book Match or Book
Sweep) would not count towards the ROT's in-person requirement
contained in Phlx Rule 1014, Commentary .01.\11\
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\11\ Phlx Rule 1014, Commentary .01 provides that, in order for
an ROT to receive specialist margin treatment for off-floor orders
in any calendar quarter, the ROT must execute the greater of 1,000
contracts or 80% of his total contracts that quarter in person.
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SQT Participation in Openings
In order to clarify the interaction of SQT quotations with opening
orders, the Exchange proposes to adopt Phlx Rule 1017(g), which would
provide that, with respect to Streaming Quote Options, SQTs may
participate in opening transactions by submitting electronic quotations
to interact with opening orders.
Exchange openings and re-openings in options are currently
conducted by way of rotation procedures \12\ or by way of Series
Opening Request Ticket (``SORT'') procedures, as provided in Phlx Rule
1047. \13\ Rotation procedures allow a brief period of auction pricing
for each option series during which bids and offers and transactions
for that option class may normally only occur in that series. Proposed
Phlx Rule 1017(g) would clarify that such an auction would include,
with respect to Streaming Quote Options, bids and offers submitted
electronically by SQTs and/or the specialist.
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\12\ A trading rotation is a series of very brief time periods
during each of which bids, offers and transactions in only a single,
specified option contract can be made. Opening rotations, currently
conducted by the specialist assigned in the particular option, are
held promptly following the opening of the underlying security on
the primary market where it is traded. An underlying security shall
be deemed to have opened on the primary market where it is traded if
such market has (i) reported a transaction in the underlying
security or (ii) disseminated opening quotations for the underlying
security and not given an indication of a delayed opening. The
Specialist generally first opens the one or more series of options
of a given class having the nearest expiration, then proceeds to a
series of options having the next most distant expiration, and so
forth, until all series have been opened. The Specialist determines
which type of option should open first, and may alternate the
opening of put series and call series or may open all series of one
type before opening any series of the other type, depending on
current market conditions except in the case of a modified rotation.
Modified rotations include ``reverse'' and ``shotgun''
rotations. A ``reverse rotation'' is an opening rotation where the
Specialist first opens the one or more series of options of a given
class having the most distant expiration, then proceed to the next
nearest expiration, and so forth, ending with the nearest
expiration, until all series have been opened. A ``shotgun
rotation'' is an opening rotation in which each option series opens
in the same manner and sequence as during a regular trading rotation
but is permitted to freely trade once all option series with the
same expiration month have been opened. See Phlx Rule 1047,
Commentary .01(a) and (b).
\13\ A SORT opening is one where the specialist opens all series
in an options class simultaneously after rotating only those series
for which a SORT was received. The SORT is a form submitted by a
member with interest in a particular series to the specialist, at
least five minutes prior to the opening of trading, and signals the
specialist to rotate that series. Prior to conducting a SORT
procedure, the specialist must announce to the crowd that such a
procedure will be utilized, and in which series, if any, a SORT has
been received. See Phlx Rule 1047, Commentary .01(c).
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The opening auction in Streaming Quote Options traded on Phlx XL
will continue to be managed by the specialist, principally using the X-
Station.\14\ Using the X-Station the specialist will be able to see and
ascertain the best bid and offer, including limit orders and, with
respect to Streaming Quote Options traded on Phlx XL, electronic
quotations submitted by SQTs. The specialist will also continue to take
into account bids, offers or orders voiced in the trading crowd during
the opening auction when determining the opening price.
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\14\ The X-Station is a component of AUTOM used by the
specialist as an on-floor display of the electronic limit order
book, and as a tool for, among other things, the manual execution of
orders that are due for execution.
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Proposed Phlx Rule 1017(b)(ii) would provide that, in connection
with an opening in a Streaming Quote Option (as defined in Phlx Rule
1080(k)), a bid submitted electronically by the specialist or an SQT in
such Streaming Quote Option which is at a higher price than the price
at which the option is to be opened and an offer submitted
electronically by the specialist or an SQT in such Streaming Quote
Option which is at a lower price than the price at which the option is
to be opened, are to be executed at the opening price. The purpose of
this provision is to ensure that an SQT would receive the best
execution at the opening when such SQT's quotation is higher (lower)
than the bid (offer).\15\
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\15\ The Exchange is not proposing a completely automated
opening process at this time.
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Assignment in Streaming Quote Options
The Options Allocation, Evaluation and Securities Committee
(``OAESC'') \16\ would assign SQTs in one or more eligible options in a
similar fashion to the current practice of allocation of trading
privileges to specialists. Proposed Phlx Rule 507 would set forth the
solicitation, application and review process to be followed by the
OAESC.
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\16\ The Options Allocation, Evaluation and Securities Committee
has jurisdiction over the allocation, retention and transfer of the
privileges to deal in all options to, by and among members on the
options and foreign currency options trading floors. See Exchange
By-Law Article X, Section 10-7. See also, Phlx Rule 500.
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Proposed Phlx Rule 507 would also provide that an application for
assignment in Streaming Quote Options would be submitted in writing to
the Exchange's designated staff and would be required to include, at a
minimum, the name of the SQT applicant and written verification from
the Exchange's Membership Services Department that such SQT applicant
is qualified as a ROT.
In order to ensure an SQT applicant's technological readiness to
submit electronic quotes, proposed Phlx Rule 507(b)(ii) would mandate
that no application for assignment in Streaming Quote Options would be
approved by the OAESC without written certification signed by an
officer (Vice President or above) of the Exchange's Financial
Automation Department \17\ indicating that the SQT applicant has
sufficient technological ability to support his/her continuous quoting
requirements as set forth in Phlx Rule 1014(b)(ii), and the SQT
applicant has successfully completed, or is scheduled to complete,
testing of its quoting system with the Exchange.
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\17\ The Exchange's Financial Automation Department is
responsible for the design, development, implementation, testing and
maintenance of the Exchange's automated trading systems,
surveillance systems, and back office systems, and for monitoring
the quality of performance and operational readiness of such
systems, in addition to user training and validation of user
technology as it pertains to such users' interface with the
Exchange's systems.
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In order to clarify that proposed Phlx Rule 507 is not intended to
function as a barrier to entry to the Exchange's marketplace while
still taking into
[[Page 33445]]
account the possibility that, initially, quote capacity may become an
issue surrounding the number of SQTs who could begin trading as such,
the Exchange proposes to add Phlx Rule 507(b)(iii) in order to provide
that (i) Phlx Rule 507 places no limit on the number of qualifying ROTs
that may become SQTs and (ii) any applicant that is qualified as an ROT
in good standing and that satisfies the technological readiness and
testing requirements described in sub-paragraph (b)(ii), must be
approved as an SQT. However, 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
status pending any action required to address the issue of concern to
the Board. The Board may not defer a determination of the approval of
the application of any SQT applicant or place any limitation(s) on
access to Phlx XL on any SQT applicant unless the basis for such
limitation(s) or deferral have 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. The Committee must
provide written notification to any SQT applicant whose application is
the subject of such limitation(s) or deferral, describing the objective
basis for such limitation(s) or deferral.
The proposed rule also includes a provision that, during the first
six months of the deployment of Phlx XL, an SQT applicant member or
member organization that has, for at least the immediately preceding
twelve months: (i) Been a member of the Exchange and (ii) maintained a
continuous presence as an ROT in the trading crowd associated with the
Streaming Quote Option(s) that are the subject of the application, must
be guaranteed an assignment in the Streaming Quote Option, provided
that such member organization has received the written certification
concerning technological readiness as set forth in proposed Phlx Rule
507(b)(ii).
Proposed Phlx Rule 507(g) would clarify that an appeal to the Board
of Governors from a decision of the Committee may be taken 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, in accordance with Exchange By-Law Article
XI, Section 11-1.
Trade Allocation in Streaming Quote Options
The proposed rules would codify the trade allocation algorithm that
would apply to orders or electronic quotes in Streaming Quote Options
that result in automatic executions\18\ via the AUTOM System.\19\ In
the case of trades stemming from orders that are not automatically
executed and instead handled manually by the specialist or represented
in the trading crowd by a Floor Broker, current Exchange rules
concerning allocation of non-automatically executed trades would
apply.\20\
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\18\ Trades in Streaming Quote Options involving inbound orders
and specialist and SQT quotes delivered via AUTOM would be
automatically executed by the Book Sweep function (described below);
and by the Book Match function (described below). Eligible orders
for non-Streaming Quote Options delivered via AUTOM would be
automatically executed via AUTO-X, an automatic execution feature of
AUTOM (see Phlx Rule 1080(c)), or against contra-side orders resting
on the limit order book by Book Match under Phlx Rule 1080(g)(ii).
\19\ The proposed trade allocation rules would only apply to
trades in Streaming Quote Options that are automatically executed
via Book Match pursuant to Phlx Rule 1080(g)(ii) and via Book Sweep
pursuant to Phlx Rule 1080(c)(ii). Currently, trades that are
automatically executed via AUTO-X are allocated among the specialist
and ROTs participating on the ``Wheel.'' The ``Wheel'' is a feature
of AUTOM that provides an automated mechanism for assigning
specialists and ROTs signed on the Wheel for a given listed option,
on a rotating basis, as contra-side participants to trades executed
via AUTO-X. See Phlx Rule 1080(g) and Option Floor Procedure Advice
(``OFPA'') F-24. Under the instant proposal, trades in Streaming
Quote Options that are automatically executed via Book Match
pursuant to the proposed amendments to Phlx Rule 1080(g)(ii) would
be allocated automatically according to the algorithm set forth in
proposed Phlx Rule 1014(g)(vii) and proposed OFPA B-6, Section F.
Trades in non-Streaming Quote Options that are automatically
executed via AUTO-X would continue to be allocated on the Wheel or
by Book Match.
\20\ In April 2003, the Commission approved the Exchange's
proposal to adopt Phlx Rule 1014(g)(v) and OFPA B-6 concerning the
allocation of non-automatically executed orders in options. See
Securities Exchange Act Release No. 47739 (April 25, 2003), 68 FR
23354 (May 1, 2003) (SR-Phlx-2001-39). That proposal was filed in
response to Order Instituting Public Administrative Proceedings
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934,
Making Findings and Imposing Sanctions, Securities Exchange Act
Release No. 43268 (September 11, 2000) and Administrative Proceeding
File 3-10282 (the ``Order''). While the instant proposal is not
filed in direct response to the Order, the Exchange believes that
the proposed rules concerning the allocation of trades in Streaming
Quote Options are consistent with the requirements of the Order.
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The proposed rules would require that automatically executed trades
in Streaming Quote Options would be allocated among the specialist and
crowd participants with orders or quotations at the Exchange's
disseminated price after public customer market and marketable limit
orders have been executed. This aspect of the proposed rule change is
consistent with current Exchange rules concerning the priority of
customer orders.\21\
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\21\ Phlx Rule 1014(g)(i)(A) requires that orders of controlled
accounts must yield priority to customer orders. A ``controlled
account'' includes any account controlled by or under common control
with a broker-dealer (such as a specialist or an SQT). Customer
accounts are all other accounts.
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Quoting alone at the Exchange's best bid/offer. The proposed rules
would provide that, if one Phlx XL participant is quoting alone at the
disseminated price and its quote is not matched by another Phlx XL
participant prior to execution, such Phlx XL participant would be
entitled to receive a number of contracts up to the size associated
with his/her quote.
Parity. The proposed rules would codify the automatic allocation
algorithm that would apply to orders or electronic quotes in Streaming
Quote Options that result in automatic executions when two or more Phlx
XL participants have quotes or booked limit orders at the Exchange's
disseminated price.\22\
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\22\ Phlx Rules 119, 120, and 1014(g) are the general rules
concerning establishment of parity and priority in the execution of
orders on the options floor. The trade allocation algorithm in
proposed Phlx Rule 1014(g)(vii) generally does not contemplate that
price-time priority would apply to quotes and orders in Streaming
Quote Options. Proposed Phlx Rule 1014(g)(vii)(B)(3) thus would
state that, notwithstanding the first sentence of Phlx Rule
1014(g)(i), neither Phlx Rule 119(a)-(d) and (f), nor Phlx Rule 120
(insofar as it incorporates those provisions by reference) would
apply to the allocation of automatically executed trades in
Streaming Quote Options.
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Quotations entered electronically by the specialist or an SQT that
do not cause an order resting on the limit order book to become due for
execution may be matched, or joined, at any time by quotations entered
electronically by the specialist and/or other SQTs, and by ROT limit
orders placed on the limit order book via electronic interface, and
would be deemed to be on parity, subject to the requirement that orders
of controlled accounts must yield priority to customer orders as set
forth in Phlx Rule 1014(g)(i)(A). This means specifically that if a
customer limit order represents all or a portion of the Exchange's
disseminated size, such customer limit order would be executed first up
to its disseminated size, before the specialist or any SQT, non-SQT
ROT, or off-floor broker-dealer would be entitled to receive any
contracts.
Quotations entered electronically by the specialist or an SQT that
cause the specialist's quote, an SQT's quote, or an order resting on
the limit order book to become due for execution would be subject to
execution under the proposed
[[Page 33446]]
amended rules concerning the Exchange's Book Match or Book Sweep
functions, described more fully below.
Specialist on parity. If the specialist is quoting at the
Exchange's best bid/offer, after public customer market and marketable
limit orders have been executed, the specialist would initially be
entitled to receive the entire allocation in orders for five contracts
or fewer provided, however, that on a quarterly basis, the Exchange
will evaluate what percentage of the volume executed on the Exchange is
comprised of orders for five contracts or fewer executed by
specialists, and will reduce the size of the orders included in this
provision if such percentage is over 25%.
Respecting orders for greater than five contracts, the specialist
would be entitled to receive the greater of the proportion of the total
disseminated size at the disseminated price represented by the size of
the specialist's quote; or:
60% of the contracts to be allocated if the specialist is
on parity with one SQT or one non-SQT ROT that has placed a limit order
on the book at the Exchange's disseminated price;
40% of the contracts to be allocated if the specialist is
on parity with two SQTs or non-SQT ROTs that have placed a limit order
on the book at the Exchange's disseminated price; and
30% of the contracts to be allocated if the specialist is
on parity with three or more SQTs or non-SQT ROTs that have placed a
limit order on the book at the Exchange's disseminated price.
In order to be entitled to receive the specified percentages, and
the five contract or fewer order preference, the specialist must be
quoting at the Exchange's disseminated price. The specialist would not
be entitled to receive a number of contracts that is greater than the
size associated with the specialist's quote.
The Exchange believes that the specialist's entitlement under this
algorithm should enable the Exchange to attract and retain highly
capitalized specialist units who can capture order flow for the
Exchange. According to the Exchange, because the specialist unit is
currently a key Exchange member organization engaged in aggressive and
often expensive marketing efforts to attract order flow in particular
options, the Exchange seeks to provide the appropriate encouragement to
specialists to plan, invest in, and effect marketing strategies.
Therefore, the Exchange believes that these programs provide
specialists with the appropriate incentive to create more depth and
liquidity. Moreover, the Exchange believes that the specialist's
entitlement in the proposed algorithm reasonably rewards specialists
for their additional obligations, such as the proposed requirement to
quote 100% of the series in all Streaming Quote Options in which they
are assigned (whereas SQTs would be required by proposed Phlx Rule
1014(b)(ii) to quote in 60% of the series in Streaming Quote Options in
which they are assigned); the obligation to handle limit orders on the
book; the obligation under the Plan for the Purpose of Creating and
Operating an Intermarket Options Linkage (the ``Linkage Plan'')\23\ to
handle all inbound Linkage Orders and to send Satisfaction Orders on
behalf of customer limit orders on the specialist's book; and the
obligation, under certain circumstances, to allocate manually executed
trades.\24\
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\23\ See Securities Exchange Act Release Nos. 43573 (November
16, 2000), 65 FR 70851 (November 28, 2000) (Notice of Phlx Joining
the Plan) and 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000)
(Approval of the Plan).
\24\ See Phlx Rule 1014(g)(vi) and OFPA F-2.
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After public customer limit orders have been executed and the
specialist has received its entitlement, SQTs quoting at the
disseminated price and non-SQT ROTs that have placed limit orders on
the limit order book which represent the Exchange's disseminated price
would be entitled to receive a number of contracts that is the
proportion of the aggregate size associated with SQT quotes and non-SQT
ROT limit orders on the book at the disseminated price represented by
the size of the SQT's quote or, in the case of a non-SQT ROT, by the
size of the limit order they have placed on the limit order book. Such
SQT(s) and non-SQT ROTs would not be entitled to receive a number of
contracts that is greater than the size associated with their quotation
or limit order.
With respect to contracts relating to off-floor broker-dealer limit
orders resting on the limit order book that are executed and allocated
automatically, if any contracts remain to be allocated after the
specialist, SQTs and non-SQT ROTs with limit orders on the limit order
book have received their respective allocations, off-floor broker-
dealers that have placed limit orders on the limit order book which
represent the Exchange's disseminated price would be entitled to
receive a number of contracts that is the proportion of the aggregate
size associated with off-floor broker-dealer limit orders on the limit
order book at the disseminated price represented by the size of the
limit order they have placed on the limit order book. Such off-floor
broker-dealers would not be entitled to receive a number of contracts
that is greater than the size that is associated with its quote.
However, when an off-floor broker-dealer order is resting on the
limit order book at the Exchange's disseminated bid or offer, an order
executed manually by the specialist would be required to be allocated
first to customer orders, and next to off-floor broker-dealer limit
orders, before the specialist and SQTs with quotations at the same
price and non-SQT ROTs that have placed limit orders via electronic
interface at the same price would be entitled to receive their
respective allocations under proposed Phlx Rule 1014(g)(vii).
Currently, Phlx Rule 1014(g)(i)(A) provides that orders of
controlled accounts\25\ must yield priority to customer orders, but
that orders of controlled accounts are not required to yield priority
to other controlled account orders. The Exchange proposes to amend Phlx
Rule 1014(g)(i)(A) to require the specialist, SQTs and non-SQT ROTs to
yield priority to off-floor broker-dealer limit orders in Streaming
Quote Options resting on the limit order book solely in the limited
circumstance where the specialist executes such an order manually, and
not in the circumstance where such an order is executed and allocated
automatically under Phlx XL. The purpose of this provision is to ensure
that the specialist complies with the fiduciary obligation that
devolves upon the specialist when acting as agent for such a limit
order.
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\25\ Phlx Rule 1014(g)(i)(A) defines a controlled account as any
account controlled by or under common control with a broker-dealer.
Customer accounts are all other accounts.
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In the situation where the off-floor broker-dealer limit order
resting on the limit order book is executed and allocated
automatically, the Exchange believes that the operation of the proposed
automatic trade allocation algorithm contained in proposed Phlx Rule
1014(g)(vii), which would allocate contracts to off-floor broker-dealer
limit orders resting on the limit order book after customers, the
specialist, SQTs and non-SQT ROTs have received their respective
allocations is appropriate since the specialist is not acting as
``agent'' for such an order in such a circumstance.
Off-Floor Broker-Dealer Orders and section 11(a) of the Act
Exchange rules do not currently distinguish between members or non-
members respecting ``off-floor broker-dealer'' orders. The Exchange
believes that its definition of ``off-floor broker-dealer,''\26\ which
does not make this
[[Page 33447]]
distinction, is consistent with section 11(a) of the Act\27\ and the
rules thereunder.
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\26\ The term ``off-floor broker-dealer'' means a broker-dealer
that delivers orders from off the floor of the Exchange for the
proprietary account(s) of such broker-dealer, including a market
maker located on an exchange or trading floor other than the
Exchange's trading floor who elects to deliver orders via AUTOM for
the proprietary account(s) of such market maker. See Phlx Rule
1080(b)(i)(C).
\27\ 15 U.S.C. 78k(a).
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Section 11(a) prohibits a member of a national securities exchange
from effecting transactions on the exchange for its own account, the
account of an associated person, or an account in which it or an
associated person exercises investment discretion, unless certain
exceptions apply. One such exception is Rule 11a2-2(T) under the
Act,\28\ known as the ``Effect Versus Execute Rule,'' permits an
exchange member, subject to certain conditions, to effect a transaction
for such accounts, utilizing an unaffiliated member to execute
transactions on an exchange floor. The Rule requires that: (i) The
order must be transmitted from off the exchange floor; (ii) once the
order has been transmitted, the exchange member that transmitted the
order may not participate in the execution; (iii) the transmitting
member may not be affiliated with the executing member; and (iv)
neither nor the member nor the associated person may retain any
compensation in connection with effecting such a transaction respecting
accounts over which either has investment discretion without the
express written consent of the person authorized to transact business
in the account. When the Exchange received Commission approval to allow
off-floor broker dealers to deliver proprietary orders to the limit
order book over AUTOM,\29\ the Commission provided the Exchange with
interpretive guidance based on the Exchange's representations that the
Effect vs. Execute Rule was applicable to off-floor broker-dealer
orders that are delivered via AUTOM.\30\
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\28\ 17 CFR 240.11a2-2T.
\29\ See Securities Exchange Act Release No. 45758 (April 15,
2002), 67 FR 19610 (April 22, 2002) (SR-Phlx-2001-40) (Order
approving the establishment of a six-month pilot program relating to
broker-dealer access to AUTOM); see also Securities Exchange Act
Release No. 46660 (October 15, 2002), 67 FR 64951 (October 22, 2002)
(SR-Phlx-2002-50) (Order granting permanent approval of the pilot
program providing broker-dealer access to AUTOM).
\30\ See letter from Paula R. Jenson, Deputy Chief Counsel,
Division of Market Regulation, Commission, to Richard S. Rudolph,
Counsel, Phlx, dated April 15, 2002.
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The instant proposal, which includes proposed rules relating to the
priority and trade allocation of off-floor broker-dealer limit orders
handled manually, may affect the yielding of priority by member and
non-member off-floor broker-dealer limit orders in certain instances.
Specifically, Section 11(a)(1)(G) of the Act\31\ provides an exemption
from the prohibition against a member of a national securities exchange
from effecting transactions on the exchange for its own account, the
account of an associated person, or an account in which it or an
associated person exercises investment discretion for any transaction
for a member's own account for a member who engages in a specific
securities business, but requires such member to yield priority,
parity, and precedence in execution to orders for the account of
persons who are not members or associated with members of the
exchange.\32\
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\31\ 15 U.S.C 78k(a)(1)(G).
\32\ Section 11(a)(1)(G) of the Act provides that it shall not
make unlawful any other transaction for a member's own account,
provided that (i) such member is primarily engaged in the business
of underwriting and distributing securities issued by other persons,
selling securities to customers, and acting as broker, or any one or
more of such activities, and whose gross income normally is derived
principally from such business and related activities and (ii) such
transaction is effected in compliance with rules of the Commission
which, at a minimum, assure that the transaction is not inconsistent
with the maintenance of fair and orderly markets and yields
priority, parity and precedence in execution to orders for the
account of persons who are not members or associated with members of
the exchange.
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As stated above, proposed Phlx Rule 1014(g)(i)(A) currently
provides that orders of controlled accounts must yield priority to
customer orders, and that orders of controlled accounts are not
required to yield priority to other controlled account orders, except
when the specialist manually executes an off-floor broker-dealer limit
order on the limit order book as provided in proposed Phlx Rule
1014(g)(i)(A). The Exchange believes that the only potential issue
raised by including both member and non-member off-floor broker-dealers
is the issue of manual allocation of contracts by specialists among
such member and non-member off-floor broker-dealers, and the
requirement that member broker-dealers who satisfy a ``business mix
test,'' \33\ and who therefore rely on the section 11(a)(1)(G)
exemption, yield priority to non-member broker-dealers.
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\33\ Rule 11a1-1T under the Act provides that a transaction
effected on a national securities exchange for the account of a
member which meets the requirements of Section 11(a)(1)(G)(i) of the
Act shall be deemed, in accordance with the requirements of Section
11(a)(1)(G)(ii), to be not inconsistent with the maintenance of fair
and orderly markets and to yield priority, parity, and precedence in
execution to orders for the account of persons who are not members
or associated with members of the exchange if such transaction is
effected in compliance with each of the following requirements:
A member shall disclose that a bid or offer for its account is
for its account to any member with whom such bid or offer is placed
or to whom it is communicated, and any member through whom that bid
or offer is communicated shall disclose to others participating in
effecting the order that it is for the account of a member.
Immediately before executing the order, a member (other than the
specialist in such security) presenting any order for the account of
a member on the exchange shall clearly announce or otherwise
indicate to the specialist and to other members then present for the
trading in such security on the exchange that he is presenting an
order for the account of a member.
Notwithstanding rules of priority, parity, and precedence
otherwise applicable, any member presenting for execution a bid or
offer for its own account or for the account of another member shall
grant priority to any bid or offer at the same price for the account
of a person who is not, or is not associated with, a member,
irrespective of the size of any such bid or offer or the time when
entered.
A member shall be deemed to meet the requirements of Section
11(a)(1)(G)(i) of the Act if during its preceding fiscal year more
than 50 percent of its gross revenues was derived from one or more
of the sources specified in that section. In addition to any revenue
which independently meets the requirements of Section
11(a)(1)(G)(i), revenue derived from any transaction specified in
paragraph (A), (B), or (D) of Section 11(a)(1) of the Act or
specified in Rule 11a1-4(T) shall be deemed to be revenue derived
from one or more of the sources specified in Section 11(a)(1)(G)(i).
A member may rely on a list of members which are stated to meet the
requirements of Section 11(a)(1)(G)(i) if such list is prepared, and
updated at least annually, by the exchange. In preparing any such
list, an exchange may rely on a report which sets forth a statement
of gross revenues of a member if covered by a report of independent
accountants for such member to the effect that such report has been
prepared in accordance with generally accepted accounting
principles.
17 CFR 240.11a1-1T.
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The Exchange believes that its proposal to include member and non-
member off-floor broker-dealers together in proposed Phlx Rule
1014(g)(i)(A) relating to the manual trade allocation rules is
consistent with Section 11(a) of the Act and Rule 11a1-1(T) thereunder
because Exchange rules require any order to which the yielding
requirement of Section 11(a)(1)(G)(i) applies is required to be marked
with the requirement to yield priority, including such orders placed on
the limit order book by Floor Brokers.\34\ Thus, specialists manually
allocating such orders to off-floor broker-dealers would know from the
notation on the order which member off-floor broker-dealer limit orders
must yield to non-member off-floor broker-dealer orders.
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\34\ Phlx Rule 1014(g)(i)(A) and OFPA B-6 require that orders of
controlled accounts, other than ROTs and Specialists market making
in-person, must be (1) verbally communicated as for a controlled
account when placed on the floor and when represented to the trading
crowd and (2) recorded as for a controlled account by appropriately
circling the ``yield'' field on the floor ticket of any such order
(except market maker tickets) or, in the case of trades involving a
Floor Broker, by making the appropriate notation the Options Floor
Broker Management System.
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Specialist not on parity. If the specialist is not quoting at the
[[Page 33448]]
Exchange's disseminated price, SQTs quoting at the disseminated price
and non-SQT ROTs that have placed limit orders on the limit order book
which represent the Exchange's disseminated price would be entitled to
receive a number of contracts that is the proportion of the total
remaining disseminated size at the disseminated price represented by
the size of the SQT's quote or, in the case of a non-SQT ROT, by the
size of the limit order they have placed on the limit order book.
Thereafter, off-floor broker-dealers that have placed limit orders on
the limit order book which represent the Exchange's disseminated price
would be entitled to receive a number of contracts that is the
proportion of the aggregate size associated with off-floor broker-
dealer limit orders on the limit order book at the disseminated price
represented by the size of the limit order they have placed on the
limit order book, not to exceed the size of their limit orders.
Split price executions. Proposed Phlx Rule 1014(g)(vii)(B)(3) would
provide that there would be no automatic split-price executions in
Streaming Quote Options. Therefore, if a market order or an electronic
quotation to be executed in a Streaming Quote Option is received for a
greater number of contracts than the Exchange's disseminated size, the
portion of such an order or quotation executed via Book Match at the
Exchange's disseminated size would be allocated in accordance with
proposed Phlx Rule 1014(g)(vii). Contracts remaining in such an order
would be represented by the specialist and handled in accordance with
Exchange rules.
The Exchange believes that, respecting Streaming Quote Options in
which specialists and SQTs submit independent electronic quotations, it
is inappropriate for the Exchange to establish the next price at which
the remaining contracts in a market order should be executed after the
Exchange's disseminated size is exhausted. To ensure that the remaining
contracts in such an order are executed at the best price available
from Exchange specialists and SQTs, the Exchange would not
automatically execute the remaining portion of such an order. Instead,
the Exchange believes that the specialist, SQTs and ROTs should re-
establish their bids and offers upon exhaustion of the Exchange's
disseminated size and execute the remaining contracts manually.
Participation in non-electronic orders. An SQT participating in a
crowd (together with the specialist and non-SQT ROTs in the crowd)
would be permitted to participate in manual trades initiated by Floor
Brokers or the specialist in such a crowd.
Accordingly, an SQT generally must be present in the trading crowd
to participate in non-electronic trades, with one exception. While the
proposed rules generally require in-crowd presence to participate in
non-electronic trades, proposed Phlx Rule 1014, Commentary .05(c) would
provide that, where a non-electronic trade is initiated by a Floor
Broker or specialist, an SQT assigned in a Streaming Quote Option who
is located in the SQT Zone (as described below) for the Streaming Quote
Option, but who is not participating in the crowd trading the Streaming
Quote Option, would be able to participate in such a manual trade only
if the non-electronic order is executed at the price quoted by the non-
crowd participant SQT at the time of execution. For purposes of trade
allocation, such an SQT would be entitled to receive contracts under
existing Phlx Rule 1014(g)(v), which applies to the allocation of
contracts for orders handled manually by the specialist or represented
in the crowd by a floor broker.
The proposed rule would permit the specialist and/or SQTs
participating in a crowd, in response to a verbal request for a market
by a floor broker, to state a bid or offer that is different than their
electronically submitted bid or offer, provided that such stated bid or
offer is not inferior to such electronically submitted bid or offer,
with one exception.
Specifically, Commentary .05(c) would provide that the requirement
that a specialist or SQT state a bid or offer that is not inferior to
their electronically submitted quotation would not apply if such
response is to a floor broker's solicitation of a single bid or offer
as set forth in Phlx Rule 1033(a)(ii). In such a situation, Phlx Rule
1033(a)(ii) permits the members of a trading crowd to discuss,
negotiate and agree upon the price or prices at which an order of a
size greater than the Exchange's disseminated size can be executed at
that time, or the number of contracts that could be executed at a given
price or prices.\35\ This is especially true of extremely large sized
orders where the trading crowd may determine by agreement to quote a
single price that could be inferior to an electronic quotation
submitted by a specialist or an SQT.\36\
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\35\ Phlx Rule 1033(a)(ii) and Options Floor Procedure Advice
(``Advice'') F-32, Solicitation of Quotations, provide that, in
response to a floor broker's solicitation of a single bid or offer,
the members of a trading crowd (including the specialist and ROTs)
may discuss, negotiate and agree upon the price or prices at which
an order of a size greater than the AUTO-X guarantee can be executed
at that time, or the number of contracts that could be executed at a
given price or prices. Notwithstanding the foregoing, a single crowd
participant may voice a bid or offer independently from, and
differently from, the members of a trading crowd (including the
specialist and ROTs). See Securities Exchange Act Release No. 45573
(March 15, 2002), 67 FR 13674 (March 25, 2003) (SR-Phlx-2001-33)
(filed in response to Section IV.B.j. of the Order, which requires
the Exchange (as well as the other respondent options exchanges) to
implement certain undertakings. One such undertaking to adopt new,
or amend existing, rules to include any practice or procedure
whereby market makers trading any particular option class determine
by agreement the spreads or option prices at which they will trade
any option class, or the allocation of orders in that option class).
\36\ As stated in the Exchange's proposal to adopt Phlx Rule
1033(a)(ii),
``Ordinarily, in meeting their obligation to make fair and
orderly markets, Phlx specialists and ROTs would be expected to make
independent business decisions concerning what market to quote at a
particular point in time, in lieu of discussing or agreeing with
other members of the trading crowd on what should be the market for
a particular option. In order to make fair and orderly markets and
to respond efficiently to the needs of investors, however, the Phlx
believes that there are circumstances where some coordination among
ROTs and specialists is both necessary and beneficial.
For example, when a request for a market to buy or sell a large
number of options contracts is presented by the floor broker to the
trading crowd, the customer on whose behalf the request is made
typically wants to know promptly at what single price all of the
options represented by the request may be bought or sold. However,
such large trades typically require more liquidity than any single
ROT or the specialist is able to provide. Coordinated efforts of the
trading crowd are, thus, necessary to respond to such a request and
to fill any resulting order to buy or sell the option at a single
price. In this regard, borrowing a phrase from corporate principles,
the Phlx believes that the trading crowd is properly viewed as a
``joint venture,'' in which the resources of the individual crowd
members are combined to produce the necessary liquidity to respond
to the needs of investors and to compete effectively with other
options exchanges.
When an options order exceeds the size that individual trading
crowd members can execute, the Phlx believes that the trading crowd
must act as a joint venture or single economic unit. In this
situation, the trading crowd must reach agreement on the price they
will offer because the customer desires a single price.
Significantly, in the Exchange's view, the antitrust laws permit
competitors to collaborate to produce and sell a product that they
could not otherwise offer individually. In fact, such activity is
pro-competitive because it increases output and increases the number
of competitors.''
See Securities Exchange Act Release No. 45391 (February 4,
2002), 67 FR 6570 (February 12, 2002) (SR-Phlx-2001-33).
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In order to remain consistent with the Linkage Plan, the Exchange
proposes to amend Phlx Rule 1033(a)(ii) and Advice F-32 to provide that
orders executed under the Rule and Advice are subject to the provisions
of the Linkage Plan and Phlx Rules 1083--1087 respecting Trade-
Throughs.\37\
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\37\ Under the Linkage Plan and Exchange Rules, a ``Trade-
Through'' means a transaction in an options series at a price that
is inferior to the NBBO. The Linkage Plan and Exchange Rules provide
that, absent reasonable justification and during normal market
conditions, members should not effect Trade-Throughs. See Phlx Rule
1085(a)(1). If a Trade-Through occurs, the Linkage Plan and Exchange
Rules provide certain rights and remedies for aggrieved parties
whose markets are traded through. A Block Trade (defined in the
Linkage Plan and Exchange Rules as a trade that involves 500 or more
contracts and has a premium value of at least $150,000) effected at
a price outside the NBBO is not deemed to be a Trade-Through for
purposes of surveillance and enforcement, provided that the
member(s) that execute such a Block Trade have satisfied all
aggrieved parties in accordance with the Linkage Plan and Exchange
Rules. See Phlx Rule 1085(d)(2).
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[[Page 33449]]
Crowd Area
For purposes of Phlx Rule 1014, Commentary .03, an SQT or non-SQT
ROT would be deemed to be participating in a crowd if such SQT or non-
SQT ROT is, at the time an order is represented in the crowd,
physically located in a specific ``Crowd Area.'' A Crowd Area would
consist of a physical location marked with specific, visible physical
boundaries on the options floor, as determined by the Options
Committee.\38\ An SQT or non-SQT ROT who is physically present in such
Crowd Area may engage in options transactions in assigned issues as a
crowd participant in such a Crowd Area, provided that such SQT or non-
SQT ROT fulfills the requirements set forth in Phlx Rule 1014. An SQT
or non-SQT ROT would be deemed to be participating in a single Crowd
Area, and thus would not be permitted to be a crowd participant in more
than one particular Crowd Area at any specific time.
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\38\ While the proposed rules would grant authority to assign
trading privileges in Streaming Quote Options to the OAESC (which
includes three off-floor persons, one public Governor, and one non-
industry governor pursuant to Phlx Rule 500), the proposed rules
would grant authority to determine the physical location of Crowd
Areas and SQT Zones to the Options Committee, which is composed of
specialists, ROTs and Floor Brokers who conduct business on the
Exchange's Options Floor. The purpose of this provision is to ensure
that Exchange members who are most familiar with the physical
configuration and layout of the Exchange's Options Floor (i.e., the
members of the Options Committee) determine such physical location.
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SQT Zones
Proposed Phlx Rule 1014, Commentary .05(b) would provide that an
SQT may be assigned to (and thus submit quotes electronically in) up to
all of the options located within a specified physical zone on the
Exchange Floor (an ``SQT Zone'') provided that such SQT is physically
present in such SQT Zone. Thus, each member organization must have at
least one SQT physically present in each SQT Zone in which such member
organization submits electronic quotations. An SQT Zone could consist
of multiple Crowd Areas. Each SQT Zone would be identified as including
specific Crowd Areas (for example, ``SQT Zone 1'' might be identified
as encompassing Crowd Areas A-D, ``SQT Zone 2'' might be identified as
encompassing Crowd Areas E-H, etc.).
Initially, there would be one SQT Zone representing the entire
options trading floor. This means that an SQT could submit electronic
quotations in any Streaming Quote Option while such SQT is physically
on the Exchange floor.
The number and location of any additional SQT Zones would be
determined by the Options Committee based on its review of quote and
trade data during the first six months of the deployment of Phlx XL.
Proposed Phlx Rule 1014, Commentary .05(c) would require the Exchange
to file for, and receive, Commission approval in the event the Options
Committee determines to change the number and/or location of SQT Zones.
ROT Limit Orders
The proposed rule change would amend the Exchange's rules regarding
ROT electronic access to the limit order book.\39\ Currently, ROTs are
permitted by rule to enter electronic price improving limit orders (and
orders matching such orders entered by the specialist or other ROTs in
the trading crowd) onto the limit order book via electronic interface
with AUTOM, and are entitled to receive a special allocation in trades
stemming from such price improving limit orders.\40\ Under the instant
proposal, ROTs would be permitted under Phlx Rule 1080(b)(i)(B) and
Commentary .04 to place certain limit orders on the limit order book
electronically. The requirement that such limit orders be price-
improving orders, however, would be deleted. ROTs would be permitted to
place limit orders, including Good Till Cancelled (``GTC'') orders, on
the limit order book whether such an order improves the then-prevailing
Exchange market or not. ROTs entering limit orders on the book would be
required to submit such orders with a size of at least ten contracts in
both Streaming Quote Options and non-Streaming Quote Options. ``Price-
Improving ROTs'' that place price-improving limit orders would continue
to be entitled to receive contracts under the aforementioned special
allocation.
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\39\ In November, 2002, the Commission approved the Exchange's
proposal to allow on-floor, in-crowd ROTs to place electronic price-
improving limit orders on the limit order book via electronic
interface with AUTOM, and to provide a special trade allocation
algorithm applicable to trades involving such limit orders. See
Securities Exchange Act Release No. 46763 (November 1, 2002), 67 FR
68898 (November 13, 2003) (SR-Phlx-2002-04). That proposal was filed
in response to the Order (see supra note 20) which required, among
other things, that the respondent exchanges adopt new, or amend
existing, rules concerning its automated quotation systems which
substantially enhance incentives to quote competitively and
substantially reduce disincentives for market participants to act
competitively. The Commission recently approved Phlx's proposal to
modify the timetable for the automatic execution of such limit
orders as such automaton relates to both Streaming Quote Options and
non-Streaming Quote Options. See Securities Exchange Act Release No.
49151 (January 29, 2004), 69 FR 6010 (February 9, 2004) (SR-Phlx-
2004-01).
\40\ Id.
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The proposed rule would provide that, respecting Streaming Quote
Options, inbound AUTOM orders or electronic quotations eligible for
execution against non-SQT ROT orders entered into AUTOM via electronic
interface would be automatically executed and would be allocated
automatically pursuant to Exchange rules.\41\
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\41\ Respecting Streaming Quote Options, non-SQT ROT limit
orders on the book, entered electronically or manually by the
specialist that are automatically executed would be allocated
pursuant to proposed Phlx Rule 1014(g)(vii).
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The Exchange believes that the instant proposal, which would enable
SQTs to stream electronic quotes, combined with the size pro rata
allocation algorithm applicable to automatically executed trades
resulting from such quotes, rewards market participants for quoting and
providing liquidity at the best price. The Exchange believes that the
result would thus be substantially enhanced incentives for market
participants to quote competitively and substantially reduced
disincentives to quote competitively. In Streaming Quote Options, non-
SQT ROTs with limit orders on the book at the Exchange's disseminated
price that are automatically executed would be allocated contracts
according to proposed new Phlx Rule 1014(g)(vii), which, as stated
above, would reward non-SQT ROTs who provide liquidity at the best
price.
Book Match
Book Match is a feature of AUTOM that currently provides automatic
executions for inbound AUTOM-delivered customer and off-floor broker-
dealer \42\ orders against customer limit orders on the book. The
proposed rules would enhance Book
[[Page 33450]]
Match to provide that the contra-side to automatically executed inbound
eligible orders would be a limit order on the book or specialist and/or
SQT electronic quotes (``electronic quotes'') at the disseminated price
where the Exchange's disseminated size includes a limit order on the
book and/or electronic quotes at the disseminated price. The
enhancements would involve the automatic execution of inbound market
and marketable limit orders against contra-side booked limit orders
and/or quotes that are included in the Exchange's disseminated
quotation.
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\42\ Phlx Rule 1080(b)(i)(C) defines an ``off-floor broker-
dealer'' as a broker-dealer that delivers orders from off the floor
of the Exchange for the proprietary account(s) of such broker-
dealer, including a market maker located on an exchange or trading
floor other than the Exchange's trading floor who elects to deliver
orders via AUTOM for the proprietary account(s) of such market
maker.
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Book Match would not be engaged: (i) When the Exchange's
disseminated price represented by a limit order on the book is not the
National Best Bid or Offer (``NBBO''); (ii) for pre-opening orders; and
(iii) during trading rotations. In these situations, incoming orders
would be subject to manual handling by the specialist.
The Exchange believes that the proposed enhancements to Book Match
should provide for a greater number of automatic executions involving
matching inbound orders against booked limit orders and SQT and
specialist quotations that are included in the Exchange's disseminated
quotation, thus providing customers with quicker, more efficient
executions for a larger number of trades.
Book Sweep
Similar to Book Match, the Book Sweep function currently matches
specialist quotations generated by Auto-Quote (or by a proprietary
quoting system called ``Specialized Quote Feed'' or ``SQF'') against
booked limit orders representing the Exchange's disseminated bid or
offer when such quotations lock or cross the booked limit order
(provided that the disseminated bid or offer is at the NBBO).
Currently, Phlx Rule 1080(c)(iii) provides that, when the bid or offer
generated by the Exchange's Auto-Quote system or SQF matches (locks) or
crosses the Exchange's best bid or offer in a particular series as
established by an order on the limit order book, orders on the limit
order book in that series will be automatically executed up to the size
associated with the quote that locks or crosses the order on the limit
order book and allocated among crowd participants signed onto the
Wheel.
Book Sweep would be enhanced in Phlx XL for Streaming Quote Options
under the instant proposed rule change to allow SQT quotations, in
addition to specialist quotations, to initiate the Book Sweep function.
The SQT Book Sweep feature would function in essentially the same
manner as the current Auto-Quote or SQF Book Sweep feature, i.e., when
an SQT submits a quotation that locks or crosses a limit order on the
book that represents the Exchange's best bid or offer, such limit order
would be executed automatically up to the size associated with the
SQT's quotation, and would be automatically allocated in accordance
with Exchange rules. The specialist or SQT may manually initiate the
Book Sweep feature by sending a manual quote in situations where the
specialist or SQT's automatic generation of electronic quotations is
suspended due to, for example, a system malfunction. Eligible orders on
the limit order book would be automatically executed up to the size
associated with the quote that matches or crosses such limit orders.
Orders on the limit order book would not be eligible for Book Sweep
when the NBBO is crossed (i.e., 2.10 bid, 2 offer).
The current functionality of Book Sweep would remain effective for
non-Streaming Quote Options. The above-described enhancements would
apply to Streaming Quote Options, and the Exchange proposes to amend
Phlx Rule 1080(c)(iii) to reflect the Book Sweep functionality for both
Streaming Quote and non-Streaming Quote Options.
NBBO Step-Up
The Exchange's current rules relating to the ``NBBO Step-Up'' AUTO-
X function would be deleted for all options, including both Streaming
Quote Options and non-Streaming Quote Options. The purpose of this
proposal is to enhance incentives for specialists and SQTs to quote
competitively at the NBBO, rather than relying on the representation
that the Exchange would ``step up'' and automatically execute at the
NBBO as disseminated by another exchange if such other exchange's
disseminated market falls within a specified ``step-up parameter'' of
the Exchange's disseminated quote.
Firm Quotations
The introduction of independent streaming options quotations in
Phlx XL necessitates various changes to the Exchange's ``Firm Quote''
requirements.
Definition of disseminated size. The Exchange proposes to amend
Phlx Rule 1082, Firm Quotations, by establishing by rule the Exchange's
firm quotation size with respect to non-Streaming Quote Options and
with respect to Streaming Quote Options.\43\
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\43\ Rule 11Ac1-1(d)(1)(i) under the Act permits an exchange to
establish by rule, and periodically publish, the quotation size for
listed options, for which responsible brokers or dealers are
obligated to execute an order. 17 CFR 240.11Ac1-1(d)(1)(i).
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Respecting non-Streaming Quote Options, the Exchange's
``disseminated size'' would be defined as, with respect to the
disseminated price, at least the sum of the size associated with: (1)
Limit orders; and (2) specialists' quotations generated by Auto-Quote
or Specialized Quote Feed (``SQF'') as described in Phlx Rule 1080,
Commentary .01 (which represents the collective quotation size of the
specialist and any ROTs bidding or offering at the disseminated price
unless an ROT has expressly indicated otherwise in a clear and audible
manner). The proposed definition of ``disseminated size'' respecting
non-Streaming Quote Options would provide more specificity to the
current definition, which includes at least the sum of limit orders and
allows, but does not require, the specialist and/or crowd to add
additional size to the Exchange's disseminated size. The Exchange
believes that the requirement that specialists' quotations generated by
Auto-Quote or SQF be included in the disseminated size provides a more
accurate and transparent reflection of the size for which the Exchange
is firm in quotations for non-Streaming Quote Options.
The Exchange is proposing to adopt new Phlx Rule 1082(a)(ii)(B) to
establish by rule the definition of ``disseminated size'' that would
apply to Streaming Quote Options. Specifically, for Streaming Quote
Options, ``disseminated size'' would mean, with respect to the
Exchange's disseminated price, at least the sum of the size associated
with limit orders, specialists' quotations,\44\ and SQTs' quotations.
The Exchange would disseminate the aggregate size of these three
components.
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\44\ Because the specialist and SQTs in Streaming Quote Options
would be quoting independently, the term ``specialist's quotations''
with respect to Streaming Quote Options would mean the individual
specialist's quotation, including, for purposes of the definition of
``disseminated size,'' the size associated with such a quotation.
---------------------------------------------------------------------------
Proposed Phlx Rule 1082(a)(ii)(C)(1) would provide that, if an
SQT's quotation size in a Streaming Quote Option is exhausted, such
SQT's quotation would be deleted from the Exchange's disseminated
quotation until the time the SQT revises his/her quotation. Although
such SQT's quotation size in a given series may be exhausted and thus
removed from the Exchange's disseminated quotation in that series, such
an SQT would nonetheless continue to be required to submit continuous
two-sided quotations in not less than 60% of the series in each
Streaming Quote Option in which
[[Page 33451]]
such SQT is assigned, in accordance with proposed Phlx Rule
1014(b)(ii)(B).
Proposed Phlx Rule 1082(a)(ii)(C)(2) would provide that, if the
Exchange's disseminated size in a particular series in a Streaming
Quote Option is exhausted, the Exchange would disseminate the next best
available quotation.\45\ If no specialist or SQT has revised their
quotation immediately following the exhaustion of the Exchange's
disseminated size, the Exchange would automatically disseminate the
specialist's most recent disseminated price prior to the time of such
exhaustion with a size of one contract.
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\45\ The Exchange would have available the quotations submitted
by the specialist and SQTs in a particular series, and would
disseminate only the aggregate size of SQT and specialist quotations
at the best bid and offer on the Exchange. If the best bid or offer
is exhausted and not refreshed, the Exchange would disseminate the
next best bid or offer submitted by the specialist and/or SQTs
quoting in the series.
---------------------------------------------------------------------------
This provision is intended to address the situation in which the
size associated with all SQT quotations in a given series, together
with the specialist's quotation in such series, are exhausted.\46\ The
purpose of this proposal is to ensure that the specialist is fulfilling
the continuous quoting requirement set forth in proposed Phlx Rule
1014(b)(ii)(B) by disseminating continuous two-sided markets in
Streaming Quote options in which such specialist is assigned, while
permitting the specialist to revise its quote. If SQTs continue to
submit quotations at the disseminated price, inbound AUTOM orders or
quotes would be eligible for automatic execution against such SQT
quotations.
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\46\ Rule 11Ac1-1(d)(3) under the Act provides that no
responsible broker or dealer shall be obligated to execute a
transaction for any listed option if, prior to the presentation of
an order, the responsible broker or dealer has communicated to its
exchange, a revised quotation size or a revised bid or offer. 17 CFR
240.11Ac1-1(d)(3). See also 17 CFR 240.11Ac1-1(c)(3)(i)(A) and
(c)(3)(ii)(A).
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Responsible broker or dealer. Currently, the Exchange's
disseminated market (whether by Auto-Quote or specialized quote feed)
is deemed to represent the quotations of all ROTs in that option unless
an ROT has expressly indicated otherwise.\47\ All ROTs in such an
option who have not expressly indicated that the disseminated market
does not represent their quote would collectively be bidding or
offering at the disseminated price, and thus are the collective
``responsible brokers or dealers'' for purposes of the Exchange's
``Firm Quote'' requirement. Phlx Rule 1082(b) currently provides that
responsible brokers or dealers bidding (or offering) at the
disseminated price are collectively required to execute orders
presented to them at such price up to the disseminated size. This would
remain in effect for non-Streaming Quote Options.
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\47\ See Phlx Rule 1080, Commentary .01(c).
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Because, however, SQTs and specialists would be quoting
independently in Streaming Quote Options, each individual SQT and
specialist would be deemed to be the ``responsible broker or dealer''
in Streaming Quote Options. To address this change, proposed new Phlx
Rule 1082(b)(ii) would provide that, with respect to Streaming Quote
Options, in the event an SQT or specialist in a Streaming Quote Option
has electronically communicated on the Exchange bids or offers for a
Streaming Quote Option, each such SQT or specialist would be considered
a ``responsible broker or dealer'' for that bid or offer, up to the
size associated with such responsible broker or dealer's bid or offer.
There thus would be individual ``responsible brokers or dealers,'' and
no ``collective'' firm quotation requirement, in Streaming Quote
Options.\48\
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\48\ This is consistent with Rule 11Ac1-1(a)(21)(i) under the
Act, which provides:
``The term responsible broker or dealer shall mean:
(i) When used with respect to bids or offers communicated on an
exchange, any member of such exchange who communicates to another
member on such exchange, at the location (or locations) designated
by such exchange for trading in a covered security, a bid or offer
for such covered security, as either principal or agent; provided,
however, That, in the event two or more members of an exchange have
communicated on such exchange bids or offers for a covered security
at the same price, each such member shall be considered a
'responsible broker or dealer' for that bid or offer, subject to the
rules of priority and precedence then in effect on that exchange;
and further provided, That for a bid or offer which is transmitted
from one member of an exchange to another member who undertakes to
represent such bid or offer on such exchange as agent, only the last
member who undertakes to represent such bid or offer as agent shall
be considered the 'responsible broker or dealer' for that bid or
offer.'' 17 CFR 240.11Ac1-1(a)(21)(i).
---------------------------------------------------------------------------
Locked and crossed markets. Two new Commentaries to Phlx Rule 1082
are proposed, relating to the situation in which a specialist or SQT's
quotation locks (i.e., 1.00 bid, 1.00 offer) or crosses (i.e., 1.10
bid, 1.00 offer) another quotation.
Because the specialist and multiple SQTs would be quoting
simultaneously, there may be instances where quotes may become locked.
Under the proposal, the Exchange would disseminate the locked market
and both quotations (bid and offer) would be deemed ``firm''
disseminated market quotations. Once SQT and/or specialists' quotations
become locked, a one-second ``counting period'' will begin during which
SQTs and/or specialists whose quotations are locked may eliminate the
locked market. However, such SQT and/or specialist would be obligated
to execute orders at their disseminated quotation. During the
``counting period'' SQTs and specialists located in the Crowd Area in
which the option that is the subject of the locked market is traded
will continue to be obligated to respond to floor brokers as set forth
in Phlx Rule 1014, Commentary .05(c), and would continue to be
obligated for one contract in open outcry to other SQTs, non-SQT ROTs,
and specialists.
If at the end of the counting period the quotations remain locked,
the locked quotations will automatically execute against each other in
accordance with the allocation algorithm set forth in Phlx Rule
1014(g)(vii).
The Options Committee may shorten the duration of the one-second
``counting period.'' The quotation that is locked may be executed by
another order during the one-second ``counting period.''
Crossed Markets. The Exchange will not disseminate an internally
crossed market (e.g., $1.10 bid, 1.00 offer). If an SQT or specialist
submits a quotation in a Streaming Quote Option (``incoming
quotation'') that would cross an existing quotation (``existing
quotation''), the Exchange will: (i) Change the incoming quotation such
that it locks the existing quotation; (ii) send a notice to the SQT or
specialist that submitted the existing quotation indicating that its
quotation was crossed; and (iii) send a notice to the specialist or SQT
that submitted the incoming quotation, indicating that its quotation
crossed the existing quotation and was changed. Such a locked market
would be handled in accordance with proposed Commentary .01 concerning
locked markets. During the one-second counting period, if the existing
quotation is cancelled subsequent to the time the incoming quotation is
changed, the incoming quotation will automatically be restored to its
original terms.
Other Rules and OFPAs
The Wheel. The Exchange is proposing to amend its OFPA F-24 to
reflect that the Wheel will apply only to non-Streaming Quote Options.
Because a new trade allocation algorithm would become effective with
respect to Streaming Quote Options, taking into account the
entitlements of the specialist, SQTs, ROTs and off-floor broker-dealers
based on the size associated with their quotes and/or limit
[[Page 33452]]
orders, the trade allocation algorithm applicable to non-Streaming
Quote Options would not apply in Streaming Quote Options.\49\
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\49\ Currently, and with respect to non-Streaming Quote Options
under the instant proposal, AUTO-X participation would be assigned
to Wheel Participants on a rotating basis, beginning at a random
place on the rotational Wheel each day, from those participants
signed-on in that listed option at that time. The Wheel rotates and
assigns contracts depending upon the size of the order executed and
the number of Wheel participants in a given option. See OFPA F-24.
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Auto-X Disengagement. The provisions relating to orders otherwise
eligible for automatic execution via AUTO-X currently included in Phlx
Rule 1080(c)(iv) would continue to apply to non-Streaming Quote
Options; such provisions would not apply to Streaming Quote Options
because the automatic execution function for Streaming Quote Options is
Book Match or Book Sweep, not AUTO-X.
Currently, Phlx Rule 1080(c)(iv)(I) provides that, when the number
of contracts automatically executed within a 15 second period in an
option (subject to a pilot program until November 30, 2004) exceeds the
specified disengagement size, a 30 second period ensues during which
subsequent orders are handled manually by the specialist. The proposed
rule change would amend the rule to provide that this provision would
continue to apply only to non-Streaming Quote Options.
Automatic executions in Streaming Quote Options would be initiated
under the Book Match or Book Sweep function and allocated automatically
in accordance with proposed Phlx Rule 1014(g)(vii), whereas automatic
executions in non-Streaming Quote Options would be executed via AUTO-X
and allocated on the Wheel.
Proposed Phlx Rule 1080(c)(iii) would provide that Book Sweep would
be engaged when AUTO-X is engaged, and would be disengaged when AUTO-X
is disengaged. In order to disengage AUTO-X, a specialist is required
to obtain the approval of two Floor Officials pursuant to OFPA A-13,
and under extraordinary circumstances, pursuant to Phlx Rule 1080(e).
Moreover, the specialist would not be able to disengage AUTO-X (and
thus the Book Sweep function) such that an SQT could not initiate Book
Sweep manually; an SQT would have the ability to initiate the Book
Sweep function regardless of whether the specialist has obtained the
necessary Floor Official approval and disengaged the AUTO-X feature.
The ``disengagement'' provision is not proposed for Streaming Quote
Options because when the size associated with an individual specialist
or SQT's quotation is exhausted, there is no ``disengagement'' of a
system; such a quotation would be handled in accordance with proposed
Phlx Rules 1082(a)(ii)(C)(1) and (2), as stated above.
Removal of Unreliable Quotes. While the Exchange is proposing to
delete the provisions in Phlx Rule 1080(c)(i) relating to the NBBO
Feature, certain language contained in that rule describing the
conditions and procedures under which the Exchange can exclude another
market's quotes from its calculation of the NBBO would be retained. The
provisions relating to the removal of unreliable quotes from another
exchange from the Exchange's calculation of NBBO are intended to apply
to both Streaming Quote Options and non-Streaming Quote Options.
Eligible AUTOM order types. Currently, the specialist, when alerted
by AUTOM, handles the conversion of contingency orders on the limit
order book into market or marketable limit orders when the respective
condition applicable to such orders is manifested. The Exchange's
systems do not currently perform this task electronically. The Exchange
therefore proposes to amend Phlx Rule 1080(b)(i)(a), Eligible Orders,
to provide that the following contingency order types would not be
eligible for delivery via AUTOM: stop, stop limit market close, market
on opening, limit on opening, and limit close.\50\ Because the
conversion of these contingency order types is not done electronically
by AUTOM, such order types would not be eligible for electronic entry
on the electronic limit order book. Previously, any limit order on the
book that became due for execution against an inbound electronic order
delivered via AUTOM was handled manually by the specialist; with the
development and deployment of Book Match, such contingency orders may
now be executed electronically, but would not be converted
electronically. Thus, such orders would not be placed on the electronic
limit order book. Customers wishing to submit such orders would be
required to do so by way of representation by a Floor Broker.
---------------------------------------------------------------------------
\50\ For a complete description of these order types, see Phlx
Rule 1066.
---------------------------------------------------------------------------
Eligible order delivery size. In order to allow a greater number of
orders to be delivered electronically to the Exchange via AUTOM, the
Exchange proposes to amend Phlx Rules 1080(b)(i)(A), (B), and (C) to
increase the maximum AUTOM order delivery size from 1,000 contracts to
5,000 contracts for all eligible order types. This increase would apply
to both Streaming Quote Options and non-Streaming Quote Options.
2. Statutory Basis
The Exchange believes that its proposal to adopt Phlx XL is
consistent with Section 6(b) of the Act \51\ in general, and furthers
the objectives of Section 6(b)(5) of the Act \52\ in particular, in
that it is designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanisms of a free and open
market and a national market system, and to protect investors and the
public interest, by creating an electronic trading platform designed to
provide Exchange members with substantially enhanced incentives to
quote competitively, increase the depth and liquidity in the Exchange's
markets, and to allow the Exchange to remain competitive for order flow
by providing order flow providers with an electronic trading platform
that will assist them in fulfilling their duty of best execution on
behalf of their customers.
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\51\ 15 U.S.C. 78f(b).
\52\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the obligation for SQTs to quote in 60%
of the series in all Streaming Quote Options in which they are
assigned, and the requirement that specialists quote in 100% of the
series in all Streaming Quote Options in which they are assigned, is
consistent with the notion that market makers receive certain benefits
for carrying out their duties because of those obligations. For
example, with respect to margin treatment, market makers may obtain
credit from lenders without regard to the restrictions in Regulation T
of the Board of Governors of the Federal Reserve system if the credit
is to be used to finance a specialist or market maker's activities on a
national securities exchange.\53\ The Exchange believes that the
affirmative obligation in the proposal, that SQTs and specialists hold
themselves out as willing to buy and sell options for their own account
on a regular and continuous basis, justifies this favorable treatment.
---------------------------------------------------------------------------
\53\ See 12 CFR 221.5(c)(6).
---------------------------------------------------------------------------
Additionally, the Exchange believes that the additional obligations
of the specialist, such as the obligation to handle limit orders on the
book; the obligation under the Linkage Plan to handle all inbound
Linkage Orders and to send Satisfaction Orders on behalf of customer
limit orders on the specialist's book; and the obligation, under
certain circumstances, to allocate manually executed trades, justifies
the proposed enhanced participation rights afforded
[[Page 33453]]
to specialists in Streaming Quote Options.
The Exchange further believes that the proposed rule change
regarding Book Match, in which orders and quotes interact directly with
one another for execution, is consistent with Congress's stated goal in
Section 11A(a)(1)(C)(v) of the Act \54\ that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure an opportunity for
investors' orders to be executed without the participation of a dealer.
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78k-1(a)(1)(C)(v).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve the 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, as amended, 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 rule-comments@sec.gov. Please include
File Number SR-Phlx-2003-59 on the subject line.
Paper comments:
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. All submissions should refer to File Number
SR-Phlx-2003-59. This file number should be included on the subject
line if e-mail is used. To help the Commission process and review your
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Section, 450 Fifth Street, NW, Washington, DC 20549. Copies
of such filing also will be available for inspection and copying at the
principal office of the Phlx. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2003-59 and should be submitted on or before July
6, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\55\
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\55\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-13403 Filed 6-9-04; 2:12 pm]
BILLING CODE 8010-01-P