[Federal Register: March 27, 2006 (Volume 71, Number 58)]
[Notices]
[Page 15240-15244]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27mr06-104]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53514; File No. SR-Phlx-2005-80]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto
Relating to the Automated Delivery and Handling of Stop and Stop-Limit
Orders
March 17, 2006.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 15, 2005, 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. Phlx
filed Amendment No. 1 with the Commission on March 6, 2006.\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1, which replaced the original filing in its
entirety, adds clarifying language to the description of the
proposed rule change and adopts a definition of ``agency order'' in
Phlx Rule 1080(b)(i)(A).
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The Phlx proposes to amend Phlx Rules 1066(c)(1) and 1080(b)(i)(A)
and (C), and to delete Options Floor Procedure Advices (``OFPAs'') A-5
and A-6, to permit customer and off-floor broker-dealer stop \4\ and
stop-limit \5\ orders in options to be delivered via the
[[Page 15241]]
Exchange's Automated Options Market (``AUTOM'') System \6\ and to be
handled electronically. The Exchange also proposes to amend Phlx Rule
1080(b)(i)(A) to include the definition of ``agency order'' in the
rule. The text of the proposed rule change is set forth below. Proposed
new language is in italics; deletions are in [brackets].
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\4\ A stop order is a contingency order to buy or sell when the
market for a particular option contract reaches a specified price. A
stop order to buy becomes a market order when the option contract
trades or is bid at or above the stop price. A stop order to sell
becomes a market order when the option contract trades or is offered
at or below the stop price. See Phlx Rule 1066(c)(1).
\5\ A stop-limit order is a contingency order to buy or sell at
a limited price when the market for a particular option contract
reaches a specified price. A stop limit order to buy becomes a limit
order executable at the limit price or better when the option
contract trades or is bid at or above the stop-limit price. A stop
limit order to sell becomes a limit order executable at the limit
price or better when the option contract trades or is offered at or
below the stop limit price. See id.
\6\ See Phlx Rule 1080.
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* * * * *
Rule 1066. Certain Types of Orders Defined
(a)-(b) No change.
(c) Contingency Order. A contingency order is a limit or market
order to buy or sell that is contingent upon a condition being
satisfied while the order is at the post.
(1) Stop-Limit Order. A stop-limit order is a contingency order to
buy or sell at a limited price when [the market] a trade or quote on
the Exchange for a particular option contract reaches a specified
price. A stop-limit order to buy becomes a limit order executable at
the limit price or better when the option contract trades or is bid on
the Exchange at or above the stop-limit price[, after the offer is
represented in the trading crowd]. A stop-limit order to sell becomes a
limit order executable at the limit price or better when the option
contract trades or is offered on the Exchange at or below the stop-
limit price[, after the order is represented in the trading crowd].
Stop (stop-loss) Order. A stop order is a contingency order to buy
or sell when [the market] a trade or quote on the Exchange for a
particular option contract reaches a specified price. A stop order to
buy becomes a market order when the option contract trades or is bid on
the Exchange at or above the stop price[, after the order is
represented in the trading crowd]. A stop order to sell becomes a
market order when the option contract trades or is offered on the
Exchange at or below the stop price[, after the order is represented in
the trading crowd].
Notwithstanding the foregoing, a stop or stop-limit order shall not
be elected by a trade that is reported late or out of sequence.
[Stop and stop-limit orders elected by a quotation must be given
floor official approval prior to execution or, if circumstances make it
impractical for prior approval, promptly following the execution. The
facts surrounding each instance when retroactive approval is requested
must be documented in writing, signed by the specialist and floor
official, and submitted to the Surveillance Department on the day of
the trade.]
(2)-(7) No change.
(d)-(g) No change.
Commentary: No change.
* * * * *
Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM)
and Automatic Execution System (AUTO-X)
(a) No change.
(b) Eligible Orders
(i) The following types of orders are eligible for entry into
AUTOM:
(A) Agency orders may be entered. The following types of agency
orders are eligible for AUTOM; day, GTC, Immediate or Cancel (``IOC''),
market, limit, stop, stop-limit, all or none, or better, simple cancel,
simple cancel to reduce size (cancel leaves), cancel to change price,
cancel with replacement order, and possible duplicate orders. For
purposes of Exchange options trading, an agency order is any order
entered on behalf of a public customer, and does not include any order
entered for the account of a broker-dealer, or any account in which a
broker-dealer or an associated person of a broker-dealer has any direct
or indirect interest.
(B) No change.
(C) Off-floor broker-dealer limit orders, subject to the
restrictions on order entry set forth in Commentary .05 of this Rule,
may be entered. The following types of broker-dealer limit orders are
eligible for AUTOM: Day, GTC, IOC, stop, stop-limit, simple cancel,
simple cancel to reduce size (cancel leaves), cancel to change price,
cancel with replacement order. For purposes of this Rule 1080, 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.
(ii)-(iii) No change.
(c)-(k) No change.
(l) Directed Orders. For a one-year pilot period, beginning on the
date of approval of this Rule by the Securities and Exchange
Commission, respecting Streaming Quote Options traded on Phlx XL,
specialists, RSQTs and SQTs may receive Directed Orders (as defined in
this Rule) in accordance with the provisions of this Rule 1080(l).
(i)(A) The term ``Directed Order'' means any customer order (other
than a stop or stop-limit order as defined in Rule 1066) to buy or sell
which has been directed to a particular specialist, RSQT, or SQT by an
Order Flow Provider, as defined below. To qualify as a Directed Order,
an order must be delivered to the Exchange via AUTOM.
(B)-(C) No change.
(ii)-(iv) No change.
Commentary: No change.
* * * * *
A-5 RESERVED [Execution of Stop and Stop Limit Orders
Stop and stop-limit orders are contingency orders to buy or sell
when the market for a particular option reaches a specified price.
Stop and stop-limit orders to buy become eligible for execution
when the option trades at or above the stop price or when the bid price
for the option is at or above the stop price. Stop and stop-limit
orders to sell become eligible for execution when the option trades at
or below the stop price or when the offer price for the option is at or
below the stop price. A stop or stop-limit order which will be made
eligible by an opening sale should be executed as the opening trade or
included with the opening trade.
Stop and stop-limit orders elected by a quotation must be given
Floor Official approval prior to execution or, if circumstances make it
impractical for prior approval, promptly following the execution. The
facts surrounding each instance where retroactive approval is requested
must be documented in writing, signed by the Specialist and Floor
Official, and submitted to the Surveillance Department on the day of
the trade.
A Specialist may refuse to accept stop and/or stop limit orders on
the book if he has received the approval of one Floor Official no later
than 30 minutes before the opening, or such orders shall be accepted
throughout the day. Notification of such approval will be posted on the
Exchange floor one-half hour before the opening. All stop or stop-limit
orders which have been entrusted to the Specialist shall be returned to
the responsible member immediately upon Floor Official approval for the
return of such orders.
FINE SCHEDULE
A-5
Fine not applicable]
* * * * *
A-6 RESERVED [Cancel/Replacement Process
It is the responsibility of the Specialist to notify the
appropriate brokers when orders they placed on the Specialist book
become subject to a
[[Page 15242]]
cancel/replacement process. This process shall normally be required
when: (1) There is a change in the contract terms of an option, (2)
there is a transfer of the Specialist book, or (3) in any other
instance where two Floor Officials approve a cancel/replacement of
orders on the book.
In all instances where a required cancel/replacement of all orders
on the book occurs, it is the responsibility of the Specialist to
ensure that, to the extent possible, any such replacement order will
not incur a loss of the priority it established prior to the cancel/
replacement process.
FINE SCHEDULE (Implemented on a two-year running calendar basis)
A-6
1st Occurrence: $250.00
2nd Occurrence: $500.00
3rd Occurrence: $1,000.00
4th Occurrence and Thereafter: Sanction is discretionary with
Business Conduct Committee]
* * * * *
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 proposal and discussed any
comments it received on the proposal. 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 increase the number
of option transactions on the Exchange that are handled automatically
by establishing rules that permit the electronic delivery and handling
of stop and stop-limit orders on the Exchange, and to delete certain
provisions in the Exchange's rules concerning stop and stop-limit
orders that are either redundant or no longer practical. Currently,
stop and stop-limit orders in options are not deliverable
electronically via AUTOM. The proposal would amend the Exchange's rules
to permit the electronic delivery of stop and stop-limit orders to the
Exchange via AUTOM.
Election of Stop and Stop-Limit Orders
Stop orders delivered electronically on the Exchange's AUTOM System
would be handled in the system as market orders once elected by a trade
or quote on the Exchange.\7\ Stop-limit orders delivered electronically
to the limit order book would become live limit orders in the system
once elected by a trade or quotation on the Exchange, and would be
placed on the limit order book \8\ in price-time priority as of the
time of election.\9\
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\7\ A stop or stop-limit order is ``elected'' when the market
(i.e., a trade or quotation) for a particular option contract
reaches a specified price. Under the proposal, such orders would be
elected when a trade or quote occurs on the Exchange that causes the
Exchange's market to reach the specified price of the stop or stop-
limit order. See Phlx Rule 1066(c)(1).
\8\ See Phlx Rule 1080, Commentary .02.
\9\ An opening trade or quotation would also elect a stop or
stop-limit order. A stop or stop-limit order that is elected by an
opening trade or quotation is treated as a market or limit order for
purposes of the Exchange's rules concerning openings. See Phlx Rule
1017.
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The proposed rule change would provide that, notwithstanding the
foregoing, a stop or stop-limit order would not be elected by a trade
that is reported late or out of sequence. The purpose of this provision
is to ensure systemically that a stop or stop-limit order would be
elected on the Exchange by the execution price at the actual time of
the execution, instead of at the time of a late or out-of-sequence
report. Absent this provision, it would be possible for a stop or stop-
limit order to be elected by a trade that is reported late or out-of-
sequence, which could result in such stop or stop-limit order being
converted into a market or limit order and, in the case of a stop
order, executed at a significantly different price than the election
price of the stop order.\10\ A stop-limit order that is elected out-of-
sequence could be converted incorrectly into a live limit order that
has a price that is significantly different than the then-current
market price.
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\10\ For example, if a stop order to sell at $3.00 is elected by
a trade reported late or out-of-sequence with an execution price of
$3.00 when the actual bid price at the time of the report is $1.00,
the stop order would be converted into a market order and executed
at $1.00.
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Eligible Order Types
Phlx Rules 1080(b)(i)(A) and (C) would be amended to include agency
\11\ and off-floor broker-dealer \12\ stop and stop-limit orders as
order types that are eligible for electronic delivery on the Exchange's
systems.
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\11\ The Exchange has defined an agency order as any order
entered on behalf of a public customer, excluding any order entered
for the account of a broker-dealer, or any account in which a
broker-dealer or an associated person of a broker-dealer has any
direct or indirect interest. See Securities Exchange Act Release
Nos. 46763 (November 1, 2002), 67 FR 68898 (November 13, 2002) and
40970 (January 25, 1999), 64 FR 4922 (February 1, 1999). The
Exchange proposes to codify this definition in Phlx Rule
1080(b)(i)(A).
\12\ 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 the
Exchange's electronic order routing, delivery, execution and
reporting system, AUTOM, for the proprietary account(s) of such
market maker. See Phlx Rule 1080(b)(i)(C).
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Floor Official Approval Requirement
OFPA A-5 and Phlx Rule 1066(c)(1) currently provide that stop and
stop-limit orders elected by a quotation must be given floor official
approval prior to execution or, if circumstances make it impractical
for prior approval, promptly following the execution. The facts
surrounding each instance when retroactive approval is requested must
be documented in writing, signed by the specialist and floor official,
and submitted to the Surveillance Department on the day of the trade.
Under the instant proposal, stop and stop-limit orders would be
entered electronically and executed and handled automatically on the
Exchange's electronic trading platform for options, Phlx XL.\13\ The
Exchange believes that it would be impractical in an electronic trading
environment to require Floor Official approval prior to the execution
of each stop and stop-limit order that is entered onto the system.
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\13\ See Securities Exchange Act Release No. 50100 (July 27,
2004), 69 FR 44612 (August 3, 2004).
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Accordingly, the Exchange proposes to delete the provision from
Phlx Rule 1066(c)(1) requiring Floor Official approval prior to the
execution of stop and stop-limit orders. The provision would also be
deleted from OFPA A-5, which is proposed to be deleted in its entirety,
as set forth more fully below.
In-Crowd Representation Requirement
Phlx Rule 1066(c)(1) currently provides that stop and stop-limit
orders are elected only after the order is represented in the trading
crowd. The Exchange believes that, with the advent of Phlx XL and
increasingly automated quoting, trading and order handling in options
obviates the need for the requirement that a stop order be represented
in the crowd prior to execution. A stop order (or a stop-limit order
that becomes a marketable limit order) that is elected by a quotation
would be executed, reported and allocated automatically by the
[[Page 15243]]
Exchange's systems. Thus, there could be no ``representation in the
crowd'' prior to such an execution. The Exchange therefore proposes to
delete the requirement that such orders be represented in the crowd as
a prerequisite to their election.
Exclusion From the Definition of ``Directed Orders''
In May 2005, the Exchange adopted rules that permit Exchange
specialists, Streaming Quote Traders (``SQTs''),\14\ and Remote
Streaming Quote Traders (``RSQTs'') \15\ to receive Directed Orders,
and to provide a participation guarantee to specialists, SQTs and RSQTs
that receive Directed Orders.\16\
Currently, Phlx Rule 1080(l) defines the term ``Directed Order'' as
any customer order to buy or sell that has been directed to a
particular specialist, SQT, or RSQT by an order flow provider. The
Exchange proposes an amendment to Phlx Rule 1080(l) that would
specifically exclude stop and stop-limit orders from the definition of
a Directed Order. Directed Orders must be executed and allocated
electronically in accordance with the Exchange's rules that provide the
participation guarantee described above.\17\ A stop or stop-limit order
that is elected on the Exchange might not be eligible for automatic
execution \18\ and instead would be handled manually by the specialist
and allocated in accordance with Phlx Rule 1014(g)(v), which governs
manual trade allocation and does not provide a participation guarantee
to the recipient of a Directed Order. Such a stop or stop-limit order
that is allocated manually would not be allocated pursuant to Phlx Rule
1014(g)(viii), the trade allocation algorithm applicable to Directed
Orders. Therefore, the Exchange proposes to exclude stop and stop-limit
orders from the definition of ``Directed Order.''
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\14\ An SQT is an Exchange Registered Options Trader (``ROT'')
who has received permission from the Exchange to generate and submit
option quotations electronically through AUTOM in eligible options
to which such SQT is assigned. An SQT may only submit such
quotations while such SQT is physically present on the floor of the
Exchange. See Phlx Rule 1014(b)(ii)(A).
\15\ An RSQT is an ROT that is a member or member organization
with no physical trading floor presence who has received permission
from the Exchange to generate and submit option quotations
electronically through AUTOM in eligible options to which such RSQT
has been assigned. An RSQT may only submit such quotations
electronically from off the floor of the Exchange. See Phlx Rule
1014(b)(ii)(B).
\16\ See Securities Exchange Act Release No. 51759 (May 27,
2005), 70 FR 32860 (June 6, 2005). See also Phlx Rule 1014(g)(viii)
(setting forth the automatic trade allocation algorithm for Directed
Orders).
\17\ See Phlx Rule 1014(g)(viii).
\18\ For example, an order is not eligible for automatic
execution on the Exchange when the Exchange's bid or offer is not
the National Best Bid or Offer. See Phlx Rule 1080(c)(iv)(E).
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Deletion of OFPA A-5 in Its Entirety
OFPA A-5 currently includes a provision that a specialist may
refuse to accept stop and/or stop-limit orders on the book if he has
received the approval of one Floor Official no later than 30 minutes
before the opening. The original purpose of this provision was to allow
the specialist to manage his or her risk of missing, or not timely
executing, elected stop and stop-limit orders in options that are
expected to be volatile during the trading day due to, for example,
pending news or other event-driven changes in the market for the
particular option. The Exchange believes that, because stop and stop-
limit orders would be elected automatically under the proposal,
specialists would no longer be subject to such risks. The Exchange
therefore proposes to delete the provision permitting specialists to
refuse to accept stop and stop-limit orders with the proper Floor
Official approval.
The Exchange proposes to delete OFPA A-5 in its entirety. The
descriptive language of stop and stop-limit orders contained in OFPA A-
5 is currently contained in Phlx Rule 1066, and would remain in Rule
1066. Additionally, the provision that a stop or stop-limit order which
will be made eligible by an opening sale should be executed as the
opening trade or included with the opening trade is addressed in Phlx
Rule 1017, which includes market orders (such as those that are the
result of a stop order being elected) and limit orders (such as those
resulting from a limit order being elected) that are treated as market
orders under that rule, in the opening of trading in a particular
series.
The remaining sections of OFPA A-5 regarding the requirement to
obtain Floor Official approval prior to election, and permitting
specialists to refuse to accept stop and stop-limit orders with prior
Floor Official approval, would be deleted for the reasons stated above.
In addition, the Exchange historically adopted some OFPAs in order to
reprint them in a pocket format; this rationale is outdated and no
longer applies.
Deletion of OFPA A-6 in Its Entirety
Currently, OFPA A-6, Cancel/Replacement Process, requires the
specialist to notify ``the appropriate brokers'' when orders they
placed on the limit order book become subject to a cancel/replacement
process. Notification of the cancel/replacement process is now provided
systemically, except with respect to stop and stop-limit orders placed
with the specialist. Stop and stop-limit orders are the only order
types for which the specialist is currently responsible to notify the
appropriate Exchange member or member organization when stop and stop-
limit orders they placed with the specialist become subject to a
cancel/replacement process (due to, for example, a transfer or an
adjustment for a dividend). Once stop and stop-limit orders are
automated the specialist would no longer be responsible for
notification of cancel/replacement activity for any order type.
Therefore the OFPA is proposed to be deleted in its entirety.
2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act \19\ in general, and furthers the objectives of section
6(b)(5) of the Act \20\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest, by increasing the number of orders handled electronically and
establishing rules that permit the electronic delivery and handling of
stop and stop-limit orders via the Exchange's AUTOM System.
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\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments with respect
to the proposed rule change.
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 self-regulatory organization consents, the Commission will:
[[Page 15244]]
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, 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-2005-80 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2005-80. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2005-80 and should be submitted on or before April
17, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-4342 Filed 3-24-06; 8:45 am]
BILLING CODE 8010-01-P