[Federal Register: May 15, 2006 (Volume 71, Number 93)]
[Notices]
[Page 28060-28062]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15my06-80]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53776; File No. SR-Phlx-2005-73]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing of a Proposed Rule Change and Amendments No. 1 and 2
Thereto Relating to the Exchange's Obvious Error Rule
May 9, 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 November 14, 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. On
November 18, 2005, the Phlx submitted Amendment No. 1 to the proposed
rule change.\3\ On April 6, 2006, the Phlx submitted Amendment No. 2 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\ Amendment No. 1 corrected technical errors in the proposed
rule text.
\4\ Amendment No. 2 deleted the proposed revisions to Rule
1092(c) that related to an erroneous print disseminated by the
underlying market which is later cancelled or corrected by the
underlying market and an erroneous quote in the underlying market.
Thus, the Exchange does not propose to make any changes to Rule
1092(c).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to amend Exchange Rule 1092 (Obvious Errors). The
proposed amendments to Phlx Rule
[[Page 28061]]
1092 would: (1) change the definition of ``obvious error'' to mean a
transaction that occurs at an execution price that differs from the
Theoretical Price by at least the maximum allowable bid/ask
differential; and (2) change the definition of ``Theoretical Price''
for purposes of determining whether an execution price constitutes an
``obvious error.''
Below is the text of the proposed rule change, as amended. Proposed
new language is in italics; proposed deletions are in [brackets].
* * * * *
Obvious Errors
Rule 1092. The Exchange shall either nullify a transaction or
adjust the execution price of a transaction that results in an Obvious
Error as provided in this Rule.
(a) Definition of Obvious Error. For purposes of this Rule only, an
Obvious Error will be deemed to have occurred when the execution price
of a transaction is higher or lower than the Theoretical Price for a
series by an amount equal to at least the amount shown below:
------------------------------------------------------------------------
Minimum
Theoretical price amount
------------------------------------------------------------------------
Below $2..................................................... $.25
$2 to $5..................................................... $.40
Above $5 to $10.............................................. $.50
Above $10 to $20............................................. $.80
Above $20.................................................... $1.00
------------------------------------------------------------------------
[(i) If the Theoretical Price of the option is less than $3.00:
(A) During regular market conditions (including rotations), the
execution price of a transaction is higher or lower than the
Theoretical Price for the series by an amount of 35 cents or more; or,
(B) During unusual market conditions (i.e., the Exchange has
declared an unusual market condition status for the option in
question), the execution price of a transaction is higher or lower than
the Theoretical Price for the series by an amount of 50 cents or more.
(ii) If the Theoretical Price of the option is $3.00 or more:
(A) During regular market conditions (including rotations), the
execution price of a transaction is higher or lower than the
Theoretical Price for the series by an amount equal to at least two
times the maximum bid/ask spread allowed for the series, so long as
such amount is 50 cents or more; or
(B) During unusual market conditions (i.e., the Exchange has
declared an unusual market condition status for the option in
question), the execution price of a transaction is higher or lower than
the Theoretical Price for the series by an amount equal to at least
three times the maximum bid/ask spread allowed for the series, so long
as such amount is 50 cents or more.]
(b) Definition of Theoretical Price. For purposes of this Rule
only, the [t] Theoretical Price of an option is:
(i) If the series is traded on at least one other options exchange,
the [last bid or offer] mid-point of the National Best Bid and Offer
(``NBBO''), just prior to the transaction [, on the exchange that has
the most total volume in that option over the most recent 60 calendar
days]; or
(ii) If there are no quotes for comparison purposes, as determined
by two Floor Officials and designated personnel in the Exchange's
Market Surveillance Department.
(c)-(f) No change.
Commentary:
.01 No change.
.02 [ The Theoretical Price will be determined under paragraph
(b)(i) of this Rule as follows: (i) the bid price from the exchange
providing the most total volume in the option over the most recent 60
calendar days will be used with respect to an erroneous bid price
entered on the Exchange, and (ii) the offer price from the exchange
providing the most total volume in the option over the most recent 60
calendar days will be used with respect to an erroneous offer price
entered on the Exchange.
.03 ] The price to which a transaction is adjusted under paragraph
(c)(ii) of this Rule will be determined as follows: (i) the bid price
from the exchange disseminating the National Best Bid for the series at
the time of the transaction that was the result of an obvious error
will be used with respect to an erroneous offer price entered on the
Exchange, and (ii) the offer price from the exchange disseminating the
National Best Offer for the series at the time of the transaction that
was the result of an obvious error will be used with respect to an
erroneous bid price entered on the Exchange. If there are no quotes for
comparison purposes, the adjustment price will be determined by two
Floor Officials and Market Surveillance.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange states that the purpose of the proposed rule change,
as amended, is to modernize the Exchange's Obvious Error rule so that
it addresses issues raised by the increasingly electronic options
marketplace.
Definition of Obvious Error
Currently, Exchange Rule 1092(a) defines ``obvious error'' as the
execution price of a transaction that is higher or lower than the
Theoretical Price (if the Theoretical Price is less than $3.00) for the
series by an amount of 35 cents or more; or, during unusual market
conditions (i.e., the Exchange has declared an unusual market condition
status for the option in question), by an amount of 50 cents or more.
Where the Theoretical Price is $3.00 or more, ``obvious error'' is
defined as the execution price of a transaction that is higher or lower
than the Theoretical Price for the series by an amount equal to at
least two times the allowable maximum bid/ask spread for the series, so
long as the amount is 50 cents or more, and three times the allowable
bid/ask spread during unusual market conditions.
The proposed rule change would re-define ``obvious error'' by
deeming an ``obvious error'' to have occurred when the execution price
of a transaction is higher or lower than the Theoretical Price for a
series by an amount equal to at least the amount shown below:
------------------------------------------------------------------------
Minimum
Theoretical price amount
------------------------------------------------------------------------
Below $2..................................................... $.25
$2 to $5..................................................... $.40
Above $5 to $10.............................................. $.50
Above $10 to $20............................................. $.80
Above $20.................................................... $1.00
------------------------------------------------------------------------
The Exchange believes that the proposed new definition of ``obvious
error'' would facilitate the efficient determination by Floor Officials
as to whether a trade resulted from an obvious error by setting minimum
amounts by which the transaction price differs from the Theoretical
Price without requiring such Floor Officials to conduct an inquiry into
the volume of all exchanges each time they review a
[[Page 28062]]
transaction under the rule. The proposed definition of ``obvious
error'' would apply during both normal and unusual market conditions,
thus further streamlining the Floor Officials' review process.
Definition of Theoretical Price
Currently, Phlx Rule 1092(b) defines ``Theoretical Price'' as the
last bid or offer, just prior to the transaction, on the exchange that
has the most total volume in that option over the most recent 60
calendar days; or if there are no quotes for comparison purposes, as
determined by two Floor Officials and designated personnel in the
Exchange's Market Surveillance Department. The proposed rule change
would define ``Theoretical Price'' as, respecting series traded on at
least one other options exchange, the mid-point of the National Best
Bid and Offer (``NBBO'') just prior to the transaction.
The Phlx notes that currently, all options exchanges, including the
Phlx, have rules permitting specialists and market makers to
disseminate electronic quotations with a bid/ask differential of up to
$5.00, regardless of the price of the bid.\5\ For the most part, the
Phlx believes that such quotations do not reflect the NBBO. Under the
current Exchange rule, the Theoretical Price, defined as the last bid
or offer just prior to the transaction on the market with the highest
volume, could differ from the NBBO by a significant amount if the bid/
ask differential on such market in the series is $5.00 wide. In order
to account for this potential discrepancy between the Theoretical Price
as established by rule and the actual NBBO, the proposal would re-
define the term ``Theoretical Price'' to mean the mid-point of the NBBO
just prior to the transaction. This should provide Exchange Floor
Officials with a more accurate measure of the price on which to base
their determination that a transaction resulted from an obvious error,
based on the actual NBBO instead of a quotation with a bid/ask
differential of $5.00.
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\5\ See, e.g., Exchange Rule 1014(c)(i)(A)(2).
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For consistency, the Exchange proposes to delete Commentary .02 to
Phlx Rule 1092, which references the Theoretical Price as currently
defined, from the Rule.
2. Statutory Basis
The Exchange believes that this proposal is consistent with Section
6(b) of the Act \6\, in general, and furthers the objectives of Section
6(b)(5) of the Act,\7\ 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 national market
system, and, in general, to protect investors and the public interest,
by establishing objective definitions of Theoretical Price and
``obvious error'' that address issues raised by the increasingly
electronic options marketplace.
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\6\ 15 U.S.C. 78f(b).
\7\ 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, as
amended, will impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received by the Exchange on
this proposal, as amended.
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, as amended, or
(B) Institute proceedings to determine whether the proposed rule
change, as amended, 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-2005-73 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2005-73. 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 the 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-2005-73 and should be submitted on or before June 5, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-7323 Filed 5-12-06; 8:45 am]
BILLING CODE 8010-01-P