[Federal Register: August 16, 2006 (Volume 71, Number 158)]
[Notices]
[Page 47282-47284]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16au06-144]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54298; File No. SR-Phlx-2006-41]
Self-Regulatory Organizations; Philadelphia Stock Exchange,
Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Relating to the Automatic Execution of a Customer Limit Order
Against an Order Entry Firm's Proprietary Order or a Solicited Broker-
Dealer Order After a Three Second Exposure Period
August 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 July 28, 2006, 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 and
II below, which Items have been prepared by the Phlx. The Phlx filed
the proposed rule change as a ``non-controversial'' rule change
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6)
thereunder,\4\ which renders the proposal effective upon filing with
the Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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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 1080, Philadelphia Stock
Exchange Automated Options Market (AUTOM) \5\ and Automatic Execution
System (AUTO-X), by: (1) Rescinding Exchange Rule 1080(b)(ii)(A), which
requires Order Entry Firms \6\ to comply with certain order marking and
exposure requirements when sending a proprietary order along with a
customer limit order to the limit order book; (2) adopting Exchange
Rule 1080(c)(ii)(C), which would permit a customer limit order to
automatically execute against an Order Entry Firm's proprietary order
or quote, or solicited orders for the accounts of member and non-member
broker-dealers, after a three second exposure period; and (3) deleting
Exchange Rule 1080(b)(ii)(B) and re-inserting similar language into
proposed Exchange Rule 1080(c)(ii)(C)(3) providing that it shall be a
violation of Exchange Rule 1080(c)(ii)(C) for any Exchange member or
member organization to be a party to any arrangement designed to
circumvent Exchange Rule 1080(c)(ii)(C) by providing an opportunity for
a customer, member, member organization, or non-member broker-dealer to
execute immediately against agency orders delivered to the Exchange,
whether such orders are delivered via AUTOM or represented in the
trading crowd by a member or a member organization.
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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
Exchange Rule 1080.
\6\ An Order Entry Firm is a member organization of the Exchange
that is able to route orders to AUTOM. See Exchange Rule
1080(c)(ii)(A)(1).
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Exchange Rule 1080(b)(ii) prohibits Order Entry Firms from
interacting on a principal basis with a customer limit order without
first marking the customer limit order with a ``K'' indicator and the
proprietary order with an ``L'' indicator. The customer limit order
must also be exposed to the crowd for at least 30 seconds prior to the
manual execution of both orders. The Exchange proposes to permit Order
Entry Firms, after exposing the customer limit order for three seconds,
to automatically execute such order against a proprietary order, or a
solicited order for the account of a member or non-member broker-dealer
under proposed Exchange Rule 1080(c)(ii)(C). The text of the proposed
rule change is set forth below. [Brackets] indicate deletions; italics
indicate new text.
Rule 1080. Philadelphia Stock Exchange Automated Options Market (AUTOM)
and Automatic Execution System (AUTO-X)
(a) No change.
(b) Eligible Orders
(i) No change.
(ii) The Exchange's Options Committee may determine to accept
additional types of orders as well as to discontinue accepting certain
types of orders.
[(A) In accordance with this sub-paragraph (ii), the Options
Committee has determined to allow a customer limit order to be
delivered via AUTOM onto the limit order book by an Order Entry Firm
(as defined in Rule 1080(c)(ii)). If the Order Entry Firm also sends in
a proprietary contraside order for the account of such Order Entry
Firm, an affiliated firm, or a solicited party (as defined in Rule
1064(c)(ii)), it must label the customer order with a ``K'' indicator
and the proprietary order (which is an immediate-or-cancel order that
is not eligible for automatic execution) with an ``L'' indicator. The
customer limit order labeled ``K'' may be executed by the specialist or
crowd at any time. The customer limit order labeled ``K'' must be
exposed to the trading crowd for not less than 30 seconds before it can
be executed, in whole or in part, against proprietary orders with a
labeled ``L'' indicator.
(B) It shall be a violation of Rule 1080(b)(ii)(A) for any Exchange
member or member organization to be a party to any arrangement designed
to circumvent Rule 1080(b)(ii)(A) by providing an opportunity for a
customer, member, member organization, or non-member broker-dealer to
execute immediately against agency orders delivered to the Exchange,
whether such orders are delivered via AUTOM or represented in the
trading crowd by a member or a member organization.]
(iii) No change.
[[Page 47283]]
(c) No change.
(i) No change.
(ii) Order Entry Firms and Users
(A)--(B) No change.
(C) Order Entry Firms shall comply with the following requirements
when interacting with orders on the limit order book which they
represent as agent.
(1) Principal Transactions: Order Entry Firms may not execute as
principal against orders on the limit order book they represent as
agent unless: (a) Agency orders are first exposed on the limit order
book for at least three (3) seconds, (b) the Order Entry Firm has been
bidding or offering on the Exchange for at least three (3) seconds
prior to receiving an agency order that is executable against such
order, or (c) the Order Entry Firm proceeds in accordance with the
crossing rules contained in Rule 1064.
(2) Solicitation Orders. Order Entry Firms must expose orders they
represent as agent for at least three (3) seconds before such orders
may be automatically executed, in whole or in part, against orders
solicited from members and non-member broker-dealers to transact with
such orders.
(3) It shall be a violation of Rule 1080(c)(ii)(C) for any Exchange
member or member organization to be a party to any arrangement designed
to circumvent Rule 1080(c)(ii)(C) by providing an opportunity for a
customer, member, member organization, or non-member broker-dealer to
execute immediately against agency orders delivered to the Exchange,
whether such orders are delivered via AUTOM or represented in the
trading crowd by a member or a member organization.
(iii)-(vi) No change.
(d)-(l) No change.
Commentary: No change.
* * * * *
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 Phlx 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 Phlx 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 modernize certain
Exchange Rules in response to the automated environment of Phlx XL by
deleting certain outdated requirements applicable to Order Entry Firms
including those related to order marking and order exposure of customer
limit orders and proprietary contraside orders under Exchange Rule
1080(b)(ii), as well as the prohibition against automatic execution of
the contraside proprietary order. The proposed rule change would allow
Order Entry Firms to submit orders (for the accounts of the Order Entry
Firm or a solicited member or non-member broker-dealer) along with
customer limit orders they represent on an agency basis to the Exchange
for automatic execution following the exposure of the customer limit
order for a three second period.
The Exchange proposes to establish the requirement that a customer
limit order entered onto the limit order book by an Order Entry Firm
must be subject to a three-second exposure period before such customer
limit order may automatically execute against an Order Entry Firm's
proprietary order, or solicited orders for the accounts of member and
non-member broker-dealers.\7\ According to the Exchange, the proposed
three-second exposure period is fully consistent with the electronic
nature of the Exchange's electronic options trading platform, Phlx
XL.\8\ Phlx XL participants have implemented systems that monitor any
updates to the Phlx market, including any changes resulting from orders
being entered into Phlx XL, and can automatically respond based on pre-
set parameters. Thus, an exposure period of three seconds would permit
exposure of orders on Phlx in a manner consistent with its electronic
market.
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\7\ In addition to the ``K'' and ``L'' marking requirement,
Exchange Rule 1080(b)(ii)(A) currently requires a customer limit
order delivered onto the limit order book by an Order Entry Firm to
be exposed to the trading crowd for not less than 30 seconds before
it may be executed, in whole or in part, against proprietary orders
with a labeled ``L'' indicator. The instant proposed rule change
would both eliminate the ``K'' and ``L'' marking requirement and
reduce the exposure period for the customer limit order from 30
seconds to three seconds.
\8\ See Securities Exchange Act Release No. 50100 (July 27,
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
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By establishing the three-second exposure period, the Phlx believes
that members would be able to provide liquidity to their customers'
orders on a timelier basis, thus providing investors with more speedy
executions. Timely and accurate executions are consistent with the
principles under which Phlx XL was developed.
The existing ``K'' and ``L'' provisions were adopted before the
rollout of Phlx XL.\9\ The Exchange proposes to delete the ``K'' and
``L'' marking requirement because, as a practical matter, the Exchange
is able to identify the Order Entry Firm submitting the customer limit
order by way of a firm mnemonic that is submitted with such an order.
The firm mnemonic is a code consisting of letters and/or numbers that
identify the originating broker-dealer (i.e., the Order Entry Firm)
that submits the customer limit order. The Order Entry Firm must
identify the order as that of a customer, broker-dealer, or its own
proprietary order. The Exchange is also able to identify a contra-side
order or quote to a customer order by way of the same information
included with a contra-side limit order or electronic quotation
submitted through Phlx XL. If the Order Entry Firm were to submit its
contra-side proprietary order or quote, or a solicited contra-side
order for the account of a member or non-member broker-dealer, prior to
the expiration of the three-second exposure period, the transaction
would be recorded in reports prepared by the Exchange's Market
Surveillance Department and would result in an investigation and
possible disciplinary action by the Exchange.
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\9\ The ``K'' and ``L'' order types were adopted in September
2003 in conjunction with the Exchange's rules relating to the
automatic execution of booked customer limit orders. See Securities
Exchange Act Release No. 48472 (September 10, 2003), 68 FR 54513
(September 17, 2003) (SR-Phlx-2002-86).
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The Phlx XL platform generally protects against trade-throughs
because it will not automatically execute a transaction if the
execution price is not the NBBO.\10\
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\10\ See Exchange Rule 1080(c)(iv)(A). Orders on Phlx XL are
eligible for automatic execution when the Exchange's disseminated
market is crossed or crosses another exchange's market by just one
minimum trading increment (and where the Exchange's disseminated
market is the NBBO). Exchange Rule 1085 provides an exception from
trade-through liability in the event that the trade-through occurred
as a result of an automatic execution when the Exchange's
disseminated market is the NBBO and is crossed by not more than one
minimum trading increment, or crosses the disseminated market of
another options exchange by not more than one minimum trading
increment. See Securities Exchange Act Release No. 53449 (March 8,
2006), 71 FR 13441 (March 15, 2006) (SR-Phlx-2005-45).
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The Exchange believes that this proposed rule change would permit
the Exchange to competitively respond to
[[Page 47284]]
similar functionality offered on other exchanges.\11\
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\11\ See Securities Exchange Act Release Nos. 53567 (March 29,
2006), 71 FR 17529 (April 6, 2006) (SR-CBOE-2006-09) (order
approving proposed rule change to decrease the exposure period for
crossing orders from 10 seconds to three seconds); 53850 (May 23,
2006), 71 FR 30703 (May 30, 2006) (SR-ISE-2006-21) (notice of filing
and immediate effectiveness of a proposed rule change to decrease
the exposure period for crossing orders from 30 seconds to three
seconds); 53854 (May 24, 2006), 71 FR 30975 (May 31, 2006) (SR-BSE-
2006-23) (notice of filing and immediate effectiveness of a proposed
rule change to decrease the exposure period for crossing orders from
30 seconds to three seconds); and 53609 (April 6, 2006), 71 FR 19224
(April 13, 2006) (SR-NYSEArca-2006-01) (order approving the proposed
rule change to shorten the time that a broker must wait prior to
executing as principal orders he or she represents as agent from 30
seconds to three seconds).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \12\ in general, and furthers the objectives of Section
6(b)(5) of the Act \13\ 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 promoting competition among the markets participants and
between exchanges.
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\12\ 15 U.S.C. 78f(b).
\13\ 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 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 either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
A proposed rule change filed under Rule 19b-4(f)(6) normally may
not become operative prior to 30 days after the date of filing.\16\
However, Rule 19b-4(f)(6)(iii) \17\ permits the Commission to designate
a shorter time if such action is consistent with the protection of
investors and the public interest. The Phlx provided the Commission
with written notice of its intent to file this proposed rule change at
least five business days prior to the date of filing of the proposed
rule change. In addition, the Phlx has requested that the Commission
waive the 30-day operative delay. The Commission believes that waiving
the 30-day operative delay is consistent with the protection of
investors and the public interest because the proposed rule change
would allow the Exchange to implement immediately a rule proposal that
corresponds to rules currently in place at other exchanges.\18\ For
this reason, the Commission designates the proposal to be effective and
operative upon filing with the Commission.\19\
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\16\ 17 CFR 240.19b-4(f)(6)(iii).
\17\ Id.
\18\ See note 11, supra.
\19\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2006-41 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-2006-41. 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 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-2006-41 and should be submitted on or before
September 6, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-13422 Filed 8-15-06; 8:45 am]
BILLING CODE 8010-01-P