[Federal Register Volume 71, Number 18 (Friday, January 27, 2006)]
[Notices]
[Pages 4625-4631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-1017]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53166; File No. SR-Phlx-2006-05]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval to a Proposed
Rule Change and Amendment No. 1 Thereto Relating to the Phlx XL Risk
Monitor Mechanism
January 23, 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 January 13, 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 Exchange. On January
19, 2006, the Exchange filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons. In
addition, the Commission is granting accelerated approval of the
proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 corrected certain technical errors in the
text of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt Phlx Rule 1093, Phlx XL Risk Monitor
Mechanism, to provide Exchange specialists, Streaming Quote Traders
(``SQTs''),\4\ Remote Streaming Quote Traders (``RSQTs''),\5\ and non-
SQT ROTs \6\ who are required to submit continuous two-sided electronic
quotations pursuant to Phlx Rule 1014(b)(ii)(E) \7\ (collectively,
``Phlx XL participants'') protection from the unreasonable risk
associated with the execution of an excessive number of contracts
resulting from near simultaneous executions in a single option issue.
Such protection would be provided by way of the implementation of a
Risk Monitor Mechanism. The Exchange also proposes conforming changes
to Phlx Rule 1017, Openings in Options, and to Phlx Rule 1082, Firm
Quotations, to describe the Exchange's disseminated quotation when the
disseminated size is exhausted and the specialist has not yet revised
its quotation. The text of the proposed rule change, as amended, is
below. Proposed new language is in italics; proposed deletions are in
[brackets].
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\4\ An SQT is an Exchange Registered Options Trader (``ROT'')
who has received permission from the Exchange to generate and submit
option quotations electronically through the Exchange's Automated
Options Market (``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).
\5\ 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).
\6\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT.
See Phlx Rule 1014(b)(ii)(C).
\7\ Phlx Rule 1014(b)(ii)(E) requires non-SQT ROTs who transact
more than 20% of their contract volume in an option electronically
versus in open outcry during a particular calendar quarter to submit
proprietary electronic quotations in such an option during the
subsequent calendar quarter for a certain number of series in such
option, depending on the percent of total volume transacted
electronically versus in open outcry on the Exchange in such option.
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Phlx XL Risk Monitor Mechanism
Rule 1093. (a) The Phlx XL system (the ``system'') will maintain a
counting program (``counting program'') for each specialist, SQT, RSQT,
and non-SQT ROT who is required to submit continuous two-sided
electronic quotations pursuant to Rule 1014(b)(ii)(E) (collectively,
``Phlx XL participants'') assigned in a particular option. The counting
program will count the number of contracts traded in such an option by
each Phlx XL participant within a specified time period, not to exceed
15 seconds, established by each Phlx XL participant (the ``specified
time period''). The specified time period will commence for an option
when a transaction occurs in any series in such option.
(b)(i) Risk Monitor Mechanism. The system will engage the Risk
Monitor Mechanism in a particular option when the counting program has
determined that a Phlx XL participant has traded a Specified Engagement
Size (as defined below) established by such Phlx XL participant during
the specified time period. When such Phlx XL participant has traded the
Specified Engagement Size during the specified time period, the Risk
Monitor Mechanism will automatically remove such Phlx XL participant's
quotations from the Exchange's disseminated quotation in all series of
the particular option.
(ii) Specified Engagement Size. The Specified Engagement Size is
determined by the following: (A) For each series in an option, the
counting program will determine the percentage that the number of
contracts executed in that series represents relative to the
disseminated size in that series (``series percentage''); (B) The
counting program will determine the sum of the series percentages in
the option issue (``issue percentage''); (C) Once the counting program
determines that the issue percentage equals or exceeds a percentage
established by the Phlx XL participant, not less than 100% (``Specified
Percentage''), the number of executed contracts in the option issue
equals the Specified Engagement Size. For example, if a Phlx XL
participant is quoting in four series of a particular option issue, and
sets its Specified Percentage at 100%, the Specified Engagement Size
would be determined as follows:
[[Page 4626]]
Example I
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 40 40
Series 2........................................................ 50 20 40
Series 3........................................................ 200 20 10
Series 4........................................................ 150 15 10
-----------------
Total....................................................... 500 95 100
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 95 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
Example II
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 0 0
Series 2........................................................ 50 0 0
Series 3........................................................ 200 0 0
Series 4........................................................ 150 150 100
-----------------
Total....................................................... 500 150 100
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 150 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
If a Phlx XL participant is quoting in four series of a particular
option, and sets its Specified Percentage at 200%, the Specified
Engagement Size would be determined as follows:
Example III
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 80 80
Series 2........................................................ 50 40 80
Series 3........................................................ 200 40 20
Series 4........................................................ 150 30 20
-----------------
Total....................................................... 500 190 200
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 190 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 200%. The Specified Engagement
Size will be automatically offset by a number of contracts that are
executed on the opposite side of the market in the same option issue
during the specified time period (the ``Net Offset Specified Engagement
Size''). For example, a Phlx XL participant that buys calls and also
sells calls or buys puts in the same option during the specified time
period would have a Net Offset Specified Engagement Size as follows:
Example IV
----------------------------------------------------------------------------------------------------------------
Sell call/buy Net offset
Series Size Buy call put size Percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................ 100 60 20 40 40
Series 2........................ 50 100 80 20 40
Series 3........................ 200 150 130 20 10
Series 4........................ 150 75 60 15 10
-----------------
Total....................... 500 385 290 95 100
----------------------------------------------------------------------------------------------------------------
The Net Offset Specified Engagement Size for each series is
determined by offsetting the number of contracts executed on the
opposite side of the market for each series during the specified time
period. The Risk Monitor Mechanism shall be engaged once the Net Offset
Specified Engagement Size is for a net number of contracts executed
among all series in an option issue during the specified time period
that
[[Page 4627]]
represents an issue percentage equal to or greater than the Specified
Percentage.
(c) Any marketable orders, or quotes that are executable against a
Phlx XL participant's disseminated quotation that are received prior to
the time the Risk Monitor Mechanism is engaged will be automatically
executed at the disseminated price up to the Phlx XL participant's
disseminated size, regardless of whether such an execution results in
executions in excess of the Phlx XL participant's Specified Engagement
Size.
(d) In the event that the specialist's quote is removed by the Risk
Monitor Mechanism and there are no other Phlx XL participants quoting
in the particular option, the system will automatically provide two-
sided quotes that comply with the Exchange's rules concerning quote
spread parameters on behalf of the specialist until such time as the
specialist revises the quotation. All quotations generated by the
Exchange on behalf of a specialist shall be considered ``firm
quotations'' and shall be the obligation of the specialist.
(e) The system will automatically reset the counting program and
commence a new specified time period when:
(i) A previous counting period has expired and a transaction occurs
in any series in such option; or
(ii) The Phlx XL participant refreshes his/her quotation, in a
series for which an order has been executed (thus commencing the
specified time period) prior to the expiration of the specified time
period.
* * * * *
Obligations and Restrictions Applicable to Specialists and Registered
Options Traders
Rule 1014. (a) No change.
(b) ROT. (i) No change.
(ii) (A)-(C) No change.
(D) Market Making Obligations Applicable in Streaming Quote
Options. In addition to the other requirements for ROTs set forth in
this Rule 1014, an SQT and an RSQT shall be responsible to quote
continuous, two-sided markets in not less than 60% of the series in
each Streaming Quote Option (as defined in Rule 1080(k)) in which such
SQT or RSQT is assigned, provided that a Directed SQT or RSQT (as
defined in Rule 1080(l)(i)(C)) shall be responsible to quote
continuous, two-sided markets in not less than [100] 99% of the series
in each Streaming Quote Option in which they receive Directed Orders
(as defined in Rule 1080(l)(i)(A)). The specialist shall be responsible
to quote continuous, two-sided markets in not less than [100] 99% of
the series in each Streaming Quote Option in which such specialist is
assigned.
(E) No change.
(c)-(h) No change.
Commentary: No change.
* * * * *
Openings in Options
Rule 1017. (a) No change.
(b) The system will calculate an Anticipated Opening Price (``AOP'')
and Anticipated Opening Size (``AOS'') when a quote or trade has been
disseminated by the primary market for the underlying security, and
under the conditions set forth below. The specialist assigned in the
particular option must enter opening quotes not later than one minute
following the dissemination of a quote or trade by the primary market
for the underlying security. An AOP may only be calculated if: (i) the
Exchange has received market orders, or the book is crossed (highest
bid is higher than the lowest offer) or locked (highest bid equals the
lowest offer); and (ii) either (A) the specialist's quote has been
submitted; (B) the quotes of at least two Phlx XL participants that are
required to submit continuous, two-sided quotes in [100] 99% of the
series in all option issues in which such Phlx XL participant is
assigned (``[100] 99% participants''), have been submitted within two
minutes of the opening trade or quote on the primary market for the
underlying security (or such shorter time as determined by the Options
Committee and disseminated to membership via Exchange Circular); or (C)
if neither the specialist's quote nor the quotes of two [100] 99%
participants have been submitted within two minutes of the opening
trade or quote on the primary market for the underlying security (or
such shorter time as determined by the Options Committee and
disseminated to membership via Exchange circular), one [100] 99%
participant has submitted their quote.
In situations where an AOP may be calculated and there is an order/
quote imbalance, the system will immediately send an imbalance notice
indicating the imbalance side (buy or sell) and the AOP and AOS (an
``Imbalance Notice'') to Phlx XL participants provided that the primary
market for the underlying security has disseminated the opening quote
or trade. Phlx XL participants that have not submitted opening quotes
will then submit their opening quotes, and Phlx XL participants that
have submitted opening quotes may submit revised opening quotes;
thereafter the system will disseminate an updated Imbalance Notice
every five seconds (or such shorter period as determined by the Options
Committee and disseminated to membership via Exchange Circular) until
the series is open. If no imbalance exists, no Imbalance Notice will be
sent, and the system will establish an opening price as described in
paragraph (c) below.
(c)-(d) No change.
(e) The system will not open a series if one of the following
conditions is met:
(i) there is no quote from the specialist or a [100] 99%
participant;
(ii)-(iii) No change.
(f)-(j) No change.
Commentary: No change.
* * * * *
Firm Quotations
Rule 1082. (a) (i) No change.
(ii) (A)-(B) No change.
(C)(1) If an SQT or RSQT's (other than a Directed SQT or RSQT)
quotation size in a particular series in a Streaming Quote Option is
exhausted or removed by the Risk Monitor Mechanism, such SQT or RSQT's
quotation shall be deleted from the Exchange's disseminated quotation
until the time the SQT or RSQT revises his/her quotation.
(2) If the Exchange's disseminated size in a particular series in a
Streaming Quote Option is exhausted at that particular price level, and
no specialist, SQT or RSQT has revised their quotation immediately
following the exhaustion of the Exchange's disseminated size at such
price level, the Exchange shall automatically [disseminate the
specialist's most recent disseminated price prior to the time of such
exhaustion] provide two-sided quotes that comply with the Exchange's
rules concerning quote spread parameters on behalf of the specialist
until such time as the specialist revises the quotation, with a size of
one contract.
(iii)-(iv) No change.
(b)-(d) 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 Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it had received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Phlx has prepared summaries, set forth in Sections
A, B, and C below, of the
[[Page 4628]]
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 provide Phlx XL
participants protection from the unreasonable risk of multiple nearly
simultaneous executions. The risk to Phlx XL participants is not
limited to a single series in an option issue; Phlx XL participants
have exposure in all series of a particular option issue, requiring
them to offset or hedge their overall position in an option issue.
Phlx XL participants submit proprietary electronic quotations in
options in which they are assigned based on proprietary pricing models
that rely on various factors such as the price and market volatility of
the underlying security. The Phlx XL participant's pricing model and
automated quotation system will continuously enter updated quotations
in all series of an option based on changes in the various factors
included in its pricing models. In addition to the Phlx XL
participant's own proprietary quoting system, the Risk Monitor
Mechanism would provide an additional tool to the Phlx XL participant
to help manage the risk associated with providing liquidity in a large
number of series across an option in which it is assigned.
Specialists trading on Phlx XL, together with SQTs and RSQTs that
receive Directed Orders \8\ are currently required to submit
continuous, two-sided quotations in 100% of the series in each option
in which they are assigned.\9\ SQTs and RSQTs that do not receive
Directed Orders are required to submit continuous, two-sided quotations
in 60% of the series in each option in which they are assigned.\10\
Phlx XL participants are thus exposed to the possibility of near-
simultaneous executions that can create large, unintended principal
positions that expose the Phlx XL participant to unnecessary market
risk. Consequently, Phlx XL participants may be more likely to widen
their quotations, quote less aggressively, and limit their disseminated
size in order to address these risks. The Risk Monitor Mechanism is
intended to address these concerns by assisting Phlx XL participants in
managing their market risk.
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\8\ See Phlx Rule 1080(l).
\9\ See Phlx Rule 1014(b)(ii)(D). The proposed rule change would
reduce the percentage quoting requirement as described more fully
below.
\10\ Id.
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Phlx XL Risk Monitor Mechanism
The Phlx XL Risk Monitor Mechanism would begin with a counting
program that would count the number of contracts traded in a particular
option by each Phlx XL participant within a specified time period
established by each Phlx XL participant (the ``specified time
period''). The specified time period would commence for an option when
a transaction occurs in any series in such option. The specified time
period may not exceed 15 seconds; Phlx XL participants may, however,
set the specified time period for less than 15 seconds.
The system would engage the Risk Monitor Mechanism in a particular
option when the counting program has determined that a Phlx XL
participant has traded a Specified Engagement Size (as defined below)
established by such Phlx XL participant during the specified time
period. When such Phlx XL participant has traded the Specified
Engagement Size during the specified time period, the Risk Monitor
Mechanism would automatically remove such Phlx XL participant's
quotations from the Exchange's disseminated quotation in all series of
the particular option until such Phlx XL participant submits a new,
revised quotation.
Specified Engagement Size. Each Phlx XL participant would establish
a Specified Engagement Size.\11\ When such Phlx XL participant has
traded the Specified Engagement Size during the specified time period,
the Risk Monitor Mechanism would automatically remove such Phlx XL
participant's quotations from the Exchange's disseminated quotation in
all series of the particular option.
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\11\ A Phlx XL participant could establish the Specified
Engagement Size as 100% or greater of the number of contracts
executed in each series during the specified time period relative to
the disseminated size. For example, a Phlx XL participant could
establish the Specified Engagement Size as 200%, in which case the
Risk Monitor Mechanism would not be engaged until 200% of the number
of contracts in each series have been executed during the specified
time period relative to the disseminated size. A Phlx XL participant
could also establish the Specified Engagement Size as, for example,
120%, in which case the Risk Monitor Mechanism would not be engaged
until 120% of the number of contracts in each series have been
executed during the specified time period relative to the
disseminated size. In any event, however, a Phlx XL participant may
not establish a Specified Engagement Size that is less than 100%.
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The Specified Engagement Size is determined as follows: For each
series in an option, the counting program would determine the
percentage that the number of contracts executed in that series
represents relative to the disseminated size in that series (the
``series percentage''). The counting program would then determine the
sum of the series percentages in the underlying option issue (the
``issue percentage''). Once the counting program determines that the
issue percentage equals or exceeds a percentage established by the Phlx
XL participant which may not be less than 100% (the ``Specified
Percentage''), the number of executed contracts in the option issue
equals the Specified Engagement Size.
For example, if a Phlx XL participant is quoting in four series of
a particular option issue, and sets its Specified Percentage at 100%,
the Specified Engagement Size would be determined as follows:
Example I
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 40 40
Series 2........................................................ 50 20 40
Series 3........................................................ 200 20 10
Series 4........................................................ 150 15 10
-----------------
Total....................................................... 500 95 100
----------------------------------------------------------------------------------------------------------------
[[Page 4629]]
In this example the Specified Engagement Size is 95 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
Example II
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 0 0
Series 2........................................................ 50 0 0
Series 3........................................................ 200 0 0
Series 4........................................................ 150 150 100
-----------------
Total....................................................... 500 150 100
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 150 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
If a Phlx XL participant is quoting in four series of a particular
option, and sets its Specified Percentage at 200%, the Specified
Engagement Size would be determined as follows:
Example III
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 80 80
Series 2........................................................ 50 40 80
Series 3........................................................ 200 40 20
Series 4........................................................ 150 30 20
-----------------
Total....................................................... 500 190 200
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 190 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 200%.
Offset on the Opposite Side of the Market. The Risk Monitor
Mechanism would calculate the number of contracts executed on one side
of the market during the specified time period, and offset that number
of contracts by the number of contracts executed on the opposite side
of the market during the specified time period. The purpose of this
provision is to account for the offset in risk of one option position
created by a position in the same option issue on the opposite side of
the market. Because the risk in such a situation is neutral, the
Exchange believes that Phlx XL participants should continue executing
contracts until the actual risk that is created by the Specified
Engagement Size is realized.
The Specified Engagement Size would thus be automatically offset by
a number of contracts that are executed on the opposite side of the
market in the same option issue during the specified time period (the
``Net Offset Specified Engagement Size''). The Risk Monitor Mechanism
would be engaged when the Net Offset Specified Engagement Size is for a
number of contracts executed among all series during the specified time
period that represents an issue percentage that is equal to or greater
than the specified percentage. For example, a Phlx XL participant that
buys calls and also sells calls or buys puts in the same option during
the specified time period would have a Net Offset Specified Engagement
Size as follows:
Example IV
----------------------------------------------------------------------------------------------------------------
Sell call/buy Net offset
Series Size Buy call put size Percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................ 100 60 20 40 40
Series 2........................ 50 100 80 20 40
Series 3........................ 200 150 130 20 10
Series 4........................ 150 75 60 15 10
-----------------
Total....................... 500 385 290 95 100
----------------------------------------------------------------------------------------------------------------
In this example, 675 contracts have been executed during the
specified time period (buy calls 385 + sell calls/buy puts 290). The
Net Offset Specified Engagement Size for each series is determined by
offsetting the number of contracts executed on the opposite side of the
market for each series during the specified time period. The Risk
Monitor Mechanism would be engaged once the Net Offset Specified
Engagement Size is executed for a net number of contracts among all
series during the specified time period that represents an issue
percentage that is equal to or greater than the specified percentage.
Firm Quotations. In order to remain consistent with the Exchange's
rules concerning Firm Quotations,\12\ the proposed rule change would
provide that any marketable orders, or quotes that are executable
against a Phlx XL participant's disseminated quotation,
[[Page 4630]]
that are received prior to the time the Risk Monitor Mechanism is
engaged would be automatically executed at the disseminated price up to
the Phlx XL participant's disseminated size, regardless of whether such
an execution results in executions in excess of the Phlx XL
participant's Specified Engagement Size. Therefore, it is possible for
a Phlx XL participant to execute a number of contracts that is greater
than the Specified Engagement Size before the Risk Monitor Mechanism
removes their quote from the Exchange's disseminated market.
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\12\ See Phlx Rule 1082.
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Further, the proposed rule change would establish that, in the
event that the specialist's quote is exhausted or removed by the Risk
Monitor Mechanism, and there are no other Phlx XL participants quoting
in the particular option, the system would automatically provide two-
sided quotes that comply with the Exchange's rules concerning quote
spread parameters on behalf of the specialist until such time as the
specialist revises the quotation. All quotations generated by the
Exchange on behalf of a specialist would be considered ``firm
quotations'' and shall be the obligation of the specialist. The
Exchange proposes conforming changes to Rule 1082 to reflect this
situation.
The purpose of this provision is to ensure that the Exchange
disseminates continuous quotations in all series traded on the
Exchange, even in situations where no Phlx XL participant is
disseminating its own quotations due to, for example, system
malfunctions. The Exchange believes that it should ``take control'' of
a Phlx XL participant's quotation only in limited circumstances (i.e.,
only when the Exchange's failure to do so would result in no
disseminated market from the Exchange), and that the Phlx XL
participants then quoting should determine the Exchange's disseminated
price and size.
The Exchange proposes to amend Phlx Rule 1014(b)(ii)(D) to reduce
the obligation of specialists and Phlx XL participants that receive
Directed Orders \13\ to quote continuous, two-sided markets in not less
than 100% of the series in each option in which they are assigned. The
new obligation would be to quote in 99% of such series. The purpose of
this proposal is to make the Exchange's rules concerning quoting
requirements consistent with the Risk Monitor Mechanism's functionality
(i.e., the removal of individual specialist and Directed SQT and RSQT
quotations from the Exchange's disseminated market). If the quoting
obligation were to remain at 100% for these particular Phlx XL
participants, a rule violation would occur each time the Risk Monitor
Mechanism removes their quotation. Thus, the Exchange proposes to
reduce this obligation so that removal of individual quotations does
not result in violations of Exchange rules.
---------------------------------------------------------------------------
\13\ See Phlx Rule 1080(l).
---------------------------------------------------------------------------
For consistency, the Exchange proposes conforming amendments to
Phlx Rule 1017, Openings in Options, to change references to ``100%
participants'' and re-name them ``99% participants.''
Re-Setting the Counting System. Finally, the proposed rule change
provides that the system would automatically reset the counting program
and commence a new specified time period when either: (i) a previous
counting period has expired and a transaction occurs in any series in
such option; or (ii) the Phlx XL participant refreshes his/her
quotation, in a series for which an order has been executed (thus
commencing the specified time period) prior to the expiration of the
specified time period.
The commencement of the specified time period is event-driven,
i.e., upon the execution of a transaction in a particular series in an
option. The system would only initiate a specified time period when
such an execution occurs. If there is no activity in an option, the
system would not repeatedly commence and calculate the expiration of a
new specified time period for such option unnecessarily. Once an
execution occurs, however, a specified time period would commence.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act,\14\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\15\ 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 assisting Phlx XL participants in managing their
risk through the Risk Monitor Mechanism.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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
No written comments were either solicited or received.
III. 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 [email protected]. Please include
File Number SR-Phlx-2006-05 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 20549-9303.
All submissions should refer to File Number SR-Phlx-2006-05. 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, 100 F Street,
NE., 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 publicly available. All
submissions should refer to File Number SR-Phlx-2006-05 and should be
submitted on or before February 17, 2006.
[[Page 4631]]
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder, applicable to a national
securities exchange.\16\ In particular, the Commission believes that
the proposed rule change is consistent with Section 6(b)(5) of the
Act,\17\ which requires among other things, that the rules of the
Exchange are 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. The Commission notes that the
proposal does not alter the obligations of Phlx XL participants, except
for the fact that it will reduce specialists and Phlx XL participants
that receive directed orders continuous quoting obligation from 100% of
the series in each option in which it is assigned to 99% of the series
in each option in which it is assigned. The Commission notes that this
reduction should provide specialists and Phlx XL participants that
receive directed orders a brief amount of time to update their quotes
after the Risk Monitor Mechanism removes their quotes from the
Exchange's disseminated quotation. In addition, the Commission believes
that the proposed rule change should provide Phlx XL participants
assistance in effectively managing their quotations.
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\16\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\17\ 15 U.S.C. 78f(b)(5).
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The Phlx has requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after
publication of notice thereof in the Federal Register. The Commission
notes that similar proposals to provide protection from risk for market
makers have been approved for other options exchanges.\18\ The
Commission believes that granting accelerated approval of the proposal
should provide Phlx XL participants with similar protections from the
risk associated with an excessive number of near simultaneous
executions in a single options class. Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2) of the Act,\19\ for approving
the proposed rule change, as amended, prior to the thirtieth day after
the date of publication of notice thereof in the Federal Register.
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\18\ See Securities Exchange Act Release Nos. 51049 (January 18,
2005), 70 FR 3756 (January 26, 2005) (SR-BSE-2004-52); 51050
(January 18, 2005), 70 FR 3758 (January 26, 2005) (SR-ISE-2004-31);
and 51740 (May 25, 2005), 70 FR 32686 (June 3, 2005) (SR-PCX-2005-
64).
\19\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-Phlx-2006-05) and Amendment
No. 1 thereto be, and hereby are, approved on an accelerated basis.
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\20\ 15 U.S.C. 78s(b)(2).
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. E6-1017 Filed 1-26-06; 8:45 am]
BILLING CODE 8010-01-P