Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Extension of a Pilot Program Concerning Split Price Priority in Open Outcry, 77435-77438 [E5-8129]

Download as PDF Federal Register / Vol. 70, No. 250 / Friday, December 30, 2005 / Notices trade, and, in general, to protect investors and the public interest. The issuance of the Series D Preferred will ensure that NASD continues to control Nasdaq until NASDAQ LLC operates as an exchange and Nasdaq is no longer operating pursuant to the Delegation Plan. B. Self-Regulatory Organization’s Statement on Burden on Competition Nasdaq does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action wwhite on PROD1PC61 with NOTICES The Exchange has designated the proposed rule change, as amended, as a ‘‘non-controversial’’ rule change pursuant to section 19(b)(3)(A)(iii) of the Act 13 and subparagraph (f)(6) of Rule 19b–4 thereunder.14 Nasdaq represents that the foregoing rule change: does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) by its terms, does not become operative for 30-days after the date of this filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. Nasdaq has requested that the Commission waive the five-day prefiling requirement and the 30-day operative delay period for ‘‘noncontroversial’’ proposals and make the proposed rule change, as amended, effective and operative upon filing. The Commission has determined to waive the five-day pre-filing requirement and the 30-day operative delay period.15 The Commission notes that accelerating the operative date will allow Nasdaq to exchange the Series B Preferred for the Series D share with NASD. Therefore, the foregoing rule change has become immediately effective and operative upon filing pursuant to section 19(b)(3)(A)(iii) of the 13 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 15 For purposes only of accelerating the operative date of this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 14 17 VerDate Aug<31>2005 18:16 Dec 29, 2005 Jkt 208001 Act 16 and Rule 19b–4(f)(6) thereunder.17 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. 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: 77435 should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NASD–2005–145 and should be submitted on or before January 20, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.18 Jonathan G. Katz, Secretary. [FR Doc. E5–8128 Filed 12–29–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 53021; File No. SR–Phlx–2005– 86] Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–NASD–2005–145 on the subject line. Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Extension of a Pilot Program Concerning Split Price Priority in Open Outcry Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File Number SR–NASD–2005–145. 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 Commissions Internet Web site (https://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 NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1, and Rule 19b–4 2 thereunder, notice is hereby given that on December 21, 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 and II, below, which Items have been prepared by the Phlx. The Exchange filed the proposal 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.5 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 16 15 17 17 PO 00000 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). Frm 00064 Fmt 4703 Sfmt 4703 December 23, 2005. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Phlx proposes to extend, for an additional six-month period, a pilot program set forth in Exchange Rule 1014(g)(i)(C), governing purchase or sale priority for orders of 100 option contracts or more (‘‘pilot’’). The rule affords priority to members that purchase (sell) fifty or more contracts at 18 17 CFR 200.30–3(a)(12). 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). 5 The Exchange requested the Commission to waive the five-day pre-filing notice requirement and the 30-day operative delay, as specified in Rule 19b–4(f)(6)(iii). 17 CFR 240.19b–4(f)(6)(iii). 1 15 E:\FR\FM\30DEN1.SGM 30DEN1 77436 Federal Register / Vol. 70, No. 250 / Friday, December 30, 2005 / Notices a particular price at the next lower (higher) price in purchasing (selling) the equivalent number of contracts in the same series. Such priority only applies to orders that represent the same transaction or order as the previous purchase (sale), and only applies to transactions in equity options and options overlying Exchange Traded Fund Shares (‘‘ETFs’’) that are effected in open outcry. The pilot is scheduled to expire December 31, 2005.6 The Exchange proposes to extend the pilot through June 30, 2006. The text of the proposed rule change is available on the Phlx Web site (https://www.phlx.com), at the Phlx’s Office of the Secretary and at the Commission’s Public Reference Room.7 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 wwhite on PROD1PC61 with NOTICES The purpose of the proposed rule change is to extend the pilot, which establishes rules that facilitate the execution of large orders, which by virtue of their size and the need to execute them at multiple prices may be difficult to execute without a limited exception to current Exchange priority rules. The pilot, as set forth in Exchange Rule 1014(g)(i)(C), establishes a priority rule regarding open outcry split price transactions in equity options and options overlying ETFs generally to permit a member who is responding to 6 See Securities Exchange Act Release No. 51820 (June 10, 2005), 70 FR 35759 (June 21, 2005) (SR– Phlx–2005–28). 7 The proposed rule change amends the current text of Phlx Rule 1014(g)(i)(C) by adding a phrase to indicate that the provision is ‘‘subject to a pilot scheduled to expire June 30, 2006.’’ VerDate Aug<31>2005 18:16 Dec 29, 2005 Jkt 208001 an order 8 for at least 100 contracts 9 who buys (sells) at least 50 contracts at a particular price to have priority over all others in purchasing (selling) up to an equivalent number of contracts of the same order at the next lower (higher) price without being required to yield to existing customer interest in the limit order book. Absent this proposed rule, such orders would be required to yield priority.10 For example, when a floor broker (‘‘Floor Broker’’) is representing a customer’s order to purchase 100 contracts and a member executes a purchase of 50 of those contracts at a price of $.30, the member would have priority over all market participants to purchase the remaining 50 contracts in the order at $.25.11 Two trades would be reported to the tape, one a purchase of 50 contracts at $.30, and the other a purchase of 50 contracts at $.25. The effect to the customer would be a net purchase price of $.275 for 100 contracts. The Exchange believes that the pilot should lead to more aggressive quoting by crowd participants, which in turn could lead to better executions. A crowd participant might be willing to trade at a better price for a portion of an order if he/she were assured of trading with the balance of the order at the next pricing increment. As a result, Floor Brokers representing orders in the trading crowd might receive betterpriced executions. Under the split price priority rule, the Exchange’s Options Committee 12 has the ability to increase the minimum qualifying order size to a number larger than 100 contracts. Any changes, which would have to apply to all products under the committee’s jurisdiction, would be announced to the membership via Exchange Circular. One possible limitation on the ability of crowd participants to use the split price priority rule is the current requirement that orders for controlled accounts 13 generally must yield priority 8 Clarification as per telephone call on December 21, 2005, between Richard Rudolph, Vice President and Counsel, Phlx and Ira Brandriss, Special Counsel, Division of Market Regulation, Commission (‘‘Telephone Call of December 21st’’). 9 Orders for a size of less than 100 contracts would not be affected by this proposed rule. 10 See, e.g., Exchange Rule 119(a). 11 Clarified as per Telephone Call of December 21st. 12 The Options Committee has general supervision of the dealings of members on the options trading floor. See Exchange By-Law Article X, Section 10–20. 13 A controlled account includes any account controlled by or under common control with a broker-dealer. Customer accounts are all other accounts. Equity option and index option orders of controlled accounts are required to yield priority to PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 to orders for customer accounts. Using the example above, if the $.25 represents orders for customer accounts, those orders would have priority over orders for controlled accounts at $.25. This means that a holder of a controlled account who is willing to trade at $.30 and $.25 may be unwilling to trade at the price of $.30 if he/she cannot trade the balance of the order at $.25 because of the requirement to yield to orders for customer accounts.14 The Exchange believes that, in the context of the splitprice priority rule, this could compromise the member’s willingness to execute the first part of the order at a price of $.30 (using the above example), thereby potentially making it difficult to achieve price improvement for the Floor Broker’s customer on the Phlx. Instead, the order might trade at another exchange that has no impediments, i.e., no customer interest at those price levels. Accordingly, one significant aspect of the pilot is a limited exception to the existing priority requirement concerning controlled accounts. The Exchange believes that it is reasonable to make a limited exception to the rule requiring controlled accounts to yield priority to non-controlled accounts in order to allow split price trading. In this regard, the exception is similar in operation to the current limited ‘‘spread-type’’ priority exception 15 under Exchange rules. This exception (which is established in the rules of many options exchanges) was intended to facilitate the trading of spread, or ‘‘hedge’’ orders,16 which by virtue of their multi-legged composition could be more difficult to trade without a limited exception to the priority rule for one of the legs. The purpose behind the split-price priority exception is the same—to bring about the execution of large orders, which by virtue of their size and the need to execute them at multiple prices may be difficult to execute without a limited exception to the priority rules. The split-price priority exception operates in the same manner as the hedge order exception by customer orders when competing at the same price. Orders of controlled accounts generally are not required to yield priority to other controlled account orders. See Exchange Rule 1014(g)(i)(A). 14 Clarified as per Telephone Call of December 21st. 15 Currently, a member that executes at least one option leg of a spread order at a better price than established bid or offer for that option contract, and no option leg of the spread order is executed at a price outside of the established bid or offer for that option contract, has priority over all other orders at the same price. See Exchange Rule 1033(d). 16 The Exchange defines a ‘‘hedge order’’ as any spread type order for the same account. See Exchange Rule 1066(f). E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 70, No. 250 / Friday, December 30, 2005 / Notices allowing a member effecting a trade that betters the market to have priority on the balance of that trade at the next pricing increment, even if there are orders in the book at the same price. In order to address potential concerns regarding section 11(a) of the Act,17 the Exchange adopted Commentary .19 to Exchange Rule 1014 as part of the pilot. Section 11(a) generally prohibits members of national securities exchanges from effecting transactions for the member’s own account, absent an exemption. Under the proposal, there could be situations where because of the limited exception to customer priority, orders on behalf of members could trade ahead of orders of nonmembers in violation of section 11(a). Commentary .19 makes it clear that Floor Brokers may avail themselves of the split-price priority rule, but that they are obligated to ensure compliance with section 11(a). Specifically, a Floor Broker bidding (offering) on behalf of a Phlx member broker-dealer that is not a specialist or Registered Options Trader (‘‘ROT’’) on the Exchange is required to ensure that the order he/she represents qualifies for an exemption from section 11(a)(1) of the Act or that the transaction satisfies the requirements of Rule 11a2–2(T) 18 under the Act.19 Otherwise, the Floor Broker is required to yield priority to order(s) for the account(s) of nonmembers. 17 15 U.S.C. 78k(a). CFR 240.11a2–2T. Rule 11a2–2T generally states that a member of a national securities exchange (the ‘‘initiating member’’) may not effect a transaction on that exchange for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion unless: (i) the transaction is executed on the floor, or through use of the facilities, of the exchange by a member (the ‘‘executing member’’) which is not an associated person of the initiating member; (ii) the order for the transaction is transmitted from off the exchange floor; (iii) neither the initiating member nor an associated person of the initiating member participates in the execution of the transaction at any time after the order for the transaction has been so transmitted; and (iv) in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof retains any compensation in connection with effecting the transaction: provided, however, that this condition shall not apply to the extent that the person or persons authorized to transact business for the account have expressly provided otherwise by written contract referring to Section 11(a) of the Act and this section executed on or after March 15, 1978, by each of them and by such exchange member or associated person exercising investment discretion. 19 The Exchange notes that there are other exemptions from the requirements of Section 11(a). wwhite on PROD1PC61 with NOTICES 18 17 VerDate Aug<31>2005 18:16 Dec 29, 2005 Jkt 208001 2. Statutory Basis The Exchange believes that its proposed rule change is consistent with section 6(b) of the Act 20 in general, and furthers the objectives of section 6(b)(5) of the Act 21 in particular, in that it is designed to perfect the mechanisms of a free and open market and the national market system, protect investors and the public interest and promote just and equitable principles of trade, by establishing a limited priority rule regarding split-price transactions. 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 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 if consistent with the protection of investors and the public interest, it has become effective pursuant to section 19(b)(3)(A) of the Act,22 and Rule 19b–4(f)(6) thereunder.23 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) 24 normally does not become operative prior to 30 days after the date of filing. However, pursuant to Rule 19b–4(f)(6)(iii),25 the Commission may designate a shorter time if such action is consistent with the protection 20 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 22 15 U.S.C. 78s(b)(3)(A). 23 17 CFR 240.19b–4(f)(6). 24 17 CFR 240.19b–4(f)(6). 25 17 CFR 240.19b–4(f)(6)(iii). 21 15 PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 77437 of investors and the public interest. The Exchange has asked the Commission to waive the five-day pre-filing notice requirement and the 30-day operative delay. The Commission believes that such waiver is consistent with the protection of investors and the public interest because it would allow the Phlx to extend without interruption a rule similar to rules already in place at other options exchanges and thus would permit the Exchange to continue to better compete for larger-sized orders. For these reasons, the Commission designates the proposed rule change to be effective upon filing with the Commission.26 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–Phlx–2005–86 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File Number SR–Phlx–2005–86. 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 (https://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 26 For purposes only of accelerating the operative date of this proposal, the Commission has considered the rule’s impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). E:\FR\FM\30DEN1.SGM 30DEN1 77438 Federal Register / Vol. 70, No. 250 / Friday, December 30, 2005 / Notices Room. Copies of the 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–2005–86 and should be submitted on or before January 20, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.27 Jonathan G. Katz, Secretary. [FR Doc. E5–8129 Filed 12–29–05; 8:45 am] BILLING CODE 8010–01–P SOCIAL SECURITY ADMINISTRATION Agency Information Collection Activities: Proposed Request The Social Security Administration (SSA) publishes a list of information collection packages that will require clearance by the Office of Management and Budget (OMB) in compliance with Public Law 104–13, the Paperwork Reduction Act of 1995, effective October 1, 1995. The information collection packages that may be included in this notice are for new information collections. SSA is soliciting comments on the accuracy of the agency’s burden estimate; the need for the information; its practical utility; ways to enhance its quality, utility, and clarity; and on ways to minimize burden on respondents, including the use of automated collection techniques or other forms of information technology. Written comments and recommendations regarding the information collection(s) should be submitted to the SSA Reports Clearance Officer. The information can be mailed and/or faxed to the individuals at the addresses and fax number listed below: (SSA), Social Security Administration, DCFAM, Attn: Reports Clearance Officer, 1333 Annex Building, 6401 Security Blvd., Baltimore, MD 21235. Fax: 410–965–6400. E-mail: OPLM.RCO@ssa.gov. The information collection listed below is pending at SSA and will be submitted to OMB within 60 days from the date of this notice. Therefore, your comments should be submitted to SSA within 60 days from the date of this publication. You can obtain copies of the collection instruments by calling the SSA Reports Clearance Officer at 410– 965–0454 or by writing to the address listed above. Number of respondents Form Explanation SSA–L1026 .............. Passive redetermination letter informing Medicare Part D subsidy recipients what income, resource, and household information SSA has on file for them, and asking if this information has changed. Redetermination form completed by Medicare Part D subsidy recipients who said their income, resource, or household information had changed in their response to form SSA– L1026. Beginning in 2007, this form will also be used as a cyclical redetermination form to be completed by Medicare Part D subsidy recipients who are automatically sent the form based on certain profile/selection criteria. Redetermination form completed by Medicare Part D subsidy recipients who called SSA to inform them of an event which is potentially subsidy-changing (marriage, divorce, annulment, legal separation, spousal death). This form, which is identical to form SSA–1026–RET but has a different cover sheet, will replace form OMB No. 0960–0703 (SSA–1020–SC). .................................................................................................... SSA–1026–RET ....... SSA–1026–SCE ....... wwhite on PROD1PC61 with NOTICES Total .................. 27 17 Redetermination of Eligibility for Help with Medicare Prescription Drug Plan Costs—0960–NEW. Under the aegis of the Medicare Modernization Act of 2003 (Pub. L. 108–173), SSA will conduct low-income subsidy eligibility redeterminations for Medicare beneficiaries who filed for the subsidy and were determined by SSA to be eligible. Subsidy eligibility redeterminations will be conducted when: (1) Medicare Part D subsidy beneficiaries use form SSA–1026–RET to report a change in income, resources, or household information in response to SSA’s inquiry via form SSA–L1026; (2) Medicare Part D subsidy beneficiaries report a change in income, resources, or household information on their own using form SSA–1026–RET; (3) Medicare Part D subsidy beneficiaries use form SSA–1026–SCE to report a subsidy-changing event which could potentially impact the amount of their subsidy, including marriage, separation, divorce/annulment, or spousal death. The respondents are current recipients of the Medicare Part D low-income subsidy who will undergo an eligibility redetermination for one of the reasons mentioned above. Following is a description of the forms in this collection, the number of respondents who will complete them, and their burden data. Frequency of response (per year) Average burden per response (in minutes) 1,500,000 1 5 125,000 300,000 1 20 100,000 76,000 1 20 25,333 1,876,000 — — 250,333 CFR 200.30–3(a)(12). VerDate Aug<31>2005 18:16 Dec 29, 2005 Jkt 208001 PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 E:\FR\FM\30DEN1.SGM 30DEN1 Estimated annual burden (in hours)

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 250 (Friday, December 30, 2005)]
[Notices]
[Pages 77435-77438]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-8129]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 53021; File No. SR-Phlx-2005-86]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Extension of a Pilot Program Concerning Split Price 
Priority in Open Outcry

December 23, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on December 21, 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 and II, below, which Items have been prepared by the Phlx. The 
Exchange filed the proposal 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.\5\ 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).
    \5\ The Exchange requested the Commission to waive the five-day 
pre-filing notice requirement and the 30-day operative delay, as 
specified in Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to extend, for an additional six-month period, a 
pilot program set forth in Exchange Rule 1014(g)(i)(C), governing 
purchase or sale priority for orders of 100 option contracts or more 
(``pilot''). The rule affords priority to members that purchase (sell) 
fifty or more contracts at

[[Page 77436]]

a particular price at the next lower (higher) price in purchasing 
(selling) the equivalent number of contracts in the same series. Such 
priority only applies to orders that represent the same transaction or 
order as the previous purchase (sale), and only applies to transactions 
in equity options and options overlying Exchange Traded Fund Shares 
(``ETFs'') that are effected in open outcry. The pilot is scheduled to 
expire December 31, 2005.\6\ The Exchange proposes to extend the pilot 
through June 30, 2006. The text of the proposed rule change is 
available on the Phlx Web site (https://www.phlx.com), at the Phlx's 
Office of the Secretary and at the Commission's Public Reference 
Room.\7\
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    \6\ See Securities Exchange Act Release No. 51820 (June 10, 
2005), 70 FR 35759 (June 21, 2005) (SR-Phlx-2005-28).
    \7\ The proposed rule change amends the current text of Phlx 
Rule 1014(g)(i)(C) by adding a phrase to indicate that the provision 
is ``subject to a pilot scheduled to expire June 30, 2006.''
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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 extend the pilot, 
which establishes rules that facilitate the execution of large orders, 
which by virtue of their size and the need to execute them at multiple 
prices may be difficult to execute without a limited exception to 
current Exchange priority rules.
    The pilot, as set forth in Exchange Rule 1014(g)(i)(C), establishes 
a priority rule regarding open outcry split price transactions in 
equity options and options overlying ETFs generally to permit a member 
who is responding to an order \8\ for at least 100 contracts \9\ who 
buys (sells) at least 50 contracts at a particular price to have 
priority over all others in purchasing (selling) up to an equivalent 
number of contracts of the same order at the next lower (higher) price 
without being required to yield to existing customer interest in the 
limit order book. Absent this proposed rule, such orders would be 
required to yield priority.\10\
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    \8\ Clarification as per telephone call on December 21, 2005, 
between Richard Rudolph, Vice President and Counsel, Phlx and Ira 
Brandriss, Special Counsel, Division of Market Regulation, 
Commission (``Telephone Call of December 21st'').
    \9\ Orders for a size of less than 100 contracts would not be 
affected by this proposed rule.
    \10\ See, e.g., Exchange Rule 119(a).
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    For example, when a floor broker (``Floor Broker'') is representing 
a customer's order to purchase 100 contracts and a member executes a 
purchase of 50 of those contracts at a price of $.30, the member would 
have priority over all market participants to purchase the remaining 50 
contracts in the order at $.25.\11\ Two trades would be reported to the 
tape, one a purchase of 50 contracts at $.30, and the other a purchase 
of 50 contracts at $.25. The effect to the customer would be a net 
purchase price of $.275 for 100 contracts.
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    \11\ Clarified as per Telephone Call of December 21st.
---------------------------------------------------------------------------

    The Exchange believes that the pilot should lead to more aggressive 
quoting by crowd participants, which in turn could lead to better 
executions. A crowd participant might be willing to trade at a better 
price for a portion of an order if he/she were assured of trading with 
the balance of the order at the next pricing increment. As a result, 
Floor Brokers representing orders in the trading crowd might receive 
better-priced executions.
    Under the split price priority rule, the Exchange's Options 
Committee \12\ has the ability to increase the minimum qualifying order 
size to a number larger than 100 contracts. Any changes, which would 
have to apply to all products under the committee's jurisdiction, would 
be announced to the membership via Exchange Circular.
---------------------------------------------------------------------------

    \12\ The Options Committee has general supervision of the 
dealings of members on the options trading floor. See Exchange By-
Law Article X, Section 10-20.
---------------------------------------------------------------------------

    One possible limitation on the ability of crowd participants to use 
the split price priority rule is the current requirement that orders 
for controlled accounts \13\ generally must yield priority to orders 
for customer accounts. Using the example above, if the $.25 represents 
orders for customer accounts, those orders would have priority over 
orders for controlled accounts at $.25. This means that a holder of a 
controlled account who is willing to trade at $.30 and $.25 may be 
unwilling to trade at the price of $.30 if he/she cannot trade the 
balance of the order at $.25 because of the requirement to yield to 
orders for customer accounts.\14\ The Exchange believes that, in the 
context of the split-price priority rule, this could compromise the 
member's willingness to execute the first part of the order at a price 
of $.30 (using the above example), thereby potentially making it 
difficult to achieve price improvement for the Floor Broker's customer 
on the Phlx. Instead, the order might trade at another exchange that 
has no impediments, i.e., no customer interest at those price levels. 
Accordingly, one significant aspect of the pilot is a limited exception 
to the existing priority requirement concerning controlled accounts.
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    \13\ A controlled account includes any account controlled by or 
under common control with a broker-dealer. Customer accounts are all 
other accounts. Equity option and index option orders of controlled 
accounts are required to yield priority to customer orders when 
competing at the same price. Orders of controlled accounts generally 
are not required to yield priority to other controlled account 
orders. See Exchange Rule 1014(g)(i)(A).
    \14\ Clarified as per Telephone Call of December 21st.
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    The Exchange believes that it is reasonable to make a limited 
exception to the rule requiring controlled accounts to yield priority 
to non-controlled accounts in order to allow split price trading. In 
this regard, the exception is similar in operation to the current 
limited ``spread-type'' priority exception \15\ under Exchange rules. 
This exception (which is established in the rules of many options 
exchanges) was intended to facilitate the trading of spread, or 
``hedge'' orders,\16\ which by virtue of their multi-legged composition 
could be more difficult to trade without a limited exception to the 
priority rule for one of the legs. The purpose behind the split-price 
priority exception is the same--to bring about the execution of large 
orders, which by virtue of their size and the need to execute them at 
multiple prices may be difficult to execute without a limited exception 
to the priority rules. The split-price priority exception operates in 
the same manner as the hedge order exception by

[[Page 77437]]

allowing a member effecting a trade that betters the market to have 
priority on the balance of that trade at the next pricing increment, 
even if there are orders in the book at the same price.
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    \15\ Currently, a member that executes at least one option leg 
of a spread order at a better price than established bid or offer 
for that option contract, and no option leg of the spread order is 
executed at a price outside of the established bid or offer for that 
option contract, has priority over all other orders at the same 
price. See Exchange Rule 1033(d).
    \16\ The Exchange defines a ``hedge order'' as any spread type 
order for the same account. See Exchange Rule 1066(f).
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    In order to address potential concerns regarding section 11(a) of 
the Act,\17\ the Exchange adopted Commentary .19 to Exchange Rule 1014 
as part of the pilot. Section 11(a) generally prohibits members of 
national securities exchanges from effecting transactions for the 
member's own account, absent an exemption. Under the proposal, there 
could be situations where because of the limited exception to customer 
priority, orders on behalf of members could trade ahead of orders of 
nonmembers in violation of section 11(a). Commentary .19 makes it clear 
that Floor Brokers may avail themselves of the split-price priority 
rule, but that they are obligated to ensure compliance with section 
11(a). Specifically, a Floor Broker bidding (offering) on behalf of a 
Phlx member broker-dealer that is not a specialist or Registered 
Options Trader (``ROT'') on the Exchange is required to ensure that the 
order he/she represents qualifies for an exemption from section 
11(a)(1) of the Act or that the transaction satisfies the requirements 
of Rule 11a2-2(T) \18\ under the Act.\19\ Otherwise, the Floor Broker 
is required to yield priority to order(s) for the account(s) of non-
members.
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    \17\ 15 U.S.C. 78k(a).
    \18\ 17 CFR 240.11a2-2T. Rule 11a2-2T generally states that a 
member of a national securities exchange (the ``initiating member'') 
may not effect a transaction on that exchange for its own account, 
the account of an associated person, or an account with respect to 
which it or an associated person thereof exercises investment 
discretion unless:
    (i) the transaction is executed on the floor, or through use of 
the facilities, of the exchange by a member (the ``executing 
member'') which is not an associated person of the initiating 
member;
    (ii) the order for the transaction is transmitted from off the 
exchange floor;
    (iii) neither the initiating member nor an associated person of 
the initiating member participates in the execution of the 
transaction at any time after the order for the transaction has been 
so transmitted; and
    (iv) in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person 
thereof exercises investment discretion, neither the initiating 
member nor any associated person thereof retains any compensation in 
connection with effecting the transaction: provided, however, that 
this condition shall not apply to the extent that the person or 
persons authorized to transact business for the account have 
expressly provided otherwise by written contract referring to 
Section 11(a) of the Act and this section executed on or after March 
15, 1978, by each of them and by such exchange member or associated 
person exercising investment discretion.
    \19\ The Exchange notes that there are other exemptions from the 
requirements of Section 11(a).
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2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with section 6(b) of the Act \20\ in general, and furthers the 
objectives of section 6(b)(5) of the Act \21\ in particular, in that it 
is designed to perfect the mechanisms of a free and open market and the 
national market system, protect investors and the public interest and 
promote just and equitable principles of trade, by establishing a 
limited priority rule regarding split-price transactions.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 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 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 if 
consistent with the protection of investors and the public interest, it 
has become effective pursuant to section 19(b)(3)(A) of the Act,\22\ 
and Rule 19b-4(f)(6) thereunder.\23\ 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.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally 
does not become operative prior to 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\25\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the five-day pre-filing notice requirement and 
the 30-day operative delay. The Commission believes that such waiver is 
consistent with the protection of investors and the public interest 
because it would allow the Phlx to extend without interruption a rule 
similar to rules already in place at other options exchanges and thus 
would permit the Exchange to continue to better compete for larger-
sized orders. For these reasons, the Commission designates the proposed 
rule change to be effective upon filing with the Commission.\26\
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    \24\ 17 CFR 240.19b-4(f)(6).
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

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 (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2005-86 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-86. 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 (https://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

[[Page 77438]]

Room. Copies of the 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-2005-86 and should be submitted on 
or before January 20, 2006.
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    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
Jonathan G. Katz,
Secretary.
[FR Doc. E5-8129 Filed 12-29-05; 8:45 am]
BILLING CODE 8010-01-P

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