Self-Regulatory Organizations; Order Approving Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating to Remote Streaming Quote Traders, 6915-6918 [05-2476]

Download as PDF Federal Register / Vol. 70, No. 26 / Wednesday, February 9, 2005 / Notices provide investors and ETP Holders 6 with greater opportunities for executing orders on the opening. Further, the Exchange believes that the proposal is merely a minor technical change to the existing PO Order type to enable this functionality for Nasdaq securities and to expand its applicability to limit orders. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,7 in general, and furthers the objectives of Section 6(b)(5) of the Act,8 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principals of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanisms of a free and open market and a national market system. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule changes 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. Written comments on the proposed rule change were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action. Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. By order approve the proposed modifications, or B. Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments PCXE Rule 1.1(n). U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). 16:49 Feb 08, 2005 Paper Comments On December 9, 2004, the Philadelphia Stock Exchange, Inc., (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to establish a new category of options market-making participant on the Exchange, a Remote Streaming Quote Trader (‘‘RSQT’’). The Exchange also proposes to amend various Exchange rules to apply to and govern RSQTs. The proposed rule change was published for notice and comment in the Federal Register on December 27, 2004.3 No comment letters were received on the proposal. This order approves the proposed rule change. • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. All submissions should refer to File Number SR–PCX–2005–15. 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of the PCX. 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–PCX– 2005–15 and should be submitted on or before March 2, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.9 Margaret H. McFarland, Deputy Secretary. [FR Doc. 05–2478 Filed 2–8–05; 8:45 am] 9 17 Jkt 205001 [Release No. 34–51126, File No. SR–Phlx– 2004–90 Self-Regulatory Organizations; Order Approving Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating to Remote Streaming Quote Traders 7 15 VerDate jul<14>2003 SECURITIES AND EXCHANGE COMMISSION • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomment@sec.gov. Please include File Number SR–PCX–2005–15 on the subject line. BILLING CODE 8010–01–M 6 See 6915 PO 00000 CFR 200.30–3(a)(12). Frm 00087 Fmt 4703 Sfmt 4703 February 2, 2005. I. Introduction II. Description of the Proposal Under the proposal, an RSQT would be a Registered Options Trader (‘‘ROT’’) that is a member or a member organization with no physical trading floor presence who has received permission from the Exchange to generate and submit quotations electronically through the Exchange’s Automated Options Market System (‘‘AUTOM’’) in eligible options to which such RSQT has been assigned.4 An RSQT would be permitted to submit such quotations electronically only from off the floor of the Exchange.5 Also, an RSQT would be permitted to trade in a market-making capacity only in classes of options in which he is assigned. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 50877 (December 17, 2004), 69 FR 77295. 4 AUTOM is the Exchange’s electronic order delivery and reporting system, which provides for the automatic entry and routing of Exchange listed equity options and index options orders to the Exchange trading floor. See Phlx Rule 1080. 5 Phlx Rule 1014 defines an ROT as a regular member or a foreign currency options participant of the Exchange located on the trading floor. Notwithstanding this provision, an RSQT would be permitted to submit electronic quotations only from off the floor of the Exchange. See proposed Phlx Rule 1014(b)(ii)(B). 2 17 E:\FR\FM\09FEN1.SGM 09FEN1 6916 Federal Register / Vol. 70, No. 26 / Wednesday, February 9, 2005 / Notices A. Appointment of RSQTs The Exchange’s Options Allocation, Evaluation and Securities Committee (‘‘OAESC’’) currently has the authority to appoint Streaming Quote Traders (‘‘SQTs’’) 6 under Phlx Rule 507 and to assign SQTs to one or more Streaming Quote Options.7 Under the proposal, the OAESC would appoint and assign RSQTs in one or more Streaming Quote Options in a fashion similar to the current practice of appointing and assigning SQTs in Streaming Quote Options. Phlx Rule 507, which sets forth the solicitation, application, and review process to be followed by the OAESC in appointing SQTs, would be modified to include RSQTs. The current requirements for SQT applicants under Phlx Rule 507 for assignment in Streaming Quote Options would apply to RSQT applicants as well. Specifically, RSQTs would be required to submit an application for assignment in writing to the Exchange. The proposed amendments to Phlx Rule 507(b)(ii) would mandate that no application for assignment as an RSQT in Streaming Quote Options would be approved by the OAESC without a written certification signed by an officer (Vice President or above) of the Exchange’s Financial Automation Department 8 indicating that the RSQT applicant has sufficient technological ability to support his/her continuous quoting requirements as set forth in Phlx Rule 1014(b)(ii) and that the RSQT applicant has successfully completed, or is scheduled to complete, testing of its quoting system with the Exchange. Phlx also proposes to approve and appoint RSQTs who demonstrate additional qualifications. Specifically, an RSQT applicant would be required to demonstrate that it has: (1) Significant market-making and/or specialist experience in a broad array of securities; (2) superior resources, including capital, technology, and personnel; (3) 6 An SQT is a ROT who has received permission from the Exchange to generate and submit option quotations electronically through AUTOM in eligible options to which such SQT is assigned. An SQT may submit such quotations only while such SQT is physically present on the floor of the Exchange. See Phlx Rule 1014(b)(ii)(A). 7 Streaming Quote Options are the specific issues in which SQTs may generate and submit option quotations from on the floor of the Exchange. See Phlx Rule 1080(k). 8 The Exchange’s Financial Automation Department is responsible for the design, development, implementation, testing, and maintenance of the Exchange’s automated trading systems, surveillance systems, and back office systems. It is also responsible for monitoring the quality of performance and operational readiness of such systems, in addition to user training and validation of user technology as it pertains to such users’ interface with the Exchange’s systems. VerDate jul<14>2003 16:49 Feb 08, 2005 Jkt 205001 demonstrated history of stability, superior electronic capacity, and superior operational capacity; (4) proven ability to interact with order flow in all types of markets; (5) existence of order flow commitments; (6) willingness to accept assignments as an RSQT in options overlying 400 or more securities; and (7) willingness and ability to make competitive markets on Phlx and otherwise to promote Phlx in a manner that is likely to enhance the ability of Phlx to compete successfully for order flow in the options it trades. The Exchange represents that any future changes to, or termination of, order flow commitments would not be used by the Exchange to terminate, or take remedial action against, an RSQT. Further, the Exchange would not take remedial action against an RSQT solely because orders subject to any such commitments were not subsequently routed to the Exchange. The Exchange also represents that the final factor listed above would not be applied in any way to restrict, either directly or indirectly, RSQTs’ activities as market makers or specialists on other exchanges or to restrict how RSQTs handle orders to which they owe a duty of best execution. Finally, proposed amendments to Phlx Rule 1014 would prohibit any person who is either directly or indirectly affiliated with an RSQT from being a specialist, RSQT, SQT, or nonSQT ROT 9 in options in which such affiliated RSQT is assigned. The purpose of this provision is to prevent multiple affiliated parties from quoting electronically in the same option and, thus, receiving multiple automatic allocations for the same or affiliated beneficial account owners. B. Limitations on Access Due to Systems Constraints Proposed amendments to Phlx Rule 507(b)(iii) would clarify that, as in the case of SQTs, the Exchange’s Board of Governors may defer qualifying applications for RSQT status based on system constraints, capacity restrictions, or other factors relevant to the maintenance of a fair and orderly market. The basis for such deferral, however, would be required to have been objectively determined by the Board and subject to Commission approval or effectiveness pursuant to a filing under section 19(b) of the Act, as amended.10 In such an event, the OAESC would be required to provide 9 A non-SQT ROT is a ROT who is neither an SQT nor an RSQT. See proposed Phlx Rule 1014(b)(ii)(C). 10 15 U.S.C. 78s(b). PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 written notification to any SQT or RSQT applicant whose application is the subject of such limitation(s) or deferral, describing the objective basis for such (limitations) or deferral. C. RSQT Obligations Under the proposal, an RSQT would be required to quote continuous, twosided markets in not less than 60% of the series in each Streaming Quote Option in which such RSQT is assigned.11 An RSQT who receives Directed Orders (as defined in proposed Phlx Rule 1080(1)(i)(A)),12 however, would be required to quote continuous, two-sided markets in not less than 100% of the series in each Streaming Quote Option in which such RSQT receive Directed Orders. Moreover, all RSQT quotations would be subject to the same minimum size requirement as that currently imposed on SQTs. The proposal also would require an RSQT to maintain information barriers reasonably designed to prevent the misuse of material, non-public information with any affiliates that may conduct a brokerage business in options assigned to the RSQT or act as a specialist or market maker in any security underlying options assigned to the RSQT. Phlx further proposes to require that an RSQT comply with the requirements of Phlx Rule 1020 regarding restrictions on the flow of privileged information between the affiliate and the specialist organization. D. Trade Allocation Phlx Rule 1014(g)(vii) currently governs the allocation of trades executed in Streaming Quote Options traded on Phlx XL. Under the proposal, RSQTs would receive the same allocation under the algorithm described in the rule as SQTs. The proposal also provides that current rules applicable to out-of-crowd SQTs regarding participation in nonelectronic orders traded in the crowd would apply to RSQTs. Specifically, an 11 For example, if an RSQT is assigned in one Streaming Quote Option that includes five series (A, B, C, D, and E), such RSQT would be required to quote continuous, two-sided markets in three of those series in order to fulfill the 60% quoting requirement. If such an RSQT initially submits quotations in series A, B, and C, and the size associated with the quotation in Series A is exhausted, such SQT would be required either to refresh its quotation in Series A while continuing to submit quotations in Series B and C, or to submit new quotations in any three of the five series, in order to fulfill the 60% quoting requirement. 12 See Securities Exchange Act Release No. 50856 (December 14, 2004) 69 FR 76817 (December 22, 2004) (notice of SR–Phlx–2004–91). The proposed provision regarding RSQTs who receive Directed Orders would have no relevance unless the separate proposal, that would create a Directed Order process, is approved by the Commission. E:\FR\FM\09FEN1.SGM 09FEN1 Federal Register / Vol. 70, No. 26 / Wednesday, February 9, 2005 / Notices RSQT would not participate in a trade with a non-electronic order, unless the order is executed at the price quoted by the RSQT at the time of execution. The proposal also would add a new definition of ‘‘Actual Size’’ to Phlx Rule 1014(g)(v)(B). A crowd participant’s Actual Size would be defined as the number of contracts on which the person responsible for allocating the trade bases allocation of the order among crowd participations on parity. Specifically, for orders handled manually by the specialist, if at the time of the execution of an order in a particular series a specialist, SQT, or RSQT is disseminating an electronic quotation at the Exchange’s disseminated price in that series, such specialist, SQT, or RSQT’s disseminated size would be his or her Actual Size. The purpose of this provision is to establish a definition of Actual Size for specialists, out-of-crowd SQTs and RSQTs, whose electronically submitted quotations are on parity with other crowd participants. Because the rest of Phlx Rule 1014(g)(v) refers to allocation of orders to ‘‘crowd participants’’ on parity, such specialist, SQT, or RSQT are deemed a crowd participant for purposes of this definition. E. Elimination of ‘‘SQT Zones’’ Commentary .05(b) to Phlx Rule 1014 provides that an SQT may be assigned to, and submit quotes electronically in, all of the options located within a specified physical zone on the Exchange Options Floor (‘‘SQT Zone’’). Because the entire Exchange floor is currently considered one SQT Zone, Phlx proposes to delete this provision. The elimination of this provision would allow SQTs and RSQTs to stream electronic quotations floor-wide. F. Book Sweep Phlx Rule 1080(c)(iii)(B) governs a feature of AUTOM known as ‘‘Book Sweep’’ as it relates to Streaming Quote Options traded on Phlx XL. When a specialist or an SQT has engaged Book Sweep and such specialist or SQT submits a quotation that locks or crosses a limit order on the book that represents the Exchange’s best bid or offer, such limit order would be executed automatically up to the size associated with the specialist’s or SQT’s quotation.13 Phlx proposes that an RSQT quotation would also initiate Book Sweep. Under the proposal, an RSQT also would be permitted to 13 Book Sweep functions only in situations where the Exchange’s disseminated best bid or offer is represented by a limit order on the limit order book and such bid or offer is, or is equal to, the National Best Bid/Offer. VerDate jul<14>2003 16:49 Feb 08, 2005 Jkt 205001 manually initiate Book Sweep by sending a manual quote in situations were the RSQT’s automatic generation of electronic quotations is suspended due to, for example, a system malfunction. G. Book Match Book Match is a feature of AUTOM that currently provides automatic executions for inbound AUTOMdelivered customer and off-floor brokerdealer 14 orders against customer limit orders on the book. Phlx Rule 1080(g) states that, in Streaming Quote Options, the contra-side to automatically executed inbound eligible orders can be a limit order on the book or specialist and/or SQT electronic quotes (‘‘electronic quotes’’) at the disseminated price, where the Exchange’s disseminated size includes a limit order on the book and/or electronic quotes at the disseminated price. Under the proposal, the contraside to an inbound eligible order could also be an RSQT electronic quote. H. Firm Quotations The Exchange proposes to amend Phlx Rule 1082 in a number of ways to capture the firm quote requirements applicable to RSQTs. Phlx also proposes to clarify that 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 his or her quotation immediately following the exhaustion of the Exchange’s disseminated size at such price level, the Exchange would automatically disseminate the specialist’s most recent disseminated price prior to the time of such exhaustion with a size of one contract. I. Additional Amendments Finally, the proposal amends Phlx’s rules to clarify the obligations that would apply to RSQTs. Because of the unique nature of an RSQT (i.e., participating as an Exchange market maker from off the floor of the Exchange), the proposal would amend Phlx Rule 1014 and commentaries thereto to clarify the obligations that would apply to RSQTs. Moreover, the Exchange proposes to amend certain Exchange Option Floor Procedure Advices to make them applicable to 14 Phlx Rule 1080(b)(i)(C) defines an ‘‘off-floor broker-dealer’’ as a broker-dealer that delivers orders from off the floor of the Exchange for the proprietary account(s) of such broker-dealer, including a market maker located on an exchange or trading floor other than the Exchange’s trading floor who elects to deliver orders via AUTOM for the proprietary account(s) of such market maker. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 6917 RSQTs. Likewise, the Exchange proposes to amend Phlx Rule 1017 to permit RSQTs to participate in opening transactions by submitting electronic quotations to interact with opening orders. Lastly, the Exchange would amend Phlx Rule 1080, Commentary .01(b)(ii) to clarify that the specialist determine which options pricing model to select per option in non-Streaming Quote Options only. III. Discussion After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange 15 and, in particular, the requirements of section 6 of the Act.16 Specifically, the Commission finds that the proposal to add a new category of options market-making participant, RSQT, to the Phlx XL trading platform is consistent with section 6(b)(5) of the Act 17 in that the proposal has been designed to promote just and equitable principles of trade, and to protect investors and the public interest. A. Appointment of RSQTs RSQTs must meet the current requirements applicable for SQT applicants for assignment in Streaming Quote Options. The Commission believes that these requirements are consistent with the Act. In addition, although RSQTs are expected to demonstrate additional qualifications, including willingness and ability to make competitive markets on Phlx and otherwise to promote Phlx in a manner that is likely to enhance the ability of Phlx to compete successfully for order flow in the options it trades, The Commission emphasizes that Phlx should not interpret this proposed obligation to in any way directly or indirectly restrict a market participant that is appointed as an RSQT on Phlx from performing market-making or specialist activities on other markets. Under the proposal, RSQTs are also expected to demonstrate the existence of order flow commitments. The Commission notes, however, that any future change to, or termination of, order flow commitments may not be used by the Exchange to terminate, or take remedial action against, an RSQT. Also, the Exchange would not be permitted to take remedial action against an RSQT solely because orders 15 The Commission has considered the amended proposed rule change’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 16 15 U.S.C. 78f. 17 15 U.S.C. 78f(b)(5). E:\FR\FM\09FEN1.SGM 09FEN1 6918 Federal Register / Vol. 70, No. 26 / Wednesday, February 9, 2005 / Notices subject to any such commitments were not subsequently routed to the Exchange. Finally, Phlx rules prohibit any person who is either directly or indirectly affiliated with an RSQT from being a specialist, RSQT, SQT, or nonSQT ROT in options in which such affiliated RSQT is assigned. The Commission believes this prohibition is important because of the potential for allocations of trades to be based, in part, on a Phlx XL Participant’s quote or order at the best bid or offer, not based on the size of such Participant’s quote or order.18 B. Limitations on Access Due to Systems Constraints In addition, the Commission notes that proposed amendments to Phlx Rule 507(b)(iii), which would allow the Exchange’s Board of Governors to defer qualifying applications for RSQT status based on systems constraints, capacity restrictions, or other relevant factors, grant the Exchange no authority at this time. Specifically, the proposed amendments to Phlx Rule 507(b)(iii) would not permit Phlx to place any limitations on its members under this rule, unless such limitations were objectively established and filed with the Commission under section 19(b) of the Act.19 C. RSQT Obligations Proposed Phlx Rule 1014 sets forth the obligations that an RSQT would be required to fulfill. Specifically, an RSQT would be required to quote continuous, two-sided markets in not less than 60% of the series in each Streaming Quote Option in which such RSQT is assigned. The Commission believes that these obligations for RSQTs are consistent with the Act. In particular, the Commission believes that RSQT’s affirmative obligations are sufficient to justify the benefits they receive as market makers.20 In this regard, the Commission believes that Phlx rules impose such affirmative obligations on RSQTs. Under the proposal, an RSQT also would be obligated to maintain information barriers that are reasonably designed to prevent the misuse of material, non-public information with 18 See Securities Exchange Act Release No. 50788 (December 3, 2004), 69 FR 71860 (December 10, 2004) (SR–Phlx–2004–57). 19 15 U.S.C. 78s(b). 20 For example, a lender may extend credit to a broker-dealer without regard to the restrictions in Regulation T of the Board of Governors of the Federal Reserve if the credit is to be used to finance the broker-dealer’s activities as a specialist or market maker on a national securities exchange. See 12 CFR 221.5(c)(6). VerDate jul<14>2003 16:49 Feb 08, 2005 Jkt 205001 any affiliates that may conduct a brokerage business in options assigned to the RSQT or that act as a specialist or market maker in any security underlying options assigned to the RSQT. The Commission believes that the requirement that there be an information barrier between an RSQT and its affiliates should reduce the opportunity for unfair trading advantages and misuse of material, nonpublic information. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.23 Margaret H. McFarland, Deputy Secretary. [FR Doc. 05–2476 Filed 2–8–05; 8:45 am] D. Trade Allocation SECURITIES AND EXCHANGE COMMISSION The Commission believes that the trade allocation algorithm that would apply to RSQTs is consistent with the Act. The Commission believes that treating RSQTs and SQTs the same under Phlx Rule 1014(g)(vii) should encourage RSQTs to quote competitively. E. Book Sweep and Book Match The Commission notes that Phlx proposes to include RSQT quotes in the Exchange’s Book Sweep and Book Match features. The Commission believes that including RSQT quotes in Book Match, and allowing RSQT quotes to initiate Book Sweep, should result in customers receiving quicker, more efficient executives of trades. F. Firm Quotations The Commission believes that the proposed amendments to the Exchange’s Firm Quote requirement are consistent with the Act. The Commission notes that, among other things, the proposal clarifies that the Exchange will automatically disseminate a quotation if the 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 its quotation immediately following the exhaustion. The Commission believes that this clarification more accurately describes the size for which the specialist is firm when the disseminated size in a particular series has been exhausted. IV. Conclusion For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, with section 6(b)(5) of the Act.21 It is therefore ordered, pursuant to section 19(b)(2) of the Act,22 that the PO 00000 proposed rule change (SR–Phlx–2004– 90) is approved. BILLING CODE 8010–10–M [Release No. 34–51127; File No. SR–Phlx– 2005–11] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating to Article III, Section 3–6 and Article IV, Section 4–1 of Its By-laws February 2, 2005. 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 31, 2005, the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Phlx. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Phlx proposes to amend Article III, Section 3–6 and Article IV, Section 4–1 its By-Laws to convert one of the On-Floor Equity Governor positions on the Board of Governors into a Philadelphia Board of Trade, Inc. (‘‘PBOT’’) representative Governor position. The text of the proposed amendments to Article III, Section 3–6 and Article IV, Section 4–1 of the Exchange’s By-laws is set forth below. Italics indicate new text; brackets indicate deletions. * * * * * 23 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 21 15 U.S.C. 78f(b)(5). 22 15 U.S.C. 78s(b)(2). Frm 00090 Fmt 4703 Sfmt 4703 E:\FR\FM\09FEN1.SGM 09FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 26 (Wednesday, February 9, 2005)]
[Notices]
[Pages 6915-6918]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-2476]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51126, File No. SR-Phlx-2004-90


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Remote 
Streaming Quote Traders

February 2, 2005.

I. Introduction

    On December 9, 2004, the Philadelphia Stock Exchange, Inc., 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish a new category of 
options market-making participant on the Exchange, a Remote Streaming 
Quote Trader (``RSQT''). The Exchange also proposes to amend various 
Exchange rules to apply to and govern RSQTs. The proposed rule change 
was published for notice and comment in the Federal Register on 
December 27, 2004.\3\ No comment letters were received on the proposal. 
This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 50877 (December 17, 
2004), 69 FR 77295.
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II. Description of the Proposal

    Under the proposal, an RSQT would be a Registered Options Trader 
(``ROT'') that is a member or a member organization with no physical 
trading floor presence who has received permission from the Exchange to 
generate and submit quotations electronically through the Exchange's 
Automated Options Market System (``AUTOM'') in eligible options to 
which such RSQT has been assigned.\4\ An RSQT would be permitted to 
submit such quotations electronically only from off the floor of the 
Exchange.\5\ Also, an RSQT would be permitted to trade in a market-
making capacity only in classes of options in which he is assigned.
---------------------------------------------------------------------------

    \4\ AUTOM is the Exchange's electronic order delivery and 
reporting system, which provides for the automatic entry and routing 
of Exchange listed equity options and index options orders to the 
Exchange trading floor. See Phlx Rule 1080.
    \5\ Phlx Rule 1014 defines an ROT as a regular member or a 
foreign currency options participant of the Exchange located on the 
trading floor. Notwithstanding this provision, an RSQT would be 
permitted to submit electronic quotations only from off the floor of 
the Exchange. See proposed Phlx Rule 1014(b)(ii)(B).

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[[Page 6916]]

A. Appointment of RSQTs

    The Exchange's Options Allocation, Evaluation and Securities 
Committee (``OAESC'') currently has the authority to appoint Streaming 
Quote Traders (``SQTs'') \6\ under Phlx Rule 507 and to assign SQTs to 
one or more Streaming Quote Options.\7\ Under the proposal, the OAESC 
would appoint and assign RSQTs in one or more Streaming Quote Options 
in a fashion similar to the current practice of appointing and 
assigning SQTs in Streaming Quote Options. Phlx Rule 507, which sets 
forth the solicitation, application, and review process to be followed 
by the OAESC in appointing SQTs, would be modified to include RSQTs.
---------------------------------------------------------------------------

    \6\ An SQT is a ROT who has received permission from the 
Exchange to generate and submit option quotations electronically 
through AUTOM in eligible options to which such SQT is assigned. An 
SQT may submit such quotations only while such SQT is physically 
present on the floor of the Exchange. See Phlx Rule 1014(b)(ii)(A).
    \7\ Streaming Quote Options are the specific issues in which 
SQTs may generate and submit option quotations from on the floor of 
the Exchange. See Phlx Rule 1080(k).
---------------------------------------------------------------------------

    The current requirements for SQT applicants under Phlx Rule 507 for 
assignment in Streaming Quote Options would apply to RSQT applicants as 
well. Specifically, RSQTs would be required to submit an application 
for assignment in writing to the Exchange. The proposed amendments to 
Phlx Rule 507(b)(ii) would mandate that no application for assignment 
as an RSQT in Streaming Quote Options would be approved by the OAESC 
without a written certification signed by an officer (Vice President or 
above) of the Exchange's Financial Automation Department \8\ indicating 
that the RSQT applicant has sufficient technological ability to support 
his/her continuous quoting requirements as set forth in Phlx Rule 
1014(b)(ii) and that the RSQT applicant has successfully completed, or 
is scheduled to complete, testing of its quoting system with the 
Exchange.
---------------------------------------------------------------------------

    \8\ The Exchange's Financial Automation Department is 
responsible for the design, development, implementation, testing, 
and maintenance of the Exchange's automated trading systems, 
surveillance systems, and back office systems. It is also 
responsible for monitoring the quality of performance and 
operational readiness of such systems, in addition to user training 
and validation of user technology as it pertains to such users' 
interface with the Exchange's systems.
---------------------------------------------------------------------------

    Phlx also proposes to approve and appoint RSQTs who demonstrate 
additional qualifications. Specifically, an RSQT applicant would be 
required to demonstrate that it has: (1) Significant market-making and/
or specialist experience in a broad array of securities; (2) superior 
resources, including capital, technology, and personnel; (3) 
demonstrated history of stability, superior electronic capacity, and 
superior operational capacity; (4) proven ability to interact with 
order flow in all types of markets; (5) existence of order flow 
commitments; (6) willingness to accept assignments as an RSQT in 
options overlying 400 or more securities; and (7) willingness and 
ability to make competitive markets on Phlx and otherwise to promote 
Phlx in a manner that is likely to enhance the ability of Phlx to 
compete successfully for order flow in the options it trades.
    The Exchange represents that any future changes to, or termination 
of, order flow commitments would not be used by the Exchange to 
terminate, or take remedial action against, an RSQT. Further, the 
Exchange would not take remedial action against an RSQT solely because 
orders subject to any such commitments were not subsequently routed to 
the Exchange. The Exchange also represents that the final factor listed 
above would not be applied in any way to restrict, either directly or 
indirectly, RSQTs' activities as market makers or specialists on other 
exchanges or to restrict how RSQTs handle orders to which they owe a 
duty of best execution.
    Finally, proposed amendments to Phlx Rule 1014 would prohibit any 
person who is either directly or indirectly affiliated with an RSQT 
from being a specialist, RSQT, SQT, or non-SQT ROT \9\ in options in 
which such affiliated RSQT is assigned. The purpose of this provision 
is to prevent multiple affiliated parties from quoting electronically 
in the same option and, thus, receiving multiple automatic allocations 
for the same or affiliated beneficial account owners.
---------------------------------------------------------------------------

    \9\ A non-SQT ROT is a ROT who is neither an SQT nor an RSQT. 
See proposed Phlx Rule 1014(b)(ii)(C).
---------------------------------------------------------------------------

B. Limitations on Access Due to Systems Constraints

    Proposed amendments to Phlx Rule 507(b)(iii) would clarify that, as 
in the case of SQTs, the Exchange's Board of Governors may defer 
qualifying applications for RSQT status based on system constraints, 
capacity restrictions, or other factors relevant to the maintenance of 
a fair and orderly market. The basis for such deferral, however, would 
be required to have been objectively determined by the Board and 
subject to Commission approval or effectiveness pursuant to a filing 
under section 19(b) of the Act, as amended.\10\ In such an event, the 
OAESC would be required to provide written notification to any SQT or 
RSQT applicant whose application is the subject of such limitation(s) 
or deferral, describing the objective basis for such (limitations) or 
deferral.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

C. RSQT Obligations

    Under the proposal, an RSQT would be required to quote continuous, 
two-sided markets in not less than 60% of the series in each Streaming 
Quote Option in which such RSQT is assigned.\11\ An RSQT who receives 
Directed Orders (as defined in proposed Phlx Rule 1080(1)(i)(A)),\12\ 
however, would be required to quote continuous, two-sided markets in 
not less than 100% of the series in each Streaming Quote Option in 
which such RSQT receive Directed Orders. Moreover, all RSQT quotations 
would be subject to the same minimum size requirement as that currently 
imposed on SQTs.
---------------------------------------------------------------------------

    \11\ For example, if an RSQT is assigned in one Streaming Quote 
Option that includes five series (A, B, C, D, and E), such RSQT 
would be required to quote continuous, two-sided markets in three of 
those series in order to fulfill the 60% quoting requirement. If 
such an RSQT initially submits quotations in series A, B, and C, and 
the size associated with the quotation in Series A is exhausted, 
such SQT would be required either to refresh its quotation in Series 
A while continuing to submit quotations in Series B and C, or to 
submit new quotations in any three of the five series, in order to 
fulfill the 60% quoting requirement.
    \12\ See Securities Exchange Act Release No. 50856 (December 14, 
2004) 69 FR 76817 (December 22, 2004) (notice of SR-Phlx-2004-91). 
The proposed provision regarding RSQTs who receive Directed Orders 
would have no relevance unless the separate proposal, that would 
create a Directed Order process, is approved by the Commission.
---------------------------------------------------------------------------

    The proposal also would require an RSQT to maintain information 
barriers reasonably designed to prevent the misuse of material, non-
public information with any affiliates that may conduct a brokerage 
business in options assigned to the RSQT or act as a specialist or 
market maker in any security underlying options assigned to the RSQT. 
Phlx further proposes to require that an RSQT comply with the 
requirements of Phlx Rule 1020 regarding restrictions on the flow of 
privileged information between the affiliate and the specialist 
organization.

D. Trade Allocation

    Phlx Rule 1014(g)(vii) currently governs the allocation of trades 
executed in Streaming Quote Options traded on Phlx XL. Under the 
proposal, RSQTs would receive the same allocation under the algorithm 
described in the rule as SQTs. The proposal also provides that current 
rules applicable to out-of-crowd SQTs regarding participation in non-
electronic orders traded in the crowd would apply to RSQTs. 
Specifically, an

[[Page 6917]]

RSQT would not participate in a trade with a non-electronic order, 
unless the order is executed at the price quoted by the RSQT at the 
time of execution.
    The proposal also would add a new definition of ``Actual Size'' to 
Phlx Rule 1014(g)(v)(B). A crowd participant's Actual Size would be 
defined as the number of contracts on which the person responsible for 
allocating the trade bases allocation of the order among crowd 
participations on parity. Specifically, for orders handled manually by 
the specialist, if at the time of the execution of an order in a 
particular series a specialist, SQT, or RSQT is disseminating an 
electronic quotation at the Exchange's disseminated price in that 
series, such specialist, SQT, or RSQT's disseminated size would be his 
or her Actual Size. The purpose of this provision is to establish a 
definition of Actual Size for specialists, out-of-crowd SQTs and RSQTs, 
whose electronically submitted quotations are on parity with other 
crowd participants. Because the rest of Phlx Rule 1014(g)(v) refers to 
allocation of orders to ``crowd participants'' on parity, such 
specialist, SQT, or RSQT are deemed a crowd participant for purposes of 
this definition.

E. Elimination of ``SQT Zones''

    Commentary .05(b) to Phlx Rule 1014 provides that an SQT may be 
assigned to, and submit quotes electronically in, all of the options 
located within a specified physical zone on the Exchange Options Floor 
(``SQT Zone''). Because the entire Exchange floor is currently 
considered one SQT Zone, Phlx proposes to delete this provision. The 
elimination of this provision would allow SQTs and RSQTs to stream 
electronic quotations floor-wide.

F. Book Sweep

    Phlx Rule 1080(c)(iii)(B) governs a feature of AUTOM known as 
``Book Sweep'' as it relates to Streaming Quote Options traded on Phlx 
XL. When a specialist or an SQT has engaged Book Sweep and such 
specialist or SQT submits a quotation that locks or crosses a limit 
order on the book that represents the Exchange's best bid or offer, 
such limit order would be executed automatically up to the size 
associated with the specialist's or SQT's quotation.\13\ Phlx proposes 
that an RSQT quotation would also initiate Book Sweep. Under the 
proposal, an RSQT also would be permitted to manually initiate Book 
Sweep by sending a manual quote in situations were the RSQT's automatic 
generation of electronic quotations is suspended due to, for example, a 
system malfunction.
---------------------------------------------------------------------------

    \13\ Book Sweep functions only in situations where the 
Exchange's disseminated best bid or offer is represented by a limit 
order on the limit order book and such bid or offer is, or is equal 
to, the National Best Bid/Offer.
---------------------------------------------------------------------------

G. Book Match

    Book Match is a feature of AUTOM that currently provides automatic 
executions for inbound AUTOM-delivered customer and off-floor broker-
dealer \14\ orders against customer limit orders on the book. Phlx Rule 
1080(g) states that, in Streaming Quote Options, the contra-side to 
automatically executed inbound eligible orders can be a limit order on 
the book or specialist and/or SQT electronic quotes (``electronic 
quotes'') at the disseminated price, where the Exchange's disseminated 
size includes a limit order on the book and/or electronic quotes at the 
disseminated price. Under the proposal, the contra-side to an inbound 
eligible order could also be an RSQT electronic quote.
---------------------------------------------------------------------------

    \14\ Phlx Rule 1080(b)(i)(C) defines an ``off-floor broker-
dealer'' as a broker-dealer that delivers orders from off the floor 
of the Exchange for the proprietary account(s) of such broker-
dealer, including a market maker located on an exchange or trading 
floor other than the Exchange's trading floor who elects to deliver 
orders via AUTOM for the proprietary account(s) of such market 
maker.
---------------------------------------------------------------------------

H. Firm Quotations

    The Exchange proposes to amend Phlx Rule 1082 in a number of ways 
to capture the firm quote requirements applicable to RSQTs. Phlx also 
proposes to clarify that 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 his 
or her quotation immediately following the exhaustion of the Exchange's 
disseminated size at such price level, the Exchange would automatically 
disseminate the specialist's most recent disseminated price prior to 
the time of such exhaustion with a size of one contract.

I. Additional Amendments

    Finally, the proposal amends Phlx's rules to clarify the 
obligations that would apply to RSQTs. Because of the unique nature of 
an RSQT (i.e., participating as an Exchange market maker from off the 
floor of the Exchange), the proposal would amend Phlx Rule 1014 and 
commentaries thereto to clarify the obligations that would apply to 
RSQTs. Moreover, the Exchange proposes to amend certain Exchange Option 
Floor Procedure Advices to make them applicable to RSQTs. Likewise, the 
Exchange proposes to amend Phlx Rule 1017 to permit RSQTs to 
participate in opening transactions by submitting electronic quotations 
to interact with opening orders. Lastly, the Exchange would amend Phlx 
Rule 1080, Commentary .01(b)(ii) to clarify that the specialist 
determine which options pricing model to select per option in non-
Streaming Quote Options only.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
\15\ and, in particular, the requirements of section 6 of the Act.\16\ 
Specifically, the Commission finds that the proposal to add a new 
category of options market-making participant, RSQT, to the Phlx XL 
trading platform is consistent with section 6(b)(5) of the Act \17\ in 
that the proposal has been designed to promote just and equitable 
principles of trade, and to protect investors and the public interest.
---------------------------------------------------------------------------

    \15\ The Commission has considered the amended proposed rule 
change's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Appointment of RSQTs

    RSQTs must meet the current requirements applicable for SQT 
applicants for assignment in Streaming Quote Options. The Commission 
believes that these requirements are consistent with the Act.
    In addition, although RSQTs are expected to demonstrate additional 
qualifications, including willingness and ability to make competitive 
markets on Phlx and otherwise to promote Phlx in a manner that is 
likely to enhance the ability of Phlx to compete successfully for order 
flow in the options it trades, The Commission emphasizes that Phlx 
should not interpret this proposed obligation to in any way directly or 
indirectly restrict a market participant that is appointed as an RSQT 
on Phlx from performing market-making or specialist activities on other 
markets.
    Under the proposal, RSQTs are also expected to demonstrate the 
existence of order flow commitments. The Commission notes, however, 
that any future change to, or termination of, order flow commitments 
may not be used by the Exchange to terminate, or take remedial action 
against, an RSQT. Also, the Exchange would not be permitted to take 
remedial action against an RSQT solely because orders

[[Page 6918]]

subject to any such commitments were not subsequently routed to the 
Exchange.
    Finally, Phlx rules prohibit any person who is either directly or 
indirectly affiliated with an RSQT from being a specialist, RSQT, SQT, 
or non-SQT ROT in options in which such affiliated RSQT is assigned. 
The Commission believes this prohibition is important because of the 
potential for allocations of trades to be based, in part, on a Phlx XL 
Participant's quote or order at the best bid or offer, not based on the 
size of such Participant's quote or order.\18\
---------------------------------------------------------------------------

    \18\ See Securities Exchange Act Release No. 50788 (December 3, 
2004), 69 FR 71860 (December 10, 2004) (SR-Phlx-2004-57).
---------------------------------------------------------------------------

B. Limitations on Access Due to Systems Constraints

    In addition, the Commission notes that proposed amendments to Phlx 
Rule 507(b)(iii), which would allow the Exchange's Board of Governors 
to defer qualifying applications for RSQT status based on systems 
constraints, capacity restrictions, or other relevant factors, grant 
the Exchange no authority at this time. Specifically, the proposed 
amendments to Phlx Rule 507(b)(iii) would not permit Phlx to place any 
limitations on its members under this rule, unless such limitations 
were objectively established and filed with the Commission under 
section 19(b) of the Act.\19\
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

C. RSQT Obligations

    Proposed Phlx Rule 1014 sets forth the obligations that an RSQT 
would be required to fulfill. Specifically, an RSQT would be required 
to quote continuous, two-sided markets in not less than 60% of the 
series in each Streaming Quote Option in which such RSQT is assigned. 
The Commission believes that these obligations for RSQTs are consistent 
with the Act. In particular, the Commission believes that RSQT's 
affirmative obligations are sufficient to justify the benefits they 
receive as market makers.\20\ In this regard, the Commission believes 
that Phlx rules impose such affirmative obligations on RSQTs.
---------------------------------------------------------------------------

    \20\ For example, a lender may extend credit to a broker-dealer 
without regard to the restrictions in Regulation T of the Board of 
Governors of the Federal Reserve if the credit is to be used to 
finance the broker-dealer's activities as a specialist or market 
maker on a national securities exchange. See 12 CFR 221.5(c)(6).
---------------------------------------------------------------------------

    Under the proposal, an RSQT also would be obligated to maintain 
information barriers that are reasonably designed to prevent the misuse 
of material, non-public information with any affiliates that may 
conduct a brokerage business in options assigned to the RSQT or that 
act as a specialist or market maker in any security underlying options 
assigned to the RSQT. The Commission believes that the requirement that 
there be an information barrier between an RSQT and its affiliates 
should reduce the opportunity for unfair trading advantages and misuse 
of material, non-public information.

D. Trade Allocation

    The Commission believes that the trade allocation algorithm that 
would apply to RSQTs is consistent with the Act. The Commission 
believes that treating RSQTs and SQTs the same under Phlx Rule 
1014(g)(vii) should encourage RSQTs to quote competitively.

E. Book Sweep and Book Match

    The Commission notes that Phlx proposes to include RSQT quotes in 
the Exchange's Book Sweep and Book Match features. The Commission 
believes that including RSQT quotes in Book Match, and allowing RSQT 
quotes to initiate Book Sweep, should result in customers receiving 
quicker, more efficient executives of trades.

F. Firm Quotations

    The Commission believes that the proposed amendments to the 
Exchange's Firm Quote requirement are consistent with the Act. The 
Commission notes that, among other things, the proposal clarifies that 
the Exchange will automatically disseminate a quotation if the 
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 its quotation immediately following the exhaustion. 
The Commission believes that this clarification more accurately 
describes the size for which the specialist is firm when the 
disseminated size in a particular series has been exhausted.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with section 6(b)(5) of the Act.\21\
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-Phlx-2004-90) is approved.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 05-2476 Filed 2-8-05; 8:45 am]
BILLING CODE 8010-10-M

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