Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval to a Proposed Rule Change and Amendment No. 1 Thereto Relating to the Phlx XL Risk Monitor Mechanism, 4625-4631 [E6-1017]
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Federal Register / Vol. 71, No. 18 / Friday, January 27, 2006 / Notices
10b–5. The law judge imposed a ceaseand-desist order on Vindman and barred
him from participating in an offering of
penny stock. She also imposed a thirdtier civil money penalty in the amount
of $20,000. In imposing the penalty, the
law judge found that the $120,000
penalty requested by the Division, the
maximum third-tier penalty allowed by
statute for each act or omission found,
was consistent with Commission
precedent, but she reduced the penalty
to $20,000, which she found took into
account both the need for deterrence
and record evidence bearing on
Vindman’s ability to pay. Vindman
appeals from the law judge’s findings of
violation and the sanctions she
imposed. The sole issue pressed in the
Division’s appeal is the amount of the
civil penalty imposed.
Among the issues likely to be argued
are:
1. Whether Vindman violated
antifraud provisions by manipulating
the market in Marx stock.
2. If violations are found, what, if any,
sanctions are warranted.
3. If a civil penalty is warranted,
whether and what amount Vindman is
able to pay.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
Dated: January 24, 2006.
Nancy M. Morris,
Secretary.
[FR Doc. 06–835 Filed 1–25–06; 11:34 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53166; File No. SR–Phlx–
2006–05]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing and Order Granting
Accelerated Approval to a Proposed
Rule Change and Amendment No. 1
Thereto Relating to the Phlx XL Risk
Monitor Mechanism
rmajette on PROD1PC67 with NOTICES
January 23, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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15:17 Jan 26, 2006
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13, 2006, the Philadelphia Stock
Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. On
January 19, 2006, the Exchange filed
Amendment No. 1 to the proposed rule
change.3 The Commission is publishing
this notice to solicit comments on the
proposed rule change, as amended, from
interested persons. In addition, the
Commission is granting accelerated
approval of the proposed rule change, as
amended.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt Phlx
Rule 1093, Phlx XL Risk Monitor
Mechanism, to provide Exchange
specialists, Streaming Quote Traders
(‘‘SQTs’’),4 Remote Streaming Quote
Traders (‘‘RSQTs’’),5 and non-SQT
ROTs 6 who are required to submit
continuous two-sided electronic
quotations pursuant to Phlx Rule
1014(b)(ii)(E) 7 (collectively, ‘‘Phlx XL
participants’’) protection from the
unreasonable risk associated with the
execution of an excessive number of
contracts resulting from near
simultaneous executions in a single
option issue. Such protection would be
provided by way of the implementation
of a Risk Monitor Mechanism. The
Exchange also proposes conforming
changes to Phlx Rule 1017, Openings in
Options, and to Phlx Rule 1082, Firm
Quotations, to describe the Exchange’s
3 Amendment No. 1 corrected certain technical
errors in the text of the proposed rule change.
4 An SQT is an Exchange Registered Options
Trader (‘‘ROT’’) who has received permission from
the Exchange to generate and submit option
quotations electronically through the Exchange’s
Automated Options Market (‘‘AUTOM’’) in eligible
options to which such SQT is assigned. An SQT
may only submit such quotations while such SQT
is physically present on the floor of the Exchange.
See Phlx Rule 1014(b)(ii)(A).
5 An RSQT is an ROT that is a member or member
organization with no physical trading floor
presence who has received permission from the
Exchange to generate and submit option quotations
electronically through AUTOM in eligible options
to which such RSQT has been assigned. An RSQT
may only submit such quotations electronically
from off the floor of the Exchange. See Phlx Rule
1014(b)(ii)(B).
6 A non-SQT ROT is an ROT who is neither an
SQT nor an RSQT. See Phlx Rule 1014(b)(ii)(C).
7 Phlx Rule 1014(b)(ii)(E) requires non-SQT ROTs
who transact more than 20% of their contract
volume in an option electronically versus in open
outcry during a particular calendar quarter to
submit proprietary electronic quotations in such an
option during the subsequent calendar quarter for
a certain number of series in such option,
depending on the percent of total volume transacted
electronically versus in open outcry on the
Exchange in such option.
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4625
disseminated quotation when the
disseminated size is exhausted and the
specialist has not yet revised its
quotation. The text of the proposed rule
change, as amended, is below. Proposed
new language is in italics; proposed
deletions are in [brackets].
Phlx XL Risk Monitor Mechanism
Rule 1093. (a) The Phlx XL system
(the ‘‘system’’) will maintain a counting
program (‘‘counting program’’) for each
specialist, SQT, RSQT, and non-SQT
ROT who is required to submit
continuous two-sided electronic
quotations pursuant to Rule
1014(b)(ii)(E) (collectively, ‘‘Phlx XL
participants’’) assigned in a particular
option. The counting program will count
the number of contracts traded in such
an option by each Phlx XL participant
within a specified time period, not to
exceed 15 seconds, established by each
Phlx XL participant (the ‘‘specified time
period’’). The specified time period will
commence for an option when a
transaction occurs in any series in such
option.
(b)(i) Risk Monitor Mechanism. The
system will engage the Risk Monitor
Mechanism in a particular option when
the counting program has determined
that a Phlx XL participant has traded a
Specified Engagement Size (as defined
below) established by such Phlx XL
participant during the specified time
period. When such Phlx XL participant
has traded the Specified Engagement
Size during the specified time period,
the Risk Monitor Mechanism will
automatically remove such Phlx XL
participant’s quotations from the
Exchange’s disseminated quotation in
all series of the particular option.
(ii) Specified Engagement Size. The
Specified Engagement Size is
determined by the following: (A) For
each series in an option, the counting
program will determine the percentage
that the number of contracts executed in
that series represents relative to the
disseminated size in that series (‘‘series
percentage’’); (B) The counting program
will determine the sum of the series
percentages in the option issue (‘‘issue
percentage’’); (C) Once the counting
program determines that the issue
percentage equals or exceeds a
percentage established by the Phlx XL
participant, not less than 100%
(‘‘Specified Percentage’’), the number of
executed contracts in the option issue
equals the Specified Engagement Size.
For example, if a Phlx XL participant is
quoting in four series of a particular
option issue, and sets its Specified
Percentage at 100%, the Specified
Engagement Size would be determined
as follows:
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Example I
Series
Series
Series
Series
Series
1
2
3
4
Number of
contracts
executed
Size
Percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
40
20
20
15
40
40
10
10
Total ......................................................................................................................................
500
95
100
In this example the Specified
Engagement Size is 95 contracts, which
is the aggregate number of contracts
executed among all series during the
specified time period that represents an
Example II
Series
Series
Series
Series
Series
1
2
3
4
issue percentage equal to the Specified
Percentage of 100%.
Number of
contracts
executed
Size
Percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
0
0
0
150
0
0
0
100
Total ......................................................................................................................................
500
150
100
In this example the Specified
Engagement Size is 150 contracts, which
is the aggregate number of contracts
executed among all series during the
specified time period that represents an
issue percentage equal to the Specified
Percentage of 100%.
If a Phlx XL participant is quoting in
four series of a particular option, and
sets its Specified Percentage at 200%,
Series
Series
Series
Series
Series
1
2
3
4
the Specified Engagement Size would be
determined as follows:
Example III
Number of
contracts
executed
Size
Percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
80
40
40
30
80
80
20
20
Total ......................................................................................................................................
500
190
200
In this example the Specified
Engagement Size is 190 contracts, which
is the aggregate number of contracts
executed among all series during the
specified time period that represents an
issue percentage equal to the Specified
Percentage of 200%. The Specified
Engagement Size will be automatically
offset by a number of contracts that are
executed on the opposite side of the
market in the same option issue during
the specified time period (the ‘‘Net
Offset Specified Engagement Size’’). For
example, a Phlx XL participant that
Series
1
2
3
4
Buy call
Example IV
Sell call/buy
put
Net offset size
Percentage
................................................................................
................................................................................
................................................................................
................................................................................
100
50
200
150
60
100
150
75
20
80
130
60
40
20
20
15
40
40
10
10
Total ..............................................................................
rmajette on PROD1PC67 with NOTICES
Series
Series
Series
Series
Size
buys calls and also sells calls or buys
puts in the same option during the
specified time period would have a Net
Offset Specified Engagement Size as
follows:
500
385
290
95
100
The Net Offset Specified Engagement
Size for each series is determined by
offsetting the number of contracts
executed on the opposite side of the
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market for each series during the
specified time period. The Risk Monitor
Mechanism shall be engaged once the
Net Offset Specified Engagement Size is
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for a net number of contracts executed
among all series in an option issue
during the specified time period that
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Federal Register / Vol. 71, No. 18 / Friday, January 27, 2006 / Notices
represents an issue percentage equal to
or greater than the Specified Percentage.
(c) Any marketable orders, or quotes
that are executable against a Phlx XL
participant’s disseminated quotation
that are received prior to the time the
Risk Monitor Mechanism is engaged will
be automatically executed at the
disseminated price up to the Phlx XL
participant’s disseminated size,
regardless of whether such an execution
results in executions in excess of the
Phlx XL participant’s Specified
Engagement Size.
(d) In the event that the specialist’s
quote is removed by the Risk Monitor
Mechanism and there are no other Phlx
XL participants quoting in the particular
option, the system will automatically
provide two-sided quotes that comply
with the Exchange’s rules concerning
quote spread parameters on behalf of
the specialist until such time as the
specialist revises the quotation. All
quotations generated by the Exchange
on behalf of a specialist shall be
considered ‘‘firm quotations’’ and shall
be the obligation of the specialist.
(e) The system will automatically reset
the counting program and commence a
new specified time period when:
(i) A previous counting period has
expired and a transaction occurs in any
series in such option; or
(ii) The Phlx XL participant refreshes
his/her quotation, in a series for which
an order has been executed (thus
commencing the specified time period)
prior to the expiration of the specified
time period.
*
*
*
*
*
rmajette on PROD1PC67 with NOTICES
Obligations and Restrictions Applicable
to Specialists and Registered Options
Traders
Rule 1014. (a) No change.
(b) ROT. (i) No change.
(ii) (A)–(C) No change.
(D) Market Making Obligations
Applicable in Streaming Quote Options.
In addition to the other requirements for
ROTs set forth in this Rule 1014, an
SQT and an RSQT shall be responsible
to quote continuous, two-sided markets
in not less than 60% of the series in
each Streaming Quote Option (as
defined in Rule 1080(k)) in which such
SQT or RSQT is assigned, provided that
a Directed SQT or RSQT (as defined in
Rule 1080(l)(i)(C)) shall be responsible
to quote continuous, two-sided markets
in not less than [100] 99% of the series
in each Streaming Quote Option in
which they receive Directed Orders (as
defined in Rule 1080(l)(i)(A)). The
specialist shall be responsible to quote
continuous, two-sided markets in not
less than [100] 99% of the series in each
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Streaming Quote Option in which such
specialist is assigned.
(E) No change.
(c)–(h) No change.
Commentary: No change.
*
*
*
*
*
Openings in Options
Rule 1017. (a) No change.
(b) The system will calculate an
Anticipated Opening Price (‘‘AOP’’) and
Anticipated Opening Size (‘‘AOS’’)
when a quote or trade has been
disseminated by the primary market for
the underlying security, and under the
conditions set forth below. The
specialist assigned in the particular
option must enter opening quotes not
later than one minute following the
dissemination of a quote or trade by the
primary market for the underlying
security. An AOP may only be
calculated if: (i) the Exchange has
received market orders, or the book is
crossed (highest bid is higher than the
lowest offer) or locked (highest bid
equals the lowest offer); and (ii) either
(A) the specialist’s quote has been
submitted; (B) the quotes of at least two
Phlx XL participants that are required to
submit continuous, two-sided quotes in
[100] 99% of the series in all option
issues in which such Phlx XL
participant is assigned (‘‘[100] 99%
participants’’), have been submitted
within two minutes of the opening trade
or quote on the primary market for the
underlying security (or such shorter
time as determined by the Options
Committee and disseminated to
membership via Exchange Circular); or
(C) if neither the specialist’s quote nor
the quotes of two [100] 99% participants
have been submitted within two
minutes of the opening trade or quote
on the primary market for the
underlying security (or such shorter
time as determined by the Options
Committee and disseminated to
membership via Exchange circular), one
[100] 99% participant has submitted
their quote.
In situations where an AOP may be
calculated and there is an order/quote
imbalance, the system will immediately
send an imbalance notice indicating the
imbalance side (buy or sell) and the
AOP and AOS (an ‘‘Imbalance Notice’’)
to Phlx XL participants provided that
the primary market for the underlying
security has disseminated the opening
quote or trade. Phlx XL participants that
have not submitted opening quotes will
then submit their opening quotes, and
Phlx XL participants that have
submitted opening quotes may submit
revised opening quotes; thereafter the
system will disseminate an updated
Imbalance Notice every five seconds (or
PO 00000
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4627
such shorter period as determined by
the Options Committee and
disseminated to membership via
Exchange Circular) until the series is
open. If no imbalance exists, no
Imbalance Notice will be sent, and the
system will establish an opening price
as described in paragraph (c) below.
(c)–(d) No change.
(e) The system will not open a series if
one of the following conditions is met:
(i) there is no quote from the
specialist or a [100] 99% participant;
(ii)–(iii) No change.
(f)–(j) No change.
Commentary: No change.
*
*
*
*
*
Firm Quotations
Rule 1082. (a) (i) No change.
(ii) (A)–(B) No change.
(C)(1) If an SQT or RSQT’s (other than
a Directed SQT or RSQT) quotation size
in a particular series in a Streaming
Quote Option is exhausted or removed
by the Risk Monitor Mechanism, such
SQT or RSQT’s quotation shall be
deleted from the Exchange’s
disseminated quotation until the time
the SQT or RSQT revises his/her
quotation.
(2) If the Exchange’s disseminated
size in a particular series in a Streaming
Quote Option is exhausted at that
particular price level, and no specialist,
SQT or RSQT has revised their
quotation immediately following the
exhaustion of the Exchange’s
disseminated size at such price level,
the Exchange shall automatically
[disseminate the specialist’s most recent
disseminated price prior to the time of
such exhaustion] provide two-sided
quotes that comply with the Exchange’s
rules concerning quote spread
parameters on behalf of the specialist
until such time as the specialist revises
the quotation, with a size of one
contract.
(iii)–(iv) No change.
(b)–(d) No change.
Commentary: No change.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it had received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item III below. The
Phlx has prepared summaries, set forth
in Sections A, B, and C below, of the
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most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to provide Phlx XL
participants protection from the
unreasonable risk of multiple nearly
simultaneous executions. The risk to
Phlx XL participants is not limited to a
single series in an option issue; Phlx XL
participants have exposure in all series
of a particular option issue, requiring
them to offset or hedge their overall
position in an option issue.
Phlx XL participants submit
proprietary electronic quotations in
options in which they are assigned
based on proprietary pricing models
that rely on various factors such as the
price and market volatility of the
underlying security. The Phlx XL
participant’s pricing model and
automated quotation system will
continuously enter updated quotations
in all series of an option based on
changes in the various factors included
in its pricing models. In addition to the
Phlx XL participant’s own proprietary
quoting system, the Risk Monitor
Mechanism would provide an
additional tool to the Phlx XL
participant to help manage the risk
associated with providing liquidity in a
large number of series across an option
in which it is assigned.
Specialists trading on Phlx XL,
together with SQTs and RSQTs that
receive Directed Orders 8 are currently
required to submit continuous, twosided quotations in 100% of the series
in each option in which they are
assigned.9 SQTs and RSQTs that do not
receive Directed Orders are required to
submit continuous, two-sided
quotations in 60% of the series in each
option in which they are assigned.10
Phlx XL participants are thus exposed to
the possibility of near-simultaneous
executions that can create large,
unintended principal positions that
expose the Phlx XL participant to
unnecessary market risk. Consequently,
Phlx XL participants may be more likely
to widen their quotations, quote less
aggressively, and limit their
disseminated size in order to address
these risks. The Risk Monitor
Mechanism is intended to address these
concerns by assisting Phlx XL
participants in managing their market
risk.
Phlx XL Risk Monitor Mechanism
The Phlx XL Risk Monitor Mechanism
would begin with a counting program
that would count the number of
contracts traded in a particular option
by each Phlx XL participant within a
specified time period established by
each Phlx XL participant (the ‘‘specified
time period’’). The specified time period
would commence for an option when a
transaction occurs in any series in such
option. The specified time period may
not exceed 15 seconds; Phlx XL
participants may, however, set the
specified time period for less than 15
seconds.
The system would engage the Risk
Monitor Mechanism in a particular
option when the counting program has
determined that a Phlx XL participant
has traded a Specified Engagement Size
(as defined below) established by such
Phlx XL participant during the specified
time period. When such Phlx XL
participant has traded the Specified
Engagement Size during the specified
Series
Series
Series
Series
Series
1
2
3
4
time period, the Risk Monitor
Mechanism would automatically
remove such Phlx XL participant’s
quotations from the Exchange’s
disseminated quotation in all series of
the particular option until such Phlx XL
participant submits a new, revised
quotation.
Specified Engagement Size. Each Phlx
XL participant would establish a
Specified Engagement Size.11 When
such Phlx XL participant has traded the
Specified Engagement Size during the
specified time period, the Risk Monitor
Mechanism would automatically
remove such Phlx XL participant’s
quotations from the Exchange’s
disseminated quotation in all series of
the particular option.
The Specified Engagement Size is
determined as follows: For each series
in an option, the counting program
would determine the percentage that the
number of contracts executed in that
series represents relative to the
disseminated size in that series (the
‘‘series percentage’’). The counting
program would then determine the sum
of the series percentages in the
underlying option issue (the ‘‘issue
percentage’’). Once the counting
program determines that the issue
percentage equals or exceeds a
percentage established by the Phlx XL
participant which may not be less than
100% (the ‘‘Specified Percentage’’), the
number of executed contracts in the
option issue equals the Specified
Engagement Size.
For example, if a Phlx XL participant
is quoting in four series of a particular
option issue, and sets its Specified
Percentage at 100%, the Specified
Engagement Size would be determined
as follows:
Example I
Number of
contracts
executed
Size
Percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
40
20
20
15
40
40
10
10
Total ......................................................................................................................................
500
95
100
rmajette on PROD1PC67 with NOTICES
8 See
Phlx Rule 1080(l).
Phlx Rule 1014(b)(ii)(D). The proposed rule
change would reduce the percentage quoting
requirement as described more fully below.
10 Id.
11 A Phlx XL participant could establish the
Specified Engagement Size as 100% or greater of
the number of contracts executed in each series
9 See
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Jkt 208001
during the specified time period relative to the
disseminated size. For example, a Phlx XL
participant could establish the Specified
Engagement Size as 200%, in which case the Risk
Monitor Mechanism would not be engaged until
200% of the number of contracts in each series have
been executed during the specified time period
relative to the disseminated size. A Phlx XL
participant could also establish the Specified
PO 00000
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Sfmt 4703
Engagement Size as, for example, 120%, in which
case the Risk Monitor Mechanism would not be
engaged until 120% of the number of contracts in
each series have been executed during the specified
time period relative to the disseminated size. In any
event, however, a Phlx XL participant may not
establish a Specified Engagement Size that is less
than 100%.
E:\FR\FM\27JAN1.SGM
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Federal Register / Vol. 71, No. 18 / Friday, January 27, 2006 / Notices
In this example the Specified
Engagement Size is 95 contracts, which
is the aggregate number of contracts
executed among all series during the
specified time period that represents an
Example II
Series
Series
Series
Series
Series
1
2
3
4
issue percentage equal to the Specified
Percentage of 100%.
Number of
contracts
executed
Size
Percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
0
0
0
150
0
0
0
100
Total ......................................................................................................................................
500
150
100
In this example the Specified
Engagement Size is 150 contracts, which
is the aggregate number of contracts
executed among all series during the
specified time period that represents an
issue percentage equal to the Specified
Percentage of 100%.
If a Phlx XL participant is quoting in
four series of a particular option, and
sets its Specified Percentage at 200%,
Series
Series
Series
Series
Series
1
2
3
4
the Specified Engagement Size would be
determined as follows:
Example III
Number of
contracts
executed
Size
Percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
80
40
40
30
80
80
20
20
Total ......................................................................................................................................
500
190
200
In this example the Specified
Engagement Size is 190 contracts, which
is the aggregate number of contracts
executed among all series during the
specified time period that represents an
issue percentage equal to the Specified
Percentage of 200%.
Offset on the Opposite Side of the
Market. The Risk Monitor Mechanism
would calculate the number of contracts
executed on one side of the market
during the specified time period, and
offset that number of contracts by the
number of contracts executed on the
opposite side of the market during the
specified time period. The purpose of
this provision is to account for the offset
in risk of one option position created by
a position in the same option issue on
the opposite side of the market. Because
the risk in such a situation is neutral,
the Exchange believes that Phlx XL
participants should continue executing
contracts until the actual risk that is
created by the Specified Engagement
Size is realized.
The Specified Engagement Size would
thus be automatically offset by a number
of contracts that are executed on the
opposite side of the market in the same
option issue during the specified time
period (the ‘‘Net Offset Specified
Series
1
2
3
4
Buy call
Example IV
Sell call/buy
put
Net offset size
Percentage
................................................................................
................................................................................
................................................................................
................................................................................
100
50
200
150
60
100
150
75
20
80
130
60
40
20
20
15
40
40
10
10
Total ..............................................................................
rmajette on PROD1PC67 with NOTICES
Series
Series
Series
Series
Size
Engagement Size’’). The Risk Monitor
Mechanism would be engaged when the
Net Offset Specified Engagement Size is
for a number of contracts executed
among all series during the specified
time period that represents an issue
percentage that is equal to or greater
than the specified percentage. For
example, a Phlx XL participant that
buys calls and also sells calls or buys
puts in the same option during the
specified time period would have a Net
Offset Specified Engagement Size as
follows:
500
385
290
95
100
In this example, 675 contracts have
been executed during the specified time
period (buy calls 385 + sell calls/buy
puts 290). The Net Offset Specified
Engagement Size for each series is
determined by offsetting the number of
contracts executed on the opposite side
of the market for each series during the
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specified time period. The Risk Monitor
Mechanism would be engaged once the
Net Offset Specified Engagement Size is
executed for a net number of contracts
among all series during the specified
time period that represents an issue
percentage that is equal to or greater
than the specified percentage.
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Firm Quotations. In order to remain
consistent with the Exchange’s rules
concerning Firm Quotations,12 the
proposed rule change would provide
that any marketable orders, or quotes
that are executable against a Phlx XL
participant’s disseminated quotation,
12 See
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Federal Register / Vol. 71, No. 18 / Friday, January 27, 2006 / Notices
that are received prior to the time the
Risk Monitor Mechanism is engaged
would be automatically executed at the
disseminated price up to the Phlx XL
participant’s disseminated size,
regardless of whether such an execution
results in executions in excess of the
Phlx XL participant’s Specified
Engagement Size. Therefore, it is
possible for a Phlx XL participant to
execute a number of contracts that is
greater than the Specified Engagement
Size before the Risk Monitor Mechanism
removes their quote from the Exchange’s
disseminated market.
Further, the proposed rule change
would establish that, in the event that
the specialist’s quote is exhausted or
removed by the Risk Monitor
Mechanism, and there are no other Phlx
XL participants quoting in the particular
option, the system would automatically
provide two-sided quotes that comply
with the Exchange’s rules concerning
quote spread parameters on behalf of the
specialist until such time as the
specialist revises the quotation. All
quotations generated by the Exchange
on behalf of a specialist would be
considered ‘‘firm quotations’’ and shall
be the obligation of the specialist. The
Exchange proposes conforming changes
to Rule 1082 to reflect this situation.
The purpose of this provision is to
ensure that the Exchange disseminates
continuous quotations in all series
traded on the Exchange, even in
situations where no Phlx XL participant
is disseminating its own quotations due
to, for example, system malfunctions.
The Exchange believes that it should
‘‘take control’’ of a Phlx XL participant’s
quotation only in limited circumstances
(i.e., only when the Exchange’s failure to
do so would result in no disseminated
market from the Exchange), and that the
Phlx XL participants then quoting
should determine the Exchange’s
disseminated price and size.
The Exchange proposes to amend
Phlx Rule 1014(b)(ii)(D) to reduce the
obligation of specialists and Phlx XL
participants that receive Directed
Orders 13 to quote continuous, twosided markets in not less than 100% of
the series in each option in which they
are assigned. The new obligation would
be to quote in 99% of such series. The
purpose of this proposal is to make the
Exchange’s rules concerning quoting
requirements consistent with the Risk
Monitor Mechanism’s functionality (i.e.,
the removal of individual specialist and
Directed SQT and RSQT quotations
from the Exchange’s disseminated
market). If the quoting obligation were
to remain at 100% for these particular
13 See
Phlx Rule 1080(l).
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15:17 Jan 26, 2006
Jkt 208001
Phlx XL participants, a rule violation
would occur each time the Risk Monitor
Mechanism removes their quotation.
Thus, the Exchange proposes to reduce
this obligation so that removal of
individual quotations does not result in
violations of Exchange rules.
For consistency, the Exchange
proposes conforming amendments to
Phlx Rule 1017, Openings in Options, to
change references to ‘‘100%
participants’’ and re-name them ‘‘99%
participants.’’
Re-Setting the Counting System.
Finally, the proposed rule change
provides that the system would
automatically reset the counting
program and commence a new specified
time period when either: (i) a previous
counting period has expired and a
transaction occurs in any series in such
option; or (ii) the Phlx XL participant
refreshes his/her quotation, in a series
for which an order has been executed
(thus commencing the specified time
period) prior to the expiration of the
specified time period.
The commencement of the specified
time period is event-driven, i.e., upon
the execution of a transaction in a
particular series in an option. The
system would only initiate a specified
time period when such an execution
occurs. If there is no activity in an
option, the system would not repeatedly
commence and calculate the expiration
of a new specified time period for such
option unnecessarily. Once an
execution occurs, however, a specified
time period would commence.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Phlx–2006–05 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number SR–Phlx–2006–05. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
2. Statutory Basis
amendments, all written statements
The Exchange believes the proposed
with respect to the proposed rule
rule change is consistent with Section
change that are filed with the
6(b) of the Act,14 in general, and furthers Commission, and all written
the objectives of Section 6(b)(5) of the
communications relating to the
Act,15 in particular, in that it is designed proposed rule change between the
to promote just and equitable principles Commission and any person, other than
of trade, to remove impediments to and
those that may be withheld from the
perfect the mechanism of a free and
public in accordance with the
open market and a national market
provisions of 5 U.S.C. 552, will be
system, and, in general, to protect
available for inspection and copying in
investors and the public interest, by
the Commission’s Public Reference
assisting Phlx XL participants in
Section, 100 F Street, NE., Washington,
managing their risk through the Risk
DC 20549. Copies of such filing also will
Monitor Mechanism.
be available for inspection and copying
at the principal office of the Phlx. All
B. Self-Regulatory Organization’s
comments received will be posted
Statement on Burden on Competition
without change; the Commission does
not edit personal identifying
The Exchange does not believe that
the proposed rule change would impose information from submissions. You
should submit only information that
any burden on competition that is not
you wish to make publicly available. All
necessary or appropriate in furtherance
submissions should refer to File
of the purposes of the Act.
Number SR–Phlx–2006–05 and should
14 15 U.S.C. 78f(b).
be submitted on or before February 17,
15 15 U.S.C. 78f(b)(5).
2006.
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Federal Register / Vol. 71, No. 18 / Friday, January 27, 2006 / Notices
rmajette on PROD1PC67 with NOTICES
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the
requirements of the Act and the rules
and regulations thereunder, applicable
to a national securities exchange.16 In
particular, the Commission believes that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,17 which
requires among other things, that the
rules of the Exchange are designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. The
Commission notes that the proposal
does not alter the obligations of Phlx XL
participants, except for the fact that it
will reduce specialists and Phlx XL
participants that receive directed orders
continuous quoting obligation from
100% of the series in each option in
which it is assigned to 99% of the series
in each option in which it is assigned.
The Commission notes that this
reduction should provide specialists
and Phlx XL participants that receive
directed orders a brief amount of time
to update their quotes after the Risk
Monitor Mechanism removes their
quotes from the Exchange’s
disseminated quotation. In addition, the
Commission believes that the proposed
rule change should provide Phlx XL
participants assistance in effectively
managing their quotations.
The Phlx has requested that the
Commission find good cause for
approving the proposed rule change
prior to the thirtieth day after
publication of notice thereof in the
Federal Register. The Commission notes
that similar proposals to provide
protection from risk for market makers
have been approved for other options
exchanges.18 The Commission believes
that granting accelerated approval of the
proposal should provide Phlx XL
participants with similar protections
from the risk associated with an
excessive number of near simultaneous
executions in a single options class.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
16 In approving this proposal, the Commission has
considered its impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
17 15 U.S.C. 78f(b)(5).
18 See Securities Exchange Act Release Nos.
51049 (January 18, 2005), 70 FR 3756 (January 26,
2005) (SR–BSE–2004–52); 51050 (January 18, 2005),
70 FR 3758 (January 26, 2005) (SR–ISE–2004–31);
and 51740 (May 25, 2005), 70 FR 32686 (June 3,
2005) (SR–PCX–2005–64).
VerDate Aug<31>2005
15:17 Jan 26, 2006
Jkt 208001
of the Act,19 for approving the proposed
rule change, as amended, prior to the
thirtieth day after the date of
publication of notice thereof in the
Federal Register.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,20 that the
proposed rule change (SR–Phlx–2006–
05) and Amendment No. 1 thereto be,
and hereby are, approved on an
accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.21
Nancy M. Morris,
Secretary.
[FR Doc. E6–1017 Filed 1–26–06; 8:45 am]
BILLING CODE 8010–01–P
4631
For
further information, including a list of
the exhibit objects, contact Julianne
Simpson, Attorney-Adviser, Office of
the Legal Adviser, U.S. Department of
State (telephone: 202/453–8049). The
address is U.S. Department of State, SA–
44, 301 4th Street, SW., Room 700,
Washington, DC 20547–0001.
FOR FURTHER INFORMATION CONTACT:
Dated: January 23, 2006.
C. Miller Crouch,
Principal Deputy Assistant Secretary for
Educational and Cultural Affairs, Department
of State.
[FR Doc. 06–842 Filed 1–26–06; 8:45 am]
BILLING CODE 4710–05–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
RIN 2120–AA64
DEPARTMENT OF STATE
General Aviation Summit; Notice of
Public Meeting
[Public Notice 5284]
Culturally Significant Objects Imported
for Exhibition Determinations: ‘‘Life in
the Pacific of the 1700s: The Cook/
Forster Collection of the George
August University of Gottingen’’
Notice is hereby given of the
following determinations: Pursuant to
the authority vested in me by the Act of
October 19, 1965 (79 Stat. 985; 22 U.S.C.
2459), Executive Order 12047 of March
27, 1978, the Foreign Affairs Reform and
Restructuring Act of 1998 (112 Stat.
2681, et seq.; 22 U.S.C. 6501 note, et
seq.), Delegation of Authority No. 234 of
October 1, 1999, Delegation of Authority
No. 236 of October 19, 1999, as
amended, and Delegation of Authority
No. 257 of April 15, 2003 [68 FR 19875],
I hereby determine that the objects to be
included in the exhibition ‘‘Life in the
Pacific of the 1700s: The Cook/Forster
Collection of the George August
University of Gottingen,’’ imported from
abroad for temporary exhibition within
the United States, are of cultural
significance. The objects are imported
pursuant to a loan agreement with the
foreign owner or custodian. I also
determine that the exhibition or display
of the exhibit objects at the Honolulu
Academy of Arts, Honolulu, HI, from on
or about February 23, 2006, until on or
about May 14, 2006, and at possible
additional venues yet to be determined,
is in the national interest. Public Notice
of these Determinations is ordered to be
published in the Federal Register.
SUMMARY:
19 15
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(2).
21 17 CFR 200.30–3(a)(12).
20 15
PO 00000
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Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Notice of Public Meeting.
AGENCY:
SUMMARY: This notice announces a
public meeting on the subject of the
continued airworthiness of the U.S.
general aviation fleet of aircraft. The
purpose of the meeting is to gather
information and discuss technical issues
related to problems associated with the
increasing average age of the general
aviation fleet. Particular emphasis will
be given to actions that have potential
to mitigate the inevitable effects of
fatigue, corrosion, and deterioration on
aging general aviation airplanes.
DATES: The public meeting will be held
March 22–23, 2006, starting at 8 a.m.
each day, in Kansas City, Missouri.
Registration will begin at 8 a.m. on the
first day of the meeting.
ADDRESSES: The public meeting will be
held at the following location:
Doubletree Hotel Overland Park, 10100
College Blvd., Overland Park, Kansas,
United States, 66210.
Persons who are unable to attend the
meeting may mail their comments to:
Federal Aviation Administration,
(FAA), Central Region, Small Airplane
Directorate, Attention: Mr. Marv Nuss,
901 Locust, Room 301, Kansas City,
Missouri 64106. Written comments
regarding the subject of this meeting
will receive the same consideration as
statements made at the public meeting.
FOR FURTHER INFORMATION CONTACT: Mr.
Marv Nuss, 901 Locust, Room 301,
Kansas City, Missouri 64106; telephone:
E:\FR\FM\27JAN1.SGM
27JAN1
]]>Agencies
[Federal Register Volume 71, Number 18 (Friday, January 27, 2006)]
[Notices]
[Pages 4625-4631]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-1017]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53166; File No. SR-Phlx-2006-05]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval to a Proposed
Rule Change and Amendment No. 1 Thereto Relating to the Phlx XL Risk
Monitor Mechanism
January 23, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 13, 2006, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. On January
19, 2006, the Exchange filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons. In
addition, the Commission is granting accelerated approval of the
proposed rule change, as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 corrected certain technical errors in the
text of the proposed rule change.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt Phlx Rule 1093, Phlx XL Risk Monitor
Mechanism, to provide Exchange specialists, Streaming Quote Traders
(``SQTs''),\4\ Remote Streaming Quote Traders (``RSQTs''),\5\ and non-
SQT ROTs \6\ who are required to submit continuous two-sided electronic
quotations pursuant to Phlx Rule 1014(b)(ii)(E) \7\ (collectively,
``Phlx XL participants'') protection from the unreasonable risk
associated with the execution of an excessive number of contracts
resulting from near simultaneous executions in a single option issue.
Such protection would be provided by way of the implementation of a
Risk Monitor Mechanism. The Exchange also proposes conforming changes
to Phlx Rule 1017, Openings in Options, and to Phlx Rule 1082, Firm
Quotations, to describe the Exchange's disseminated quotation when the
disseminated size is exhausted and the specialist has not yet revised
its quotation. The text of the proposed rule change, as amended, is
below. Proposed new language is in italics; proposed deletions are in
[brackets].
---------------------------------------------------------------------------
\4\ An SQT is an Exchange Registered Options Trader (``ROT'')
who has received permission from the Exchange to generate and submit
option quotations electronically through the Exchange's Automated
Options Market (``AUTOM'') in eligible options to which such SQT is
assigned. An SQT may only submit such quotations while such SQT is
physically present on the floor of the Exchange. See Phlx Rule
1014(b)(ii)(A).
\5\ An RSQT is an ROT that is a member or member organization
with no physical trading floor presence who has received permission
from the Exchange to generate and submit option quotations
electronically through AUTOM in eligible options to which such RSQT
has been assigned. An RSQT may only submit such quotations
electronically from off the floor of the Exchange. See Phlx Rule
1014(b)(ii)(B).
\6\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT.
See Phlx Rule 1014(b)(ii)(C).
\7\ Phlx Rule 1014(b)(ii)(E) requires non-SQT ROTs who transact
more than 20% of their contract volume in an option electronically
versus in open outcry during a particular calendar quarter to submit
proprietary electronic quotations in such an option during the
subsequent calendar quarter for a certain number of series in such
option, depending on the percent of total volume transacted
electronically versus in open outcry on the Exchange in such option.
---------------------------------------------------------------------------
Phlx XL Risk Monitor Mechanism
Rule 1093. (a) The Phlx XL system (the ``system'') will maintain a
counting program (``counting program'') for each specialist, SQT, RSQT,
and non-SQT ROT who is required to submit continuous two-sided
electronic quotations pursuant to Rule 1014(b)(ii)(E) (collectively,
``Phlx XL participants'') assigned in a particular option. The counting
program will count the number of contracts traded in such an option by
each Phlx XL participant within a specified time period, not to exceed
15 seconds, established by each Phlx XL participant (the ``specified
time period''). The specified time period will commence for an option
when a transaction occurs in any series in such option.
(b)(i) Risk Monitor Mechanism. The system will engage the Risk
Monitor Mechanism in a particular option when the counting program has
determined that a Phlx XL participant has traded a Specified Engagement
Size (as defined below) established by such Phlx XL participant during
the specified time period. When such Phlx XL participant has traded the
Specified Engagement Size during the specified time period, the Risk
Monitor Mechanism will automatically remove such Phlx XL participant's
quotations from the Exchange's disseminated quotation in all series of
the particular option.
(ii) Specified Engagement Size. The Specified Engagement Size is
determined by the following: (A) For each series in an option, the
counting program will determine the percentage that the number of
contracts executed in that series represents relative to the
disseminated size in that series (``series percentage''); (B) The
counting program will determine the sum of the series percentages in
the option issue (``issue percentage''); (C) Once the counting program
determines that the issue percentage equals or exceeds a percentage
established by the Phlx XL participant, not less than 100% (``Specified
Percentage''), the number of executed contracts in the option issue
equals the Specified Engagement Size. For example, if a Phlx XL
participant is quoting in four series of a particular option issue, and
sets its Specified Percentage at 100%, the Specified Engagement Size
would be determined as follows:
[[Page 4626]]
Example I
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 40 40
Series 2........................................................ 50 20 40
Series 3........................................................ 200 20 10
Series 4........................................................ 150 15 10
-----------------
Total....................................................... 500 95 100
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 95 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
Example II
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 0 0
Series 2........................................................ 50 0 0
Series 3........................................................ 200 0 0
Series 4........................................................ 150 150 100
-----------------
Total....................................................... 500 150 100
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 150 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
If a Phlx XL participant is quoting in four series of a particular
option, and sets its Specified Percentage at 200%, the Specified
Engagement Size would be determined as follows:
Example III
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 80 80
Series 2........................................................ 50 40 80
Series 3........................................................ 200 40 20
Series 4........................................................ 150 30 20
-----------------
Total....................................................... 500 190 200
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 190 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 200%. The Specified Engagement
Size will be automatically offset by a number of contracts that are
executed on the opposite side of the market in the same option issue
during the specified time period (the ``Net Offset Specified Engagement
Size''). For example, a Phlx XL participant that buys calls and also
sells calls or buys puts in the same option during the specified time
period would have a Net Offset Specified Engagement Size as follows:
Example IV
----------------------------------------------------------------------------------------------------------------
Sell call/buy Net offset
Series Size Buy call put size Percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................ 100 60 20 40 40
Series 2........................ 50 100 80 20 40
Series 3........................ 200 150 130 20 10
Series 4........................ 150 75 60 15 10
-----------------
Total....................... 500 385 290 95 100
----------------------------------------------------------------------------------------------------------------
The Net Offset Specified Engagement Size for each series is
determined by offsetting the number of contracts executed on the
opposite side of the market for each series during the specified time
period. The Risk Monitor Mechanism shall be engaged once the Net Offset
Specified Engagement Size is for a net number of contracts executed
among all series in an option issue during the specified time period
that
[[Page 4627]]
represents an issue percentage equal to or greater than the Specified
Percentage.
(c) Any marketable orders, or quotes that are executable against a
Phlx XL participant's disseminated quotation that are received prior to
the time the Risk Monitor Mechanism is engaged will be automatically
executed at the disseminated price up to the Phlx XL participant's
disseminated size, regardless of whether such an execution results in
executions in excess of the Phlx XL participant's Specified Engagement
Size.
(d) In the event that the specialist's quote is removed by the Risk
Monitor Mechanism and there are no other Phlx XL participants quoting
in the particular option, the system will automatically provide two-
sided quotes that comply with the Exchange's rules concerning quote
spread parameters on behalf of the specialist until such time as the
specialist revises the quotation. All quotations generated by the
Exchange on behalf of a specialist shall be considered ``firm
quotations'' and shall be the obligation of the specialist.
(e) The system will automatically reset the counting program and
commence a new specified time period when:
(i) A previous counting period has expired and a transaction occurs
in any series in such option; or
(ii) The Phlx XL participant refreshes his/her quotation, in a
series for which an order has been executed (thus commencing the
specified time period) prior to the expiration of the specified time
period.
* * * * *
Obligations and Restrictions Applicable to Specialists and Registered
Options Traders
Rule 1014. (a) No change.
(b) ROT. (i) No change.
(ii) (A)-(C) No change.
(D) Market Making Obligations Applicable in Streaming Quote
Options. In addition to the other requirements for ROTs set forth in
this Rule 1014, an SQT and an RSQT shall be responsible to quote
continuous, two-sided markets in not less than 60% of the series in
each Streaming Quote Option (as defined in Rule 1080(k)) in which such
SQT or RSQT is assigned, provided that a Directed SQT or RSQT (as
defined in Rule 1080(l)(i)(C)) shall be responsible to quote
continuous, two-sided markets in not less than [100] 99% of the series
in each Streaming Quote Option in which they receive Directed Orders
(as defined in Rule 1080(l)(i)(A)). The specialist shall be responsible
to quote continuous, two-sided markets in not less than [100] 99% of
the series in each Streaming Quote Option in which such specialist is
assigned.
(E) No change.
(c)-(h) No change.
Commentary: No change.
* * * * *
Openings in Options
Rule 1017. (a) No change.
(b) The system will calculate an Anticipated Opening Price (``AOP'')
and Anticipated Opening Size (``AOS'') when a quote or trade has been
disseminated by the primary market for the underlying security, and
under the conditions set forth below. The specialist assigned in the
particular option must enter opening quotes not later than one minute
following the dissemination of a quote or trade by the primary market
for the underlying security. An AOP may only be calculated if: (i) the
Exchange has received market orders, or the book is crossed (highest
bid is higher than the lowest offer) or locked (highest bid equals the
lowest offer); and (ii) either (A) the specialist's quote has been
submitted; (B) the quotes of at least two Phlx XL participants that are
required to submit continuous, two-sided quotes in [100] 99% of the
series in all option issues in which such Phlx XL participant is
assigned (``[100] 99% participants''), have been submitted within two
minutes of the opening trade or quote on the primary market for the
underlying security (or such shorter time as determined by the Options
Committee and disseminated to membership via Exchange Circular); or (C)
if neither the specialist's quote nor the quotes of two [100] 99%
participants have been submitted within two minutes of the opening
trade or quote on the primary market for the underlying security (or
such shorter time as determined by the Options Committee and
disseminated to membership via Exchange circular), one [100] 99%
participant has submitted their quote.
In situations where an AOP may be calculated and there is an order/
quote imbalance, the system will immediately send an imbalance notice
indicating the imbalance side (buy or sell) and the AOP and AOS (an
``Imbalance Notice'') to Phlx XL participants provided that the primary
market for the underlying security has disseminated the opening quote
or trade. Phlx XL participants that have not submitted opening quotes
will then submit their opening quotes, and Phlx XL participants that
have submitted opening quotes may submit revised opening quotes;
thereafter the system will disseminate an updated Imbalance Notice
every five seconds (or such shorter period as determined by the Options
Committee and disseminated to membership via Exchange Circular) until
the series is open. If no imbalance exists, no Imbalance Notice will be
sent, and the system will establish an opening price as described in
paragraph (c) below.
(c)-(d) No change.
(e) The system will not open a series if one of the following
conditions is met:
(i) there is no quote from the specialist or a [100] 99%
participant;
(ii)-(iii) No change.
(f)-(j) No change.
Commentary: No change.
* * * * *
Firm Quotations
Rule 1082. (a) (i) No change.
(ii) (A)-(B) No change.
(C)(1) If an SQT or RSQT's (other than a Directed SQT or RSQT)
quotation size in a particular series in a Streaming Quote Option is
exhausted or removed by the Risk Monitor Mechanism, such SQT or RSQT's
quotation shall be deleted from the Exchange's disseminated quotation
until the time the SQT or RSQT revises his/her quotation.
(2) If the Exchange's disseminated size in a particular series in a
Streaming Quote Option is exhausted at that particular price level, and
no specialist, SQT or RSQT has revised their quotation immediately
following the exhaustion of the Exchange's disseminated size at such
price level, the Exchange shall automatically [disseminate the
specialist's most recent disseminated price prior to the time of such
exhaustion] provide two-sided quotes that comply with the Exchange's
rules concerning quote spread parameters on behalf of the specialist
until such time as the specialist revises the quotation, with a size of
one contract.
(iii)-(iv) No change.
(b)-(d) No change.
Commentary: No change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it had received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Phlx has prepared summaries, set forth in Sections
A, B, and C below, of the
[[Page 4628]]
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to provide Phlx XL
participants protection from the unreasonable risk of multiple nearly
simultaneous executions. The risk to Phlx XL participants is not
limited to a single series in an option issue; Phlx XL participants
have exposure in all series of a particular option issue, requiring
them to offset or hedge their overall position in an option issue.
Phlx XL participants submit proprietary electronic quotations in
options in which they are assigned based on proprietary pricing models
that rely on various factors such as the price and market volatility of
the underlying security. The Phlx XL participant's pricing model and
automated quotation system will continuously enter updated quotations
in all series of an option based on changes in the various factors
included in its pricing models. In addition to the Phlx XL
participant's own proprietary quoting system, the Risk Monitor
Mechanism would provide an additional tool to the Phlx XL participant
to help manage the risk associated with providing liquidity in a large
number of series across an option in which it is assigned.
Specialists trading on Phlx XL, together with SQTs and RSQTs that
receive Directed Orders \8\ are currently required to submit
continuous, two-sided quotations in 100% of the series in each option
in which they are assigned.\9\ SQTs and RSQTs that do not receive
Directed Orders are required to submit continuous, two-sided quotations
in 60% of the series in each option in which they are assigned.\10\
Phlx XL participants are thus exposed to the possibility of near-
simultaneous executions that can create large, unintended principal
positions that expose the Phlx XL participant to unnecessary market
risk. Consequently, Phlx XL participants may be more likely to widen
their quotations, quote less aggressively, and limit their disseminated
size in order to address these risks. The Risk Monitor Mechanism is
intended to address these concerns by assisting Phlx XL participants in
managing their market risk.
---------------------------------------------------------------------------
\8\ See Phlx Rule 1080(l).
\9\ See Phlx Rule 1014(b)(ii)(D). The proposed rule change would
reduce the percentage quoting requirement as described more fully
below.
\10\ Id.
---------------------------------------------------------------------------
Phlx XL Risk Monitor Mechanism
The Phlx XL Risk Monitor Mechanism would begin with a counting
program that would count the number of contracts traded in a particular
option by each Phlx XL participant within a specified time period
established by each Phlx XL participant (the ``specified time
period''). The specified time period would commence for an option when
a transaction occurs in any series in such option. The specified time
period may not exceed 15 seconds; Phlx XL participants may, however,
set the specified time period for less than 15 seconds.
The system would engage the Risk Monitor Mechanism in a particular
option when the counting program has determined that a Phlx XL
participant has traded a Specified Engagement Size (as defined below)
established by such Phlx XL participant during the specified time
period. When such Phlx XL participant has traded the Specified
Engagement Size during the specified time period, the Risk Monitor
Mechanism would automatically remove such Phlx XL participant's
quotations from the Exchange's disseminated quotation in all series of
the particular option until such Phlx XL participant submits a new,
revised quotation.
Specified Engagement Size. Each Phlx XL participant would establish
a Specified Engagement Size.\11\ When such Phlx XL participant has
traded the Specified Engagement Size during the specified time period,
the Risk Monitor Mechanism would automatically remove such Phlx XL
participant's quotations from the Exchange's disseminated quotation in
all series of the particular option.
---------------------------------------------------------------------------
\11\ A Phlx XL participant could establish the Specified
Engagement Size as 100% or greater of the number of contracts
executed in each series during the specified time period relative to
the disseminated size. For example, a Phlx XL participant could
establish the Specified Engagement Size as 200%, in which case the
Risk Monitor Mechanism would not be engaged until 200% of the number
of contracts in each series have been executed during the specified
time period relative to the disseminated size. A Phlx XL participant
could also establish the Specified Engagement Size as, for example,
120%, in which case the Risk Monitor Mechanism would not be engaged
until 120% of the number of contracts in each series have been
executed during the specified time period relative to the
disseminated size. In any event, however, a Phlx XL participant may
not establish a Specified Engagement Size that is less than 100%.
---------------------------------------------------------------------------
The Specified Engagement Size is determined as follows: For each
series in an option, the counting program would determine the
percentage that the number of contracts executed in that series
represents relative to the disseminated size in that series (the
``series percentage''). The counting program would then determine the
sum of the series percentages in the underlying option issue (the
``issue percentage''). Once the counting program determines that the
issue percentage equals or exceeds a percentage established by the Phlx
XL participant which may not be less than 100% (the ``Specified
Percentage''), the number of executed contracts in the option issue
equals the Specified Engagement Size.
For example, if a Phlx XL participant is quoting in four series of
a particular option issue, and sets its Specified Percentage at 100%,
the Specified Engagement Size would be determined as follows:
Example I
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 40 40
Series 2........................................................ 50 20 40
Series 3........................................................ 200 20 10
Series 4........................................................ 150 15 10
-----------------
Total....................................................... 500 95 100
----------------------------------------------------------------------------------------------------------------
[[Page 4629]]
In this example the Specified Engagement Size is 95 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
Example II
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 0 0
Series 2........................................................ 50 0 0
Series 3........................................................ 200 0 0
Series 4........................................................ 150 150 100
-----------------
Total....................................................... 500 150 100
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 150 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
If a Phlx XL participant is quoting in four series of a particular
option, and sets its Specified Percentage at 200%, the Specified
Engagement Size would be determined as follows:
Example III
----------------------------------------------------------------------------------------------------------------
Number of
Series Size contracts Percentage
executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 80 80
Series 2........................................................ 50 40 80
Series 3........................................................ 200 40 20
Series 4........................................................ 150 30 20
-----------------
Total....................................................... 500 190 200
----------------------------------------------------------------------------------------------------------------
In this example the Specified Engagement Size is 190 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 200%.
Offset on the Opposite Side of the Market. The Risk Monitor
Mechanism would calculate the number of contracts executed on one side
of the market during the specified time period, and offset that number
of contracts by the number of contracts executed on the opposite side
of the market during the specified time period. The purpose of this
provision is to account for the offset in risk of one option position
created by a position in the same option issue on the opposite side of
the market. Because the risk in such a situation is neutral, the
Exchange believes that Phlx XL participants should continue executing
contracts until the actual risk that is created by the Specified
Engagement Size is realized.
The Specified Engagement Size would thus be automatically offset by
a number of contracts that are executed on the opposite side of the
market in the same option issue during the specified time period (the
``Net Offset Specified Engagement Size''). The Risk Monitor Mechanism
would be engaged when the Net Offset Specified Engagement Size is for a
number of contracts executed among all series during the specified time
period that represents an issue percentage that is equal to or greater
than the specified percentage. For example, a Phlx XL participant that
buys calls and also sells calls or buys puts in the same option during
the specified time period would have a Net Offset Specified Engagement
Size as follows:
Example IV
----------------------------------------------------------------------------------------------------------------
Sell call/buy Net offset
Series Size Buy call put size Percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................ 100 60 20 40 40
Series 2........................ 50 100 80 20 40
Series 3........................ 200 150 130 20 10
Series 4........................ 150 75 60 15 10
-----------------
Total....................... 500 385 290 95 100
----------------------------------------------------------------------------------------------------------------
In this example, 675 contracts have been executed during the
specified time period (buy calls 385 + sell calls/buy puts 290). The
Net Offset Specified Engagement Size for each series is determined by
offsetting the number of contracts executed on the opposite side of the
market for each series during the specified time period. The Risk
Monitor Mechanism would be engaged once the Net Offset Specified
Engagement Size is executed for a net number of contracts among all
series during the specified time period that represents an issue
percentage that is equal to or greater than the specified percentage.
Firm Quotations. In order to remain consistent with the Exchange's
rules concerning Firm Quotations,\12\ the proposed rule change would
provide that any marketable orders, or quotes that are executable
against a Phlx XL participant's disseminated quotation,
[[Page 4630]]
that are received prior to the time the Risk Monitor Mechanism is
engaged would be automatically executed at the disseminated price up to
the Phlx XL participant's disseminated size, regardless of whether such
an execution results in executions in excess of the Phlx XL
participant's Specified Engagement Size. Therefore, it is possible for
a Phlx XL participant to execute a number of contracts that is greater
than the Specified Engagement Size before the Risk Monitor Mechanism
removes their quote from the Exchange's disseminated market.
---------------------------------------------------------------------------
\12\ See Phlx Rule 1082.
---------------------------------------------------------------------------
Further, the proposed rule change would establish that, in the
event that the specialist's quote is exhausted or removed by the Risk
Monitor Mechanism, and there are no other Phlx XL participants quoting
in the particular option, the system would automatically provide two-
sided quotes that comply with the Exchange's rules concerning quote
spread parameters on behalf of the specialist until such time as the
specialist revises the quotation. All quotations generated by the
Exchange on behalf of a specialist would be considered ``firm
quotations'' and shall be the obligation of the specialist. The
Exchange proposes conforming changes to Rule 1082 to reflect this
situation.
The purpose of this provision is to ensure that the Exchange
disseminates continuous quotations in all series traded on the
Exchange, even in situations where no Phlx XL participant is
disseminating its own quotations due to, for example, system
malfunctions. The Exchange believes that it should ``take control'' of
a Phlx XL participant's quotation only in limited circumstances (i.e.,
only when the Exchange's failure to do so would result in no
disseminated market from the Exchange), and that the Phlx XL
participants then quoting should determine the Exchange's disseminated
price and size.
The Exchange proposes to amend Phlx Rule 1014(b)(ii)(D) to reduce
the obligation of specialists and Phlx XL participants that receive
Directed Orders \13\ to quote continuous, two-sided markets in not less
than 100% of the series in each option in which they are assigned. The
new obligation would be to quote in 99% of such series. The purpose of
this proposal is to make the Exchange's rules concerning quoting
requirements consistent with the Risk Monitor Mechanism's functionality
(i.e., the removal of individual specialist and Directed SQT and RSQT
quotations from the Exchange's disseminated market). If the quoting
obligation were to remain at 100% for these particular Phlx XL
participants, a rule violation would occur each time the Risk Monitor
Mechanism removes their quotation. Thus, the Exchange proposes to
reduce this obligation so that removal of individual quotations does
not result in violations of Exchange rules.
---------------------------------------------------------------------------
\13\ See Phlx Rule 1080(l).
---------------------------------------------------------------------------
For consistency, the Exchange proposes conforming amendments to
Phlx Rule 1017, Openings in Options, to change references to ``100%
participants'' and re-name them ``99% participants.''
Re-Setting the Counting System. Finally, the proposed rule change
provides that the system would automatically reset the counting program
and commence a new specified time period when either: (i) a previous
counting period has expired and a transaction occurs in any series in
such option; or (ii) the Phlx XL participant refreshes his/her
quotation, in a series for which an order has been executed (thus
commencing the specified time period) prior to the expiration of the
specified time period.
The commencement of the specified time period is event-driven,
i.e., upon the execution of a transaction in a particular series in an
option. The system would only initiate a specified time period when
such an execution occurs. If there is no activity in an option, the
system would not repeatedly commence and calculate the expiration of a
new specified time period for such option unnecessarily. Once an
execution occurs, however, a specified time period would commence.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act,\14\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\15\ in particular, in that it is designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest, by assisting Phlx XL participants in managing their
risk through the Risk Monitor Mechanism.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2006-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-Phlx-2006-05. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (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, 100 F Street,
NE., Washington, DC 20549. Copies of such filing also will be available
for inspection and copying at the principal office of the Phlx. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available. All
submissions should refer to File Number SR-Phlx-2006-05 and should be
submitted on or before February 17, 2006.
[[Page 4631]]
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder, applicable to a national
securities exchange.\16\ In particular, the Commission believes that
the proposed rule change is consistent with Section 6(b)(5) of the
Act,\17\ which requires among other things, that the rules of the
Exchange are designed to promote just and equitable principles of
trade, to remove impediments to and perfect the mechanism of a free and
open market and a national market system, and, in general, to protect
investors and the public interest. The Commission notes that the
proposal does not alter the obligations of Phlx XL participants, except
for the fact that it will reduce specialists and Phlx XL participants
that receive directed orders continuous quoting obligation from 100% of
the series in each option in which it is assigned to 99% of the series
in each option in which it is assigned. The Commission notes that this
reduction should provide specialists and Phlx XL participants that
receive directed orders a brief amount of time to update their quotes
after the Risk Monitor Mechanism removes their quotes from the
Exchange's disseminated quotation. In addition, the Commission believes
that the proposed rule change should provide Phlx XL participants
assistance in effectively managing their quotations.
---------------------------------------------------------------------------
\16\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Phlx has requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after
publication of notice thereof in the Federal Register. The Commission
notes that similar proposals to provide protection from risk for market
makers have been approved for other options exchanges.\18\ The
Commission believes that granting accelerated approval of the proposal
should provide Phlx XL participants with similar protections from the
risk associated with an excessive number of near simultaneous
executions in a single options class. Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2) of the Act,\19\ for approving
the proposed rule change, as amended, prior to the thirtieth day after
the date of publication of notice thereof in the Federal Register.
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release Nos. 51049 (January 18,
2005), 70 FR 3756 (January 26, 2005) (SR-BSE-2004-52); 51050
(January 18, 2005), 70 FR 3758 (January 26, 2005) (SR-ISE-2004-31);
and 51740 (May 25, 2005), 70 FR 32686 (June 3, 2005) (SR-PCX-2005-
64).
\19\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-Phlx-2006-05) and Amendment
No. 1 thereto be, and hereby are, approved on an accelerated basis.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
---------------------------------------------------------------------------
\21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E6-1017 Filed 1-26-06; 8:45 am]
BILLING CODE 8010-01-P
