Notice: Self-Regulatory Organizations Proposed Rule Changes: Philadelphia Stock Exchange, Inc.

59184 Federal Register / Vol. 71, No.
194 / Friday, October 6, 2006 / Notices
VI. Conclusion September 22, 2006, the Exchange filed XLE will accept orders in NMS
It is therefore ordered, pursuant to Amendment No. 3 to the proposed rule Stocks 7 that are traded on the Exchange
Section 19(b)(2) of the Act,97 that the change.5 (which, as proposed, will include
proposed rule change (File No. SR– This order approves the proposed rule Nasdaq-listed securities) 8 from
NYSEArca–2006–59), as amended by change as amended by Amendment Nos. Exchange members and member
Amendment No. 1, be, and hereby is, 1 and 2. Simultaneously, the organizations, and their Sponsored
approved on an accelerated basis. Commission is providing notice of filing Participants and their Participant
of Amendment No. 3 and is granting Authorized Users (collectively, ‘‘XLE
For the Commission, by the Division of accelerated approval of Amendment No. Participants’’) and will display, route,
Market Regulation, pursuant to delegated 3. and execute those orders automatically
authority.98
pursuant to non-discretionary
Nancy M. Morris, II. Description
algorithms codified in the proposed
Secretary. The Exchange proposes to amend its Phlx Rules. Orders will be ranked on
[FR Doc. E6–16582 Filed 10–5–06; 8:45 am] rules to implement a new market XLE in price-time priority regardless of
BILLING CODE 8011–01–P structure and trading model for equity the identity of the entering XLE
securities. Specifically, the Exchange Participant, and executions will occur
proposes to adopt a fully-automated automatically and immediately upon
SECURITIES AND EXCHANGE equities trading system, referred to as order entry if trading interest is
COMMISSION ‘‘XLE,’’ through which automated available on the system. The Exchange
[Release No. 34–54538; File No. SR–Phlx– executions will occur within a central also will provide an optional routing
2006–43] matching system. With the introduction service for those orders eligible for
of this new automated, order-driven routing for which trading interest is not
Self-Regulatory Organizations; system, the Exchange no longer will present on XLE.9
Philadelphia Stock Exchange, Inc.; continue to operate a physical equities With its new equities trading
Order Approving a Proposed Rule trading floor, nor will it operate its platform, the Exchange no longer will
Change and Amendment Nos. 1 and 2 automated Philadelphia Stock Exchange accommodate equity specialists.
Thereto and Notice of Filing and Order Automated Communication and However, the Exchange proposes to
Granting Accelerated Approval to Execution (‘‘PACE’’) System through allow its member organizations to
Amendment No. 3 Thereto Relating to which Phlx member organizations register as Market Makers 10 on XLE, and
the Exchange’s New Equity Trading currently can send orders to the those Market Makers could then choose
System, XLE Exchange electronically.6 to register in one or more securities that
September 28, 2006. are traded on XLE. Since Market Maker
dated September 5, 2006; and Letter from Joseph D.
Carapico, PennMont Securities to C. Robert Paul, registration will be optional, an NMS
I. Introduction Chief Counsel, Phlx, dated September 13, 2006 Stock may trade on XLE without a
On July 13, 2006, the Philadelphia (‘‘Second PennMont Letter’’). See also Letter from Market Maker. Once registered in a
C. Robert Paul, Executive Vice President and particular security, a Market Maker will
Stock Exchange, Inc. (‘‘Phlx’’ or General Counsel, Phlx, to Nancy M. Morris,
‘‘Exchange’’) filed with the Securities Secretary, Commission, dated September 20, 2006 be required to maintain continuous
and Exchange Commission (responding to the two comment letters) (‘‘Phlx Limit Orders on both sides of the market
(‘‘Commission’’), pursuant to section Response Letter’’). in that security during the Core Session
5 The text of Amendment No. 3 is available on
19(b)(1) of the Securities Exchange Act
Phlx’s Web site (http://www.phlx.com), at the
of 1934 (‘‘Act’’) 1 and Rule 19b–4 principal office of Phlx, and at the Commission’s also proposes to delete various outdated Phlx Rules
thereunder,2 a proposed rule change to Public Reference Room. In Amendment No. 3, the that relate, for example, to the delivery and
settlement of securities. The Commission notes that
amend its rules to implement a new Exchange made several technical, non-substantive
upon approval, unless otherwise specified, the
trading model for equity securities that changes to the proposed rule text. In addition, the
Exchange added text to proposed Phlx Rule 188 proposed rule changes will be effective, but not
provides the opportunity for automated regarding trade identifiers; relocated the self-help operative, until the Exchange discontinues its
executions to occur within a central provision from proposed Phlx Rule 1(cc) to physical equities trading floor and commences
operation of XLE, as described in Section II.
matching system accessible by Exchange proposed Phlx Rule 185(h); added text to proposed
7 See proposed Phlx Rule 1(t). See also 17 CFR
members and member organizations and Phlx Rule 185(b)(3) to clarify the operation of
Pegged Orders; and amended the terminology in 242.600(b)(47). The term ‘‘NMS Stock’’ means any
their Sponsored Participants, as defined proposed Phlx Rule 163 from ‘‘Exchange Official’’ NMS security other than an option. ‘‘NMS security’’
below. On August 14, 2006, the to ‘‘Equity Exchange Official.’’ Further, the is defined in Rule 600(b)(46) of Regulation NMS
Exchange filed Amendment No. 1 to the Exchange proposes to allow floor members and under the Act to mean any security or class of
member organizations who become XLE securities for which transaction reports are
proposed rule change. On August 16, collected, processed, and made available pursuant
participants to remain in their current space on the
2006, the Exchange filed Amendment Exchange’s floor, paying the applicable space rental to an effective transaction reporting plan. See 17
No. 2 to the proposed rule change. The fees, for a short time while they transition to XLE. CFR 242.600(b)(46).
8 Unlike its current equities floor, where Phlx
proposed rule change, as amended, was The Exchange also announced its intent to request
relief from the applicable provisions of the ITS Plan does not trade Nasdaq-listed securities, the
published for comment in the Federal Exchange proposes to allow XLE to trade Nasdaq-
to allow the Exchange to implement ISO Orders and
Register on August 25, 2006.3 The IOC Cross Orders marked ISO, as well as orders listed securities, in addition to securities listed on
Commission received two comment marked ‘‘Benchmark,’’ before the February 5, 2007 other national securities exchanges, pursuant to
letters on the proposal, as amended.4 On ‘‘Trading Phase Date’’ for Regulation NMS (i.e., the unlisted trading privileges.
operative date for Regulation NMS-compliant 9 The Routing Agreement will allow the routing
97 Id. systems that intend to qualify their quotations for broker-dealer to act for the XLE Participant if the
trade-through protection under Rule 611 of XLE Participant or its Sponsored Participant enters
cprice-sewell on PROD1PC66 with NOTICES
98 17 CFR 200.30–3(a)(12). Regulation NMS during the Pilot Stocks Phase and an order-type that is routable. As proposed, no XLE
1 15 U.S.C. 78s(b)(1). All Stocks Phase). Participant will be able to enter a Limit Order or
2 17 CFR 240.19b–4. 6 Since the Exchange proposes to operate XLE in Reserve Order without ‘‘Do Not Route’’ instructions,
3 See Securities Exchange Act Release No. 54329 or a Single Sweep Order, unless the XLE Participant
lieu of trading on its physical equities trading floor,
(August 17, 2006), 71 FR 50482 (August 25, 2006) in addition to proposing new and amended rules to or the XLE Participant’s Sponsoring Member
(‘‘Notice’’). implement XLE, the Exchange also proposes to Organization has entered into a Routing Agreement.
4 See Letter from Joseph D. Carapico, PennMont modify or delete several Phlx By-laws and various See proposed Phlx Rule 181.
Securities to C. Robert Paul, Chief Counsel, Phlx, Phlx Rules that relate to floor trading. The Exchange 10 See proposed Phlx Rule 1(l).
VerDate Aug<31>2005 14:52 Oct 05, 2006 Jkt 211001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 E:\FR\FM\06OCN1.SGM 06OCN1
Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Notices 59185
(normally 9:30 a.m. to 4 p.m., ISOs; 20 and (3) designated as Pegged elimination of specialists.33
Philadelphia time). Orders.21 In addition, XLE will accept Accordingly, the commenter proposed
The Exchange has proposed a number certain two-sided cross orders, that Phlx implement a hybrid system
of provisions that are designed including Mid-Point Cross Orders,22 similar to the one being implemented by
specifically to enable XLE to comply IOC Cross Orders,23 Benchmark the New York Stock Exchange.34
with Regulation NMS under the Act Orders,24 Qualified Contingent The Exchange submitted a response
(‘‘Regulation NMS’’) 11 including, for Trades,25 and two-sided orders that are letter to the Commission addressing the
example, proposed Phlx Rule 186 marked for ‘‘non-regular way’’ commenter’s concerns.35 In particular,
relating to locking or crossing settlement.26 the Exchange noted that it complied
quotations in NMS Stocks. Further, the The Exchange intends to roll-out XLE with the By-laws of the Exchange as
Exchange intends to operate XLE as an in several phases (within each phase, well as applicable securities laws and
‘‘automated trading center’’ for purposes the Exchange will start first with NYSE- regulations in submitting its proposed
of Regulation NMS and display and Amex-listed securities, then rule change to the Commission on Form
‘‘automated quotations’’ (as defined by Nasdaq-listed securities), beginning 19b–4.36 The Exchange also addressed
Regulation NMS) at all times except in with: (1) Two-sided orders only for the commenter’s concerns regarding the
the event that a systems malfunction approximately one week; (2) then one- proposed discontinuance of equity
renders XLE incapable of displaying sided orders, all of which will be specialists on the Exchange by noting
automated quotations.12 In addition, deemed ‘‘Do Not Route,’’ incoming that a national securities exchange is
once the February 5, 2007 Trading linkage orders routed to the Exchange permitted, but not required, to provide
Phase Date for Regulation NMS has been through the new NMS Linkage, and all for specialists on its marketplace,37 and
reached, XLE will permit orders to be Intermarket Trading System (‘‘ITS’’) that the Act does not mandate a
marked as intermarket sweep orders commitments; and finally (3) routing particular market structure.38 The
(‘‘ISOs’’) pursuant to Regulation NMS functionality.27 In addition, the Exchange also noted that other national
and will also permit incoming ISOs Exchange has stated that it may roll-out securities exchanges already operate
from other trading centers.13 Reserve Orders later than it rolls out electronic markets without specialists
In its filing, the Exchange proposed other one-sided orders.28 The Exchange (e.g., NYSE Arca), and several
new rules and revisions to its existing anticipates that the roll-out will be exchanges are currently proposing to
rules in order to accommodate XLE. complete within a two month period, adopt market structures that feature
These rules, which are examined in and it intends to publish more precise electronic platforms without
more detail in Section IV, below, relate information regarding the roll-out via specialists.39 Finally, the Exchange
to, among other things: Hours of Exchange circular.29 opined that any effect on a member’s tax
business; order entry and execution status is collateral to the legality and
increments; registration of market III. Comments Received
operation of the proposed rule change.40
makers; obligations of market maker The Commission received two The Commission agrees with the
authorized traders; registration of comment letters from one commenter.30 statement in the Phlx Response Letter
market makers in a security; obligations The commenter, PennMont Securities, that the Act does not impose upon or
of market makers; access; order entry; which currently operates as an equities otherwise mandate any particular
order marking; trading sessions specialist on Phlx, objected to the market structure for a national securities
customer disclosure; order ranking and Exchange’s proposal to eliminate equity exchange. While an exchange may
display; orders and order execution; odd specialists from the new Phlx equities choose to operate a market that provides
and mixed lots; trade execution and platform and criticized the process by for specialist participation, it also is free
reporting; clearance and settlement and which the Exchange considered its
anonymity; clearly erroneous to propose and adopt another market
proposed rule change. In addition, the structure as long as such structure and
executions; trading halts; clearance and commenter contended that eliminating
settlement; and short sales. governing rules comport with the Act
equity specialists would negatively and the rules and regulations
In particular, XLE will accept several affect the prospects for its business,31
new order types.14 In addition to thereunder. In addition, the
and inferred that such elimination Commission notes that issues for a
accepting market orders,15 XLE will would adversely impact specific
accept certain one-sided limited price particular market participant that arise
benefits for which it currently is eligible under the Internal Revenue Code as a
orders that are: (1) Subject to the Quote under the Internal Revenue Code.32
Management Instructions (‘‘QMI’’) of result of the Exchange’s proposal are
Further, the commenter opined that past outside of the Commission’s
either ‘‘Ship and Quote’’ 16 or ‘‘Post cases of abuse of trading privileges on
Order and Participate’’; 17 (2) executed jurisdiction. As noted below, the
the Exchange by specialists can be Commission believes that the
immediately on XLE, including addressed through increased oversight
Immediate-or-Cancel (‘‘IOC’’) orders,18 Exchange’s proposed XLE system and
by the Exchange, rather than the governing rules meet the requirements
Single Sweep Orders (‘‘SSO’’),19 and
20 See
of the Act.
proposed Phlx Rule 185(b)(2)(C).
11 17 CFR 242.600 et seq. 21 See proposed Phlx Rule 185(b)(3).
12 See 33 See id. at 2.
proposed Phlx Rule 160. The Exchange 22 See proposed Phlx Rule 185(c)(1).
34 See id.
states that it will halt trading and therefore not 23 See proposed Phlx Rule 185(c)(2).
display any quotations in the event of such a 35 See Phlx Response Letter, supra note 4.
24 See proposed Phlx Rule 185(c)(3).
systems malfunction. See Notice, supra note 3, 71 36 See id. at 1.
25 See id.
FR at 50483. 37 See 15 U.S.C. 78k(b).
13 See 17 CFR 242.611(b)(5). See also proposed 26 See proposed Phlx Rule 185(c)(4).
38 See Phlx Response Letter, supra note 4, at 2.

Phlx Rule 185(b)(2)(C). 27 See Notice, supra note 3, 71 FR at 50483.
39 See, e.g., Securities Exchange Act Release Nos.
14 See proposed Phlx Rule 185. 28 See Notice, supra note 3, 71 FR at 50483.
54291 (August 8, 2006), 71 FR 47264 (August 16,
15 See proposed Phlx Rule 185(a). 29 See id.
2006) (File No. SR–BSE–2006–30); and 54301
16 See proposed Phlx Rule 185(b)(1)(C)(i). 30 See supra note 4 (citing comment letters).
(August 10, 2006), 71 FR 47836 (August 18, 2006)
17 See proposed Phlx Rule 185(b)(1)(C)(ii). 31 See Second PennMont Letter, supra note 4, at (File No. SR–CHX–2006–05).
18 See proposed Phlx Rule 185(b)(2)(A). 1. 40 See Phlx Response Letter, supra note 4, at 2–
19 See proposed Phlx Rule 185(b)(2)(B). 32 See id. at 1. 3.
59186 Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Notices
IV. Discussion and Commission Orders, IOC Orders, SSO Orders, ISO IOC Orders. IOC Orders will be
Findings Orders, and Pegged Orders), and Two- executed immediately and
After careful review and Sided Orders (including Mid-Point automatically against existing orders on
consideration of the comments, the Cross Orders, IOC Cross Orders, Non- XLE up to and including the price of the
Commission finds, for the reasons Regular Way Cross Orders, and IOC best away Protected Quotation, unless
discussed more fully below, that the Cross Orders marked ‘‘Benchmark’’ or the market is crossed (i.e., the Protected
proposed rule change, as amended, is ‘‘Qualified Contingent Trade’’). Existing Bid is priced higher than the Protected
consistent with the requirements of the orders on XLE will be ranked according Offer), in which case XLE will ignore
Act and the rules and regulations to price-time priority. An existing away Protected Quotations.50 IOC
thereunder applicable to a national order’s displayable price will be Orders will not be eligible for routing to
securities exchange 41 and, in particular, determined by XLE based on its limit another market center. Accordingly, the
the requirements of section 6 of the price or pegging instructions, its portion of an IOC Order that does not
Act 42 and the rules and regulations routability and QMI, and its short sale get executed on XLE will be
status. immediately and automatically
thereunder. The Commission finds that
cancelled. Any XLE Participant may use
the proposed rule change, as amended, 1. Market Orders an IOC Order to immediately and
is consistent with section 6(b)(5) of the
A Market Order on XLE is an order to automatically execute against the full
Act 43 in that it is designed to prevent
buy or sell a stated amount of a security size of the displayed quotation on XLE
fraudulent and manipulative acts and
that is to be executed immediately and (including any undisplayed or reserve
practices, to promote just and equitable
automatically against existing orders on size available at the price of the
principles of trade, to remove
XLE up to and including the price of the displayed quotation). As with all
impediments to and perfect the
best away Protected Quotation.46 Any executions on XLE, XLE will
mechanism of a free and open market
unexecuted shares of a Market Order immediately and automatically transmit
and a national market system, and, in a response to the XLE Participant who
general, to protect investors and the will be automatically cancelled. Further,
XLE will cancel a Market Order when sent the IOC Order indicating the action
public interest. taken with respect to the IOC Order.
In addition, the Commission finds the market is crossed (i.e., when the
Protected Bid is priced higher than the Additionally, XLE will immediately and
that the proposal is consistent with
Protected Offer). In other words, a automatically update its bid/offer as a
section 11A 44 of the Act in general, and
Market Order on XLE is executable only result of the execution.
furthers the objectives of section SSOs. SSOs are executed immediately
11A(a)(1)(C) of the Act,45 in particular, on XLE and is designed not to trade-
through the best away Protected and automatically against existing
including: (1) The economically orders on XLE and/or away Protected
efficient execution of securities Quotation.
Quotations, up to and including the
transactions; (2) fair competition among 2. Limited Price Orders order’s limit price.51 Any shares of the
brokers and dealers, among exchange SSO that are not immediately executed
markets, and between exchange markets XLE also is designed to accept a
number of limited price orders, on XLE or on an away market will be
and markets other than exchange cancelled.
markets; (3) the availability to brokers, including: (1) Limited price orders
subject to QMI; (2) limited price orders ISOs. ISOs are executed immediately
dealers, and investors of information and automatically against existing
with respects to quotations for and executed immediately on XLE; and (3)
orders on XLE at their displayable price,
transactions in securities; (4) the Pegged Orders. XLE Participants will be
and the shares of the ISO not so
practicability of brokers executing able to designate during which
executed will be cancelled.52 An ISO
investors’ orders in the best market; and contiguous XLE trading session(s) their
will be executed on XLE without regard
(5) an opportunity for investors’ orders limited price orders will be eligible for
to any away Protected Quotations.
to be executed without the participant execution. Pegged Orders. Pegged Orders are
of a dealer. Limit and Reserve Orders. Limit round lot or mixed lot limited price
The discussion below addresses more Orders are one-sided orders to buy or orders to buy or sell, only on XLE, a
fully the Exchange’s proposal to replace sell a stated amount of a security at a stated amount of a security at a display
its current equities trading model with specified price or better.47 Reserve price set to track (up, down, or at) the
a new electronic trading system that Orders are one-sided orders to buy or current best Protected Bids or Offers on
will provide for price-time priority sell a stated amount of a security at a either side of the market in an amount
executions and to adopt new rules and specified price or better with at least a specified by the XLE Participant in an
revisions to its existing rules in round lot portion of the size that is increment permitted by proposed Phlx
connection with its proposed new displayable and with at least a round lot Rule 125.53 A Pegged Order must
market structure. portion of the size that is not
displayable by XLE, provided that the 50 See proposed Phlx Rule 185(b)(2)(A).
A. Order Types portion of the Reserve Order that is not 51 See proposed Phlx Rule 185(b)(2)(B).
XLE will accept several order types displayable shall have the same price as 52 See proposed Phlx Rule 185(b)(2)(C). The
from XLE Participants. Specifically, XLE the portion that is displayable.48 Limit Exchange intends that the ISO Order be equivalent
to the intermarket sweep order defined in Rule
will accept the following order types: Orders and Reserve Orders will be 600(b)(30) of Regulation NMS. 17 CFR
Market Orders, Limited Priced Orders routable unless otherwise marked by a 242.600(b)(30). XLE Participants entering an ISO
(including Limit Orders, Reserve XLE Participant.49 must ensure that the ISO meets the requirements of
Rule 600(b)(30) of Regulation NMS. 17 CFR
41 The Commission has considered the proposed

242.600(b)(30). See also Notice, supra note 3, 71 FR
46 See proposed Phlx Rule 185(a). See also
at 50485 (note 62).
rule’s impact on efficiency, competition and capital proposed Phlx Rule 1(cc) (defining Protected Bid, 53 See proposed Phlx Rule 185(b)(3). The display
formation. 15 U.S.C. 78c(f). Offer or Quotation).
42 15 U.S.C. 78f.
price will not be permitted to lock or cross the
47 See proposed Phlx Rule 185(b)(1)(A).
market in a manner that would violate proposed
43 15 U.S.C. 78f(b)(5). 48 See proposed Phlx Rule 185(b)(1)(B).
Phlx Rule 186. See id. See also Amendment No. 3,
44 15 U.S.C. 78k–1. 49 See proposed Phlx Rule 185(b)(1)(A), (B), and supra note 5 (clarifying the definition of Pegged
45 15 U.S.C. 78k–1(a)(1)(C). (C). Order).
consist of at least a round lot portion ensuring that customer priority Participants be able to access XLE
that is displayable and may include at principles are upheld. Further, the through an Exchange electronic
least a round lot portion that is not proposed features of XLE are designed interface by means of their own
displayable by XLE, provided that the to allow new opportunities for orders to communication lines or through lines
portion of the Pegged Order that is not interact, thereby promoting efficiency of established by service providers in the
displayable shall have the same price as executions. business of maintaining connectivity in
the portion that is displayable . the securities marketplace. In addition,
B. Order Delivery, Display, and
XLE Participants may access XLE for the
3. Two-Sided Orders Interaction
entry of two-sided orders through
XLE will accept several types of two- Trading Sessions. As proposed, XLE technology provided by the Exchange.
sided cross orders, including Mid-Point will be open to accept orders for three Finally, to the extent that the Exchange
Cross Orders and IOC Cross Orders. different trading sessions beginning at 8 participates in the ITS Plan or any other
Two-sided orders involve instructions a.m. Eastern time and continuing until linkage plan for NMS Stocks, ITS
to match immediately and automatically 6 p.m., except during trading halts, commitments and other intermarket
on XLE an identified buy-side order every trading day unless otherwise orders can be sent to XLE through these
with an identified sell-side order.54 declared by the Exchange.57 The Pre linkages. The Commission believes that
Mid-Point Cross Orders are two-sided Market Session will begin at 8 a.m., and the Exchange’s proposed means for
orders that execute, in their entirety, at will run until the start of the Core providing connectivity to XLE are
the midpoint of the Protected National Session, typically at 9:30 a.m. The Core reasonable and consistent with the Act.
Best Bid/Offer (‘‘NBBO’’), unless the Session, which will end at 4 p.m., will Under proposed Phlx Rule 181, XLE
Protected Bid is higher than the be XLE’s ‘‘regular trading hours,’’ as Participants will be allowed to enter any
Protected Offer, in which case the Mid- defined in Rule 600(b)(64) of Regulation type of order available on XLE provided,
Point Cross Order will be cancelled.55 NMS.58 The Post Market Session will however, that no XLE Participant may
The execution process for two-sided run from the end of the Core Session enter a Limit Order or Reserve Order
orders and the circumstances under until 6 p.m. XLE Participants may without ‘‘Do Not Route’’ instructions, or
which XLE will cancel a Mid-Point designate during which contiguous XLE an SSO, unless the XLE Participant or
Cross Order (when the Protected NBBO trading session(s) a Limit, Reserve, or the XLE Participant’s Sponsoring
is locked) or an IOC Cross Order are Pegged Order is eligible for execution.59 Member Organization has entered into a
discussed below in Section IV.C. Since XLE will not feature any Routing Agreement.60 The Routing
XLE also will accept two-sided cross opening or closing auctions or rotations Agreement between the Exchange, the
orders for ‘‘non-regular way at the beginning of, during, or at the end Exchange’s routing broker-dealer and
settlement.’’ 56 A non-regular way cross of any of these sessions, XLE will only the XLE Participant or the XLE
is a two-sided order that, if marked for accept orders when it is open for trading Participant’s Sponsoring Member
non-regular way settlement, may and can immediately process those Organization will allow the routing
execute at any price, without regard to orders for execution, routing, or display, broker-dealer to act for the XLE
the Protected NBBO or any other orders as applicable. At the end of the trading Participant if the XLE Participant or its
on XLE, provided that Mid-Point Cross day, and in the event of an intraday Sponsored Participant enters an order
Orders marked for non-regular way trading halt, XLE will cancel all existing that is routable. The Commission
settlement will be cancelled when the orders so that when trading begins believes that Phlx’s proposed Rule 181
Protected Bid is priced higher than the again, either the next day or after the is appropriate and consistent with the
Protected Offer. halt is lifted, there are no existing orders Act.
The Commission finds that the that could impermissibly lock or cross Order Display. XLE will be an order-
Exchange’s proposed rules relating to the market. The Commission believes driven system where automated
order types are designed to promote just that the proposed rule regarding trading executions in NMS Stocks can occur
and equitable principles of trade, sessions is reasonable and consistent within a centralized matching system
remove impediments to and perfect the with the Act. In particular, the without the participation of a specialist.
mechanism of a free and open market Commission notes that a XLE Orders, or portions thereof, that are not
and a national market system, and are Participant will be required to disclose immediately matched, routed to another
not designed to permit unfair the risks of pre-market and post-market market center, or cancelled, will be
discrimination between customers, session trading to its customers, and eligible for posting on XLE. Once
brokers, or dealers. In particular, the that existing orders in XLE will be displayed on XLE, such orders will be
Commission believes that the cancelled when trading stops so as to eligible to be executed against any
Exchange’s proposed SSO and ISO not lock or cross the market when incoming orders.
orders are designed, among other things, trading resumes. The Exchange has proposed two
to meet the requirements of Regulation Access to XLE and Order Delivery. levels of order display. The first level,
NMS, and to perfect the mechanism of Phlx has proposed that all XLE which will be provided to the
a free and open market and a national appropriate market data reporting plans
57 See proposed Phlx Rule 101.
market system and to protect investors for dissemination, will include the best-
58 17 CFR 242.600(b)(64).
and the public interest, and thus, are 59 See proposed Phlx Rule 185(b)(1)(A)–(B) and
ranked displayed orders to buy and sell
consistent with the requirements of the (b)(3). Before accepting an order from a non-XLE
on XLE, as well as the aggregated size
Act. In addition, the Commission Participant for execution in the Pre Market or Post of those orders (i.e., the top of the XLE
believes that the proposed XLE order Market Session, a XLE Participant will be required book). The second level of display,
to make certain risk disclosures to the non-XLE which will be available to any person
types are designed to provide investors Participant. See proposed Phlx Rule 183. The
with flexibility in the display and disclosure notes, among other things, that trading subject to the payment of any applicable
execution of their orders, while still outside of ‘‘regular’’ trading hours may involve fees, will feature a depth-of-book feed
material trading risks, including the possibility of displaying all orders on XLE, except for
lower liquidity, high volatility, changing prices,
54 See proposed Phlx Rule 185(c). unlinked markets, an exaggerated effect from news
the undisplayed reserve portions of
55 See proposed Phlx Rule 185(c)(1). announcements, wider spreads and any other
56 See proposed Rule 185(c)(4). relevant risk. 60 See proposed Phlx Rule 181.
Reserve Orders. All orders will be including proposed Phlx Rule 185, to trading resumes.74 The Commission
displayed on an anonymous basis.61 prevent trade-throughs of Protected believes that the proposed trade halt
The Commission believes that the Quotations.64 In addition, XLE will rule is consistent with the Act,
proposed rules regarding order display make outbound routing available for including the protection of investors
on XLE are reasonable and consistent those orders that are required to be and the public interest.
with the Act and are designed to routed.65 Clearly Erroneous Executions. The
provide investors with timely and The Exchange also intends to take Exchange’s proposed Rule 163
accurate information regarding trading advantage of certain exceptions to Rule governing clearly erroneous executions
interest on XLE. 611 of Regulation NMS, including the will allow the Exchange to review a
Locked and Crossed Markets. In most ‘‘self-help’’ exception.66 In addition, transaction when there is an obvious
cases, XLE will not accept and display Phlx has proposed that the following error in any term, such as price, number
an order that would lock or cross an orders be allowed to trade-through an of shares or other unit of trading, or
away Protected Quotation disseminated away Protected Quotation: (1) Two- identification of the security.75 The
pursuant to an effective national market sided orders for non-regular way proposed rule sets forth formal
system plan (i.e., an order that would settlement ; 67 (2) when a Protected Bid procedures for use by XLE Participants
improperly lock or cross the ITS best is priced higher than a Protected Offer, in requesting a review of a transaction,
bid or offer, or, upon the February 5, Limit, Reserve, IOC, and IOC Cross as well as the procedures governing the
2007 Trading Phase Date for Regulation Orders; 68 (3) incoming ISO orders; 69 (4) Exchange’s review of such transactions
NMS, if display of the order would IOC Cross Orders that are marked as and specific means for market
constitute a locking or crossing participants to appeal decisions made
‘‘Benchmark’’; 70 (5) IOC Cross Orders
quotation). Further, consistent with by an Exchange Official. In addition, the
that are marked as ‘‘Qualified
Regulation NMS, the Exchange has Exchange Official may, on his or her
Contingent Trades’’; 71 and (6) orders
proposed a rule that will require its own motion, review transactions on
that are accompanied by the
members to reasonably avoid displaying XLE that arose during any disruption or
simultaneous routing of an intermarket
quotations that would lock or cross a malfunction in the use or operation of
sweep order to execute against the full
Protected Quotation (unless an any electronic communications or
displayed size of that Protected
applicable exemption applies), and also trading facilities of the Phlx, or
Quotation.72 The Commission believes
will prohibit members from engaging in extraordinary market conditions or
that the proposed Phlx Rules governing
a pattern or practice of displaying any other circumstances in which the
such quotations.62 Pursuant to proposed order protection on XLE, including nullification or modification of
Phlx Rule 186, XLE will be allowed to proposed Phlx Rule 185, are appropriate transactions may be necessary for the
lock or cross an away Protected and consistent with the Act and the maintenance of a fair and orderly
Quotation, however, when the market is requirements of Regulation NMS. market or the protection of investors
crossed. Additionally, XLE will be Trading Halts. In addition to current and the public interest.76 In addition,
allowed to lock or cross an away Phlx rules governing the halting of XLE will contain a mechanism to
Protected Quotation if XLE first routes trading,73 proposed Phlx Rule 164(a) prevent the entry of potentially
an order to that away Protected will allow the Chairman and Chief erroneous orders. Proposed Phlx Rule
Quotation (and all better-priced Executive Officer of the Exchange or his 185(d) specifies that XLE will reject an
quotations) for the full displayed size. designee to suspend trading, for a order if its price would cross the best
Finally, when the market is locked, and period of no longer than two days Protected Bid or Offer by 20% or
XLE is disseminating an order equal to (unless extended by the Exchange’s more.77 The Commission believes that
either the best Protected Bid or best Board of Governors), in any and all proposed Phlx Rule 163 is consistent
Protected Offer, then XLE may continue securities traded on XLE whenever in with the Act and provides for a fair,
to display new orders at the same price his or his designee’s opinion such transparent, and reasonable process in
of the order that it is disseminating. The suspension would be in the public which XLE Participants can seek
Exchange has requested that its interest. If trading in one or more correction of clearly erroneous
proposed Rule 186 not become effective securities is halted, all orders in those transactions. The Commission believes
until the February 5, 2007 Trading securities will be cancelled and XLE that proposed Phlx Rule 185 is
Phase Date for Regulation NMS.63 will not accept any new orders until consistent with the Act, and the
The Commission believes that the Commission notes that this proposed
proposed rule regarding locking and 64 See Notice, supra note 3, 71 FR at 50489. rule is similar to the rule of another
crossing the market is appropriate and 65 See proposed Phlx Rule 185(g). exchange that was approved by the
consistent with the Act and the 66 See infra Section IV.J. (Compliance with
Commission.78
Regulation NMS and Transition to XLE). Short Sales. To allow XLE to treat sale
requirements of Regulation NMS. 67 See proposed Phlx Rule 185(c)(4).
Further, the Commission believes that 68 See 17 CFR 242.611(b)(4). See also proposed
orders properly under Rule 10a–1 under
delaying the operative date of proposed Phlx Rules 185(b)(1)(A), (b)(1)(B), (b)(2)(A), and the Act,79 XLE Participants will be
Phlx Rule 186 will allow the Exchange (c)(2), respectively.
74 See proposed Phlx Rule 164(b).
and its members to coordinate their 69 See 17 CFR 242.611(b)(5). See also proposed
compliance with the requirements of Phlx Rule 185(b)(2)(C). 75 See proposed Phlx Rule 163.
70 See 17 CFR 242.611(b)(7). See also proposed 76 See proposed Phlx Rule 163(d).
Rule 610 of Regulation NMS, while Phlx Rule 185(c)(3). 77 In the case of an order priced under $1.00, XLE
ensuring that the Exchange complies 71 See proposed Phlx Rule 185(c)(3). See also will reject such order if it crosses the best Protected
with the applicable ITS requirements so Securities Exchange Act Release No. 54389 (August Bid or Offer by $0.20 or more. See proposed Phlx
long as they remain in effect. 31, 2006), 71 FR 52829 (September 7, 2006) (order Rule 185(d).
Order Protection. The Exchange states granting an exemption for Qualified Contingent 78 See Securities Exchange Act Release No. 53233
Trades from Rule 611(a) of Regulation NMS). (February 6, 2006), 71 FR 7100 (February 10, 2006)
that it has designed its XLE system, 72 See 17 CFR 242.600(b)(30) and 17 CFR (File No. SR–NASD–2006–019) (notice of filing and
242.611(b)(6). immediate effectiveness of proposed rule change to
61 See infra Section IV.G. (Anonymity). 73 See, e.g., Phlx Rules 133 (Trading Halts Due to establish Nasdaq’s uniform warning and rejection
62 See proposed Phlx Rule 186(b) and (d). parameters for orders that cross the best bid/offer).
Extraordinary Market Volatility) and 136 (Trading
63 See Notice, supra note 3, 71 FR at 50489. Halts in Certain Exchange Traded Funds). 79 17 CFR 240.10a–1.
required to mark all sell orders (and the round-lot orders. Accordingly, all displayable price, and route IOC ISO
sell side of a two-sided order) with the incoming orders, except for two-sided orders to any away Protected
proper designation of ‘‘long,’’ ‘‘short,’’ orders and ITS commitments,86 will be Quotations, up to and including the
or ‘‘short-exempt’’ pursuant to Rule eligible for execution against existing order’s limit price.90 Any remaining
200(g) of Regulation SHO.80 orders on XLE regardless of the order shares will be displayable on XLE at the
Specifically, XLE will not effect a sell size of the existing orders. order’s limit price.
order or sale of any security, except As discussed above, proposed Phlx Pursuant to a POP instruction, XLE
Nasdaq Global Market and Nasdaq Rule 185 sets forth the various order will execute immediately and
Capital Market securities, unless such types that will be accepted by XLE. The automatically against existing orders in
sell order or sale is effected in proposed order execution parameters of XLE at their displayable price up to and
compliance with Rule 10a–1. XLE can, the various order types are discussed including the price of the best away
however, effect sell orders and sales of below.87 Protected Quotation, and route IOC ISO
all Nasdaq securities without regard to orders to the best away Protected
1. One-Sided Orders
any short sale price test.81 The Quotations. After XLE receives
Commission believes that the Market Orders. Market Orders will be responses from away markets, XLE will
Exchange’s proposed rule governing executed immediately and continue to route IOC ISO orders to
short sales, including the order marking automatically against existing orders on away orders priced at the best away
requirement, is consistent with the Act XLE at their displayable price up to and Protected Quotation until the incoming
and conforms to the requirements of including the price of the best away order is fully executed or its limit price
Regulation SHO. Protected Quotation. Any unexecuted is reached. Further, while it is routing
shares of a Market Order will be IOC ISO orders, XLE also will display
C. Priority of Orders and Order automatically cancelled. Further, XLE any unexecuted and unrouted shares of
Execution will cancel Market Orders if the the incoming order on XLE at $.01 away
Proposed Phlx Rules 184 and 185 set Protected NBBO is crossed (i.e., when from the best Protected Offer (in the
forth the priority and execution the Protected Bid is priced higher than case of an incoming order to buy) or Bid
parameters of XLE. Each incoming the Protected Offer). (in the case of an incoming order to
order, except certain two-sided orders, Limited Price Orders. XLE also is sell).91
will execute against existing orders on designed to accept a number of limited Limited Price Orders Subject to
XLE at the existing order’s displayable price orders, including: (1) Limited Immediate Execution. Limit Orders and
price, in sequence of the existing order’s price orders subject to QMI; (2) limited Reserve Orders may be marked ‘‘Do Not
ranking, unless it is routed away for price orders to be executed immediately Route,’’ in which case they will be
execution.82 An existing order’s on XLE; and (3) Pegged Orders. XLE immediately and automatically
displayable price will be determined by Participants will be able to designate executed against existing orders on XLE
XLE based on the order’s limit price or during which contiguous XLE trading at their displayable price up to and
pegging instructions, its routability and session(s) their limited price orders will including the price of the best away
QMI (described below), and its short be eligible for execution. Protected Quotation, with any
sale status.83 Limited Price Orders Subject to QMI. remainder displayable as a bid (offer) on
XLE will rank orders on a price-time XLE Participants that enter Limit XLE, in the case of a buy (sell) order, at
basis, first by price and then by time.84 Orders 88 and Reserve Orders 89 will be $.01 away from the best Protected Offer
Within each price level, Limit Orders, able to choose from certain QMI. The (Bid).92 Unless marked as ‘‘Do Not
the displayed portion of Reserve Orders, following QMI will be available to XLE Route,’’ XLE will route the order, if
and Pegged Orders will be ranked based Participants: (1) ‘‘Ship and Quote’’; and marketable, to another market center.
on: (1) The time the order is received, (2) ‘‘Post Order and Participate’’
and, if applicable, (2) the time its price (‘‘POP’’). Pursuant to a Ship and Quote 90 See proposed Phlx Rule 185(b)(1)(C)(i). If an
is updated. With respect to Reserve instruction, XLE will execute order with Ship and Quote instructions arrives
Orders, the time priority of the immediately and automatically against while the market is crossed (i.e., the Protected Bid
is priced higher than the Protected Offer), then XLE
displayed portion of these orders is existing orders in XLE at their will not route IOC ISO orders to any away Protected
updated when the displayed portion is Quotations.
refreshed with shares from the 86 Because ITS does not accept orders in share 91 See proposed Phlx Rule 185(b)(1)(C)(ii).
undisplayed reserve portion (which amounts other than round lots and multiple round However, if the market is crossed (i.e., the Protected
lots, XLE will not match odd lot orders or odd lot Bid is priced higher than the Protected Offer), then
occurs when the displayed portion is portions of mixed lot orders on XLE against an the incoming order will be displayable as a bid
reduced below a round lot).85 As incoming ITS commitment. (offer) on XLE, in the case of a buy (sell) order, at
proposed, XLE will rank odd-lot and 87 Section 11(a) of the Act, 15 U.S.C. 78k(a),
the same price as the best Protected Quotation Offer
mixed-lot orders in the same manner as prohibits a member of a national securities (Bid). Further, if the market is locked (i.e., the
exchange from effecting transactions on that Protected Bid is priced equal to the Protected Offer)
80 17
exchange for its own account, the account of an and XLE is displaying an order at the Protected
CFR 242.200(g). associated person, or an account over which it or
81 See
NBBO on the same side of the market as the
proposed Phlx Rule 455. its associated person exercises discretion, unless an incoming order, then the incoming order will be
82 Executions occurring as a result of orders
exception applies. Rule 11a2–2(T) under the Act, 17 displayable at the Protected NBBO.
matched on XLE will be reported by the Exchange CFR 240.11a2–2(T), known as the ‘‘effect versus 92 See proposed Phlx Rule 185(b)(1)(D). However,
to an appropriate consolidated transaction reporting execute’’ rule, provides exchange members with an if the market is locked (i.e., the Protected Bid is
system. The Exchange will promptly notify XLE exemption from the Section 11(a) prohibition. The priced equal to the Protected Offer) and XLE is
Participants of all executions as soon as such Exchange intends to submit a letter to the displaying an order at the Protected NBBO on the
executions have taken place. See proposed Phlx Commission, before trading commences on XLE, same side of the market as the incoming order, then
Rule 188. representing that transactions effected in the XLE the incoming order will be displayable at the same
83 See proposed Phlx Rule 185(b)(1)(C)–(E), (b)(3), system meet the requirements of Rule 11a2–2(T). price as the Protected NBBO. Further, if the market
and (e)–(f). See Telephone call between Richard Holley III, is crossed (i.e., the Protected Bid is priced higher
84 See proposed Phlx Rule 184(a). Special Counsel, Division of Market Regulation, than the Protected Offer), then the incoming order
85 See proposed Phlx Rule 184(a)(1). The Commission, and John Dayton, Director and will execute on XLE without regard to away
undisplayed portion of a Reserve Order is ranked Counsel, Phlx, on September 26, 2006. Protected Quotations, and any unexecuted
88 See proposed Phlx Rule 185(b)(1)(A).
based upon the time the order is received or its remainder will be displayable on XLE at its limit
price is updated. See proposed Phlx Rule 184(a)(2). 89 See proposed Phlx Rule 185(b)(1)(B). price.
Limited price orders of the following Mid-Point Cross and IOC Cross Orders Order, a Proprietary Order,105 or a
types may also be executed immediately Generally. XLE will accept Mid-Point Professional Order 106 on XLE
on XLE: (1) IOC orders; (2) SSO orders; Cross Orders that execute at the disseminated pursuant to proposed Phlx
and (3) ISO orders.93 An IOC order will midpoint of the Protected NBBO, unless Rule 184(c). In other words, XLE will
execute immediately and automatically the Protected Bid is higher than the afford Approved Dealers execution
against existing orders on XLE at their Protected Offer, in which case the Mid- priority for their orders over same-
displayable price up to and including Point Cross Order will be cancelled.98 priced Professional Orders and
the price of the best away Protected XLE also will accept IOC Cross Orders Proprietary Orders, but not Public
Quotation unless the market is crossed that execute at a specified price; Agency Orders, of other XLE
(i.e., the Protected Bid is priced higher Participants.
however, XLE will cancel such order at
than the Protected Offer), in which case Large Mid-Point Cross Orders and IOC
the time of entry if: (1) The specified Cross Orders. XLE also will allow large
XLE will ignore the away Protected price is equal to or inferior to the price
Quotations.94 A SSO order will execute Mid-Point Cross Orders and IOC Cross
of the best order on XLE disseminated Orders to take priority over same-priced
immediately and automatically against
pursuant to proposed Phlx Rule orders on XLE, if the orders meet certain
existing orders on XLE at their
displayable price and will be routed 184(c) 99 (except as discussed below); size and other thresholds. In other
away to Protected Quotations (using IOC and (2) the specified price would trade words, XLE will not cancel a Mid-Point
ISO orders), up to and including the through the price of the Protected Cross Order or an IOC Cross Order with
order’s limit price.95 An ISO order will NBBO, unless the Protected Bid is a price equal to the price of the best
execute immediately and automatically priced higher than the Protected Offer or disseminated order on XLE, where
against existing orders on XLE at their the IOC Cross Order is marked as neither side is marked as Proprietary,
displayable price without regard to any meeting the requirements of an and the order is for at least 5,000 shares
away Protected Quotations.96 Any intermarket sweep order in Rule and has an aggregate value of at least
shares of an IOC, SSO, or ISO order not 600(b)(30) of Regulation NMS,100 as $100,000, and the order is larger than
immediately executed, as described Benchmark, or as a Qualified Contingent the aggregate size disseminated on XLE
above, will be cancelled. Trade.101 at the cross price.107
Pegged Orders. Pegged Orders feature Benchmark and Qualified Contingent
Approved Dealer Status for Mid-Point
a display price that is set to track either Trade Modifiers. As proposed, XLE also
Cross Orders and IOC Cross Orders. In
side of the current best Protected Bids will accept two-sided IOC Cross Orders
addition, with respect to Mid-Point
or Offers by an amount specified by the marked as Benchmark Orders or
Cross Orders and IOC Cross Orders, Qualified Contingent Trades. Orders
XLE Participant in an increment Phlx has proposed to use Approved
permitted by proposed Phlx Rule 125; marked ‘‘Benchmark’’ will be required
Dealer 102 status in determining whether to meet the requirements of Rule
provided, however that the display there will be additional flexibility in
price will not be permitted to lock or 611(b)(7) of Regulation NMS.108 Orders
how these two-sided orders will be marked ‘‘Qualified Contingent Trade’’
cross the market in a manner that would executed.103 As proposed, XLE will
violate proposed Phlx Rule 186.97 The will be required to meet the
cancel Mid-Point Cross Orders when the requirements of the exemption to Rule
tracking of the relevant Protected Bid or Protected NBBO is locked and IOC
Offer for Pegged Orders will occur on a 611 of Regulation NMS issued by the
Cross Orders if such orders would trade: Commission on August 31, 2006.109
real-time basis, except that when the (1) If entered by an Approved Dealer, at
calculated price for the Pegged Order
the price of a Public Agency Order 104 105 The term ‘‘Proprietary Order’’ means an order
exceeds its limit price, it will no longer for the account of the XLE Participant who entered
on XLE disseminated pursuant to
track and will remain displayed at its the order into XLE. See proposed Phlx Rule 1(bb).
proposed Phlx Rule 184(c); or (2) if
limit price. 106 The term ‘‘Professional Order’’ means an order
entered by other than an Approved for the account of a broker or dealer, which order
2. Two-Sided Orders Dealer, at the price of a Public Agency is represented, as agent, by a XLE Participant. See
proposed Phlx Rule 1(aa).
XLE also will accept several types of 107 See proposed Phlx Rule 185(c)(1) and (2).
98 See proposed Phlx Rule 185(c)(1)(C).
two-sided cross orders, including: (1) 99 An
108 17 CFR 242.611(b)(7). Under Regulation NMS
IOC Cross Order will not be permitted to
Mid-Point Cross Orders; (2) IOC Cross take priority over existing orders on XLE for less
Rule 611(b)(7), the Benchmark order’s price could
Orders; (3) IOC Cross Orders marked as not be based, directly or indirectly, on the quoted
than the minimum quoting increment for that NMS
price of the subject security at the time of
Benchmark or Qualified Contingent Stock indicated in proposed Phlx Rule 125. See
execution, and the material terms could not have
Trades; and (4) cross orders marked for proposed Phlx Rule 125.
100 IOC Cross Orders so marked are intended to
been reasonably determinable at the time the
‘‘non-regular way’’ settlement. commitment to execute the order was made. See id.
meet the definition of an intermarket sweep order Orders marked ‘‘Benchmark’’ will not be permitted
in Rule 600(b)(30) of Regulation NMS, 17 CFR to take priority over existing orders on XLE for less
93 See proposed Phlx Rule 185(b)(2). Any shares 242.600(b)(30), because the order has a limit price than the minimum quoting increment for that NMS
of these orders that are not immediately executed and the XLE Participant sending the order is Stock indicated in proposed Phlx Rule 125. See
will be cancelled. responsible to send the other orders required by Notice, supra note 3, 71 FR at 50486 (text
94 See proposed Phlx Rule 185(b)(2)(A). Exchange Rule 600(b)(30)(ii), 17 CFR 242.600(b)(30)(ii). accompanying note 77). The Exchange has stated
members should remain mindful of their best 101 See proposed Phlx Rule 185(c)(3).
that it will seek an exemption from Rule 612 of
execution obligations when handling customer 102 See proposed Phlx Rule 185(c). The term
Regulation NMS to accept two-sided orders marked
order types that may execute on XLE without regard ‘‘Approved Dealer’’ means a Market Maker on XLE Benchmark in increments no smaller than $0.0001.
to the best away Protected Quotation when the in that security or a specialist or market maker See id., 71 FR at 50485 (note 51). The Exchange has
market is crossed (i.e., the Protected Bid is priced registered as such with another exchange or NASD stated that, contrary to its intent as reflected in the
higher than the Protected Offer). in that security. See proposed Phlx Rule 1(a). Notice, it intends to seek appropriate relief to
95 See proposed Phlx Rule 185(b)(2)(B). 103 The Exchange believes that this provision is permit orders to be marked ‘‘Benchmark’’ prior to
96 See proposed Phlx Rule 185(b)(2)(C). XLE similar to former National Securities Exchange the February 5, 2007 Trading Phase Date for
Participants that enter an ISO order must ensure (‘‘NSX’’) Rule 11.9(l)–(m), (u). See Notice, supra Regulation NMS. See Amendment No. 3, supra note
that the ISO meets the requirements of Regulation note 3, 71 FR at 50486 (note 75). 5.
NMS Rule 600(b)(30). 104 The term ‘‘Public Agency Order’’ means an 109 See Securities Exchange Act Release No.
97 See proposed Phlx Rule 185(b)(3). See also order for the account of a person other than a broker 54389 (August 31, 2006), 71 FR 52829 (September
Amendment No. 3, supra note 5 (clarifying the or dealer, which order is represented, as agent, by 7, 2006) (order granting an exemption for Qualified
definition of Pegged Order). a XLE Participant. See proposed Phlx Rule 1(ee). Contingent Trades from Rule 611(a) of Regulation
Non-Regular Way Crosses. Finally, subsidiary of Order Execution Services Examining Authority (‘‘DEA’’) pursuant
XLE will accept cross orders marked for Holdings, Inc. (‘‘OES’’), operate as a to Rule 17d–1 of the Act.116 In addition,
‘‘non-regular way’’ settlement. Such ‘‘facility’’ of the Exchange.113 PRO’s the Exchange intends to enter into a
orders will execute at any price, without only function will be to provide an 17d–2 agreement with the NASD to
regard to the Protected NBBO or any optional routing service to XLE regulate PRO for compliance with
other orders on XLE, provided that Mid- Participants, thereby enabling them to applicable Exchange rules and federal
Point Cross Orders marked non-regular route eligible order types 114 from XLE securities rules and regulations.117
way will be cancelled when the to other securities exchanges, facilities The Exchange notes that the PRO’s
Protected Bid is higher than the of securities exchanges, automated Outbound Routing function includes the
Protected Offer.110 trading systems, electronic
The Commission believes that the clearing functions that it may perform
communications networks (‘‘ECNs’’), or for trades with respect to orders routed
Exchange’s proposed rules relating to other brokers or dealers (collectively,
order priority and order execution are to other trading centers. Pursuant to
‘‘Trading Centers’’) through other proposed Rule 185(g), the Exchange will
designed to perfect the mechanism of a brokers operating on XLE that are
free and open market and a national be required to establish and maintain
members or participants of those trading procedures and internal controls
market system and to protect investors centers (‘‘Access Brokers’’) (such
and the public interest, and are reasonably designed to adequately
function is referred to as the ‘‘Outbound
consistent with the requirements of the restrict the flow of confidential and
Router’’).
Act. The Commission further believes proprietary information between the
XLE Participants’’ use of PRO to route
that these proposed rules are designed Exchange and the Routing Facility, and
orders to another trading center will be
to provide investors with flexibility in any other entity, including any affiliate
optional and subject to Exchange rules.
executing their orders, while still Those XLE Participants that choose to of the Routing Facility. Moreover, the
ensuring that customer priority use PRO’s Outbound Router function books, records, premises, officers,
principles are upheld, thereby must sign a Routing Agreement. XLE agents, directors and employees of the
promoting efficiency of executions and Participants that elect not to use PRO’s Routing Facility, as a facility of the
helping to promote competition on the Outbound Router function may still Exchange, will be deemed to be the
XLE system and the national market enter orders on XLE, but they may only books, records, premises, officers,
system in general. enter orders that are not routable to agents, directors and employees of the
With respect to the Exchange’s other trading centers. Exchange for purposes of, and subject to
proposed rule governing the effect of PRO will be subject to several oversight pursuant to, the Act. Further,
Approved Dealer status for Mid-Point conditions and undertakings that are the books and records of the Routing
Cross Orders and IOC Cross Orders, the reflected in proposed Phlx Rule 185(g). Facility, as a facility of the Exchange,
Commission believes that the As an Outbound Router, PRO will will be subject at all times to inspection
Exchange’s proposed approach is receive routing instructions from XLE, and copying by the Exchange and the
consistent with the Act in that it route orders to broker-dealers to route to Commission.
protects the price-time priority of non- another trading center, and report such The Commission agrees with the
broker dealer orders by prohibiting executions back to XLE. All orders Exchange that PRO’s services as
Approved Dealers from obtaining routed through PRO will be subject to Outbound Router would qualify it as a
priority for their cross orders over same- the Exchange’s rules. PRO will not be ‘‘facility’’ of the Exchange, and,
priced Public Agency Orders on XLE. In able to change the terms of an order or consequently, the operation of the
addition, the Commission believes that the routing instructions, nor will PRO
the Exchange’s proposal is similar to the Outbound Router will be subject to
have any discretion about where to Exchange oversight, as well as
rules previously approved for another
route an order. Commission oversight. The Commission
exchange.111 The Commission also As a facility of the Exchange, the
notes that it has approved rules notes that the Outbound Router
Outbound Router function of PRO will functionality is not the exclusive means
substantially similar to those proposed be subject to the Commission’s
by the Exchange relating to large cross for accessing better-priced orders in
continuing oversight. In particular and other market centers should an order
orders.112
without limitation, under the Act, the not be executable on XLE. Accordingly,
D. Outbound Router Exchange will be responsible for filing PRO’s routing services are optional, and
Phlx proposed that PRO Securities with the Commission rule changes and a XLE Participant is free to route its
LLC (‘‘PRO’’), a wholly-owned fees relating to the PRO Outbound orders to other market centers through
Router function, and PRO will be alternative means. In light of the
NMS). The Exchange has stated that it no longer subject to exchange non-discrimination protections afforded by the conditions
intends to permit orders to be marked as ‘‘Qualified requirements.115 Further, the Exchange discussed above, the Commission
Contingent Trades’’ prior to the February 5, 2007 has represented that the National
Trading Phase Date for Regulation NMS. See believes that the Exchange’s Outbound
Amendment No. 3, supra note 5. Association of Securities Dealers, Inc. Router function, and the rules and
110 See proposed Phlx Rule 185(c)(4). (‘‘NASD’’) will be responsible for procedures governing the Outbound
111 See former NSX Rule 11.9(u). See also regulatory oversight and enforcement as Router, are appropriate and consistent
Securities Exchange Act Release Nos. 54391 the Outbound Router’s Designated with the Act.
(August 31, 2006), 71 FR 52836 (September 7, 2006)
(File No. SR–NSX–2006–08) (order approving
proposed rule change that, among other things,
113 See 15 U.S.C. 78c(a)(2). PRO is a broker-dealer E. Market Makers
deleted NSX Rule 11.9(u)); and 37046 (March 29, and a member of the NASD, and is applying to
1996), 61 FR 15322 (April 5, 2006) (File No. SR– become a member of the Exchange. The Exchange The Exchange will allow XLE
CSE–95–03) (order approving proposed rule change has represented that PRO will not engage in any Participants that are member
regarding the preferencing of public agency orders). business other than its Outbound Router function,
except as approved by the Commission. See Notice,
organizations to register to act as Market
112 See, e.g., Securities Exchange Act Release Nos.
54391 (August 31, 2006), 71 FR 52836 (September supra note 3, 71 FR at 50493.

114 Certain order types, including Limit Orders, 116 17 CFR 240.17d–1. See also Notice, supra note
7, 2006) (File No. SR–NSX–2006–08); and 46568
(September 27, 2002), 67 FR 62276 (October 4, Reserve Orders, and SSOs are eligible to be routed. 3, 71 FR at 50493.
2002) (File No. SR–Amex–2002–23). 115 See 15 U.S.C. 78f(b)(5). 117 See Notice, supra note 3, 71 FR at 50493.
Makers on XLE.118 Market Makers, once Once registered as a Market Maker, a contain the identification of the
registered as such, can then choose to member organization may register in a individual MMAT that entered the
register in one or more securities that newly authorized security or in a order.131 MMATs may be officers,
are traded on XLE. Once registered in a security already admitted to dealings on partners, employees or other associated
particular security, Market Makers will XLE by filing a security registration persons of member organizations that
be required to maintain continuous form with the Exchange.124 A Market are registered with the Exchange as
Limit Orders on both sides of the market Maker’s registration in a security may be Market Makers.132 The Exchange may
in that security during XLE’s Core terminated by the Exchange if the grant a member conditional registration
Session. Market Maker fails to enter quotations as a MMAT subject to any conditions it
Although the proposed rules provide in the security within five business days considers appropriate in the interests of
for Market Makers, an NMS Stock may after the Market Maker’s registration in maintaining a fair and orderly
trade on XLE without a Market Maker. the security becomes effective.125 In market.133 In addition, to be eligible for
While the presence of a Market Maker addition, the Exchange may suspend or registration as a MMAT, a person must
in a security is not required, the terminate any registration of a Market have served as a dealer-specialist or
Exchange has proposed to allow Market Maker in a security or securities under market maker on a registered national
Makers to provide an additional source proposed Phlx Rule 172 whenever, in securities exchange or association (or be
of liquidity to XLE in the securities in the Exchange’s judgment, the interests deemed to have similar experience from
which the Market Maker is making of a fair and orderly market are best having functioned as a trader) for at
markets. Market Makers can use any of served by such action.126 least one year within three years of the
the order types available to any other Upon becoming a Market Maker and date of application, or, in the
XLE Participant, but there are no special registering in one or more securities on alternative, must successfully complete
order types or quotations available to XLE, a Market Maker will be required to the General Securities Registered
Market Makers. Orders from Market assume a number of responsibilities.127 Representative Examination (‘‘Series
Makers on XLE will be treated the same A Market Maker must engage in a course 7’’).134
as orders from other XLE Participants. of dealings for its own account to assist Upon written request, a member
in the maintenance, insofar as organization may withdraw the
In addition, Market Makers will not
reasonably practicable, of a fair and registration of one of its MMATs.135 In
have any special or enhanced access to,
orderly market on XLE. Among other addition, the Exchange may suspend or
or responsibility for, the orders on XLE
things, a Market Maker must maintain withdraw an MMAT’s registration if it
in any given security.
adequate minimum capital in determines that: (1) The MMAT has
Proposed Phlx Rule 170 governs the caused the Market Maker to not
registration of Market Makers on XLE. accordance with Phlx Rule 703 and
must remain in Good Standing 128 with properly perform the responsibilities of
The Exchange will review an a Market Maker; (2) the MMAT has
application of a member organization to the Exchange. Each Market Maker must
use electronic system(s) to maintain failed to meet the conditions set forth
become a Market Maker, considering under the preceding paragraph; or (3)
such factors as capital, operations, continuously two-sided markets with at
least one Limit Order to buy and at least the Exchange believes it is in the
personnel, technical resources, and interest of maintaining fair and orderly
disciplinary history.119 In the event that one Limit Order to sell, each for at least
a round lot, in those securities in which markets.136 If the Exchange suspends
an application is disapproved by the the registration of a person as a MMAT,
Exchange, the applicant would have an the Market Maker is registered to trade.
A Market Maker must meet these the Market Maker must not allow the
opportunity to be heard upon the person to submit orders on XLE.137
specific grounds for the denial, in obligations during XLE’s Core Session
in its registered securities on all days The Commission believes that the
accordance with the provisions of proposed rules concerning Market
proposed Phlx Rule 174.120 that XLE is open for business.129
Market Maker Authorized Traders. Makers and MMATs are appropriate and
The registration of a Market Maker Because Market Makers must be consistent with the Act.
may be suspended or terminated by the member organizations, individuals who
Exchange upon a determination of any F. Access
enter orders on XLE in the course of
substantial or continued failure by such Members and member organizations
making markets for a Market Maker are
Market Maker to engage in dealings in can register with the Exchange to
Market Maker Authorized Traders
accordance with proposed Phlx Rule become XLE Participants, which
(‘‘MMATs’’). The Exchange may, upon
173, which describes the obligations of requires entering into a XLE Participant
receiving an application in writing from
Market Makers.121 Additionally, a Agreement with the Exchange.138 In
a Market Maker on a form prescribed by
Market Maker may withdraw its addition to providing access to its
the Exchange, register a member of the
registration by giving written notice to members and member organizations, the
Exchange as a MMAT. Each MMAT
the Exchange.122 Subsequent to Exchange has proposed to allow
must be a member of the Exchange at all
withdrawal, the member organization times he or she is acting as a MMAT.130
will not be permitted to re-register as a 131 See proposed Phlx Rule 171(a).
All orders entered by a MMAT must 132 See proposed Phlx Rule 171(b)(1).
Market Maker for a period of six
133 See proposed Phlx Rule 171(b)(3).
months.123 124 See proposed Phlx Rule 172(a). 134 See proposed Phlx Rule 171(b)(5).
125 See proposed Phlx Rule 172(b). 135 See proposed Phlx Rule 171(c)(3).
118 See proposed Phlx Rule 170(a) and (b). 126 See proposed Phlx Rule 172(d). Any such 136 See proposed Phlx Rule 171(c)(1).
119 See proposed Phlx Rule 170(b). suspension or withdrawal of privileges by the 137 See proposed Phlx Rule 171(c)(2). Any such
120 See proposed Phlx Rule 170(c). Exchange would be subject to review pursuant to suspension or withdrawal of MMAT privileges by
121 See proposed Phlx Rule 170(d). proposed Phlx Rule 174, which permits an appeal the Exchange is subject to review pursuant to
122 See proposed Phlx Rule 170(e). A Market to the Board of Governors pursuant to By-Law proposed Phlx Rule 174.
Maker who fails to give a ten-day written notice of Article XI, Section 11–1(a). 138 See proposed Phlx Rule 180(a). Among other
127 See proposed Phlx Rule 173(a).
withdrawal to the Exchange may be subject to things, the Exchange would confirm that the
128 See proposed Phlx Rule 1(h).
formal disciplinary action pursuant to Phlx Rule member or member organization has the proper
960.1 et seq. 129 See proposed Phlx Rule 173(b).
clearing relationships and has the ability to
123 See proposed Phlx Rule 170(e). 130 See proposed Phlx Rule 171(b). electronically connect to XLE.
member organizations to sponsor other G. Anonymity executed against an order submitted by

persons to gain access to XLE. When that same member organization.147
Except as provided below, In order to satisfy the member
doing so, these member organizations
transactions executed on XLE will be organization’s recordkeeping obligations
will be referred to as ‘‘Sponsoring
processed anonymously. XLE under Rules 17a–3(a)(1) 148 and 17a–4(a)
Member Organizations,’’ and the transaction reports will indicate the
persons sponsored will be referred to as under the Act,149 the Exchange will,
details of the transaction, but will not except as provided below, retain for the
‘‘Sponsored Participants.’’ 139 A reveal contra-party identities.142 XLE
Sponsored Participant and its period specified in Rule 17a–4(a) the
will maintain this anonymity after the identity of each member organization
Sponsoring Member Organization will execution by instructing the registered
be required to enter into and maintain that executes an anonymous transaction
clearing agencies of the anonymous described in paragraph (b) of proposed
a XLE Participant Agreement with the nature of the transaction.143 Phlx Rule 189. In addition, member
Exchange, in which the Sponsoring Additionally, no one who has the right organizations will retain the obligation
Member Organization must designate to trade on XLE and who has been a to comply with Rules 17a–3(a)(1) and
the Sponsored Participant by name.140 party to or has knowledge of an 17a–4(a) under the Act whenever they
The XLE Participant Agreement is execution will be under an obligation to possess the identity of their contra-
intended to highlight the divulge, except to the Exchange, the party. In either case, the information
responsibilities that a XLE Participant name of the person buying or selling in must be retained in its original form or
has regarding its use of XLE and bind any transaction.144 By masking the XLE a form approved under Rule 17a–6
Sponsored Participants to their terms of Participant’s identity, the Exchange under the Act.150 The Commission
use of XLE. believes that it may help XLE believes that the proposed rules relating
Sponsored Participants also will be Participants mitigate the market impact to anonymity are appropriate and
required to enter into and maintain of their orders.145 consistent with the Act.
customer agreements with one or more Notwithstanding the above, the In connection with XLE’s proposed
Sponsoring Member Organizations so Exchange will reveal the identity of the clearance and settlement anonymity, the
that Sponsoring Member Organizations member organization or the member Exchange has stated that it intends to
may maintain the requisite level of organization’s clearing firm in the request, for XLE Participants, an
following limited circumstances: (1) For exemption from Rule 10b–10 under the
control over the Sponsored Participants’
regulatory purposes or to comply with Act,151 regarding the required disclosure
trading on XLE. The Exchange has
an order of a court or arbitrator; (2) of the contra-party on a customer’s
proposed certain sponsorship confirmation, and a no-action position
when the National Securities Clearing
provisions in its proposed Rule 180. on Rules 17a–3 and 17a–4 under the
Corporation (‘‘NSCC’’) or Stock Clearing
Among other things, these agreements Act,152 regarding a XLE Participant’s
Corporation of Philadelphia (‘‘SCCP’’)
will specify that all orders entered by reliance on the Exchange for
ceases to act for a member organization
the Sponsored Participants and any recordkeeping responsibilities for
or the member organization’s clearing
person acting on behalf of or in the firm and NSCC or SCCP determines not anonymous executions.153 The
name of such Sponsored Participant and to guarantee the settlement of the Commission notes that the Exchange
any executions occurring as a result of member organization’s trades; or (3) on may not commence operations on its
such orders are binding in all respects risk management reports provided to the XLE system with the anonymity
on the Sponsoring Member contra-party of the member organization functionality until it has obtained relief
Organization, and that the Sponsoring or the member organization’s clearing from the applicable rules discussed
Member Organization is responsible for firm which disclose trading activity on above.
any and all actions taken by such an aggregate dollar value basis.146 Also, H. Other Rule Changes to Implement
Sponsored Participant and any person the Exchange will inform a member XLE
acting on behalf of or in the name of organization when that member
such Sponsored Participant. In addition, In addition to the proposed rules
organization submits an order that has
the agreement will specify that a described above, to implement XLE, the
Sponsored Participant may not permit 142 See
Exchange has proposed several new
Proposed Phlx Rule 189(b).
rules and has proposed to amend a
anyone other than its Participant 143 See Securities Exchange Act Release Nos.
52651 (October 21, 2005), 70 FR 65956 (November number of other existing Exchange rules
Authorized Users (‘‘PAUs’’) to use or
1, 2005) (File No. SR–SCCP–2004–03); 48526 that address, among other things, hours
obtain access to XLE, and the Sponsored (September 23, 2003), 68 FR 56367 (September 30, of trading, units of trading, price
Participant is required to establish 2003) (File No. SR–NSCC–2003–14). See also Letter variations, securities eligible for trading,
adequate procedures and controls to from Everton McLennon, Vice President, SCCP, to
trade execution and reporting, clearance
monitor access and prevent Jerry Carpenter, Assistant Director, Division of
Market Regulation, Commission, dated September and settlement, and limitation of
unauthorized use or access to XLE. 12, 2006 (notifying the Commission, as required by liability. The Commission believes that
The Commission believes that the a condition of approval to File No. SR–SCCP–2004– these proposed rule changes are
03, that SCCP intends to begin processing trades
Exchange’s proposed rules relating to executed on an anonymous trading system).
appropriate and consistent with the Act.
access to XLE for its members and 144 See Proposed Phlx Rules 161 and 189(c). Since
147 See Proposed Phlx Rule 189(d).
member organizations and certain other the Exchange’s proposed clearly erroneous
148 17 CFR 240.17a–3(a)(1).
persons who are sponsored by member execution rule will be coordinated by the Exchange,
the Exchange has stated that post-trade anonymity 149 17 CFR 240.17a–4(a).
organizations are consistent with the should not compromise a XLE Participant’s ability 150 17 CFR 240.17a–6.
Act. The Commission notes that it has
to settle an erroneous trade. See Notice, supra note 151 17 CFR 240.10b–10.
previously approved similar rules for 3, 71 FR at 50488. 152 17 CFR 240.17a–3 and 17 CFR 240.17a–4,
145 See, e.g., Securities Exchange Act Release No.
other exchanges.141 respectively.
49053 (January 12, 2004), 69 FR 2642 (January 16, 153 See, e.g., Letter from Brian A. Bussey,
2004) (File No. SR–PCX–2003–63) (notice of filing Assistant Chief Counsel, Division of Market
139 See proposed Phlx Rule 180(b). and immediate effectiveness of proposed rule Regulation, Commission, to Mai S. Shiver, Senior
140 See proposed Phlx Rule 180(b)(2)(A). change relating to post-trade anonymity). Counsel, Pacific Exchange, Inc., dated April 30,
141 See, e.g., NYSE Arca Rule 7.29. 146 See Proposed Phlx Rule 189(c). 2004.
I. Modifications to Current Phlx By-Laws The Commission believes that these as intermarket sweep orders and
and Rules proposed rule changes are appropriate accepting orders marked as intermarket
Aside from the proposed rules to and consistent with the Act. sweep orders. The Commission also
implement XLE, as part of its proposed Additionally, the Exchange is believes that Phlx’s proposed
proposing to amend Phlx Rule 604 immediate-or-cancel functionality 162 is
rule change, the Exchange also proposes
(Registration and Termination of consistent with Rule 600(b)(3) of
to modify various Phlx By-laws, Rules,
Registered Persons), to extend an Regulation NMS.
Equity Floor Procedure Advices
exemption from the requirement to Further, the Exchange intends to
(‘‘EFPAs’’), and Options Floor
complete the Series 7 examination to operate XLE as an ‘‘automated trading
Procedure Advices (‘‘OFPAs’’).154 Most
persons who are primarily engaged in center’’ as defined by Rule 600(b)(3) of
of the changes are being made to either
business on XLE and whose member Regulation NMS,163 and has designed
apply or disapply certain Phlx By-laws,
organization is assigned to the Exchange the proposed trading rules for XLE
Rules, EFPAs and OFPAs to XLE, or to
as their designated examining accordingly. Specifically, XLE will
reflect the elimination of the physical
authority.157 Phlx Rule 604(e)(1) applies display automated quotations at all
trading floor for equity securities and the Exchange’s competency requirement
the status of XLE as its replacement. In times except in the event that a systems
to persons ‘‘off the floor,’’ while persons malfunction renders XLE incapable of
addition, the proposed changes reflect trading on the Exchange’s equity floor
the elimination of the Floor Procedure displaying automated quotations.164 The
are not required by Phlx Rule 604 to Exchange has represented that it will
Committee and the Equity Allocation, take the Series 7 examination. XLE will
Evaluation and Securities Committee, halt trading and therefore not display
not have a physical trading floor, and any ‘‘manual’’ quotations in the event of
and reflect the elimination of PACE, the thus all XLE Participants literally will
Exchange’s current electronic system for such a systems malfunction.165 In
be conducting their business ‘‘off floor.’’ addition, the Exchange included in
trading equity securities. Accordingly, the Exchange proposed to
With respect to the proposed proposed Phlx Rule 185(h) 166 its intent
amend Phlx Rule 604 to maintain the to take advantage of the self-help
elimination of the Floor Procedure status quo with respect to the
Committee,155 the Exchange has provisions of Regulation NMS in the
Exchange’s Series 7 examination event that another trading center
represented that Phlx officers and requirement for XLE Participants.158
employees will handle matters that were providing a Protected Bid, Offer or
The Commission believes that the Quotation repeatedly fails to respond
previously referred to Floor Officials or proposed change to Phlx Rule 604 is
the Committee on the equity floor. The within one second to incoming orders
appropriate and consistent with the Act. attempting to access that Protected Bid,
Exchange is eliminating the Floor
Procedure Committee because it J. Compliance With Regulation NMS Offer or Quotation.167
believes that its function in governing and Transition to XLE Transition to XLE. The Exchange has
conduct on the equity trading floor is no declared its intent to make the transition
The Commission believes that the
longer necessary in light of the floor’s to XLE (thus closing its equities trading
proposed rule change is consistent with
elimination. With respect to the floor and PACE system) prior to the
the requirements of Regulation NMS. In
elimination of the Equity Allocation, February 5, 2007 Trading Phase Date for
particular, the Exchange proposes to
Evaluation and Securities Committee, Regulation NMS. As such, certain of its
adopt a rule with regard to locked and
the Exchange has proposed that proposed rules or portions thereof that
crossed markets, as required by Rule
Exchange staff will be responsible for are designed to comply with the
610(d) of Regulation NMS.159 The
processing applications to become provisions of Regulation NMS will not
Exchange also has designed its proposed
Market Makers on XLE. As proposed, become effective until February 5, 2007.
rules relating to orders, modifiers, and
Exchange staff also will be responsible order execution rules to comply with The Exchange has proposed to achieve
for managing the listing of new equities. the requirements of Regulation NMS.160 this delayed effectiveness through: (1)
The Commission believes that these These proposed rules include marking Including specific provisions in certain
proposed rule changes, including the certain orders meeting the requirements of its proposed rule text; 168 or (2) by
elimination of the Floor Procedure of Rule 600(b)(30) of Regulation NMS 161 162 See proposed Phlx Rule 185(b)(2)(A).
Committee and the Equity Allocation, 163 17 CFR 242.600(b)(3).
Evaluation and Securities Committee, 157 The Exchange initially adopted the Series 7 164 See proposed Phlx Rule 160.
are appropriate and consistent with the examination requirement for off-floor traders in 165 See Notice, supra note 3, 71 FR at 50483.
order to impose a competency requirement on
Act. persons not on its floor, and not subject to its
166 See Amendment No. 3, supra note 5
The Exchange also has proposed to registration and testing processes for floor (relocating the self-help provision from proposed
delete several of its rules and forms personnel pursuant to Phlx Rules 620 and 625. Phlx Rule 1(cc) to proposed Phlx Rule 185(h)).
158 XLE Participants could, however, be required 167 See 17 CFR 242.611(b)(1). In particular,
relating to the delivery and settlement of proposed Phlx Rule 185(h), which contains text that
by the rules of another self-regulatory organization
securities, which the Exchange has to take the Series 7 examination. was relocated from proposed Phlx Rule 1(cc) via
represented are obsolete since such 159 17 CFR 242.610(d). See also proposed Phlx Amendment No. 3, provides that Phlx will
function is performed not by the Rule 186. disregard the away Protected Bid, Offer or
Quotation when routing, displaying, canceling, or
Exchange but by registered clearing 160 For example, Proposed Phlx Rule 188 will
executing orders on XLE, and Phlx will notify the
agencies. Further, the Exchange has require the Exchange to identify trades executed
pursuant to an exception to or exemption from Rule non-responding trading center when it elects self-
proposed to require all XLE Participants 611 of Regulation NMS in accordance with help. Phlx will also assess whether the cause of the
to use the services of a clearing firm or specifications approved by the operating committee problem was with XLE, and, if so, would not invoke
of the relevant national market system plan for an self-help.
SCCP to clear transactions on XLE.156 168 See, e.g., proposed Phlx Rule 1(cc) (the
NMS Stock. For trades executed pursuant to both
the intermarket sweep order exception of Rule definition of Protected Bid, Offer or Quotation). The
154 See Notice, supra note 3, 71 FR at 50494 (for
611(b)(5) or (6) of Regulation NMS and the self-help Exchange has provided for alternate definitions of
a discussion of the modifications to current Phlx exception of Rule 611(b)(1) of Regulation NMS, XLE ‘‘Protected Bid, Offer or Quotation’’ that are
By-laws and Rules). will identify those trades as executed pursuant to applicable both before and after Rule 611 of
155 Currently, at least 50% of the Floor Procedure the intermarket sweep order exception. See Regulation NMS is operative on the Exchange. See
Committee must consist of permit holders or proposed Phlx Rule 188, as amended by Notice, supra note 3, 71 FR at 50484. After Rule 611
persons associated with a member organization. Amendment No. 3. of Regulation NMS is operative, a Protected
156 See proposed Phlx Rule 165(a). 161 17 CFR 242.600(b)(30). Quotation will have the same meaning as Rule
requesting that the Commission allow and to include proper formatting of Electronic Comments
the Exchange to delay the effectiveness proposed rule text. In addition, the
of a particular proposed rule; 169 or (3) Exchange added language to proposed • Use the Commission’s Internet
as applicable, expressing its intent to Phlx Rule 188 regarding identifiers for comment form (http://www.sec.gov/
apply to for any necessary relief from trades executed pursuant to both the rules/sro.shtml); or
any provision of the ITS Plan still in intermarket sweep exception and the • Send an e-mail to rule-
effect.170 The Exchange intends to roll- self-help provision in Rule 611 of comments@sec.gov. Please include File
out XLE in several phases, as discussed Regulation NMS; relocated the self-help Number SR–Phlx–2006–43 on the
above in Section II. provision from proposed Phlx Rule 1(cc) subject line.
The Commission believes that the to proposed Phlx Rule 185(h) and
Exchange has proposed a reasonable changed the term ‘‘cease to consider’’ in Paper Comments
approach that should help ensure that that subsection to the word ‘‘disregard’’;
the appropriate Exchange rules are in • Send paper comments in triplicate
and added text to proposed Phlx Rule
place when the operative date of the 185(b)(3) to clarify the operation of to Nancy M. Morris, Secretary,
applicable Regulations NMS provisions Pegged Orders and clarified the purpose Securities and Exchange Commission,
occurs.171 section discussion of that proposed rule. 100 F Street, NE., Washington, DC
The Exchange also amended the 20549–1090. All submissions should
V. Accelerated Approval of
terminology in proposed Phlx Rule 163 refer to File Number SR–Phlx–2006–43.
Amendment No. 3
from ‘‘Exchange Official’’ to ‘‘Equity This file number should be included on
As set forth below, the Commission Exchange Official.’’ In addition, the the subject line if e-mail is used. To help
finds good cause to approve Exchange proposed to allow floor the Commission process and review
Amendment No. 3 to the proposed rule members and member organizations your comments more efficiently, please
change prior to the thirtieth day after use only one method. The Commission
who become XLE participants to remain
Amendment No. 3 is published for
in their current space on the Exchange’s will post all comments on the
comment in the Federal Register
floor, paying the applicable space rental Commission’s Internet Web site (http://
pursuant to section 19(b)(2) of the
fees (which the Exchange may or may www.sec.gov/rules/sro.shtml). Copies of
Act.172 In Amendment No. 3, the
not seek to eliminate during the the submission, all subsequent
Exchange made several technical, non-
transition to XLE, upon the filing of a amendments, all written statements
substantive changes to the proposed
proposed rule change with the with respect to the proposed rule
rule text to correct typographical errors
Commission), for a short time while the change that are filed with the
600(b)(57) and (58) of Regulation NMS. 17 CFR
Exchange’s members transition to XLE. Commission, and all written
242.600(b)(57)–(58). The Exchange also announced its communications relating to the
169 See, e.g., proposed Phlx Rule 186; and Notice, revised intent, contrary to its intent proposed rule change between the
supra note 3, 71 FR at 50489. See, e.g., proposed expressed in the Notice, to request the Commission and any person, other than
Phlx Rule 186 (Locking or Crossing Quotations in appropriate relief from the ITS Plan
NMS Stocks). those that may be withheld from the
provisions that remain in effect to
170 See, e.g., proposed Phlx Rule 185(c)(3); and
public in accordance with the
Amendment No. 3, supra note 5. For example, with implement ISO Orders and IOC Cross
provisions of 5 U.S.C. 552, will be
respect to the proposed incoming ISO Orders and Orders marked ISO, as well as orders
IOC Cross Orders marked as ISO orders, and two- available for inspection and copying in
marked ‘‘Benchmark,’’ before the
sided orders that are eligible to be marked
February 5, 2007 Trading Phase Date of the Commission’s Public Reference
‘‘Benchmark,’’ the Exchange has stated that it Room. Copies of the filing also will be
intends to implement these order types prior to the Regulation NMS. The Exchange further
Trading Phase Date for Regulation NMS, and stated that it no longer intends to available for inspection and copying at
accordingly, the Exchange would need to seek relief request relief to allow orders marked as the principal office of the Phlx. All
for any applicable provision of the ITS Plan that comments received will be posted
remains in effect. See Amendment No. 3, supra note a ‘‘Qualified Contingent Trade’’ prior to
5. the February 5, 2007 Trading Phase Date without change; the Commission does
171 The Commission notes that, in the period
of Regulation NMS. not edit personal identifying
preceding the operative date of Regulation NMS,
The Commission believes that these information from submissions. You
the Exchange remains subject to currently
applicable intermarket rules, including the ITS clarifying and technical changes to the should submit only information that
Plan. To the extent that the Exchange commences proposed rule change, as amended, you wish to make available publicly. All
operations before Regulation NMS is operative, improve the proposal and raise no new submissions should refer to File
with respect to certain XLE features or order types,
the Exchange, like all other exchanges subject to
or novel issues and therefore should not Number SR–Phlx–2006–43 and should
Regulation NMS, would need to obtain relief from delay approval of the proposed rule be submitted on or before October 27,
any contrary provisions contained in any applicable change, as amended. Accordingly, the 2006.
plan, rule, or regulation. For example, in the Commission finds good cause to
absence of a Market Maker, XLE will not necessarily
accelerate approval of Amendment No. VII. Conclusion
be able to maintain a continuous two-sided quote
in a given security and thus will need relief from 3, pursuant to section 19(b)(2) of the It is therefore ordered, pursuant to
the ITS Plan’s two-sided quote requirement. Act.173 section 19(b)(2) of the Act,174 that the
Similarly, the Exchange will need relief from the
ITS Plan to recognize an exception permitting two- VI. Solicitation of Comments proposed rule change (SR–Phlx–2006–
sided Benchmark orders and Qualified Contingent 43), as amended by Amendment Nos. 1
Trades to trade-through a Protected Quotation. Interested persons are invited to
Finally, the Exchange has proposed to delete Phlx
and 2, be, and hereby is, approved, and
submit written data, views, and
Rule 230 (ITS—Opening Notification) and EFPA S– that Amendment No. 3 to the proposed
arguments concerning Amendment No.
3 (The ‘‘Three by Three’’ Requirement Applicable rule change be, and hereby is, approved
to Tape Indications and Pre-Openings); however, 3, including whether Amendment No. 3
the Exchange has requested that the operative date is consistent with the Act. Comments on an accelerated basis.
of these deletions be no earlier than the date that may be submitted by any of the
the Exchange is no longer subject to the ITS pre-
opening notification responsibilities in the ITS
following methods:
Plan.
172 15 U.S.C. 78s(b)(2). 173 15 U.S.C. 78s(b)(2). 174 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of review, the effective date for actions Dated: September 27, 2006.
Market Regulation, pursuant to delegated identified in this notice shall be the date Paul O. Swartz,
authority.175 of publication of this notice. Executive Director.
Nancy M. Morris, [FR Doc. E6–16611 Filed 10–5–06; 8:45 am]
FOR FURTHER INFORMATION CONTACT:
Secretary. BILLING CODE 7040–01–P
Richard A. Cairo, General Counsel, 717–
[FR Doc. E6–16550 Filed 10–5–06; 8:45 am]
238–0423, Ext. 306; Fax: 717–238–2436;
BILLING CODE 8011–01–P
e-mail: rcairo@src.net or Michael G.
Brownell, Chief, Water Resources DEPARTMENT OF TRANSPORTATION
Management, 717–238–0425, Ext. 223;
DEPARTMENT OF STATE Fax: 717–238–2436; e-mail Surface Transportation Board
[Public Notice 5575] mbrownell@srbc.net. Further details on Release of Waybill Data
the docket actions taken on the projects
Department of State Performance listed below are also available on The Surface Transportation Board has
Review Board Members (for Non SRBC’s Web site at http://www.srbc.net. received a request from Sidley Austin
Career Senior Executive Employees) Brown LLP on behalf of Canadian
SUPPLEMENTARY INFORMATION: Pacific Railway Company (WB471–10—
In accordance with section 4314 (c) September 28, 2006) for permission to
(4) of the Civil Service Reform Act of List of Approved Projects
use certain data from the Board’s
1978 (Pub. L. 95–454), the Executive 1. Mansfield Borough Municipal Carload Waybill Samples. A copy of the
Resources Board of the Department of Authority—Groundwater withdrawal (30-day request may be obtained from the Office
State has appointed the following average) of 0.252 mgd from Well 2, and a of Economics, Environmental Analysis,
individuals to the Department of State total groundwater system withdrawal limit and Administration.
Performance Review Board (for Non (30-day average) of 0.255 mgd, for public The waybill sample contains
Career Senior Executive Employees) water supply, Richmond Township, Tioga confidential railroad and shipper data;
Kim M. Nickles, Under Secretary for County, Pennsylvania. therefore, if any parties object to these
Management, White House Liaison, 2. Tunkhannock Borough Municipal
requests, they should file their
Department of State; Brian F. Authority—Groundwater withdrawal (30-day
objections with the Director of the
Gunderson, Chief of Staff, Office of the average) of 0.144 mgd from Well 3R, and a
Board’s Office of Economics,
Secretary, Department of State. total system withdrawal limit (30-day
Environmental Analysis, and
average) of 0.300 mgd for public water
Dated: September 15, 2006. supply, Tunkhannock Borough, Wyoming
Administration within 14 calendar days
George M. Staples, County, Pennsylvania.
of the date of this notice. The rules for
Director General of the Foreign Service and 3. EP FCL, LLC dba Ron Jaworski’s release of waybill data are codified at 49
Director of Human Resources, Department Edgewood in the Pines—Consumptive water CFR 1244.9.
of State. use of up to 0.360 mgd, for golf course Contact: Mac Frampton, (202) 565–
[FR Doc. E6–16591 Filed 10–5–06; 8:45 am] irrigation, Butler Township, Luzerne County, 1541.
BILLING CODE 4710–15–P Pennsylvania. Vernon A. Williams,
4. Bedford Township Municipal Authority Secretary.
Schaffer Tract—Groundwater withdrawals
[FR Doc. E6–16606 Filed 10–5–06; 8:45 am]
SUSQUEHANNA RIVER BASIN (30-day averages) of 0.288 mgd from Schaffer
BILLING CODE 4915–01–P
COMMISSION Tract Well 1 and 0.288 mgd from Schaffer
Tract Well 2, Bedford Township, Bedford
Notice of Action by the Commission County, Pennsylvania.
DEPARTMENT OF TRANSPORTATION
Approving Certain Projects 5. Bedford Township Municipal Authority
Hotel Well—Groundwater withdrawal (30- Surface Transportation Board
AGENCY: Susquehanna River Basin day average) of 0.367 mgd from the Bedford
Commission (SRBC). Springs Hotel Well 1, Bedford Township, [STB Docket No. AB–6 (Sub-No. 445X)]
SUMMARY: Pursuant to its authority Bedford County, Pennsylvania.
6. Monroe Valley Golf Course—Surface BNSF Railway Company—
under the Susquehanna River Basin
water withdrawal of up to 0.221 mgd from Abandonment Exemption—in Cascade
Compact, Pub. L. 91–575, 84 Stat. 1509
East Pond, when available; surface water County, MT
et seq. (the ‘‘Compact’’) and its
Regulations for Review of Projects, 18 withdrawal of up to 0.221 mgd from West BNSF Railway Company (BNSF) has
CFR parts 803, 804 and 805, the SRBC, Pond, when available; and a total combined filed a notice of exemption under 49
surface water withdrawal of up to 0.532 mgd,
following a public hearing, approved CFR 1152 subpart F—Exempt
when available, from East Pond, West Pond,
certain water resources projects listed Abandonments to abandon 1.67 miles of
and Monroe Creek; and consumptive water
below at its meeting held in Aberdeen, railroad between milepost 194.61 and
use of up to 0.532 mgd, for golf course
Maryland on September 13, 2006. irrigation, Swatara Township, Lebanon
milepost 196.28, near Great Falls, in
Opportunity For Review: In County, Pennsylvania. Cascade County, MT. The line traverses
accordance with Section 3.10(6) of the 7. Dairy Farmers of America, Inc.— United States Postal Service Zip Code
Compact and Paragraph (o) of the Consumptive water use of up to 0.500 mgd, 59401.
Federal Reservations to the Compact, all for manufacture of beverages, Lower Allen BNSF has certified that: (1) No local
such actions of the SRBC are reviewable Township, Cumberland County, traffic has moved over the line for at
in federal district court provided that an least 2 years; (2) there is no overhead
Pennsylvania.
action for such review is commenced 8. Manheim Borough Authority— traffic to be rerouted; (3) no formal
within 90 days from the effective date Groundwater withdrawal (30-day average) of complaint filed by a user of rail service
of the determination sought to be 0.936 mgd from Well 6, and a total system on the line (or by a State or local
reviewed. For purposes of judicial withdrawal limit (30-day average) of 0.936 government entity acting on behalf of
mgd for public water supply, Manheim such user) regarding cessation of service
175 17 CFR 200.30–3(a)(12). Borough, Lancaster County, Pennsylvania. over the line either is pending with the

Notice: Self-Regulatory Organizations Proposed Rule Changes: Philadelphia Stock Exchange, Inc.

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59184 Federal Register / Vol. 71, No.

194 / Friday, October 6, 2006 / Notices

38 See Phlx Response Letter, supra note 4, at 2.

41 The Commission has considered the proposed

54391 (August 31, 2006), 71 FR 52836 (September supra note 3, 71 FR at 50493.

member organizations to sponsor other G. Anonymity executed against an order submitted by

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