[Federal Register: August 25, 2006 (Volume 71, Number 165)]
[Notices]
[Page 50482-50497]
[DOCID:fr25au06-138]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54329; File No. SR-Phlx-2006-43]

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2
Thereto Relating to the Exchange's New Equity Trading System, XLE

August 17, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on July 13, 2006, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, below, which Items have been prepared by the
Phlx. On August 14, 2006, the Exchange filed Amendment No. 1 to the
proposed rule change.\3\ On August 16, 2006, the Exchange filed
Amendment No. 2 to the proposed rule change.\4\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing
in its entirety.
    \4\ See Partial Amendment No. 2.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Phlx, pursuant to Section 19(b)(1) of the Act \5\ and Rule 19b-
4 thereunder,\6\ proposes to amend its rules to implement a new trading
model for equity securities that provides the opportunity for entirely
automated executions to occur within a central matching system
accessible by Exchange members and member organizations and their
Sponsored Participants, as defined below. The rules proposed herein are
intended to comply with the requirements of Regulation NMS.\7\ The
Exchange will no longer operate a physical trading floor for equity
securities, nor the Philadelphia Stock Exchange Automated Communication
and Execution (``PACE'') system. This proposal does not affect the way
options trade on the Exchange, and the Exchange will continue to have a
physical trading floor for options. The text of this proposed rule
change is available on the Exchange's Web site at http://www.phlx.com,

in the

Commission's Public Reference Room, and on the Commission's Web site at
http://www.sec.gov/rules/sro/phlx.shtml.

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    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ 17 CFR 242.600 et seq.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Phlx included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Phlx has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Phlx proposes to adopt new Phlx Rules 160-165, 170-174, and
180-189, and amend or delete other rules to accommodate the Exchange's
proposed new equity system (``XLE''). The purpose of the proposed rule
change is to adopt a new market structure for the trading of equity
securities on the Phlx.
a. Summary of XLE
    XLE would provide Exchange members and member organizations and
their Sponsored Participants and their Participant Authorized Users,
described herein (together known as ``XLE Participants''), with a more
efficient method for displaying, routing, and executing orders in NMS
Stocks \8\ on the Exchange. With this new system, the Exchange would no
longer operate a physical equity trading floor where specialists and
floor brokers execute their orders, nor would it operate its PACE
system, through which member organizations currently can send orders to
the Exchange electronically, which represents the Exchange's current
market structure. Instead, the Exchange proposes to adopt a new market
structure in which it will operate an automated system, XLE, where XLE
Participants, from any location, may submit orders for immediate
execution, display, or routing, as applicable.\9\ The Exchange believes
that this new system will provide an opportunity for XLE Participants
and their customers to receive efficient, low-cost executions.
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    \8\ Currently, the Exchange trades, pursuant to unlisted trading
privileges, various equity securities listed on national securities
exchanges, but it does not trade Nasdaq-listed securities. On XLE,
the Exchange intends to trade Nasdaq-listed securities, as well as
securities listed on other national securities exchanges, pursuant
to unlisted trading privileges. 15 U.S.C. 78l(f).
    \9\ See proposed Phlx Rule 160.
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    The Exchange anticipates that most XLE Participants will be broker-
dealers that will send orders to XLE for execution, display, or
routing, as applicable. These organizations would not be required to
register with the Exchange to act in any specific capacity other than
as a member organization or a Sponsored Participant of a member
organization. The Exchange would, however, allow member organizations
to register as Market Makers on XLE.\10\ Market Makers, once registered
as such, could then choose to register in one or more securities that
are traded on XLE. Once registered in a particular security, Market
Makers would be required to maintain continuous Limit Orders on both
sides of the market in that security during the Core Session (normally
9:30 a.m. to 4 p.m.).\11\ In addition, Market Makers could also send
other types of orders to XLE in securities in which they are Market
Makers.
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    \10\ See proposed Phlx Rule 1(l). See also infra Section
II.A.1.c.xviii (Market Makers).
    \11\ Unless otherwise noted, all time references refer to
Eastern time as effective in the City of Philadelphia. See Phlx Rule
101.
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    XLE would be an order-driven system; there will be no ``quotes''
akin to what equity specialists submit on the Exchange today. Moreover,
on XLE, there will be no specialists. Although the new rules provide
for Market Makers, an NMS Stock may trade on XLE without a Market
Maker.
    The Exchange intends to discontinue its PACE system and the
operation of its equity trading floor, and then roll-out XLE in several
phases, beginning with two-sided orders only for approximately one week
(with each phase, generally starting first with NYSE and Amex listed
securities and then Nasdaq listed securities); then one-sided orders,
all of which will be deemed ``Do Not Route,'' and incoming linkage
orders routed to the Exchange through the new NMS Linkage and all
Intermarket Trading System (``ITS'') commitments; and finally, routing
functionality. In addition, the Exchange may roll-out Reserve Orders
later than it rolls out other one-sided orders. The Exchange
anticipates that the roll-out will be complete within a two month
period and will publish more precise information regarding the roll-out
via Exchange circular.
b. Summary of Changes
    Because the Exchange proposes to launch XLE in lieu of trading on
its physical trading floor, the Exchange is proposing to modify or
delete many Phlx By-laws and Phlx Rules that relate to floor trading.
The Exchange also is proposing to delete outdated Phlx Rules that
relate to the delivery and settlement of securities,\12\ which
currently take place in registered clearing agencies. Most notably,
changes to the Phlx By-laws and Phlx Rules are necessary to reflect the
proposed elimination of the equity trading floor \13\ and equity
specialists,\14\ as well as the Floor Procedure Committee and the
Equity Allocation, Evaluation and Securities Committee.\15\
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    \12\ See various rules between Phlx Rules 251-423, as
applicable.
    \13\ See various rules between Phlx Rules 102-124, 126-155, and
225-233, as well as certain Phlx Rules in the 600 and 700 series,
certain Equity Floor Procedure Advices (``EFPAs'') from E-1 through
Regulation 7, and Options Floor Procedure Advices (``OFPAs'') F-33
and Regulation 5.
    \14\ See Phlx Rules 201-220, 236, 460-461, 500-524, and EFPAs A-
1 and A-2.
    \15\ See certain Phlx Rules in the 800 series.
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c. The New Trading System--XLE--New Rules
    As stated above, the Exchange's proposed new trading system is XLE.
XLE would be a fully automated, electronic trading system that will
accept orders in NMS Stocks traded on the Exchange from XLE
Participants and display, route, and execute those orders automatically
pursuant to non-discretionary algorithms codified in the proposed Phlx
Rules. Orders will be ranked on XLE in price-time priority regardless
of the identity of the entering XLE Participant. Executions on XLE will
take place automatically and immediately upon order entry if trading
interest is available. XLE will provide an optional routing service for
orders for which trading interest is not present on XLE. A more
detailed description of XLE is set forth below. The Exchange intends to
operate XLE as an ``automated trading center'' for purposes of
Regulation NMS \16\ and would display automated quotations at all times
except in the event that a systems malfunction renders XLE incapable of
displaying automated quotations. The Exchange states that it would halt
trading and therefore not display any quotations in the event of such a
systems malfunction.
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    \16\ See proposed Phlx Rule 160.
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i. New Definitions
    A number of new definitions are used in the proposed Phlx Rules
regarding XLE. The term ``XLE'' shall mean the electronic system which
is operated by the Exchange for the entry, display, execution, and
reporting of orders in

``NMS Stocks.'' \17\ Various persons will be using XLE to trade NMS
Stocks, which include stocks listed on national securities
exchanges.\18\ Collectively, these persons are referred to as ``XLE
Participants.'' \19\ Individuals authorized by a member organization or
a Sponsored Participant who use XLE are ``Participant Authorized
Users'' or ``PAUs.'' \20\ Non-members may gain access to XLE by
becoming ``Sponsored Participants'' \21\ who are sponsored by
``Sponsoring Member Organizations.'' \22\ Further, member organizations
that clear transactions for XLE Participants are referred to as
``clearing firms.'' \23\
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    \17\ See proposed Phlx Rule 1(mm).
    \18\ See proposed Phlx Rule 1(t). Definitions of the classes of
stocks traded on Nasdaq are at proposed Phlx Rule 1(r)-(s).
    \19\ See proposed Phlx Rule 1(nn). ``XLE Participants'' includes
members and member organizations registered on XLE, Sponsored
Participants, and PAUs.
    \20\ See proposed Phlx Rule 1(x).
    \21\ See proposed Phlx Rule 1(jj).
    \22\ See proposed Phlx Rule 1(kk).
    \23\ See proposed Phlx Rule 1(c).
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    XLE Participants that are member organizations may register to
become ``Market Makers'' in a particular security.\24\ Because the term
``Market Makers'' refers to organizations and not individuals,
individuals who enter orders on behalf of Market Makers are called
``Market Maker Authorized Traders'' or ``MMATs.'' \25\ In regards to a
particular security, the term ``Approved Dealer'' means a Market Maker
on XLE in that security or a specialist or market maker registered as
such with another exchange or the National Association of Securities
Dealers, Inc. (``NASD'') in that security. Approved Dealers would be
required to register as such with the Exchange. Approved Dealers also
would be required to notify the Exchange immediately if they cease to
be a specialist or market maker registered as such with another
exchange or NASD in a security.\26\ Approved Dealer status will be used
to determine how certain two-sided orders will be executed.\27\
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    \24\ See proposed Phlx Rule 1(l).
    \25\ See proposed Phlx Rule 1(m).
    \26\ See proposed Phlx Rule 1(a).
    \27\ See proposed Phlx Rule 185(c).
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    Certain characteristics of orders on XLE and quotations on away
markets are newly defined in proposed Phlx Rule 1. The size of orders
is defined by the terms ``odd lot,'' \28\ ``round lot,'' \29\ and
``mixed lot.'' \30\ Also, XLE Participants would be required to mark
all orders as ``Proprietary,'' \31\ ``Professional,'' \32\ or ``Public
Agency.'' \33\ As described below, XLE will take into account away
quotations for purposes of order execution, display, and routing. The
definitions include ``Protected Bid, Offer or Quotation'' \34\ and
``Protected NBBO.'' \35\ Because Rule 611 of Regulation NMS \36\
changes the requirements the Exchange must meet regarding trade-
throughs, the definition of Protected Bid, Offer or Quotation will
reflect this. Specifically, the terms ``Protected Bid, Offer or
Quotation'' shall: (1) Have, after Rule 611 of Regulation NMS is
operative on the Exchange, the same meaning as Rule 600(b)(57) and
(58),\37\ as appropriate, of Regulation NMS, provided, however that if
another trading center providing a Protected Bid, Offer or Quotation
repeatedly fails to respond within one second to incoming orders
attempting to access its Protected Bid, Offer or Quotation, XLE may
cease to consider those Protected Bids, Offers or Quotations as such
by: (a) Notifying the non-responding trading center immediately after
(or at the same time as) electing self-help; and (b) assessing whether
the cause of the problem lies with its own system and, if so, taking
immediate steps to resolve the problem; (2) mean, before Rule 611 of
Regulation NMS is operative on the Exchange, for Nasdaq Global Market
and Nasdaq Capital Market Securities, the best bid, offer or quotation,
respectively, of any national securities exchange or national
securities association; and (3) mean, before Rule 611 of Regulation NMS
is operative on the Exchange, for securities other than Nasdaq Global
Market and Nasdaq Capital Market Securities, the bids, offers or
quotations as required by the ITS Plan (as long as such Plan is in
effect) and related Exchange rules or as otherwise provided in any
relief granted therefrom by the Commission.\38\
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    \28\ See proposed Phlx Rule 1(w).
    \29\ See proposed Phlx Rule 1(gg).
    \30\ See proposed Phlx Rule 1(q).
    \31\ See proposed Phlx Rule 1(bb) (Proprietary Order is defined
as an order for the account of the XLE Participant who entered the
order into XLE).
    \32\ See proposed Phlx Rule 1(aa) (Professional Order is defined
as an order for the account of a broker or dealer, which order is
represented, as agent, by a XLE Participant).
    \33\ See proposed Phlx Rule 1(ee) (Public Agency Order is
defined as an order for the account of a person other than a broker
or dealer, which order is represented, as agent, by a XLE
Participant).
    \34\ See proposed Phlx Rule 1(cc).
    \35\ See proposed Phlx Rule 1(dd).
    \36\ 17 CFR 242.611.
    \37\ 17 CFR 242.600(b)(57)-(58).
    \38\ See proposed Phlx Rule 1(cc).
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    Other terms used in the proposed Phlx Rules and defined in proposed
Phlx Rule 1 are ``Good Standing,'' \39\ ``Quote Management
Instruction'' or ``QMI,'' \40\ ``SCCP,'' \41\ and ``NSCC.'' \42\
Existing terms in current Phlx Rules 2-22 have been renumbered within
proposed Phlx Rule 1.
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    \39\ See proposed Phlx Rule 1(h).
    \40\ See proposed Phlx Rule 1(ff).
    \41\ See proposed Phlx Rule 1(hh).
    \42\ See proposed Phlx Rule 1(u).
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ii. Trading Hours
    XLE would operate three trading sessions: (1) A Pre Market Session;
(2) a Core Session; and (3) a Post Market Session.\43\ The Pre Market
Session would begin at 8 a.m. and continue until the commencement of
the Core Session. The Core Session would take place during a security's
``regular trading hours'' as that term is defined in Rule 600(b)(64) of
Regulation NMS, which is typically from 9:30 a.m. until 4 p.m. The Post
Market Trading Session would begin following the conclusion of the Core
Session, and it would end at 6 p.m.
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    \43\ See proposed Phlx Rule 101.
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iii. Access to XLE
    All XLE Participants would be able to access XLE through an
Exchange electronic interface by means of their own communication lines
or through lines established by service providers in the business of
maintaining connectivity in the securities marketplace. In addition,
XLE Participants may access XLE for the entry of two-sided orders
through technology provided by the Exchange. Finally, to the extent
that the Exchange participates in the ITS Plan or any other linkage
plan for NMS Stocks, ITS commitments and other intermarket orders could
be sent to XLE through these linkages.
iv. Eligible Orders--Basic Requirements
    XLE will accept orders with either an immediate-or-cancel (``IOC'')
designation \44\ or with a time designation set to cancel at the end of
one of XLE's trading sessions.\45\ The time designations include
immediate-or-cancel or good until end of the end of one of XLE's three
trading sessions (Pre Market, Core, or Post Market). In all cases, any
open orders on XLE at the end of the Post Market Session will be
cancelled. XLE would not accommodate good-til-cancelled orders. XLE
will accept orders, other than two-sided orders, for regular way
settlement only.\46\ Two-sided orders may be accepted with non-regular
way settlement.\47\
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    \44\ See proposed Phlx Rule 185(a), (b)(2), and (c).
    \45\ See proposed Phlx Rule 185(b)(1) and (3).
    \46\ See proposed Phlx Rule 162(a).
    \47\ See proposed Phlx Rule 162(b). Under proposed Phlx Rule
162(b), a XLE Participant could mark a two-sided order not for
regular way settlement with one of the following conditions: (1)
Cash; (2) next day; or (3) seller's option.

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    XLE Participants would be required to mark all sell orders (and the
sell side of a two-sided order) with the proper designation of
``short'' or ``short-exempt'' pursuant to Rule 200(g) of Regulation
SHO.\48\ This will allow XLE to treat such short sale orders properly
under Rule 10a-1 of the Act.\49\ Specifically, XLE shall not effect a
sell order or sale of any security, except Nasdaq Global Market and
Nasdaq Capital Market securities, unless such sell order or sale is
effected in compliance with Rule 10a-1. XLE shall effect on the
Exchange sell orders and sales of all Nasdaq securities without regard
to any short sale price test.\50\
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    \48\ 17 CFR 242.200(g).
    \49\ 17 CFR 240.10a-1.
    \50\ See proposed Phlx Rule 455.
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    Further, all orders entered on XLE would be required to conform to
the minimum increments for order entry.\51\ Finally, in order to help
prevent erroneous transactions and protect investors and the national
market system, all orders would be required to meet the price
limitations imposed by the Exchange.\52\ Specifically, under proposed
Phlx Rule 185(d), if an order is entered that, at the time of entry,
would cross the best Protected Bid or Offer by 20% or more, the order
would be rejected by XLE, provided, however, for orders priced under
$1.00, such orders would be rejected by XLE if they cross the best
Protected Bid or Offer by $0.20 or more.
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    \51\ See proposed Phlx Rule 125(a)-(b). In accordance with Rule
612 of Regulation NMS, 17 CFR 242.612, XLE will accept, rank and
display orders priced $1.00 or higher in increments no smaller than
$0.01 and orders below $1.00 in increments no smaller than $0.0001.
In addition, if a security received an exemption from Rule 612, XLE
will accept, rank and display orders consistent with the fullest
extent of the exemption granted to the security. Finally, the
Exchange will seek an exemption from Rule 612 to accept two-sided
orders marked Benchmark in increments no smaller than $0.0001.
    \52\ See proposed Phlx Rule 185(d).
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v. Order Types, Attributes, and Execution
    XLE will accept several order types from XLE Participants. Each
order, except two-sided orders, that executes on XLE will execute
against existing orders on XLE at the existing order's displayable
price, in order of the existing order's ranking, unless it is routed
away for execution.\53\ An existing order's displayable price will be
determined by XLE based on its limit price or pegging instructions, its
routability and QMI (described below), and its short sale status.\54\
Existing orders on XLE will be ranked according to price-time
priority.\55\
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    \53\ Executions occurring as a result of orders matched on XLE
shall be reported by the Exchange to an appropriate consolidated
transaction reporting system. The Exchange shall promptly notify XLE
Participants of all executions as soon as such executions have taken
place. See proposed Phlx Rule 188.
    \54\ See proposed Phlx Rule 185(b)(1)(C)-(E), (b)(3), and (e)-
(f).
    \55\ See proposed Phlx Rule 184.
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    Market Orders. XLE will accept Market Orders.\56\ A Market Order is
an order to buy or sell a stated amount of a security that is to be
executed immediately and automatically against existing orders on XLE
up to and including the price of the best away Protected Quotation. Any
unexecuted shares of a Market Order will be cancelled. If the Protected
Bid is priced higher than the Protected Offer, the Market Order shall
be cancelled.
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    \56\ See proposed Phlx Rule 185(a).
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    Limited Priced Orders. XLE will accept a number of limited priced
orders. XLE will accept a Limit Order.\57\ Limit Orders are one-sided
orders to buy or sell a stated amount of a security at a specified
price or better. XLE will also accept a Reserve Order.\58\ Reserve
Orders are one-sided orders to buy or sell a stated amount of a
security at a specified price or better with at least a round lot
portion of the size that is displayable and with at least a round lot
portion of the size that is not displayable by XLE, provided that the
portion of the Reserve Order that is not displayable shall have the
same price as the portion that is displayable. Limit Orders and Reserve
Orders will be routable unless otherwise marked by a XLE
Participant.\59\
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    \57\ See proposed Phlx Rule 185(b)(1)(A).
    \58\ See proposed Phlx Rule 185(b)(1)(B).
    \59\ See proposed Phlx Rule 185(b)(1)(A), (B), and (C).
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    Other limited priced orders include an IOC Order, a Single Sweep
Order (``SSO''), and an Intermarket Sweep Order (``ISO''). IOC Orders
will be executed immediately and automatically against existing orders
on XLE up to and including the price of the best away Protected
Quotation, unless the Protected Bid is priced higher than the Protected
Offer, in which case XLE will ignore away Protected Quotations.\60\ The
shares of an IOC Order not executed on XLE shall be immediately and
automatically cancelled without routing the order elsewhere. Any XLE
Participant may use an IOC Order to immediately and automatically
execute against the full size of the displayed quotation on XLE
(including any undisplayed or reserve size available at the price of
the displayed quotation). As with all executions on XLE, XLE will
immediately and automatically transmit a response to the XLE
Participant who sent the IOC Order indicating the action taken with
respect to the IOC Order. Additionally, XLE will immediately and
automatically update its bid/offer as a result of the execution.
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    \60\ See proposed Phlx Rule 185(b)(2)(A).
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    SSOs are executed immediately and automatically against existing
orders on XLE and/or away Protected Quotations, up to and including the
order's limit price.\61\ Any shares of the SSO not immediately executed
on XLE or on an away market shall be cancelled. ISOs are executed
immediately and automatically against existing orders on XLE at their
displayable price, in order of their ranking, and the shares of the ISO
not so executed shall be cancelled.\62\ An ISO will be executed on XLE
without regard to any away Protected Quotations.
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    \61\ See proposed Phlx Rule 185(b)(2)(B).
    \62\ See proposed Phlx Rule 185(b)(2)(C). Phlx intends that the
ISO Order be equivalent to the intermarket sweep order defined in
Rule 600(b)(30) of Regulation NMS, 17 CFR 242.600(b)(30). XLE
Participants entering an ISO must ensure that the ISO meets the
requirements of Rule 600(b)(30) of Regulation NMS. This order type
will not be effective until Rule 611 of Regulation NMS is operative,
which is currently scheduled for February 5, 2007.
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    Pegged Orders. XLE will also accept Pegged Orders. Pegged Orders
are round or mixed lot limited price orders to buy or sell, only on
XLE, a stated amount of a security at a display price set to track (up,
down, or at) the current best Protected Bids or Offers on either side
of the market by an amount specified by the XLE Participant in an
increment permitted by proposed Phlx Rule 125, provided, however that
the display price will not impermissibly lock or cross the market.\63\
The tracking of the relevant Protected Bid or Offer for Pegged Orders
will occur on a real-time basis, except that when the calculated price
for the Pegged Order would exceed its limit price, it will no longer
track and will remain displayed at its limit price. A Pegged Order must
consist of at least a round lot portion that is displayable and may
include at least a round lot portion that is not displayable by XLE,
provided that the portion of the Pegged Order that is not displayable
shall have the same price as the portion that is displayable.\64\
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    \63\ See proposed Phlx Rule 185(b)(3).
    \64\ At the Exchange's request, the Commission has clarified the
description of Pegged Orders to match the proposed rule text as
specified in Exhibit 5. See Telephone call between Heather Seidel,
Senior Special Counsel, Division of Market Regulation, Commission,
and John Dayton, Director and Counsel, Phlx, on August 15, 2006
(``August 15 Telephone Call'').

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    Two-Sided Orders. XLE will accept a number of two-sided orders.
Two-sided orders are instructions to match immediately and
automatically on XLE the identified buy-side with the identified sell-
side.\65\ For instance, XLE will accept Mid-Point Cross Orders.\66\
Mid-Point Cross Orders are two-sided orders that execute, in their
entirety, at the midpoint of the Protected National Best Bid/Offer
(``NBBO''), unless the Protected Bid is higher than the Protected
Offer, in which case the Mid-Point Cross Order will cancel.
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    \65\ See proposed Phlx Rule 185(c).
    \66\ See proposed Phlx Rule 185(c)(1).
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    XLE will also accept IOC Cross Orders.\67\ IOC Cross Orders are
two-sided orders that execute, in their entirety, at the specified
price, except as described below. IOC Cross Orders will be cancelled if
the specified price would trade through the price of the best order on
XLE disseminated pursuant to proposed Phlx Rule 184(c). IOC Cross
Orders will also be cancelled if the specified price would trade
through the price of the Protected NBBO, unless the Protected Bid is
priced higher than the Protected Offer or the IOC Cross Order is marked
as meeting the requirements of an intermarket sweep order in Rule
600(b)(30) of Regulation NMS,\68\ as Benchmark, or as a Qualified
Contingent Trade.\69\
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    \67\ See proposed Phlx Rule 185(c)(2).
    \68\ IOC Cross Orders so marked are intended to meet the
definition of an intermarket sweep order in Rule 600(b)(30) of
Regulation NMS, 17 CFR 242.600(b)(30), because the order has a limit
price and the XLE Participant sending the order is responsible to
send the other orders required in Rule 600(b)(30)(ii), 17 CFR
242.600(b)(30)(ii). Therefore, this order attribute will not be
effective until Rule 611 of Regulation NMS is operative, which is
currently scheduled for February 5, 2007.
    \69\ See proposed Phlx Rule 185(c)(3). Orders marked
``Benchmark'' must meet the requirements of Rule 611(b)(7) of
Regulation NMS, 17 CFR 242.611(b)(7). Orders marked ``Qualified
Contingent Trade'' must meet the requirements of an exemption to
Rule 611 of Regulation NMS, 17 CFR 242.611. The Exchange intends to
request the appropriate exemptive relief to accommodate these
Qualified Contingent Trade orders prior to the operative date of
Regulation NMS.
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    In addition, XLE will cancel Mid-Point Cross Orders (when the
Protected NBBO is locked) and IOC Cross Orders if the order would
trade: (1) If entered by an Approved Dealer, at the price of a Public
Agency Order \70\ on XLE disseminated pursuant to proposed Phlx Rule
184(c); or (2) if entered by other than an Approved Dealer, at the
price of a Public Agency Order,\71\ a Proprietary Order,\72\ or a
Professional Order \73\ on XLE disseminated pursuant to proposed Phlx
Rule 184(c).\74\ Approved Dealers are providing liquidity in the
security, either on XLE, on another exchange, or in the over-the-
counter market, through their specialist or market making activities.
Therefore, the Exchange believes that it is appropriate to give two-
sided orders entered by Approved Dealers priority over orders for the
account of broker-dealers and over proprietary orders, but not Public
Agency Orders, of XLE Participants.\75\
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    \70\ The term ``Public Agency Order'' shall mean an order for
the account of a person other than a broker or dealer, which order
is represented, as agent, by a XLE Participant. See proposed Phlx
Rule 1(ee).
    \71\ See id.
    \72\ The term ``Proprietary Order'' shall mean an order for the
account of the XLE Participant who entered the order into XLE. See
proposed Phlx Rule 1(bb).
    \73\ The term ``Professional Order'' shall mean an order for the
account of a broker or dealer, which order is represented, as agent,
by a XLE Participant. See proposed Phlx Rule 1(aa).
    \74\ The term ``Approved Dealer'' means a Market Maker on XLE in
that security or a specialist or market maker registered as such
with another exchange or NASD in that security. See proposed Phlx
Rule 1(a).
    \75\ The Exchange believes that this is similar to the
provisions of current National Securities Exchange (``NSX'') Rule
11.9(l)-(m), (u).
---------------------------------------------------------------------------

    Mid-Point Cross Orders and IOC Cross Orders may trade at the price
of any order on XLE disseminated pursuant to proposed Phlx Rule 184(c)
if neither side of the cross order is marked as Proprietary, the cross
order is for at least 5,000 shares, has an aggregate value of at least
$100,000, and its size is larger than the aggregate size on XLE
disseminated pursuant to proposed Phlx Rule 184(c) at that price.\76\
Pursuant to proposed Rule 185(c)(iv), a non-regular way cross is a two-
sided order that, if marked for non-regular way settlement, may execute
at any price, without regard to the Protected NBBO or any other orders
on XLE, provided that Mid-Point Cross Orders marked non-regular way
will be cancelled when the Protected Bid is higher than the Protected
Offer.
---------------------------------------------------------------------------

    \76\ See proposed Phlx Rule 185(c)(1)-(2).
---------------------------------------------------------------------------

    Finally, orders marked Benchmark cannot take priority over existing
orders on XLE for less than the minimum quoting increment for that NMS
stock indicated in Phlx Rule 125.\77\
---------------------------------------------------------------------------

    \77\ See August 15 Telephone Call, supra note 64.
---------------------------------------------------------------------------

vi. Order Routing
    The Exchange will offer an optional routing service for XLE
Participants. Any member organization that is a XLE Participant, or a
Sponsored Participant's Sponsoring Member Organization, may enter into
a Routing Agreement with the Exchange and the Exchange's broker-dealer
routing facility to gain access to the routing features of XLE.\78\ The
Exchange intends to utilize PRO Securities LLC (``PRO'') \79\ to
perform routing and processing functions necessary to clear routed
orders, as described in proposed Phlx Rule 185, as a facility (as
defined in Section 3(a)(2) of the Act) of the Exchange. Certain order
types, including Limit Orders, Reserve Orders, and SSOs are eligible to
be routed.\80\
---------------------------------------------------------------------------

    \78\ See proposed Phlx Rule 181.
    \79\ See infra note 183 (discussing PRO Securities).
    \80\ Regardless of whether a XLE Participant chooses to access
the routing features of XLE, all XLE Participants will be able to
use IOC Orders to execute against the full size of the displayed
quotation on XLE (including any undisplayed or reserve size
available at the price of the displayed quotation).
---------------------------------------------------------------------------

    Limit Orders and Reserve Orders \81\ will be executed and routed
based on a XLE Participant's QMI. \82\ XLE Participants may choose one
of two QMI: (1) Ship and Quote; or (2) Post Order and Participate
(``POP''). With Ship and Quote,\83\ when the order arrives, XLE will
execute it immediately and automatically against existing orders on XLE
at their displayable price, up to their full size, and route orders to
any away Protected Quotations up to and including the order's limit
price and up to and including the full displayable size of the
Protected Quotation. If the order arrives during a time when a
Protected Bid is priced higher than a Protected Offer, then XLE will
not route orders to any away Protected Quotations. In either case, the
remaining shares of the incoming order will be displayable on XLE at
the order's limit price.
---------------------------------------------------------------------------

    \81\ XLE Participants may mark Limit Orders and Reserve Order
with `Do Not Route' instructions. In that case, XLE will not route
those orders, but instead will only execute and display them on XLE.
See proposed Phlx Rule 185(b)(1)(D).
    \82\ See proposed Phlx Rule 185(b)(1)(C).
    \83\ See proposed Phlx Rule 185(b)(1)(C)(i).
---------------------------------------------------------------------------

    With POP,\84\ when the order arrives, XLE will execute it
immediately and automatically against existing orders on XLE at their
displayable price up to and including the price of the best away
Protected Quotation and route orders to away Protected Quotations
priced at the best away Protected Quotation. After XLE receives
responses to such orders that were routed away, XLE will repeat this
process by continuing to route orders to away Protected Quotations
priced at the best away Protected Quotation until the incoming order is
executed in its entirety or its limit price is reached. During this
time, any unexecuted and unrouted shares of an incoming buy (sell)
order will be

displayable as the bid (offer) on XLE at $.01 away from the best
Protected Offer (Bid), unless: (1) The Protected Bid is priced higher
than the Protected Offer, then the incoming buy (sell) order will be
displayable on XLE at the same price as best Protected Offer (Bid); or
(2) the Protected Bid is priced equal to the Protected Offer and XLE is
displaying an order at the price of the Protected NBBO on the same side
of the market as the incoming order, then the incoming order will be
displayable at the Protected NBBO. The POP instruction differs from the
Ship and Quote instruction, in that with the POP instruction, XLE will
continue to send orders to available liquidity so long as liquidity is
available up to and including the order's limit price. With the Ship
and Quote instruction, XLE will only send orders once, to the liquidity
that is available at the time of order entry.
---------------------------------------------------------------------------

    \84\ See proposed Phlx Rule 185(b)(1)(C)(ii). The Exchange does
not anticipate that this feature will be available when XLE is
initially launched, but expects that it will be available soon
afterwards. The Exchange will notify XLE Participants of its
availability after the initial launch of XLE.
---------------------------------------------------------------------------

    The following order types are, by definition, never routed: IOC
Orders, ISO, Pegged Orders, IOC Cross Orders, and Mid-Point Cross
Orders. Limit Orders and Reserve Orders with ``Do Not Route''
instructions attached are also never routed. Pursuant to Rule
185(b)(1)(D), such Limit and Reserve Orders marked ``Do Not Route'' are
executed immediately and automatically against existing orders on XLE
at their displayable price, in order of their ranking, up to and
including the price of the best away Protected Quotation, and the
shares of the such Limit or Reserve Order not so executed shall be
displayable as a bid (offer) on XLE, in the case of a buy (sell) order,
at $.01 away from the best Protected Offer (Bid) regardless of the XLE
Participant's QMI, unless: (1) The Protected Bid is priced equal to the
Protected Offer and XLE is displaying an order at the price of the
Protected NBBO on the same side of the market as the incoming order,
then the incoming order will be displayable at the Protected NBBO; or
(2) the Protected Bid is priced higher than the Protected Offer, then a
buy (sell) order will be executed immediately and automatically against
existing orders on XLE at their displayable price, in order of their
ranking, without regard to away Protected Quotations, and the shares of
such Limit or Reserve Order not so executed shall be displayable on XLE
at the limit price.
    XLE will not route orders to away quotations that are not Protected
Quotations. Additionally, XLE may trade through the price of away
quotations that are not Protected Quotations. XLE Participants should
note that the definition of Protected Quotations is dependent on
whether Rule 611 of Regulation NMS \85\ is operative on the
Exchange.\86\ Before Rule 611 of Regulation NMS is operative on the
Exchange, a Protected Quotation will be, for securities other than
those listed on Nasdaq, the best bid or offer of any ITS participating
market center, subject to any exemption the Exchange may receive from
the Commission. For Nasdaq securities before Rule 611 of Regulation NMS
is operative on the Exchange, a Protected Quotation will be the best
bid, offer or quotation, respectively, of any national securities
exchange or national securities association. After Rule 611 of
Regulation NMS is operative on the Exchange, a Protected Quotation will
have the same meaning as Rule 600(b)(57) and (58), as appropriate, of
Regulation NMS.\87\ In either case, Protected Quotations may not
include every available source of liquidity in the marketplace for a
security. Therefore, when deciding to route agency orders to XLE, XLE
Participants should be mindful of their duty of best execution.
---------------------------------------------------------------------------

    \85\ 17 CFR 242.611.
    \86\ Currently, the Commission has set the operative date for
Rule 611 of Regulation NMS, 17 CFR 242.611, on among other venues,
the Exchange as February 5, 2007. See Securities Exchange Act
Release No. 53829 (May 18, 2006), 71 FR 30038 (May 24, 2006) (File
No. S7-10-04).
    \87\ 17 CFR 242.600(b)(57)-(58).
---------------------------------------------------------------------------

vii. Order Display and Ranking
    Orders (or the portion of orders) that are not immediately
executed, routed away, or cancelled become orders on XLE available to
be displayed and executed against new orders sent to XLE.\88\ XLE will
use two methods to display orders that are available for execution.
First, pursuant to Rule 602 of Regulation NMS,\89\ XLE will collect and
make available to the appropriate market data reporting plans for
dissemination the best-ranked displayed order(s) to buy and the best
ranked displayed orders(s) to sell on XLE and the aggregate displayed
size of such orders associated with such prices.\90\ Second, XLE will
display all orders, except the undisplayed portion of Reserve Orders,
to all users of a depth of book feed on an anonymous basis.\91\ The
Exchange will make this depth of book feed available to any person,
subject to any fee associated with this service.
---------------------------------------------------------------------------

    \88\ Pegged Orders will be displayed as described, supra, in the
text accompanying notes 63-64. Other than Limit, Reserve, and Pegged
Orders, orders on XLE are immediate-or-cancel.
    \89\ 17 CFR 242.602.
    \90\ See proposed Phlx Rule 184(c).
    \91\ See proposed Phlx Rule 184(b).
---------------------------------------------------------------------------

    XLE will rank orders on XLE in strict price-time priority.\92\
Orders are ranked beginning with the highest priced orders to buy and
the lowest priced orders to sell. For purposes of ranking, XLE uses the
price at which the order is displayed.\93\ Within each price, orders
are ranked in time priority based on the time that: (1) An order is
received; (2) the price is updated; or (3) the display portion of a
Reserve Order is reduced below a round lot and the display size is
refreshed with shares from the undisplayed portion of the Reserve
Order, except that the undisplayed portion of Reserve Orders shall be
ranked after all other orders and display portions of Reserve Orders at
the same price. With regard to Reserve Orders, XLE will decrement the
share size of the display portion of a Reserve Order upon an execution
against such portion of such order. When the display portion of a
Reserve Order is reduced below a round lot, the display portion of that
Reserve Order will be refreshed and re-ranked in time priority based on
the time of refresh, however, the undisplayed portion of that Reserve
Order will retain the ranking in relation to the undisplayed portion of
other Reserve Orders based on the original Reserve Order entry time.
Orders for which the price is changed are ranked based on the time of
the change.\94\
---------------------------------------------------------------------------

    \92\ See proposed Phlx Rule 184(a).
    \93\ For purposes of ranking, orders are considered displayed
based on the price that they would be displayed on the Exchange's
depth of book feed. See proposed Phlx Rule 184(b). This price is the
same price that would be disseminated to the appropriate market data
reporting plans pursuant to proposed Phlx Rule 184(c) if the order
was the best round lot bid or offer.
    \94\ See Partial Amendment No. 2.
---------------------------------------------------------------------------

viii. Anonymity
    Except as provided below, as proposed, transactions executed on XLE
will be processed anonymously. This means that XLE transaction reports
will indicate the details of the transaction, but will not reveal
contra-party identities.\95\ XLE will maintain this anonymity after the
execution by instructing the registered clearing agencies of the
anonymous nature of the transaction.\96\ Additionally, no one having
the right to trade on XLE and who has been a party to or has knowledge
of an execution shall be under obligation to divulge, except to the
Exchange, the name of the person

buying or selling in any transaction.\97\ The Exchange believes that
post-trade anonymity should benefit investors because preserving
anonymity until and after the settlement of a trade should limit the
potential market impact that disclosing the XLE Participant's identity
may have. Specifically, when a contra-party's identity is revealed, XLE
Participants may be able to detect trading patterns and make
assumptions about the potential direction of the market based on the
XLE Participant's presumed client base. For example, if the XLE
Participant handles large institutional orders and becomes an active
buyer in a security, others could anticipate such demand and adjust
their trading strategy accordingly. The Exchange believes that this
could result in increased costs. The Exchange believes that post-trade
anonymity should not compromise a XLE Participant's ability to settle
an erroneous trade, because under proposed Phlx Rule 163, the clearly
erroneous execution resolution process is coordinated by the Exchange,
without the need for contra-parties to know each other's identities. By
masking the XLE Participant's identity, the Exchange believes that it
may help XLE Participants meet their best execution obligations by
mitigating market impact.\98\
---------------------------------------------------------------------------

    \95\ See proposed Phlx Rule 189(b).
    \96\ See Securities Exchange Act Release Nos. 52651 (October 21,
2005), 70 FR 65956 (November 1, 2005) (SR-SCCP-2004-03); and 48526
(September 23, 2003), 68 FR 56367 (September 30, 2003) (SR-NSCC-
2003-14).
    \97\ See proposed Phlx Rules 161 and 189(c).
    \98\ See, e.g., Securities Exchange Act Release No. 49053
(January 12, 2004), 69 FR 2642 (January 16, 2004) (SR-PCX-2003-63).
---------------------------------------------------------------------------

    The Exchange will reveal the identity of the member organization or
the member organization's clearing firm in the following circumstances:
(1) For regulatory purposes or to comply with an order of a court or
arbitrator; (2) when the National Securities Clearing Corporation
(``NSCC'') or Stock Clearing Corporation of Philadelphia (``SCCP'')
ceases to act for a member organization or the member organization's
clearing firm and NSCC or SCCP determines not to guarantee the
settlement of the member organization's trades; or (3) on risk
management reports provided to the contra-party of the member
organization or the member organization's clearing firm which disclose
trading activity on an aggregate dollar value basis.\99\ Also, the
Exchange will reveal to a member organization, no later than the end of
the day on the date an anonymous trade was executed, when that member
organization submits an order that has executed against an order
submitted by that same member organization.\100\
---------------------------------------------------------------------------

    \99\ See proposed Phlx Rule 189(c).
    \100\ See proposed Phlx Rule 189(d).
---------------------------------------------------------------------------

    In order to satisfy the member organization's record keeping
obligations under Rules 17a-3(a)(1)\101\ and 17a-4(a) under the
Act,\102\ Phlx shall, with the exception of those circumstances
described below, retain for the period specified in Rule 17a-4(a) the
identity of each member organization that executes an anonymous
transaction described in paragraph (b) of proposed Phlx Rule 189. In
addition, member organizations shall retain the obligation to comply
with Rules 17a-3(a)(1) and 17a-4(a) under the Act whenever they possess
the identity of their contra-party. In either case, the information
shall be retained in its original form or a form approved under Rule
17a-6 under the Act.\103\ In connection with this proposed rule change,
the Exchange intends to request, for XLE Participants, an exemption
from Rule 10b-10 under the Act,\104\ regarding the required disclosure
of the contra-party on a customer's confirmation, and a no-action
position on Rules 17a-3 and 17a-4 under the Act, regarding a XLE
Participant's reliance on the Exchange for recordkeeping
responsibilities for anonymous executions.\105\
---------------------------------------------------------------------------

    \101\ 17 CFR 240.17a-3(a)(1).
    \102\ 17 CFR 240.17a-4(a).
    \103\ 17 CFR 240.17a-6.
    \104\ 17 CFR 240.10b-10.
    \105\ See Letter from Brian A. Bussey, Assistant Chief Counsel,
Division of Market Regulation, Commission, to Mai S. Shiver, Senior
Counsel, Pacific Exchange, Inc., dated April 30, 2004.
---------------------------------------------------------------------------

ix. Odd Lots and Mixed Lots
    XLE will rank odd lot orders \106\ and mixed lot orders \107\ in
the same manner (in price-time priority) as round lot orders \108\ (or
multiple round lot orders).\109\ This means that all incoming orders,
except ITS commitments \110\ and two-sided orders, will be executed
against existing orders on XLE on an order-by-order basis regardless of
the size of the existing orders. For example, suppose XLE receives
three orders to buy in the following sequence: Order A for 50 shares
priced at $10.00, Order B for 300 shares priced for $10.00, and Order C
for 125 shares priced for $10.00. Then, XLE receives an order to sell,
Order D, for 100 shares priced at $10.00. XLE will execute 50 shares of
Order D against Order A at $10.00 and 50 shares of Order D against 50
shares of Order B at $10.00. This leaves 250 shares of Order B. Next,
XLE receives another order to sell, Order E, for 280 shares priced at
$10.00. XLE will execute 250 shares of Order E against the remainder of
Order B at $10.00 and 30 shares of Order E against 30 shares of Order C
at $10.00. This leaves 95 shares of Order C. Finally, XLE receives an
order to sell, Order F, for 100 shares at $10.00. XLE will execute 95
shares of Order F against the remainder of Order C at $10.00. This
leaves 5 shares of Order F available to execute against future orders
to sell.
---------------------------------------------------------------------------

    \106\ See proposed Phlx Rules 1(w) and 187(a) (an odd lot order
shall refer to an order that is sent to XLE for less than 100 shares
or a larger order that has less than 100 shares remaining
unexecuted). All odd lot orders that a XLE Participant submits to
XLE as an odd lot order must be a Limit Order, an IOC Order, or a
two-sided order.
    \107\ See proposed Phlx Rule 1(q) (a mixed lot order shall refer
to an order that is more than 100 shares, but shall not include
orders in multiples of 100 shares).
    \108\ See proposed Phlx Rule 1(gg) (a round lot order shall
refer to an order that is for 100 shares). Multiple round lot orders
are orders for multiples of 100 shares, for example 400 shares.
    \109\ See proposed Phlx Rule 187(c).
    \110\ ITS is not configured to accept executions in share
amounts other than round lots and multiples of round lots.
Therefore, XLE will not execute existing odd lot or odd lot portions
of mixed lot orders against an incoming ITS commitment. XLE will
treat any commitment or order from any other intermarket linkage
with similar restrictions in the same manner.
---------------------------------------------------------------------------

    The market data reporting plans that disseminate quotations
pursuant to Rule 602 of Regulation NMS \111\ only collect and report
quotations in round lots and multiples of round lots.\112\ For purposes
of the CQ and Nasdaq UTP Plans, the Exchange will not disseminate any
odd lot orders or any size connected to the odd lot portion of mixed
lot orders.\113\ For example, if XLE has two orders to buy at $10.00,
the best price to buy on XLE, one consisting of 50 shares and another
consisting of 250 shares, the Exchange shall disseminate to the CQ or
Nasdaq UTP Plan, as appropriate, a quotation of $10.00 for 200 shares.
XLE would ignore the 50 share odd lot order and takes into account 200
shares (the round lot multiple portion) of the 250 share order,
ignoring the remaining 50 share portion (the odd lot portion of the
mixed lot). XLE would not aggregate the odd lot portions. However, the
Exchange's depth of book feed would display both orders at their actual
size, 50 shares and 250 shares. Because the Exchange will not
disseminate odd lot orders to the CQ and Nasdaq UTP Plans, the Exchange
proposes the following restrictions regarding odd lot orders so that
orders that would otherwise be displayable are not entered in a form
that is undisplayable.\114\ Pursuant to proposed Phlx Rule 187(d), XLE

Participants shall not unbundle round lots for the purpose of entering
odd lot limit orders in comparable amounts. XLE Participants shall
aggregate odd lot orders into round lots when such orders are for the
same account or for various accounts in which there is a common
monetary interest. XLE Participants shall not enter both buy and sell
odd lot limit orders in the same stock before one of the orders is
executed for the purpose of capturing the spread in the stock when such
orders are for the same account or for various accounts in which there
is a common monetary interest.
---------------------------------------------------------------------------

    \111\ 17 CFR 242.602.
    \112\ The two market data reporting plans for quotations in NMS
Stocks are the Consolidated Quotation Plan (``CQ Plan'') and the
Nasdaq UTP Plan.
    \113\ XLE will, however, display the actual size of odd lot and
mixed lot orders over its depth of book feed. See proposed Phlx Rule
184(b).
    \114\ See proposed Phlx Rule 187(d).
---------------------------------------------------------------------------

x. Prevention of Trade-Throughs
    XLE is designed to automatically prevent trade-throughs of
Protected Quotations, both before and after Rule 611 of Regulation NMS
is operative. XLE would accomplish this in two principal ways: (1)
Through the use of outbound routing \115\ for those orders that will be
available to route; and (2) by only displaying orders \116\ at prices
that would not impermissibly lock or cross a market. Additionally, XLE
will take advantage of various exceptions to Rule 611, once operative.
Phlx will allow XLE to trade-through a Protected Quotation displayed by
a trading center that was experiencing a failure, material delay, or
malfunction of its systems or equipment.\117\ Specifically, if another
trading center providing a Protected Bid, Offer or Quotation repeatedly
fails to respond within one second to incoming orders attempting to
access its Protected Bid, Offer or Quotation, XLE may cease to consider
those Protected Bids, Offers or Quotations as such by: (1) Notifying
the non-responding trading center immediately after (or at the same
time as) electing self-help; and (2) assessing whether the cause of the
problem lies with its own system and, if so, taking immediate steps to
resolve the problem. Further, XLE will allow two-sided orders for non-
regular way settlement \118\ to trade-through Protected
Quotations.\119\ XLE will allow Limit, Reserve, IOC, and IOC Cross
Orders to execute at prices that trade-through Protected Quotations
when the Protected Bid is higher than Protected Offer.\120\ Incoming
ISO orders, which may, by definition, trade-through Protected
Quotations, are designed to take advantage of the Rule 611 exception
for intermarket sweep orders.\121\ XLE also will allow orders \122\ to
trade-through Protected Quotations when XLE has simultaneously routed
an intermarket sweep order to execute against the full displayed size
of that Protected Quotation.\123\ Rule 611(b)(7) of Regulation NMS
allows orders to execute if their price was not based, directly or
indirectly, on the quoted price of the NMS stock at the time of
execution and for which the material terms were not reasonably
determinable at the time the commitment to execute the order was
made.\124\ XLE will allow IOC Cross Orders that have been marked
``Benchmark''\125\ to trade-through Protected Quotations based on Rule
611(b)(7). In addition, if the Commission grants the appropriate
exemption from Rule 611 of Regulation NMS, XLE will allow certain IOC
cross orders marked as ``Qualified Contingent Trades'' to trade through
protected quotations.\126\ XLE will identify trades executed pursuant
to an exception or exemption to Rule 611 of Regulation NMS in
accordance with specifications approved by the operating committee of
the relevant national market system plan for an NMS Stock.\127\
---------------------------------------------------------------------------

    \115\ See supra Section II.A.1.c.vi (Order Routing).
    \116\ See supra Section II.A.1.c.vii (Order Display and
Ranking).
    \117\ See 17 CFR 242.611(b)(1).
    \118\ See proposed Phlx Rule 185(c)(4).
    \119\ See 17 CFR 242.611(b)(2).
    \120\ See 17 CFR 242.611(b)(4).
    \121\ See 17 CFR 242.611(b)(5).
    \122\ Limit Orders, Reserve Orders, and SSOs. See proposed Phlx
Rule 185(b)(1)(C)(i) and (b)(2)(B).
    \123\ See 17 CFR 242.600(b)(30) and 17 CFR 242.611(b)(6).
    \124\ See 17 CFR 242.611(b)(7).
    \125\ See proposed Phlx Rule 185(c)(3).
    \126\ See id. See also August 15 Telephone Call, supra note 64.
    \127\ See proposed Phlx Rule 188 and Partial Amendment No. 2.
---------------------------------------------------------------------------

xi. Locked and Crossed Markets
    XLE would not, upon initial implementation, lock or cross any away
Protected Quotations that it reads from an effective national market
system plan, except in the following circumstances. XLE may lock or
cross an away Protected Quotation when XLE reads that a Protected Bid
is higher than a Protected Offer. XLE also may lock or cross an away
Protected Quotation if XLE has first routed an order to that quotation
and all better priced quotations for their full displayed size.
Finally, if XLE is reading the Protected Bid equal to the Protected
Offer and XLE is disseminating an order pursuant to proposed Phlx Rule
184(c) equal to either the best Protected Bid or best Protected Offer,
XLE may continue to display new orders at the same price of the order
it is disseminating.
    In addition, the Exchange proposes a rule that would require
members of the Exchange to reasonably avoid displaying, and prohibit
them from engaging in, a pattern or practice of displaying any
quotations that lock or cross a Protected Quotation, and any manual
quotations that lock or cross a quotation previously disseminated
pursuant to an effective national market system plan, unless an
applicable exemption applies.\128\ Phlx requests that proposed Phlx
Rule 186 not become operative until Rule 610 of Regulation NMS \129\ is
operative on the Exchange, which is currently scheduled for February 5,
2007.
---------------------------------------------------------------------------

    \128\ See proposed Phlx Rule 186(b) and (d).
    \129\ 17 CFR 242.610.
---------------------------------------------------------------------------

xii. Trading Halts
    A number of current and proposed rules will govern trading halts on
XLE. Proposed Phlx Rule 164(a) would allow the Chairman and Chief
Executive Officer of the Exchange or his designee to suspend trading in
any and all securities traded on XLE whenever in his or his designee's
opinion such suspension would be in the public interest. No such action
shall continue longer than a period of two days, or as soon thereafter
as a quorum of Governors can be assembled, unless the Board approves
the continuation of such suspension. This is the general authority to
suspend trading on XLE. Additionally, current Phlx Rules 133 (Trading
Halts Due to Extraordinary Market Volatility) and 136 (Trading Halts in
Certain Exchange Traded Funds) would provide for trading halts in
specific situations in securities to be traded on XLE.
    If trading in one or more securities is halted, all orders in those
securities shall be cancelled.\130\ XLE shall not accept any orders, or
any changes to orders (other than cancellations), in those securities
during a trading halt. Immediately after the trading halt has ended,
XLE shall begin accepting orders for processing.
---------------------------------------------------------------------------

    \130\ See proposed Phlx Rule 164(b).
---------------------------------------------------------------------------

xiii. Clearly Erroneous Executions
    Pursuant to proposed Phlx Rule 163, a XLE Participant that receives
an execution on an order that was submitted erroneously to XLE for its
own or customer account may request that Phlx review the transaction
under proposed Phlx Rule 163(b) within the time limits prescribed
therein. The terms of a transaction executed on XLE would be ``clearly
erroneous'' when there is an obvious error in any term, such as price,
number of shares or other unit of trading, or identification of the
security. A transaction made in clearly erroneous error and cancelled
by both parties may be removed, if the parties

do not object, subject to the approval of Phlx. If both parties do not
agree that a transaction is clearly erroneous, then the Exchange,
through an Exchange Official,\131\ will then perform a review pursuant
to proposed Phlx Rule 163(c)(1). If the Exchange Official determines
that the transaction is not clearly erroneous, the Exchange Official
shall decline to take any action in connection with the completed
trade. In the event that the Exchange Official determines that the
transaction in dispute is clearly erroneous, the Exchange Official
shall declare the transaction null and void or modify one or more of
the terms of the transaction to achieve an equitable rectification of
the error that would place the parties in the same position, or as
close as possible to the same position that they would have been in,
had the error not occurred.
---------------------------------------------------------------------------

    \131\ An Exchange Official is an officer of Phlx or such other
designee of Phlx. See proposed Phlx Rule 163(b).
---------------------------------------------------------------------------

    The party affected by the review may then appeal the decision of
the Exchange Official to the Referee within the time limits set forth
in Phlx Rule 124(d)(i) (currently within fifteen minutes).\132\ The
Referee shall review the decision of the Exchange Official as if it was
a Floor Official Ruling.\133\ Therefore, the decisions of the Referee
are final and may not be appealed to the Board of Governors, and
members or member organizations who fail to promptly comply with the
decision of an Exchange Official or Referee may result in referral to
the Business Conduct Committee (``BCC'').\134\ Notwithstanding the
Exchange's dispute process, disputes continue to be eligible for
arbitration pursuant to Phlx Rule 950.
---------------------------------------------------------------------------

    \132\ The Referee is an Exchange employee or independent
contractor who is appointed by the Phlx Board of Governors on the
recommendation of the Audit Committee. See Phlx Rule 124. The
Referee resolves disputes and makes certain rulings pursuant to Phlx
Rule 124(d) and proposed Phlx Rule 163(c)(2).
    \133\ See proposed Phlx Rule 163(c)(2).
    \134\ See Phlx Rules 124(d)(iv) and (vi).
---------------------------------------------------------------------------

    Exchange Officials may, on their own motion, review transactions on
XLE that arose during any disruption or malfunction in the use or
operation of any electronic communications or trading facilities of the
Phlx, or extraordinary market conditions or other circumstances in
which the nullification or modification of transactions may be
necessary for the maintenance of a fair and orderly market or the
protection of investors and the public interest.\135\ Each XLE
Participant involved in such a transaction shall be notified as soon as
practicable, and the XLE Participant aggrieved by the action may appeal
such action to the Referee.\136\
---------------------------------------------------------------------------

    \135\ See proposed Phlx Rule 163(d).
    \136\ See id.
---------------------------------------------------------------------------

    Pursuant to Rule 12f-2 under the Act,\137\ as amended, the Phlx may
extend unlisted trading privileges to a security that is the subject of
an initial public offering when at least one transaction in the subject
security has been effected on the national securities exchange or
association upon which the security is listed and the transaction has
been reported pursuant to an effective transaction reporting plan. A
clearly erroneous error may be deemed to have occurred in the opening
transaction of the subject security if the execution price of the
opening transaction on XLE is more than the lesser of $1.00 or 10% away
from the opening price on the listing exchange or association. In such
circumstances, the Exchange Official shall declare the opening
transaction null and void or adjust the transaction price to the
opening price on the listing exchange or association. Clearly erroneous
executions of subsequent transactions of the subject security will be
reviewed in the same manner as the procedure set forth in proposed Phlx
Rule 163(c)(1).\138\
---------------------------------------------------------------------------

    \137\ 17 CFR 240.12f-2.
    \138\ See proposed Phlx Rule 163(e).
---------------------------------------------------------------------------

xiv. Pre Market, Core, and Post Market Sessions
    XLE will be open to accept orders for three different trading
sessions beginning at 8 a.m. Eastern time and continuing until 6 p.m.,
except during trading halts, every trading day unless otherwise
declared by the Exchange. XLE will not have any opening or closing
auctions or rotations at the beginning of, during, or at the end of any
of these sessions. Therefore, XLE will not accept any orders unless it
is open for trading and can immediately process those orders for
execution, routing, or display, as applicable. At the end of the
trading day and if trading is halted intraday, XLE will cancel all
existing orders so that when trading begins again, either the next day
or after the halt is lifted, there are no existing orders that would
impermissibly lock or cross the market. New orders would only be
accepted when they could again be executed, routed, or displayed, which
would only happen when XLE is open for trading.
    Because XLE will operate during three distinct trading sessions, a
XLE Participant may designate during which contiguous XLE trading
session(s) a Limit, Reserve, or Pegged Order is eligible for
execution.\139\ For example, a XLE Participant could enter a Limit
Order at 8:45:00 a.m. (during the Pre Market Session) for execution and
designate it as eligible for the Pre Market and Core Sessions. That
means that unless the order is fully executed, it will remain on XLE
until the end of the Core Session, at which time it will be cancelled
back to the XLE Participant.
---------------------------------------------------------------------------

    \139\ See proposed Phlx Rule 185(b)(1)(A)-(B) and (b)(3).
---------------------------------------------------------------------------

    Finally, no XLE Participant may accept an order from a non-XLE
Participant for execution in the Pre Market or Post Market Session
without disclosing to such non-XLE Participant that: (1) An order must
be designated specifically for trading in the Pre Market or Post Market
Session to be eligible for trading in the Pre Market or Post Market
Session; and (2) trading outside of ``regular'' trading hours may
involve material trading risks, including the possibility of lower
liquidity, high volatility, changing prices, unlinked markets, an
exaggerated effect from news announcements, wider spreads and any other
relevant risk.\140\ Proposed Phlx Rule 183(b) provides a form of notice
XLE Participants may use to disclose the material trading risks of
trading in the Pre Market or Post Market Sessions.
---------------------------------------------------------------------------

    \140\ See proposed Phlx Rule 183(a).
---------------------------------------------------------------------------

xv. Access to XLE
    The Exchange will provide access to XLE for its members and member
organizations and certain other persons who are sponsored by member
organizations. Members and member organizations can register with the
Exchange to become a XLE Participant, which includes entering into a
XLE Participant Agreement.\141\ The Exchange will confirm that the
member or member organization has the proper clearing relationships
\142\ and has the ability to electronically connect to XLE. Member
organizations may sponsor other persons to gain access to XLE. When
doing so, these member organizations become Sponsoring Member
Organizations. The persons that the Sponsoring Member Organizations
sponsor become Sponsored Participants.\143\ A Sponsored Participant and
its Sponsoring Member Organization would be required to enter into and
maintain a XLE Participant Agreement with the Exchange. The Sponsoring
Member Organization must designate the Sponsored Participant by

name in its XLE Participant Agreement.\144\ The XLE Participant
Agreement is intended to highlight the responsibilities that a XLE
Participant has regarding its use of XLE. In addition, it is intended
to bind Sponsored Participants to their terms of use of XLE.
---------------------------------------------------------------------------

    \141\ See proposed Phlx Rule 180(a).
    \142\ See proposed Phlx Rule 165.
    \143\ See proposed Phlx Rule 180(b).
    \144\ See proposed Phlx Rule 180(b)(2)(A).
---------------------------------------------------------------------------

    Sponsored Participants also would be required to enter into and
maintain customer agreements with one or more Sponsoring Member
Organizations so that Sponsoring Member Organizations may maintain the
requisite level of control over the Sponsored Participants' trading on
XLE. These customer agreements should also establish proper
relationship(s) and account(s) through which the Sponsored Participant
may trade on XLE.\145\ Such customer agreement(s) must incorporate the
following Sponsorship Provisions:
---------------------------------------------------------------------------

    \145\ See proposed Phlx Rule 180(b)(1).
---------------------------------------------------------------------------

    1. Sponsoring Member Organization acknowledges and agrees that all
orders entered by the Sponsored Participants and any person acting on
behalf of or in the name of such Sponsored Participant and any
executions occurring as a result of such orders are binding in all
respects on the Sponsoring Member Organization; and that the Sponsoring
Member Organization is responsible for any and all actions taken by
such Sponsored Participant and any person acting on behalf of or in the
name of such Sponsored Participant.
    2. Sponsoring Member Organization shall comply with the Exchange's
Certificate of Incorporation, Bylaws, Rules, and procedures with regard
to XLE and Sponsored Participant shall comply with the Exchange's
Certificate of Incorporation, Bylaws, Rules, and procedures with regard
to XLE, as if Sponsored Participant were a member organization.
    3. Sponsored Participant shall maintain, keep current and provide
to the Sponsoring Member Organization a list of PAUs who may obtain
access to XLE on behalf of the Sponsored Participant.
    4. Sponsored Participant shall familiarize its PAUs with all of the
Sponsored Participant's obligations under this Rule and will assure
that they receive appropriate training prior to any use or access to
XLE.
    5. Sponsored Participant may not permit anyone other than PAUs to
use or obtain access to XLE.
    6. Sponsored Participant shall take reasonable security precautions
to prevent unauthorized use or access to XLE, including unauthorized
entry of information into XLE, or the information and data made
available therein. Sponsored Participant understands and agrees that
Sponsored Participant is responsible for any and all orders, trades and
other messages and instructions entered, transmitted or received under
identifiers, passwords and security codes of PAUs, and for the trading
and other consequences thereof.
    7. Sponsored Participant acknowledges its responsibility to
establish adequate procedures and controls that permit it to
effectively monitor its employees'', agents'', and customers' use and
access to XLE for compliance with the terms of this agreement.
    8. Sponsored Participant shall pay when due all amounts, if any,
payable to Sponsoring Member Organization, the Exchange or any other
third parties that arise from the Sponsored Participants access to and
use of XLE. Such amounts include, but are not limited to, applicable
exchange and regulatory fees.
xvi. Order Entry by XLE Participants
    XLE Participants may enter any type of order available on XLE
provided, however, no XLE Participant may enter a Limit Order or
Reserve Order without ``Do Not Route'' instructions, or an SSO, unless
the XLE Participant or the XLE Participant's Sponsoring Member
Organization has entered into a Routing Agreement.\146\ The Routing
Agreement between the Exchange, the Exchange's routing broker-dealer
and the XLE Participant or the XLE Participant's Sponsoring Member
Organization allows the routing broker-dealer to act for the XLE
Participant if the XLE Participant or its Sponsored Participant enters
an order that is routable.
---------------------------------------------------------------------------

    \146\ See proposed Phlx Rule 181.
---------------------------------------------------------------------------

    In addition, all XLE Participants may enter Proprietary Orders,
Professional Orders, and Public Agency Orders.\147\ Proprietary Orders
are for the account of the XLE Participant who entered the order into
XLE.\148\ Professional Orders are for the account of a broker or
dealer, which order is represented, as agent, by a XLE
Participant.\149\ Public Agency Orders are for the account of a person
other than a broker or dealer, which order is represented, as agent, by
a XLE Participant.\150\ Proprietary Orders are subject to the same
display and ranking processes as agency orders (Professional Orders and
Public Agency Orders). XLE Participants that enter orders on XLE shall
mark each order (or each side of a two-sided order) with the
appropriate designator to identify the order (or the side of the order)
as Proprietary, Professional, or Public Agency. In addition, all orders
would need to be entered with a valid clearing account number and two-
sided orders would need to be entered with valid clearing account
numbers for both sides of the order.\151\
---------------------------------------------------------------------------

    \147\ See proposed Phlx Rule 182.
    \148\ See proposed Phlx Rule 1(bb).
    \149\ See proposed Phlx Rule 1(aa).
    \150\ See proposed Phlx Rule 1(ee).
    \151\ See proposed Phlx Rule 189(a)(1) and Partial Amendment No.
2.
---------------------------------------------------------------------------

xvii. Clearing Requirements for XLE Participants
    Each member organization that is a XLE Participant must either be a
clearing firm, clear transactions on XLE through a clearing firm, or
clear transaction through an entity duly authorized by the Exchange
(e.g., SCCP).\152\ Each clearing firm must be admitted to the Exchange
as a member organization and to SCCP as a SCCP Participant. Clearing
firms must be SCCP Participants because all transactions on XLE will be
sent to SCCP to perform trade reconciliation and confirmation functions
before being sent to the NSCC for clearing and settlement, which is
consistent with current practice on the Exchange's equity trading
floor.\153\ Additionally, member organizations that are XLE
Participants may clear transactions on XLE through SCCP without going
through a clearing firm.\154\
---------------------------------------------------------------------------

    \152\ See proposed Phlx Rule 165(a).
    \153\ See Securities Exchange Act Release No. 41210 (March 24,
1999), 64 FR 15857 (April 1, 1999) (SR-Phlx-96-14) (text at note
26).
    \154\ SCCP is permitted to provide margin accounts for certain
persons (called ``Margin Members'' at SCCP) that clear and settle
their transactions through SCCP's Omnibus Clearance and Settlement
Account at NSCC. See Securities Exchange Act Release No. 48954
(December 18, 2003), 68 FR 75013 (December 29, 2003) (SR-SCCP-2003-
04). SCCP Margin Members who are XLE Participants may use their SCCP
margin accounts to trade on XLE without needing to use another
clearing firm.
---------------------------------------------------------------------------

    A clearing firm shall have a number of responsibilities respecting
XLE executions. Clearing firms shall clear their own transactions made
on XLE, if any. In addition to clearing their own transactions, a
clearing firm shall be responsible for the clearance of the
transactions effected by each member organization which gives up such
clearing firm's name pursuant to a letter of authorization, letter of
guarantee or other authorization given by such clearing firm to such
member organization, which authorization shall be submitted to the
Exchange.\155\ Clearing firms may also clear transactions on XLE
effected by Sponsored Participants whose Sponsoring Member Organization
gives up the clearing firm or whose

Sponsoring Member Organization is the clearing firm.\156\
---------------------------------------------------------------------------

    \155\ See proposed Phlx Rule 165(c).
    \156\ See proposed Phlx Rule 189(a).
---------------------------------------------------------------------------

xviii. Market Makers
    XLE Participants that are member organizations may apply to
register as Market Makers on XLE.\157\ While the presence of a Market
Maker in a security is not a requirement on XLE, the Exchange believes
that Market Makers can provide an additional source of liquidity to XLE
in the securities in which the Market Maker is making markets. Market
Makers may use any of the order types available to any other XLE
Participant, but there are no special order types or quotations
available for Market Makers. Orders from Market Makers on XLE will be
treated the same as orders from other XLE Participants. In addition,
Market Makers will not have any special or enhanced access to or
responsibility for the orders on XLE in any given security.
---------------------------------------------------------------------------

    \157\ See proposed Phlx Rule 170(a) and (b).
---------------------------------------------------------------------------

    Market Makers shall apply to the Exchange for registration pursuant
to proposed Phlx Rule 170. The Exchange will review an application to
become a Market Maker considering such factors as capital, operations,
personnel, technical resources, and disciplinary history.\158\ An
applicant's registration as a Market Maker shall become effective upon
receipt by the member organization of notice of an approval of
registration by the Exchange. In the event that an application is
disapproved by the Exchange, the applicant shall have an opportunity to
be heard upon the specific grounds for the denial, in accordance with
the provisions of Phlx Proposed Rule 174.\159\ Specifically, for an
opportunity to be heard, persons may appeal such action to the
Exchange's Board of Governors pursuant to By-Law Article XI, Section
11-1(a). The registration of a Market Maker may be suspended or
terminated by the Exchange upon a determination of any substantial or
continued failure by such Market Maker to engage in dealings in
accordance with proposed Phlx Rule 173, which describes the obligations
of Market Makers.\160\ Any registered Market Maker may withdraw its
registration by giving written notice to the Exchange. Such withdrawal
of registration shall become effective on the tenth business day
following the Exchange's receipt of the notice. A Market Maker who
fails to give a ten-day written notice of withdrawal to the Exchange
may be subject to formal disciplinary action pursuant to Phlx Rule
960.1 et seq. Subsequent to withdrawal, the member organization shall
not be permitted to re-register as a Market Maker for a period of six
months.\161\
---------------------------------------------------------------------------

    \158\ See proposed Phlx Rule 170(b).
    \159\ See proposed Phlx Rule 170(c).
    \160\ See proposed Phlx Rule 170(d).
    \161\ See proposed Phlx Rule 170(e).
---------------------------------------------------------------------------

    Once registered as a Market Maker, a member organization may then
register in a newly authorized security or in a security already
admitted to dealings on XLE by filing a security registration form with
the Exchange.\162\ Registration in the security shall become effective
on the first business day following the Exchange's approval of the
registration. In considering a Market Maker's registration for a
particular security, the Exchange may consider the fitness of Market
Maker as well as attributes of the individual security and the current
market for the security on XLE.\163\ A Market Maker's registration in a
security may be terminated by the Exchange if the Market Maker fails to
enter quotations in the security within five business days after the
Market Maker's registration in the security becomes effective.\164\ In
addition, the Exchange may suspend or terminate any registration of a
Market Maker in a security or securities under this proposed Phlx Rule
172 whenever, in the Exchange's judgment, the interests of a fair and
orderly market are best served by such action.\165\ Any such suspension
or withdrawal of privileges by the Exchange is subject to review
pursuant to proposed Phlx Rule 174, which permits an appeal to the
Board of Governors pursuant to By-Law Article XI, Section 11-1(a).
---------------------------------------------------------------------------

    \162\ See proposed Phlx Rule 172(a).
    \163\ See id.
    \164\ See proposed Phlx Rule 172(b).
    \165\ See proposed Phlx Rule 172(d).
---------------------------------------------------------------------------

    Alternatively, a Market Maker may voluntarily terminate its
registration in a security by providing the Exchange with a one-day
written notice of such termination.\166\ Such termination shall be
effective on the first business day immediately following the business
day the Exchange received the notice. A Market Maker that fails to give
advanced written notice of termination to the Exchange may be subject
to formal disciplinary action pursuant to Phlx Rule 960.1 et seq.\167\
A Market Maker may apply to the Exchange to withdraw temporarily from
its Market Maker status in the securities in which it is
registered.\168\ The Market Maker must base its request on demonstrated
legal or regulatory requirements that necessitate its temporary
withdrawal, or provide the Exchange an opinion of counsel certifying
that such legal or regulatory basis exists. The Exchange will act
promptly on such request and, if the request is granted, the Exchange
may temporarily reassign the securities to another Market Maker.
---------------------------------------------------------------------------

    \166\ See proposed Phlx Rule 172(c).
    \167\ See proposed Phlx Rule 172(c).
    \168\ See proposed Phlx Rule 173(d).
---------------------------------------------------------------------------

    Upon becoming Market Makers and registering in one or more
securities on XLE, Market Makers would be required to assume a number
of responsibilities.\169\ Market Makers must engage in a course of
dealings for their own account to assist in the maintenance, insofar as
reasonably practicable, of fair and orderly markets on XLE. Each Market
Maker must use electronic system(s) to maintain continuously two-sided
markets with at least one Limit Order to buy and at least one Limit
Order to sell, each for at least a round lot, in those securities in
which the Market Maker is registered to trade. Market Makers must
maintain adequate minimum capital in accordance with Phlx Rule 703.
Market Makers must remain in Good Standing \170\ with the Exchange.
Market Makers must inform the Exchange of any adverse material change
in financial or operational condition or significant change in
personnel. Finally, Market Makers must clear and settle transactions
through the facilities of a registered clearing agency using the means
described in proposed Phlx Rule 165(a). Market Makers must meet these
obligations during the Core Session in their registered securities on
all days XLE is open for business.\171\ If the Exchange finds any
substantial or continued failure by a Market Maker to engage in a
course of dealings required by a Market Maker, such Market Maker will
be subject to suspension or revocation of the registration by the
Exchange in one or more of the securities in which the Market Maker is
registered, provided, however, this does not limit any other power of
the Board of Governors under the By-laws, Rules, or procedures of the
Exchange with respect to the registration of a Market Maker or in
respect of any violation by a Market Maker. In accordance with proposed
Phlx Rule 174, a member organization may seek review of such suspension
or revocation.\172\
---------------------------------------------------------------------------

    \169\ See proposed Phlx Rule 173(a).
    \170\ See proposed Phlx Rule 1(h).
    \171\ See proposed Phlx Rule 173(b).
    \172\ See proposed Phlx Rule 173(c).
---------------------------------------------------------------------------

    Because Market Makers are member organizations, individuals who
enter orders on XLE in the course of making markets for a Market Maker
are Market Maker Authorized Traders (``MMATs''). The Exchange may, upon
receiving an

application in writing from a Market Maker on a form prescribed by the
Exchange, register a member of the Exchange as a MMAT. Each MMAT must
be a member of the Exchange at all times he or she is acting as a
MMAT.\173\ All orders entered by a MMAT must contain the identification
of the individual MMAT that entered the order.\174\ MMATs may be
officers, partners, employees or other associated persons of member
organizations that are registered with the Exchange as Market
Makers.\175\ The Exchange may require a Market Maker to provide
additional information the Exchange considers necessary to establish
whether registration should be granted.\176\ The Exchange may grant a
member conditional registration as a MMAT subject to any conditions it
considers appropriate in the interests of maintaining a fair and
orderly market.\177\ A Market Maker must ensure that a MMAT is properly
registered to perform market making activities.\178\ In addition, to be
eligible for registration as a MMAT, a person must have served as a
dealer-specialist or market maker on a registered national securities
exchange or association (or be deemed to have similar experience from
having functioned as a trader) for at least one year within three years
of the date of application, or, in the alternative, must successfully
complete the General Securities Representative Examination (Series
7).\179\
---------------------------------------------------------------------------

    \173\ See proposed Phlx Rule 171(b).
    \174\ See proposed Phlx Rule 171(a) and Partial Amendment No. 2.
    \175\ See proposed Phlx Rule 171(b)(1).
    \176\ See proposed Phlx Rule 171(b)(2).
    \177\ See proposed Phlx Rule 171(b)(3).
    \178\ See proposed Phlx Rule 171(b)(4).
    \179\ See proposed Phlx Rule 171(b)(5).
---------------------------------------------------------------------------

    The Exchange may suspend or withdraw the registration previously
given to a person to be a MMAT if the Exchange determines that: (1) The
MMAT has caused the Market Maker to not properly perform the
responsibilities of a Market Maker; (2) the MMAT has failed to meet the
conditions set forth under the preceding paragraph; or (3) the Exchange
believes it is in the interest of maintaining fair and orderly
markets.\180\ If the Exchange suspends the registration of a person as
a MMAT, the Market Maker must not allow the person to submit orders on
XLE.\181\ Any such suspension or withdrawal of MMAT privileges by the
Exchange is subject to review pursuant to proposed Phlx Rule 174. The
registration of a MMAT will be withdrawn upon the written request of
the member organization for which the MMAT is registered. Such written
request shall be submitted on the form prescribed by the Exchange.\182\
---------------------------------------------------------------------------

    \180\ See proposed Phlx Rule 171(c)(1).
    \181\ See proposed Phlx Rule 171(c)(2).
    \182\ See proposed Phlx Rule 171(c)(3).
---------------------------------------------------------------------------

xix. Outbound Routing Facility
    In connection with the proposed changes to the trading rules
described above, the Exchange intends to have PRO, a wholly owned
subsidiary of Order Execution Services Holdings, Inc. (``OES''),\183\
operate as a facility (as defined in Section 3(a)(2) of the Act) \184\
of the Exchange. PRO is a broker-dealer, a member of the NASD, and is
applying to become a member organization of the Exchange. PRO plans to
provide an optional routing service for the Exchange, in which PRO will
route orders from the Exchange to trading centers with Protected
Quotations through other brokers (``Access Brokers'') that are members
or participants of those trading centers (such function of PRO is
referred to as the ``Outbound Router'').\185\ As an Outbound Router,
PRO will receive routing instructions from XLE, route orders to another
trading center through an Access Broker, and be responsible for
reporting resulting executions back to XLE.\186\ All orders routed
through PRO would be subject to the Exchange's rules. PRO cannot change
the terms of an order or the routing instructions, nor does PRO have
any discretion about where to route an order.
---------------------------------------------------------------------------

    \183\ At this time, PRO Securities LLC is called Smart Execution
Securities LLC. OES is in the process of changing the name of Smart
Execution Securities LLC to PRO Securities LLC.
    \184\ 15 U.S.C. 78c(a)(2).
    \185\ The optional routing of orders to away markets by XLE is
described above in Section II.A.1.c.vi.
    \186\ Executions occurring as a result of orders routed away
from the Exchange shall be reported to an appropriate consolidated
transaction reporting system by the relevant reporting market
center. The Exchange shall promptly notify XLE Participants of all
executions of their orders as soon as the Exchange is notified that
such executions have taken place. See proposed Phlx Rule 188.
---------------------------------------------------------------------------

    The Outbound Router function of PRO will operate as a facility (as
defined in Section 3(a)(2) of the Act).\187\ As such, the Outbound
Router function of PRO is subject to the Commission's continuing
oversight. In particular, and without limitation, under the Act, the
Exchange is responsible for filing with the Commission proposed rule
changes and fees relating to the PRO Outbound Router function, and PRO
is subject to exchange non-discrimination requirements.\188\
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 78c(a)(2).
    \188\ 15 U.S.C. 78f(b)(5). Neither PRO nor the Routing Agreement
may unfairly discriminate among XLE Participants, pursuant to
Section 6(b)(5) of the Act. See August 15 Telephone Call, supra note
64.
---------------------------------------------------------------------------

    Pursuant to Rule 17d-1 under the Act,\189\ where a member of the
Securities Investor Protection Corporation is a member of more than one
self-regulatory organization (``SRO''), the Commission shall designate
to one of such organizations the responsibility for examining such
member for compliance with the applicable financial responsibility
rules.\190\ The SRO designation by the Commission is referred to as a
``Designated Examining Authority.'' As noted above, PRO is applying to
become a member organization of the Exchange, and is a member of the
NASD. The NASD is an SRO not affiliated with the Exchange or its
affiliates. Currently, the NASD is the Designated Examining Authority
for PRO pursuant to Rule 17d-1 of the Act \191\ with the responsibility
for examining PRO for compliance with the applicable financial
responsibility rules. The Exchange intends to enter into a 17d-2
agreement with the NASD to regulate PRO in its capacity as a member of
both the Exchange and the NASD.\192\
---------------------------------------------------------------------------

    \189\ 17 CFR 240.17d-1.
    \190\ Pursuant to Rule 17d-1 of the Act, in making such
designation the Commission shall take into consideration the
regulatory capabilities and procedures of the SROs, availability of
staff, convenience of location, unnecessary regulatory duplication,
and such other factors as the Commission may consider germane to the
protection of investors, the cooperation and coordination among
self-regulatory organizations, and the development of a national
market system for the clearance and settlement of securities
transactions.
    \191\ 17 CFR 240.17d-1.
    \192\ See 17 CFR 240.17d-2 and Partial Amendment No. 2.
---------------------------------------------------------------------------

    XLE Participants' use of PRO to route orders to another trading
center will be optional and subject to Exchange rules, as described
above. Those XLE Participants who choose to use PRO's Outbound Router
function must sign a Routing Agreement.\193\ XLE Participants that
choose not to sign a Routing Agreement may still enter orders on XLE,
but they may only enter orders that are not routable to other trading
centers, by definition or by instruction, such as IOC Orders, Pegged
Orders, ISOs, as well as Limit Orders and Reserve Orders marked ``Do
Not Route.''\194\
---------------------------------------------------------------------------

    \193\ See proposed Phlx Rule 181.
    \194\ See id.
---------------------------------------------------------------------------

    Finally, PRO will not engage in any business other than its
Outbound Router function, except as approved by the Commission. The
Exchange notes that PRO's Outbound Routing function includes the
clearing functions that it may perform for trades with respect to
orders routed to other trading centers. Pursuant to proposed Phlx Rule
185(g), the Exchange shall establish and

maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between the Exchange and the Routing Facility, and any
other entity, including any affiliate of the Routing Facility, and, if
the Routing Facility or any of its affiliates engages in any other
business activities other than providing routing services to the
Exchange, between the segment of the Routing Facility or affiliate that
provides the other business activities and the routing services.
Moreover, the books, records, premises, officers, directors, agents,
and employees of the Routing Facility, as a facility of the Exchange,
shall be deemed to be the books, records, premises, officers,
directors, agents, and employees of the Exchange for purposes of and
subject to oversight pursuant to the Exchange Act. The books and
records of the Routing Facility, as a facility of the Exchange, shall
be subject at all times to inspection and copying by the Exchange and
the Commission.
d. Modifications to Current Phlx By-laws and Rules
    In addition to the proposed Phlx Rules to implement XLE, the
Exchange is modifying various Phlx By-laws, Rules, EFPAs and OFPAs.
Most of the changes are being made to either apply or disapply certain
Phlx By-laws, Rules, EFPAs and OFPAs to XLE, to reflect the elimination
of the physical trading floor for equity securities; to reflect the
elimination of the Floor Procedure Committee and the Equity Allocation,
Evaluation and Securities Committee; and to reflect the elimination of
PACE, the Exchange's current electronic system for trading equity
securities. These changes are described below beginning with the By-
laws, then followed by the Rules, EFPAs and OFPAs, generally in
numerical order.
e. Modifications to Current By-laws
    Proposed Phlx By-law, Article I, Section 1-1(ii) is being added to
adopt a definition of XLE, because the term is being used in a number
of other By-laws. Phlx By-law, Article VIII, Section 8-1 is being
amended to reflect the elimination of the Floor Procedure Committee
\195\ and to reflect that Phlx officers and employees will now handle
matters that were previously referred to Floor Officials or the
Committee on the equity floor.\196\ The Floor Procedure Committee is
being eliminated because Phlx believes that its function in governing
conduct on the equity trading floor is no longer necessary in light of
the floor's elimination. As a practical matter, the Exchange believes
that the Committee's traditional role in overseeing equity trading is
no longer necessary. The Exchange does not believe that the Committee
is required by the federal securities laws, nor does the Exchange
believe that its elimination is inconsistent with the Act. Members
using XLE are represented on the Exchange's Board of Governors through
the exercise of their voting rights for members of the Board of
Governors.\197\ In addition, Phlx By-law, Article X, Sections 10-1 and
10-11 are being amended and Section 10-16 is being deleted to reflect
the elimination of the Floor Procedure Committee.
---------------------------------------------------------------------------

    \195\ Currently, at least 50% of the Floor Procedure Committee
must consist of permit holders or persons associated with a member
organization.
    \196\ See proposed Phlx Rule 163.
    \197\ See Phlx By-law, Article III.
---------------------------------------------------------------------------

    Phlx By-law Article X, Section 10-7 is being amended to reflect the
elimination of the Equity Allocation, Evaluation and Securities
Committee, which currently appoints equity specialists and handles new
equity listings. With XLE, there will be no specialists, but rather
Market Makers, who will be appointed by Exchange staff. Exchange staff
also will manage the listing of any new equities. In addition, the
composition of the Business Conduct Committee, in Section 10-11 is
being amended such that the current ``equity member'' would be replaced
by a member or a person associated with a member organization whose
business is principally carried out on XLE. Accordingly, XLE
Participants will be represented on the key committee involved in
disciplinary matters. Additionally, Phlx By-law Article X, Section 10-
15, Finance Committee, is being amended to allow for a member or person
associated with a member organization that conducts business primarily
on XLE, rather than on the equity trading floor, to be included on that
Committee as one of the ``member'' Committee members. Phlx By-law
Article XVI, Sections 16-1 and 16-2 are being amended to reflect the
elimination of the equity floor and to include transactions on XLE as
member and exchange contracts.
f. Modifications to Current Rules
    Phlx Rule 1, Definitions, is being expanded to include the current
definitions (currently contained in Phlx Rules 2-22) \198\ and the new
proposed definitions used in connection with XLE. Phlx Rule 98,
Emergency Committee, is being amended to reflect the elimination of the
Floor Procedure Committee and the creation of XLE. Phlx Rule 100,
Committee on Floor Procedure, is being amended to reflect the
elimination of the Floor Procedure Committee. Phlx Rules 102, Dealings
on Floor--Hours; 103, Dealings on Floor--Securities; and 104, Dealings
on Floor--Persons, are being amended to reflect that transactions in
equity securities will no longer take place on a floor of the Exchange.
Phlx Rule 105, Recognized Quotations, is being deleted because, as
written, it would not apply to XLE. The Exchange is already subject to
display its best quotations pursuant to Rule 602 of Regulation
NMS,\199\ and the Exchange proposes to do so as described in proposed
Phlx Rule 184(c). The other provisions of Phlx Rule 105 are not
applicable to XLE. Phlx Rule 106, Unit of Trading, is being deleted,
but the concept is codified into the proposed definition of Round Lot
in proposed Phlx Rule 1(gg). Phlx Rule 107, Bids and Offers--Other Than
Unit of Trading, is being deleted, because all orders entered into XLE
will specify the exact number of shares of the order. Phlx Rule 108,
Bids and Offers to Be Made Within Six Feet of Post, is being amended to
reflect that trading on XLE will not take place on the floor, but this
rule will continue to apply to options and foreign currency options
trading on the Exchange. Phlx Rule 109, Member May Bid for or Offer
Round Lots in Open Market, is being deleted to reflect the elimination
of the open outcry method used on the Exchange's equity trading floor.
Phlx Rules 110, 119 to 121, and 123 \200\ are being amended or deleted
to make them inapplicable to XLE, because the priority of orders on XLE
will be governed by proposed Phlx Rule 184. Phlx Rule 111, Bids and
Offers Binding, is being amended to incorporate a specific reference to
orders on XLE.\201\ Phlx Rule 112, Bids and Offers--``When Issued,'' is
being amended to reflect that the Exchange, through its staff, as
opposed to a committee of the Board, will administer the admittance of
securities for trading on XLE. Phlx Rules 113, 117, and 122, relating
to non-regular way settlement, are being deleted and replaced by
proposed Phlx Rule 162. Phlx Rules 9, 114, 115, and 150 to 154 are
being deleted because bonds will not trade on XLE.
---------------------------------------------------------------------------

    \198\ Phlx Rule 9, the definition of Bond, is proposed for
deletion.
    \199\ 17 CFR 242.602.
    \200\ These rules are titled, respectively: Bids and Offers--
Precedence; Precedence of Highest Bid; Precedence of Offers at Same
Price; Member as Principal Having Orders to Buy and Sell; and Bids
and Offers to Be Made Public.
    \201\ See August 15 Telephone Call, supra note 64.

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    Phlx Rule 118, Bids and Offers Outside Best Bid and Offer, is being
deleted, because it is inapplicable to XLE. XLE will accept bids and
offers priced below and above the best bid and offer, respectively, and
rank those bids and offers on XLE pursuant to proposed Phlx Rule 184.
Phlx Rule 124, Disputes, is being amended to reflect that XLE will not
use Floor Officials for resolving disputes. Instead, persons using XLE
may use proposed Phlx Rule 163 to address clearly erroneous executions,
which provides that an Exchange official will make the determination.
Further, the Phlx Rule 124 is being amended to remove a reference to
the Floor Procedure Committee, which is being eliminated. Phlx Rule 126
is being deleted and replaced by proposed Phlx Rule 185(c) concerning
two-sided orders. Phlx Rule 127, Substitute Principal, is being
deleted, because orders on XLE shall be made and executed anonymously
pursuant to proposed Phlx Rule 189. Phlx Rule 130, Offers Not Allowed
on Floor, is being deleted because proposed Phlx Rule 185 lists all of
the order types permitted on XLE. Phlx Rule 134, Stop Order Bans, is
being deleted because stop orders will not be permitted on XLE. Phlx
Rule 155, General Responsibility of Floor Brokers, is being amended to
reflect that transactions in equity securities will no longer take
place on a floor of the Exchange. Phlx Rules 201 to 214;\202\ 216 to
220;\203\ 236, Reports of Positions of Specialist and Alternate
Specialists in Securities for Which the Exchange Is the Primary Market;
460, Procedures for Competing Specialists; and 461, PACE Remote
Specialist, are being deleted. These rules describe equity specialists
and how they operate currently on the equity trading floor of the
Exchange. As stated above, a new type of liquidity provider, a Market
Maker, will be available on XLE; the registration and functions are
described in proposed Phlx Rules 170 to 173. Phlx Rules 225-228,\204\
referring to order types available on the current equity trading floor,
are being deleted. Order types available on XLE are described in
proposed Phlx Rule 185. Phlx Rules 229 to 229B \205\ are being deleted
because the Exchange's current electronic order delivery and execution
system, PACE, is being eliminated and replaced by XLE. Phlx Rule 230,
ITS Pre-Opening Notification, and EFPA S-3, The ``Three by Three''
Requirement Applicable to Tape Indications and Pre-Openings, are being
deleted; however, the operative date of this deletion will be no
earlier than the date that the Exchange is no longer subject to the ITS
pre-opening notification responsibilities in the ITS Plan. Phlx Rule
231, Inactive Securities, is being deleted, as it is not applicable to
XLE, because XLE is designed to accommodate securities that trade
without a specialist or market maker. Phlx Rule 232, Handling Orders
When Primary Market Is Not Open for Free Trading (EXP, PPS, GTX
Orders), is being deleted, as XLE will operate during the hours in Phlx
Rule 101, Supplementary Material .02. Phlx Rule 233, Trading in Nasdaq/
NM Securities, is being deleted, as the Exchange anticipates that the
requirements in the Nasdaq UTP Plan for telephone access to NASD market
makers will be eliminated prior to the launch of XLE. Phlx Rule 237,
The eVWAPTM Morning Session, is being deleted, as it was a
pilot program on the Exchange that has expired.\206\ Therefore, the
rule no longer has any application.
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    \202\ These rules are titled, respectively: Specialist;
Alternate Specialists--Appointment, Assignment and Termination;
Registrant; Responsibilities of Alternate Specialists; Agreement of
Specialists; Hours; Odd-Lot Orders Must Be Given to Specialist;
Written Orders--Day Orders; Open Orders; No Commission Charged; Open
Orders Ex-dividend; Unusual Situations; Books Closed; Joint
Accounts; Puts and Calls; and Violations of Rules.
    \203\ These rules are titled, respectively: Records to Be Kept;
Discretionary Order; Customer's Order Receives Priority; Seller Must
Be Identified; and Stopping Stock.
    \204\ These Rules are titled, respectively: Odd-Lot Orders in
Securities Which the Exchange Is the Primary Market; Round Lot
Orders Before the Opening in Nasdaq/NM Securities and in Securities
For Which the Exchange Is the Primary Market; Odd-Lot Orders in
Securities For Which Another Exchange Is the Primary Market and in
Nasdaq/NM Securities; and Round Lot Orders in Securities For Which
Another Exchange Is the Primary Market.
    \205\ These rules are titled, respectively: Philadelphia Stock
Exchange Automated Communication and Execution System (PACE);
Operation of PACE System When Competing Specialists Are Trading; and
Alternative Electronic Order Entry.
    \206\ See Securities Exchange Act Release No. 45125 (December 4,
2001), 66 FR 64069 (December 11, 2001) (SR-Phlx-2001-95) (final
extension of the Exchange's eVWAP pilot program).
---------------------------------------------------------------------------

    Phlx Rules 251 to 273, 275 to 278, and 291 to 423, including the
Forms, are being deleted as obsolete, because they refer to the
delivery and settlement of securities, which is not done by the
Exchange, but by registered clearing agencies. The Exchange is
requiring all XLE Participants to use the services of a clearing firm
or SCCP to clear their securities transactions on XLE.\207\ In turn,
these entities provide for the delivery and settlement of securities
pursuant to the rules of NSCC, a registered clearing agency. Phlx Rules
431, Ex-dividend, Ex-rights; 432, Ex-warrants; and 442, Communications,
are being amended to reflect the elimination of the Floor Procedure
Committee. Phlx Rules 441, Visitors, and 444, Wire Connections Between
Exchange and Members' Offices, are being deleted because of the
elimination of the equity trading floor. Phlx Rule 451 is being amended
to reflect for trading on XLE by expanding its coverage to member
organizations and by removing its references to bidding and offering in
the open market, which are auction market concepts. Phlx Rules 500-524
are being amended to reflect the elimination of the Equity Allocation,
Evaluation and Securities Committee and the elimination of equity
specialists.
---------------------------------------------------------------------------

    \207\ See proposed Phlx Rule 165(a).
---------------------------------------------------------------------------

    Phlx Rule 604, Registration and Termination of Registered Persons,
is being modified to reflect the elimination of the equity floor as
well as to extend an exemption to persons whose member organization is
assigned to the Exchange as their designated examining authority
(``DEA'') and who is primarily engaged in business on XLE from the
requirement to complete the Uniform Registered Representative
Examination Series 7 (``Series 7''). Currently, persons trading on the
equity floor are not required by this rule to take the Series 7 by
virtue of being on the floor and therefore not an off-floor trader,
because Rule 604(e)(1) applies to persons ``off the floor.'' The
Exchange adopted the Series 7 examination requirement for off-floor
traders in 1999 in order to impose a competency requirement on persons
not on its floor, and not subject to its registration and testing
processes for floor personnel pursuant to Phlx Rule 620 and 625.
    Going forward, however, because there will no longer be an equity
floor, those who trade on XLE will be, by definition, off-floor
traders, unless they are trading on another Phlx trading floor. In
order to address this situation, language is being added to the
renumbered Phlx Rule 604(e)(iii) which would exempt those persons who
are primarily engaged in either (1) Submitting proprietary or agency
orders for execution on XLE, or (2) making trading decisions with
respect to trading on XLE from the rules requirement to take the Series
7. Modifying the exemption to reflect the elimination of the floor is
intended to maintain the status quo respecting the Exchange's
requirements to take the Series 7, and is not intended to broaden the
exemption beyond dealing with the elimination of the equity trading
floor. The Exchange intends to interpret this exemption to permit the
transition of existing floor persons to the new XLE environment. Those
persons currently on the Exchange's equity trading floor who will
continue to operate their equity

business in a similar fashion, now primarily on XLE, should fit within
the exemption and therefore not be required to take the Series 7. The
Exchange believes that absent other changes, simply moving an existing
business from the current trading floor to XLE should not result in the
imposition of the Series 7 examination. Of course, XLE Participants may
be required by the rules of another SRO to take the Series 7.
Similarly, if a XLE Participant performs the duties reflected in
revised Phlx Rule 604(a), they must take the Series 7.
    Phlx Rule 625 and EFPA F-30 are being amended to specifically
require new persons using XLE to successfully complete training
requirements. In addition, Phlx Rule 625 will also subject persons
using XLE to continuing mandatory training requirements. For these
reasons, the Exchange believes that adding the Series 7 requirement to
these persons is not warranted.
    Rule 604 is also being amended to eliminate existing paragraph (c),
Limited Registration/Floor Members, due to the elimination of the
equity trading floor, and also because the Series 7A examination
prescribed therein was not utilized by Exchange members and is being
eliminated by the SRO administering that examination.
    Phlx Rule 606, Communications and Equipment, is being amended to
take into account the elimination of the equity trading floor. Phlx
Rule 610, Notification of Changes in Business Operations, and related
EFPA F-33 and OFPA F-33, are being amended to extend their coverage to
members, foreign currency options participants, and member and foreign
currency options participant organizations for which the Exchange is
the DEA. This change is appropriate because, as currently written, Phlx
Rule 610 would not apply to XLE Participants because the rule is
currently limited to specialists and floor brokers. The change would
have the effect of extending the requirements of the rule beyond those
trading on XLE. However, the Exchange believes this is warranted
because the purpose of the rule is to assist the Exchange's Examination
Department in performing its functions as DEA. Therefore, the new
language in the rule will cover all entities for which the Exchange is
the DEA.
    Phlx Rule 640 is being amended to extend the exemption from
continuing education requirements to persons whose activities are
limited solely to the transaction of business on XLE with members or
registered broker-dealers. Currently, this exemption applies only to
persons whose activities are limited solely to the transaction of
business on the floor with members or registered broker-dealers.
    Phlx Rule 701, Permission to Deal With Public, is being deleted,
because it is obsolete. Today, the rules of the Commission require
membership in the NASD for broker-dealers unless a narrow exception
applies.\208\ As a member of the NASD, broker-dealers' dealings with
the public are regulated by NASD's rules, making permission by the
Exchange superfluous. Phlx Rule 703, Financial Responsibility and
Reporting, is being amended to reflect the elimination of specialists
and to require certain brokers using XLE who are not self-clearing and
who are assigned to Phlx as their DEA to have a sole purpose error
account. Phlx Rule 715, Monthly Payment and Reporting, is being amended
to reflect the elimination of the equity trading floor. Phlx Rule 722,
Margin, is being amended to reflect that Market Makers may receive
``good faith margin'' for their market maker security positions in the
same manner that equity specialists do today. Phlx Rule 755, Record of
Orders--Transmitted to Floor, is being deleted to reflect the
elimination of the equity trading floor. Broker-dealers continue to
have responsibilities to retain certain information about their orders
pursuant to the books and records rules under the Act.\209\ Phlx Rule
774, Discretionary Transactions, is being deleted, however, the
substance of subsection (c) is being moved to Phlx Rule 771, Excessive
Trading by Members. The other sections of Phlx Rule 774 will not be
applicable to trading on XLE, because XLE is not considered the floor
of the Exchange. Phlx Rule 772, Trading for Joint Account, is being
amended to delete references to odd-lot dealers, which was a type of
dealer that is being eliminated. Phlx Rule 773, Participation in Joint
Accounts, is being amended to avoid overlapping regulatory burdens on
members who do business on more than one exchange. Phlx Rules 800, 801,
805, 811, 813, and 864 are being modified to reflect the elimination of
the Equity Allocation, Evaluation and Securities Committee, such that
the listing of securities and the trading of securities on an unlisted
trading privileges basis will be administered and approved by Exchange
staff, rather than the Committee.
---------------------------------------------------------------------------

    \208\ See 15 U.S.C. 78o(b)(8).
    \209\ See 17 CFR 240.17a-3(a)(6).
---------------------------------------------------------------------------

g. Modifications to current EFPAs and OFPAs
    EFPA A-1 is being deleted, because there will be no specialists on
XLE. EFPA A-2 is being deleted because there will be no stopped orders
on XLE. EFPA E-1 is being deleted to reflect the elimination of the
equity trading floor. EFPA E-5 is being amended to reflect the
transition from the equity trading floor to XLE. EFPAs F-1, S-1, and S-
2 are being deleted to reflect that XLE will open before the primary
market is open and remain open after the primary market is closed,
pursuant to Phlx Rule 101. EFPA F-25 is being amended to remove the
word ``floor,'' in order to make it clear that the EFPA will apply to
persons using XLE, which is not considered the floor. EFPA F-27 is
being deleted to reflect the fact that XLE will not use Floor Officials
for resolving disputes. Instead, persons using XLE will use proposed
Phlx Rule 163 to address clearly erroneous executions. Regulations 1-7
are being deleted because they are only applicable to the equity
trading floor, which is being eliminated. Regulation 5 that applies to
options is being amended to reflect that the Floor Procedure Committee
is being eliminated.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Sections
6(b) \210\ and 11A \211\ of the Act in general, and furthers the
objectives of Sections 6(b)(3)\212\ and (5),\213\ and 11A(a)(1)\214\ of
the Act in particular, in that, in part, it is designed to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general to protect investors and the public interest, for the
reasons discussed below.
---------------------------------------------------------------------------

    \210\ 15 U.S.C. 78f(b).
    \211\ 15 U.S.C. 78k-1.
    \212\ 15 U.S.C. 78f(b)(3).
    \213\ 15 U.S.C. 78f(b)(5).
    \214\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

    The Exchange's new automated system, XLE, will allow XLE
Participants, from any location, to submit orders for immediate
execution, display or routing, as applicable. The Exchange believes
that XLE should provide an opportunity for XLE Participants and their
customers to receive efficient, low-cost executions in an anonymous
system that will execute orders according to a non-discretionary
matching algorithm without the participation of a dealer. Therefore,
the Exchange believes that XLE should further the goals Section
11A(a)(1)(C) of the Act,\215\ including: (i) The economically efficient
execution of securities transactions; (ii) fair

competition among brokers and dealers, among exchange markets, and
between exchange markets and markets other than exchange markets; (iii)
the availability to brokers, dealers, and investors of information with
respects to quotations for and transactions in securities; (iv) the
practicability of brokers executing investors' orders in the best
market; and (v) an opportunity, consistent with the provisions with (i)
and (ii) above, for investors' orders to be executed without the
participant of a dealer.
---------------------------------------------------------------------------

    \215\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change also furthers
the objectives of Section 6(b)(3) under the Act \216\ in that it
provides a fair representation on the BCC of persons using XLE, in that
Phlx By-law Article X, Section 10-11 is being amended such that the
current ``equity member'' would be replaced by a member or a person
associated with a member organization whose business is principally
carried out on XLE.
---------------------------------------------------------------------------

    \216\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received by the
Exchange.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number SR-Phlx-2006-43 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-Phlx-2006-43. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,

all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of the
filing also will be available for inspection and copying at the
principal office of the Phlx. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2006-43 and should be submitted on or before
September 15, 2006.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\217\
---------------------------------------------------------------------------

    \217\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.