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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53004; File No. SR-Phlx-2005-78]

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to the Extension of a Pilot Concerning Priority in Trades Involving Synthetic Option Orders

Phlx proposes to extend, for an additional six months, the pilot concerning Exchange rule 1033(e), which affords priority to synthetic option orders (as defined below) traded in open outcry over bids and offers in the trading crowd but not over bids (offers) of public customers on the limit order book and not over crowd participants who are willing to participate in the synthetic option order at the net debit or credit price. The proposed rule change would apply to orders for 100 contracts or more and would be subject to a pilot program scheduled to expire on June 30, 2006. The text of the proposed rule change is set forth below. Brackets indicate deletions;italicsindicates new text.

(e) Synthetic Option Orders. When a member holding a synthetic option order, as defined in rule 1066, and bidding or offering on the basis of a total credit or debit for the order has determined that the order may not be executed by a combination of transactions at or within the bids and offers established in the marketplace, then the order may be executed as a synthetic option order at the total credit or debit with one other member, provided that, the member executes the option leg at a better price than the established bid or offer for that option contract, in accordance with rule 1014. Subject to a pilot expiring [December 31]June 30, 200[5]6, synthetic option orders in open outcry, in which the option component is for a size of 100 contracts or more, have priority over bids (offers) of crowd participants who are bidding (offering) only for the option component of the synthetic option order, but not over bids (offers) of public customers on the limit order book, and not over crowd participants that are willing to participate in the synthetic option order at the net debit or credit price.

In its filing with the Commission, 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 III below. Phlx has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

The purpose of the proposed rule change is to extend for a six-month period the pilot that facilitates the execution of an option order that is represented in the crowd together with a stock component, known under the Exchange rules as a synthetic option order,3 which by virtue of the stock component may be difficult to execute without a limited exception to the Exchange priority rules. The current pilot is scheduled to expire on December 31, 2005.4 Phlx proposes to extend the pilot to June 30, 2006.

The pilot provides that, if an Exchange member who is holding a synthetic option order and bidding or offering on a net debit or credit basis determines that such synthetic option order cannot be executed at the net debit or credit against the established bids and offers in the crowd, the member bidding for or offering the synthetic option on a net debit or credit basis may execute the synthetic option order with one other crowd participant, provided that the option portion of the synthetic option order is executed at a price that is better than the established bid or offer for the option. Thus, if the desired net debit or credit amount cannot be achieved by way of executing against the established bids and offers in the crowd, the member may elect to trade at the desired net debit or credit amount with one other member, provided that there is price improvement for the option component of the synthetic option order.

Exchange Rule 1033(e) affords synthetic option orders priority over bids (offers) of the trading crowd but not over bids (offers) of public customers on the limit order book and not over crowd participants that are willing to participate in the synthetic option order at the net debit or credit price. The effect of Exchange Rule 1033(e) is that a crowd participant bidding or offering for the synthetic option order has priority over other crowd participants that are bidding or offering only for the option component of the order. Exchange Rule 1033(e) applies only to synthetic option orders of 100 contracts or more.

In addition, Exchange Rule 1033(e) provides that members bidding and offering for synthetic option orders of 100 contracts or more do not have priority over bids (offers) of public customers on the limit order book.5 Therefore, if members of the trading crowd wish to trade a synthetic option order that is marketable against public customer orders on the limit order book, public customers would have priority. Multiple public customer orders at the same price are accorded priority based on time.

The Exchange believes that the pilot, which provides a limited exception to the Exchange's priority rules only respecting controlled accounts6 competing at the same price, should enable Floor Brokers representing synthetic option orders to provide best executions to customers placing such orders and should enable the Exchange to provide liquid markets and compete for order flow in such orders.

As stated above, the pilot applies only to synthetic option orders in which the option component is for a size of 100 contracts or more that are represented in the trading crowd in open outcry and would be subject to a pilot program through June 30, 2006.

The Exchange believes that its proposal is consistent with Section 6(b) of the Act7 in general, and furthers the objectives of Section 6(b)(5) of the Act8 in particular, in that it is designed to perfect the mechanisms of a free and open market and the national market system, protect investors and the public interest and promote just and equitable principles of trade, by adopting a limited exception to the Exchange's priority rules concerning synthetic option orders.

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

No written comments were either solicited or received.

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:

* Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or

* Send an e-mail torule-comments@sec.gov.Please include File Number SR-Phlx-2005-78 in the subject line.

* Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-9303.

All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Phlx-2005-78 and should be submitted on or before January 19, 2006.

After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange,9 and, in particular, with the requirements of Section 6(b) of the Act10 and the rules and regulations thereunder. The Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,11 which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and to protect investors and the public interest. The Commission notes that the priority rules with respect to the execution of synthetic option orders on other options exchanges are similar to Exchange Rule 1033(e).12 In general, such rules serve to reduce the risk of incomplete or inadequate executions of synthetic option orders by allowing the synthetic option orders to have priority over bids and offers of crowd participants who are bidding or offering only for the option component of the synthetic option order but only subject to restrictions such as those proposed by Phlx. For example, the pilot would continue to protect the priority of public customer orders on the limit order book. In addition, the pilot protects the priority of crowd participants who are willing to participate in the synthetic option order at the net debit or credit price.

The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,13 for approving the proposed rule change prior to the thirtieth day after the date of publication of the notice of the filing thereof in theFederal Register. The Commission believes that granting accelerated approval would preserve the pilot for synthetic option orders without interruption.

It is therefore ordered,pursuant to Section 19(b)(2) of the Act14 that the proposed rule change (SR-Phlx-2005-78) is hereby approved on an accelerated basis for a pilot period to expire on June 30, 2006.