[Federal Register Volume 76, Number 92 (Thursday, May 12, 2011)]
[Notices]
[Pages 27732-27734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-11584]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64415; File No. SR-Phlx-2011-56]
Self-Regulatory Organizations; The NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Establish a Qualified Contingent
Cross Order for Execution on the Floor of the Exchange
May 5, 2011.
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 May 4, 2011, NASDAQ OMX PHLX LLC (``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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposal to amend PHLX
Rule 1064(e) to establish a Floor Qualified Contingent Cross Order
(``Floor QCC Order''). The Floor QCC Order will facilitate the
execution of stock/option Qualified Contingent Trades that satisfy the
requirements of the trade through exemption in connection with Rule
611(d) of Regulation NMS (``QCT Trade Exemption'').\3\
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\3\ See Securities Exchange Act Release No. 54389 (August 31,
2006), 71 FR 52829 (September 7, 2006); Securities Exchange Act
Release No. 57620 (April 4, 2008), 73 FR 19271 (April 9, 2008).
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The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange 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
On February 24, 2011, the Commission issued an order approving SR-
ISE-2010-073, a proposal by the ISE to establish a Qualified Contingent
Cross (``ISE QCC Proposal''). The ISE QCC Proposal was controversial,
attracting opposition from multiple exchanges including PHLX. In its
comment letter on the ISE QCC Proposal, PHLX asserted that the QCC
Proposal deviated from ``long-held principles in the options market by
permitting the crossing of orders without requiring prior exposure''
and that the ISE QCC Proposal failed adequately to protect customers
with orders resting on the ISE limit order book.\4\
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\4\ See Letter, dated August 13, 2010, from Thomas Wittman,
President, NASDAQ OMX PHLX to Elizabeth Murphy, Secretary, U.S.
Securities and Exchange Commission.
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The Commission, in a thorough and thoughtful decision, concluded
that the QCC Proposal--including the lack of prior order exposure--is
consistent with the Act. With respect to order exposure, the Commission
stated:
While the Commission believes that order exposure is generally
beneficial to options markets in that it provides an incentive to
options market makers to provide liquidity and therefore plays an
important role in ensuring competition and price discovery in the
options markets, it also has recognized that contingent trades can be
``useful trading tools for investors and other market participants,
particularly those who trade the securities of issuers involved in
mergers, different classes of shares of the same issuer, convertible
securities, and equity derivatives such as options [italics added]''
and that ``[t]hose who engage in contingent trades can benefit the
market as a whole by studying the relationships between the prices of
such securities and executing contingent trades when they believe such
relationships are out of line with what they believe to be fair
value.'' As such, the Commission stated that transactions that meet the
specified requirements of the NMS QCT Exemption could be of benefit to
the market as a whole, contributing to the efficient functioning of the
securities markets and the price discovery process.\5\
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\5\ Approval Order at p. 28 (citing to Regulation NMS QCT
Exemption).
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The Approval Order succinctly sets forth the material elements of
ISE's Qualified Contingent Cross:
Thus, as modified, an ISE member effecting a trade pursuant to
the NMS QCT Exemption could cross the options leg of the trade on
ISE as a QCC Order immediately upon entry, without exposure, only if
there are no Priority Customer orders on the Exchange's limit order
book at the same price and if the order: (i) Is for at least 1,000
contracts; (ii) meets the six requirements of the NMS QCT Exemption;
and (iii) is executed at a price at or between the NBBO (``Modified
QCC Order''). In the Notice, ISE stated that the modifications to
the Original QCC Order (i.e., to prevent the execution of a QCC if
there is a Priority Customer on its book and to increase the minimum
size of a QCC Order) remove the appearance that such orders are
trading ahead of Priority Customer orders or that the QCC Order
could be used to disadvantage retail customers (citations
omitted).\6\
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\6\ Id. at p. 18.
The Exchange believes that the Commission, having considered and
addressed all arguments in favor and in opposition to the QCC, has
established binding precedent under which other exchanges can establish
a QCC Order that is also consistent with the Act.
In keeping with that precedent, PHLX hereby proposes to add PHLX
Rule 1064(e) to establish a Floor QCC Order based on the precedent of
ISE's QCC Order.\7\ Specifically, PHLX proposes to amend Rule 1064 to
provide that a PHLX member effectuating a trade on the floor of the
Exchange pursuant to the Regulation NMS Qualified Contingent Trade
Exemption to Rule 611(a) (``QCT Exemption'') can cross the options
leg's of the trade on PHLX as a Floor QCC Order immediately upon entry
and without order exposure if no Customer Orders \8\ exist on the
[[Page 27733]]
Exchange's order book at the same price. Floor QCC Orders will be
electronically entered by a Floor Broker on the floor of the Exchange
using the Floor Broker Management System and the execution will then be
executed electronically. Only Floor Brokers will be permitted to enter
Floor QCC Orders.
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\7\ PHLX previously established an electronic QCC Order set
forth in PHLX Rule 1080(o). See Securities Exchange Act Release No.
64249 (April 7, 2011), 76 FR 20773 (April 13, 2011) (SR-Phlx-2011-
047).
\8\ PHLX will reject QCC Orders that attempt to execute when any
Customer orders are resting on the Exchange limit order book at the
same price. ISE QCC Orders will be cancelled only when they
encounter resting orders of Priority Customers. The Commission has
previously approved the rejection of crossing transactions when
there is a customer order on the book at the same price. See, e.g.,
ISE Rule 721(a); and CBOE Rule 6.74A, Interpretations and Policies
.08.
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The Commission in the Approval Order carefully considered the
comparison between floor-based and electronic trading, including
commissioning a study by the Division of Risk, Strategy and Financial
Innovation (``RiskFin Study''). The RiskFin Study and the Approval
Order compare electronic trading and floor trading, the similarities
between the two forms of trading, and the ability of one to replicate
the other. Additionally, the Commission received comment letters from
multiple floor-based exchanges that challenged the comparison that ISE
drew between floor-based and electronic trading.
Despite facing direct comparisons between floor-based trading and
electronic trading by multiple commenters, as well as by its own
Division of RiskFin, the Commission Approval focuses on similarities
between the two. On its face, the Commission Approval Order draws no
distinctions and identifies no material differences between floor-based
and electronic trading that would confound the comparison between cross
orders executed electronically and those executed on an exchange floor.
The Exchange believes that the Floor QCC Order is consistent with the
requirements stated in the Approval Order and consistent with the Act.
The Exchange also believes that the Commission, in writing the Approval
Order assumed that QCC orders entered on the floor of an exchange that
meet the requirements stated in the Approval Order are equally
consistent with the Act.
The Exchange has analyzed the application to Floor QCC Orders of
Section 11(a) of the Act and the rules thereunder. Section 11(a) and
the rules thereunder generally prohibit members of an exchange from
effecting transactions on the exchange for their own account, the
account of an associated person, or an account with respect to which it
or an associated person thereof exercises investment discretion unless
an exemption applies.\9\ Section 11(a) contains multiple exemptions,
including exemptions for those acting in the capacity of market makers,
as odd-lot dealers, and those engaged in stabilizing conduct; there are
also rule-based exemptions such as the ``effect vs. execute'' exception
under SEC Rule 11a2-2(T) under the Act.\10\
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\9\ See 15 U.S.C. 78k(a).
\10\ See 17 CFR 240.11a2-2(T).
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The Exchange has in the past analyzed the application of Section
11(a) to various Exchange systems and order types.\11\ In analyzing
Floor QCC Orders, the Exchange has concluded that the entry and
execution of Floor QCC Orders raises no novel issues under Section
11(a) and the rules thereunder from a compliance, surveillance or
enforcement perspective. In other words, Exchange Floor Brokers are
currently required to comply and the Exchange surveils for compliance
with Section 11(a) and the rules thereunder when using Exchange systems
to effect transactions using existing order types, and they will be
required to comply with Section 11(a) and the rules thereunder when
using the Floor QCC Order.
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\11\ See, e.g., Securities Exchange Act Release No. 63027 (Oct.
1, 2010), 75 FR 62160 (Oct. 7, 2010) (order approving Price
Improvement XL System).
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Nonetheless, out of an abundance of caution, the Exchange has added
subsection (e)(2) which prohibits Options Floor Brokers from entering
Floor QCC Orders for their own accounts, the account of an associated
person, or an account with respect to which it or an associated person
thereof exercises investment discretion. This modification is designed
to remove even a theoretical time and place advantage available to an
Options Floor Broker on the Floor of the Exchange that is reflected in
the prohibitions of Section 11(a) of the Exchange Act and the rules
thereunder. The Exchange is prohibiting by rule certain conduct that
runs afoul of Section 11(a) and the rules thereunder, and providing
both a surveillance and enforcement mechanism to promote compliance.
Thus, it would be incorrect to say that the Floor QCC Order differs
from the electronic QCC Order due to the Options Floor Broker's
presence on the Floor.
These restrictions set forth in subsection (e)(2) do not limit in
any way the obligation of Options Floor Brokers and other Exchange
members to comply with Section 11(a) or the rules thereunder. For
example, Options Floor Brokers cannot avoid or circumvent their
obligations with respect to a Floor QCC Order that triggers a Section
11(a) obligation by transmitting that order to another Options Floor
Broker or to an Exchange member off the floor of the Exchange.
Likewise, Exchange members off the floor must ensure that their Floor
QCC Orders comply with Section 11(a) and the rules thereunder. In both
cases, Exchange members must ensure compliance with Section 11(a) and
the rules thereunder, including by relying upon an exemption such as
those listed above.
Additionally, to provide a mechanism for the Exchange to review
whether Floor QCC Orders have been entered properly by Options Floor
Brokers, the Exchange proposes to adopt proposed Rule 1064(e)(2). This
provision would require Options Floor Brokers to maintain books and
records demonstrating that no Floor Qualified Contingent Cross Order
was entered by the Options Floor Broker in a prohibited account.\12\
Any Floor Qualified Contingent Cross Order that does not have a
corresponding record required by this provision would be deemed to have
been entered in violation of Rule 1064(e).
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\12\ The Exchange System will also be programmed to require
certain order entry parameters for submission of Floor QCC Orders.
For example, a Floor QCC Order must include data reflecting the
number of shares of stock sold/purchased in the stock leg of the QCT
trade. Floor QCC Orders lacking this data will be rejected by the
System. The order entry parameters will be included in the
Exchange's published specifications and described in an Options
Trader Alert prior to launch.
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Finally, the Exchange proposes to modify subsections (a), (b), and
(c) of Rule 1064. These changes are designed clearly to establish that
the requirements applicable to Floor QCC Orders that are set forth in
subsection (e) are different from those applicable to the orders
described in subsections (a), (b) and (c).
As set forth in proposed Rule 1064(e), the Floor QCC Order must:
(i) Be for at least 1,000 contracts,\13\ (ii) meet the six requirements
of Rule 1080(o)(3) which are modeled on the QCT Exemption, (iii) be
executed at a price at or between the National Best Bid and Offer
(``NBBO''); and (iv) be rejected if a Customer order is resting on the
Exchange book at the same price.\14\ As a result, the PHLX Floor QCC
Order proposed herein satisfies all of the
[[Page 27734]]
requirements the Commission enumerated in the Approval Order.
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\13\ In order to satisfy the 1,000-contract requirement, a Floor
QCC Order must be for 1,000 contracts and could not be, for example,
two 500-contract orders or two 500-contract legs.
\14\ While the Floor QCC would not provide exposure for price
improvement for the options leg of a stock-option order, the options
leg must be executed at the NBBO or better. The Commission has
previously approved crossing transactions with no opportunity for
price improvement. See, e.g., ISE Rule 721(a) and Chicago Board
Options Exchange Rule 6.74A, Interpretations and Policies .08.
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The Exchange's proposal addresses the mechanics of executing the
stock and options components of a net-price transaction. The Exchange
believes that it is necessary that it provide members and their
customers with the same trading capabilities available on other
exchanges with respect to QCCs, including the change proposed herein,
which would permit members to execute the options legs of their
customers' large complex orders on the Exchange.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \15\ in general, and furthers the objectives of
Sections 6(b)(5) \16\ and 6(b)(8) \17\of the Act in particular, in that
it is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general to protect
investors and the public interest and the rules of an exchange do not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. In addition, the proposed rule
change is consistent with Section 11A(a)(1)(C) of the Act,\18\ in which
Congress found that it is in the public interest and appropriate for
the protection of investors and the maintenance of fair and orderly
markets to assure, among other things, the economically efficient
execution of securities transactions. As described in detail above, the
proposed rule change is also consistent with Section 11(a) of the Act
and the rules thereunder.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ 15 U.S.C. 78f(b)(8).
\18\ 15 U.S.C. 78k-1(a)(1)(C).
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The statutory basis for PHLX's proposed Floor QCC Order is
identical to the Commission's basis for finding that the ISE's QCC
Proposal is consistent with the Act ``in that it would facilitate the
execution of qualified contingent trades, for which the Commission
found in the Original QCT Exemption to be of benefit to the market as a
whole, contributing to the efficient functioning of the securities
markets and the price discovery process. The Floor [sic] QCC Order
would provide assurance to parties to stock-option qualified contingent
trades that their hedge would be maintained by allowing the options
component to be executed as a clean cross.'' In addition, like the
ISE's QCC Order, the Exchange's Floor QCC Order ``is narrowly drawn to
provide a limited exception to the general principle of exposure, and
retains the general principle of customer priority.''
PHLX's proposed Floor QCC Order promotes the same Commission goals
as or more effectively, and it is as or more narrowly drawn than ISE's
QCC Order. Accordingly, the Exchange believes that the proposed rule
change must also be consistent with the Act.
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. To the contrary, the proposed
Floor QCC Order is a competitive response to the ISE QCC Order and
similar orders adopted by other exchanges.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 shall: (a) By order approve
or disapprove 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 protected]. Please include
File Number SR-Phlx-2011-56 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2011-56. 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the Exchange. 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 No. SR-Phlx-2011-56 and should be
submitted on or before June 2, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-11584 Filed 5-11-11; 8:45 am]
BILLING CODE 8011-01-P