[Federal Register Volume 78, Number 84 (Wednesday, May 1, 2013)]
[Notices]
[Pages 25512-25514]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-10240]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69452; File No. SR-Phlx-2013-24]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto
To Adopt a Price/Display/Time Priority Algorithm, Permit the
Registration of Market Makers, and Amend the Order Types Available on
PSX
April 25, 2013.
I. Introduction
On March 8, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule changes to
adopt a price/display/time algorithm, permit the registration of market
makers, and amend the order types available on NASDAQ OMX PSX
(``PSX''). Phlx filed Amendment No. 1 to the proposed rule change on
March 18, 2013.\3\ The proposed rule change, as amended by Amendment
No. 1, was published for comment in the Federal Register on March 26,
2013.\4\ The Commission received no comment letters on the proposal.
The Commission is approving the Exchange's proposal, as modified by
Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaced the original filing in its
entirety.
\4\ See Securities Exchange Act Release No. 69194 (March 20,
2013), 78 FR 18386 (March 26, 2013) (``Notice'').
---------------------------------------------------------------------------
II. Background
In 2010, the Exchange launched PSX as a new platform for trading
cash equity securities, establishing a price/size pro rata priority
model for allocating the execution of incoming orders against orders
resting on the PSX book.\5\ The Exchange had anticipated that this
market model would gain traction as an alternative to the price/time
priority model currently used by other national securities exchanges.
According to the Exchange, however, the price/size priority model has
been only marginally successful in garnering market share, primarily
due to the risk of a large execution at a stale price that a market
participant would face if unable to adjust the prices of its posted
orders quickly.\6\ Therefore, the Exchange proposes to adopt a price/
time priority model (but with displayed orders receiving priority over
non-displayed orders) for PSX. The Exchange also proposes to allow
member organizations that satisfy certain criteria to register as
market makers on PSX (``PSX Market Makers''). Finally, the Exchange
proposes to introduce Midpoint Peg Post-Only Orders and Price to Comply
Post Orders, to adjust the operation of Minimum Quantity Orders and
Post-Only Orders, and to eliminate Minimum Life Orders.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 62877 (September 9,
2010), 75 FR 56633 (September 16, 2010) (SR-Phlx-2010-79) (``PSX
Approval Order'').
\6\ See Notice, supra note 4, at 18386.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
The Commission finds that the proposed rule changes filed by the
Exchange are consistent with the requirements of the Act and the rules
and regulations thereunder applicable to a national securities
exchange.\7\ Specifically, the Commission finds that the proposed rule
changes are consistent with Section 6(b)(5) of the Act,\8\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, 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. Overall, the Commission believes that approving the
Exchange's proposed rule change could benefit the public and market
participants to the extent that it provides a more competitive venue
for the trading of cash equity securities, resulting in better prices
and executions for investors. The Commission finds that, for the
reasons discussed below, the Exchange's proposal is consistent with the
Act.
---------------------------------------------------------------------------
\7\ In approving these proposed rule changes, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Order Processing Algorithm
PSX currently employs a price/size pro rata execution order
processing algorithm, with displayed orders receiving priority over
non-displayed orders. Specifically, multiple orders displayed on the
PSX book at the best price are allocated shares of an incoming order
pro rata based on the proportion of the size of the displayed order to
the total size of all displayed orders at that price. Once all
displayed size at any price level is exhausted, the same pro rata logic
applies to non-displayed orders at that price level.\9\
---------------------------------------------------------------------------
\9\ See Rule 3307. See also PSX Approval Order, supra note 5.
---------------------------------------------------------------------------
Phlx proposes to amend its rules to replace its price/size pro rata
order processing algorithm with a price/time priority algorithm that is
substantially similar to the order processing algorithms used at the
NASDAQ Stock Market (``NASDAQ'') and/or NASDAQ OMX BX, Inc. (``BX'').
Specifically, PSX's new order processing algorithm would allocate
orders as follows:
(1) Price. Better priced orders would be executed first.
(2) Displayed orders. As among equally priced displayed orders, the
first to arrive on the book would be executed first.
(3) Non-displayed orders and the reserve portion of quotes and
reserve orders. As among equally priced non-displayed orders and the
reserve portion of quotes and reserve orders, the first to arrive on
the book would be executed first.\10\
---------------------------------------------------------------------------
\10\ See proposed Rule 3307.
---------------------------------------------------------------------------
The Commission believes that the proposed PSX execution priority
rules are consistent with Section 6(b)(5) of the Act. The Commission
notes that the price/time priority model is the prevailing execution
algorithm for the exchange trading of cash equity securities. The
Commission has previously determined price/time execution algorithms to
be consistent with the Act.\11\ Moreover, the particular price/time
priority model proposed by Phlx is substantially similar to the model
currently used by NASDAQ and BX and does not raise any novel issues.
---------------------------------------------------------------------------
\11\ See, e.g., Securities Exchange Act Release No. 54155 (July
14, 2006), 71 FR 41291 (July 20, 2006) (SR-NASDAQ-2006-001);
Securities Exchange Act Release No. 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48).
---------------------------------------------------------------------------
B. Market Making
Phlx proposes to adopt rules to allow member organizations that are
PSX participants to register and act as PSX Market Makers. Under the
proposed rules, quotations and quotation sizes may be entered into PSX
only by a PSX Market Maker or other entity approved by the Exchange to
function in a market-making capacity.\12\ A PSX participant may
register as a PSX Market Maker in an issue by entering an electronic
[[Page 25513]]
request or by contacting PSX Market Operations.\13\ Registration would
become effective on the day the registration request is entered.\14\ A
PSX Market Maker's registration in an issue will be terminated by the
Exchange if the PSX Market Maker fails to enter quotations in the issue
within five (5) business days after the PSX Market Maker's registration
in the issue becomes effective.\15\
---------------------------------------------------------------------------
\12\ Proposed Rule 3212(a).
\13\ Proposed Rule 3212(b).
\14\ Id.
\15\ Proposed Rule 3212(c).
---------------------------------------------------------------------------
The proposed rules provide that a PSX Market Maker for a particular
security must be willing to buy and sell that security for its own
account on a continuous basis during regular market hours,\16\ and that
a PSX Market Maker must also display a two-sided trading interest in
that security of at least one normal unit of trading in PSX's quotation
montage at all times. Proposed Rule 3213(a)(2) would require a PSX
Market Maker for NMS stocks to adhere to certain pricing obligations
that are premised on entering quotation prices that are not more than a
designated percentage \17\ away from the national best bid or best
offer (as applicable) and that must be refreshed if a change in the
national best bid or best offer causes the quotation price to be more
than a defined limit \18\ away from the national best bid or best
offer.
---------------------------------------------------------------------------
\16\ Proposed Rule 3213(a)(1).
\17\ The applicable percentages are defined in proposed Rule
3213(a)(2)(D).
\18\ The applicable limits are defined in proposed Rule
3213(a)(2)(E).
---------------------------------------------------------------------------
In general, a PSX Market Maker that wishes to withdraw quotations
in a security would be required to contact the Exchange's MarketWatch
Department to obtain excused withdrawal status prior to withdrawing its
quotations. An exception to the requirement for prior approval would
exist for withdrawals based on a PSX Market Maker's systemic equipment
problems. For other circumstances beyond the PSX Market Maker's
control, a PSX Market Maker that wishes to withdraw its quotations
would be required to contact the Exchange's MarketWatch Department to
obtain excused withdrawal status prior to withdrawing its quotations.
If a PSX Market Maker's ability to enter or update quotations is
impaired, the PSX Market Maker would be required to immediately contact
PSX Market Operations to request a withdrawal of its quotations. A PSX
Market Maker that elects to remain in PSX when its ability to update
quotations is impaired would be obligated to execute orders presented
for execution against its disseminated quotations.\19\
---------------------------------------------------------------------------
\19\ Proposed Rule 3213(c).
---------------------------------------------------------------------------
Under the proposed rules, a PSX Market Maker may voluntarily
terminate its registration in a security by withdrawing its two-sided
quotation from PSX, but a PSX Market Maker that voluntarily terminated
its registration in a security could not re-register as a PSX Market
Maker in that security for one (1) business day.\20\ A PSX Market Maker
would not be deemed to have terminated its registration in a security
by voluntarily withdrawing its two-sided quotation from PSX if the PSX
Market Maker's two-sided quotation in the subject security is withdrawn
by the Exchange's systems due to certain issuer corporate actions and
the PSX Market Maker satisfies specified conditions following the
withdrawal of the quotation.\21\
---------------------------------------------------------------------------
\20\ Proposed Rule 3220(a).
\21\ Proposed Rule 3220(d).
---------------------------------------------------------------------------
A PSX Market Maker that accidentally withdraws as a PSX Market
Maker may be reinstated at the Exchange's discretion, if the PSX Market
Maker notifies the Exchange's MarketWatch department promptly, the PSX
Market Maker was not attempting to avoid its market making obligations,
and the PSX Market Maker's firm has not exceeded the Exchange's
reinstatement limitations.\22\
---------------------------------------------------------------------------
\22\ Proposed Rule 3220(b).
---------------------------------------------------------------------------
The Exchange also proposes several rules to govern conduct of PSX
Market Makers in connection with securities that are subject of
offerings governed by SEC Regulation M.\23\ The proposed rules address
the entry of stabilizing bids,\24\ excused withdrawals based on status
as a distribution participant or affiliated purchaser within the
meaning of Regulation M,\25\ the imposition of penalty bids or engaging
in syndicate covering transactions,\26\ and the meaning of certain new
defined terms.\27\
---------------------------------------------------------------------------
\23\ Rules 100-105 under Regulation M, 17 CFR 242.100-242.105.
\24\ Proposed Rule 3214.
\25\ Proposed Rule 3219(e).
\26\ Proposed Rule 3224.
\27\ Proposed Rule 3203.
---------------------------------------------------------------------------
Phlx also proposes to require a member organization that is acting
as a PSX Market Maker in a Commodity-Related Security \28\ to establish
adequate information barriers when engaging in inter-departmental
communications.\29\ A member organization acting as a PSX Market Maker
in a Commodity-Related Security would be required to file with the
Exchange's Regulation Department and keep current a list identifying
all accounts--in which the PSX Market Maker holds an interest, over
which it may exercise investment discretion, or in which it shares in
the profits and losses--for trading in commodities or derivatives
underlying that Commodity-Related Security.\30\ A member organization
acting as a PSX Market Maker in a Commodity-Related Security would not
be permitted to act or register as a market maker in any commodities or
derivatives underlying that Commodity-Related Security.\31\
---------------------------------------------------------------------------
\28\ The term ``Commodity-Related Security'' is defined in Rule
3230(c).
\29\ Proposed Rule 3230(d).
\30\ Proposed Rule 3230(e).
\31\ Id.
---------------------------------------------------------------------------
A member organization acting as a registered PSX Market Maker in a
Commodity-Related Security would be required to make available to the
Exchange's Regulation Department certain information pertaining to
transactions by the PSX Market Maker or by registered or non-registered
employees affiliated with it for its or their own accounts for trading
commodities or derivatives underlying that Commodity-Related
Security.\32\ Finally, in connection with trading a Commodity-Related
Security or commodities or derivatives underlying a Commodity-Related
Security, the member organization acting as a PSX Market Maker in a
Commodity-Related Security would be prohibited from using any material
nonpublic information received from any person associated with the
member organization or employee of that person regarding trading by
that person or employee in the commodities or derivatives underlying
such Commodity-Related Security.\33\
---------------------------------------------------------------------------
\32\ Proposed Rule 3230(f).
\33\ Proposed Rule 3230(g).
---------------------------------------------------------------------------
The Commission finds the proposed rules governing the registration
and regulation of PSX Market Makers to be consistent with Section
6(b)(5) of the Act. In particular, the proposed rules should help to
ensure that quotations submitted by PSX Market Makers, and displayed to
market participants, bear some relationship to the prevailing market
price and should thus promote fair and orderly markets and the
protection of investors.\34\ The proposed
[[Page 25514]]
rules are substantially similar to requirements currently in place at
NASDAQ and BX and raise no novel issues.\35\
---------------------------------------------------------------------------
\34\ See, e.g., Securities Exchange Act Release No. 53128
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131)
(approving NASDAQ market maker rules as part of its registration as
a national securities exchange); Securities Exchange Act Release No.
59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-
2008-48); Securities Exchange Act Release No. 63255 (November 5,
2010), 75 FR 69484, 69485 (November 12, 2010) (SR-BATS-2010-025, SR-
BX-2010-66, SR-CBOE-2010-087, SR-CHX-2010-22, SR-FINRA-2010-049, SR-
NASDAQ-2010-115, SR-NSX-2010-12, SR-NYSE-2010-69, SR-NYSEAmex-2010-
96, SR-NYSEArca-2010-83) (approving corresponding marketwide rules
with respect to market maker quoting and pricing obligations)
(``2010 Order'').
\35\ See, e.g., proposed Rule 3212 (addressing the registration
of PSX Market Makers), which is substantially similar to NASDAQ Rule
4612 and BX Rule 4612.
---------------------------------------------------------------------------
C. Modifications to Order Types
Phlx proposes to make certain changes to PSX's order functionality.
Specifically, Phlx proposes to adjust the operation of Minimum Quantity
Orders and Post-Only Orders, adopt rules to institute Midpoint Peg
Post-Only Orders and Price to Comply Orders, and eliminate Minimum Life
Orders.
Under current PSX rules, if the size of a Minimum Quantity Order is
reduced to less than one round lot due to a partial execution, the
minimum quantity condition on the order will be removed.\36\ Phlx
proposes to modify the operation of PSX's Minimum Quantity Order by
permitting such orders to retain their minimum quantity condition even
after their size is reduced to less than one round lot.\37\ The
Commission believes that Phlx's proposed changes to the Minimum
Quantity Order type are consistent with the Act. The Commission notes
that the proposed change will allow the operation of the order to
better reflect the intention of the market participants entering the
order, since it will allow a minimum quantity condition to continue to
be attached to an order at a size below one round lot. This change also
will make the operation of the PSX Minimum Quantity Order consistent
with functionality currently in place at NASDAQ.\38\
---------------------------------------------------------------------------
\36\ Rule 3301(f)(5).
\37\ Proposed Rule 3301(f)(5).
\38\ NASDAQ Rule 4751(f)(5).
---------------------------------------------------------------------------
Phlx also proposes to modify the functionality associated with its
existing Post-Only Order on PSX. Currently, if a Post-Only Order would
lock or cross an order on PSX at the time of entry, the order is re-
priced and displayed by PSX one minimum price increment below the
current low offer (for bids) or above the current best bid (for
offers).\39\ Under the proposed change, if a Post-Only Order would
cross an existing order, the order would be repriced unless the value
of price improvement associated with executing against a resting order
equals or exceeds the sum of fees charged for the execution and the
value of any rebate that would be provided if the order posted to the
book and subsequently provided liquidity, in which case the order would
execute.\40\ The Commission believes that Phlx's proposed changes to
the Post-Only Order type are consistent with the Act. According to the
Exchange, the proposed changes to the Post-Only Order are designed to
provide market participants with better control over their execution
costs by ensuring that a Post-Only Order will post to the PSX book only
when an immediate execution of the order would not be more economically
advantageous to the market participant that entered it.\41\ The
Commission notes that the proposed changes to the Post-Only Order
functionality would make this order type consistent with functionality
currently existing on NASDAQ and BX.\42\
---------------------------------------------------------------------------
\39\ Rule 3301(f)(10). In addition, if the order would lock or
cross a protected quotation of another market center, the order will
be accepted at the locking price (i.e., the current low offer (for
bids) or the current best bid (for offers)) and displayed by PSX to
one minimum price increment (i.e., $0.01 or $0.0001) below the
current low offer (for bids) or above the current best bid (for
offers). Thus, if the national best bid and offer, as displayed on
another market center, was $10 x $10.05, an order to buy at $10.05
or higher would be accepted at the locking price of $10.05, but
would be displayed at $10.04. Subsequently, an incoming order to
sell at $10.05 or lower would be matched against the Post-Only buy
order.
\40\ Proposed Rule 3301(f)(11).
\41\ Proposed Rule 3301(f)(11).
\42\ NASDAQ Rule 4751(f)(10) and BX Rule 4751(9).
---------------------------------------------------------------------------
In addition, Phlx also proposes to adopt two new order types: the
Midpoint Peg Post-Only Order and the Price to Comply Post Order. A
Midpoint Peg Post-Only Order would be a non-displayed order that is
priced at the mid-point between the national best bid and best
offer.\43\ Like a Post-Only Order, the Midpoint Peg Post-Only Order
would not remove liquidity from PSX upon entry if it would lock a non-
displayed order on PSX. Rather, the Midpoint Peg Post-Only Order would
post and lock the pre-existing order but will remain undisplayed.\44\
The Price to Comply Post Order would permit participants to post
liquidity at or near the inside market in compliance with the
restrictions on locked and crossed markets and trade-throughs under
Rules 610(d) and 611 under Regulation NMS.\45\ If, at the time of its
entry, a Price to Comply Post Order would lock or cross the protected
quotation of another trading center or would execute at a price
inferior to the protected quotation of another trading center, the
order would be re-priced and displayed one minimum price increment
below the current low offer (for bids) or one penny above the current
best bid (for offers). Price to Comply Post Orders would not be
routable.\46\
---------------------------------------------------------------------------
\43\ Proposed Rule 3301(f)(7).
\44\ SEC Rule 610(d) under Regulation NMS, 17 CFR 242.610(d),
restricts displayed quotations that lock protected quotations in NMS
Stocks, but does not apply to non-displayed trading interest.
\45\ 17 CFR 242.610(d), 611.
\46\ Proposed Rule 3301(f)(9).
---------------------------------------------------------------------------
The Commission believes that Phlx's proposed new order types are
consistent with the Act. The Commission notes that the proposed
introduction of Midpoint Peg Post-Only Orders is intended to provide
market participants with better control over their execution costs and
to provide a means to offer price improvement opportunities.\47\ The
proposed Midpoint Peg Post-Only Order functionality is identical to an
order currently operative on NASDAQ.\48\ The Exchange represents that
the proposed Price to Comply Post Order is intended to provide PSX
Market Makers and other participants with a straightforward mechanism
to enter an order that re-prices to ensure that it does not lock or
cross or trade through the protection quotation of another market
center.\49\ The Commission notes that the Proposed Price to Comply Post
Order is substantially similar to an order type that is currently in
use at NASDAQ.\50\
---------------------------------------------------------------------------
\47\ Proposed Rule 3301(f)(7).
\48\ NASDAQ Rule 4751(f)(11).
\49\ Proposed Rule 3301(f)(9).
\50\ NASDAQ Rule 4715(f)(8).
---------------------------------------------------------------------------
Finally, Phlx also proposes to eliminate PSX's Minimum Life Order.
The Minimum Life Order is a displayed order that may not be cancelled
for a period of 100 milliseconds following its receipt.\51\ The
Commission finds that Phlx's proposed elimination of the Minimum Life
Order type is consistent with the Act. The Commission notes that no
other national securities exchange has adopted this order type.
---------------------------------------------------------------------------
\51\ Rule 3301(e)(11).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\52\ that the proposed rule change (SR-Phlx-2013-24), as amended,
be, and hereby is, approved.
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
---------------------------------------------------------------------------
\53\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10240 Filed 4-30-13; 8:45 am]
BILLING CODE 8011-01-P