[Federal Register Volume 78, Number 94 (Wednesday, May 15, 2013)]
[Notices]
[Pages 28654-28663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-11521]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69550; File No. SR-Phlx-2013-46]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change, as Modified by Amendment No. 1,
Regarding Complex Order PIXL
May 9, 2012.
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 April 30, 2013, 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. On May
8, 2013, the Exchange filed Amendment No. 1 to the proposed rule
change. 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.
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[[Page 28655]]
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange is filing with the Commission a proposal to amend Rule
1080 (Phlx XL and Phlx XL II) to accommodate Complex Orders in PIXL.\3\
The Exchange requests that the Commission approve the proposed rule
change on an accelerated basis.
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\3\ The Exchange adopted PIXL in October 2010 as a price-
improvement mechanism that is a component of the Exchange's fully
automated options trading system, Phlx XL, now known as XL II. See
Securities Exchange Act Release No. 63027 (October 1, 2010), 75 FR
62160 (October 7, 2010) (SR-Phlx-2010-108) (order granting approval
of price improvement system, XL).
Six-legged Complex Orders trade on the Exchange. See Securities
Exchange Act Release No. 63777 (January 26, 2011), 76 FR 5630
(February 1, 2011) (SR-Phlx-2010-157) (approval order allowing six-
legged Complex Orders); and Commentary .08 to Rule 1080. This
proposal would enable Complex Orders to trade on PIXL.
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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
The purpose of this proposed rule change is to amend Rule 1080 to
accommodate Complex Orders in PIXL. This proposal would allow Complex
Orders in the Exchange's price-improving electronic auction, PIXL,
similarly to other options exchanges that currently allow complex
orders in their price-improving electronic auctions.\4\
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\4\ See Securities Exchange Act Release No. 64805 (July 5,
2011), 76 FR 40758 (July 11, 2011) (SR-ISE-2011-30) (order granting
approval of a proposed rule change relating to Complex Orders in
ISE's Price Improvement Mechanism, PIM). See also Securities
Exchange Act Release No. 66235 (January 25, 2012), 77 FR 4844
(January 31, 2012) (SR-CBOE-2011-114) (order granting approval of a
proposed rule change relating to Complex Order processing in CBOE's
Hybrid 3.0 classes).
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Background
Current PIXL
The PIXL mechanism is a process whereby members electronically
submit orders they represent as agent against principal interest or
other interest that they represent as agent. The submitted orders are
stopped at a price and are subsequently entered into an auction seeking
price improvement. Currently, the PIXL mechanism accepts only simple
orders.
An Exchange member may initiate a PIXL Auction (``Initiating
Member'') by submitting a PIXL Order in one of three ways: \5\
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\5\ Three components of the PIXL system were approved by the
Commission on a pilot basis: (1) Paragraphs (n)(i)(A)(2) and
(n)(i)(B)(2) of Rule 1080, relating to stopping the entire PIXL
Order where the order is for a size less than 50 contracts; (2)
paragraphs (n)(ii)(B)(4) and (n)(ii)(D) of Rule 1080, relating to
the early conclusion of the PIXL Auction; and (3) paragraph (n)(vii)
of Rule 1080, stating that there shall be no minimum size
requirement of orders entered into PIXL (collectively, the
``pilots''). See supra note 3. The pilots were extended for a pilot
period expiring July 18, 2013. All of the pilots are applicable to
Complex PIXL. The paragraph (n)(i)(A)(2) and (n)(i)(B)(2) pilot is,
for Complex Orders of less than 50 contracts in size, in new
(n)(i)(C). Paragraph (n)(ii)(B)(4) is re-numbered as (n)(ii)(B)(5)
and, along with paragraph (n)(ii)(D), the early conclusion of the
PIXL Auction pilot is applicable to Complex PIXL Orders. Proposed
(n)(ii)(D) states, regarding Complex PIXL Auctions, that an
unrelated market or marketable limit Complex Order on the opposite
side of the market from the Complex PIXL Order, as well as orders
for the individual components of the Complex Order received during
the Auction, will not cause the Auction to end early and will
execute against interest outside of the Auction. If contracts remain
from such unrelated order at the time the Auction ends, they will be
considered for participation in the order allocation process
described in sub-paragraph (E) below.
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(1) The Initiating Member could submit a PIXL Order specifying a
single price at which it seeks to execute the PIXL Order (a ``stop
price'');
(2) An Initiating Member could submit a PIXL Order specifying that
it is willing to automatically match as principal or as agent on behalf
of an Initiating Order, the price and size of all trading interest, and
responses to the PIXL Auction Notification (``PAN'') (known as ``auto-
match''), in which case the PIXL Order will be stopped at the National
Best Bid/Offer (``NBBO'') on the Initiating Order side of the market
(if 50 contracts or greater) or, if less than 50 contracts, the better
of: (i) The Phlx Best Bid/Offer (``PBBO'') price on the opposite side
of the market from the PIXL Order improved by at least one minimum
price improvement increment, or (ii) the PIXL Order's limit price (if
the order is a limit order), provided in either case that certain
circumstances are met and that such price is at least one increment
better than the limit of an order on the book on the same side as the
PIXL Order; or
(3) An Initiating Member could submit a PIXL Order specifying that
it is willing to either: (i) Stop the entire order at a single stop
price and auto-match PAN responses, as described below, together with
trading interest, at a price or prices that improve the stop price to a
specified price above or below which the Initiating Member will not
trade (a ``Not Worse Than'' or ``NWT'' price); (ii) stop the entire
order at a single stop price and auto-match all PAN responses and
trading interest at or better than the stop price; or (iii) stop the
entire order at the NBBO on the Initiating Order side (if 50 contracts
or greater) or the better of: (A) The PBBO price on the opposite side
of the market from the PIXL Order improved by one minimum price
improvement increment, or (B) the PIXL Order's limit price (if the
order is a limit order) on the Initiating Order side (if for less than
50 contracts), and auto-match PAN responses and trading interest at a
price or prices that improve the stop price up to the NWT price.\6\ In
all cases, if the PBBO on the same side of the market as the PIXL Order
represents a limit order on the book, the stop price must be at least
one minimum price improvement increment better than the booked limit
order's limit price.
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\6\ The PIXL 50 contract distinction is applicable to Complex
Orders entered into PIXL.
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After the PIXL Order is entered, a PAN is broadcast and a one-
second blind Auction ensues. Anyone may respond to the PAN
notification. At the conclusion of the Auction, the PIXL Order will be
allocated at the best price(s) among quotes, orders, and PAN responses.
Once the Initiating Member has submitted a PIXL Order for
processing, such PIXL Order may not be modified or cancelled, and a
member submitting the order has no ability to control the timing of the
execution. The execution is carried out by the Exchange's Phlx XL
automated options trading system and pricing is determined solely by
the other orders and quotes that are present in the Phlx XL system at
the time the Auction ends.
Current Complex Orders
A Complex Order is any order involving the simultaneous purchase
and/or sale of two or more different options series in the same
underlying
[[Page 28656]]
security, priced at a net debit or credit based on the relative prices
of the individual components, for the same account, for the purpose of
executing a particular investment strategy. A Complex Order may also be
a stock-option order, which is an order to buy or sell a stated number
of units of an underlying stock or exchange-traded fund (``ETF'')
coupled with the purchase or sale of options contract(s). Complex
Orders on Phlx are discussed in Commentary .08 to Rule 1080.\7\ In
particular, Commentary .08 governs the trading of Complex Orders on the
Phlx's electronic options trading platform, Phlx XL II, to, among other
things: (i) Permit Complex Orders with up to six components, including
the underlying stock or ETF; (ii) establish a Do Not Auction (``DNA'')
designation for Complex Orders; (iii) add a definition of conforming
ratio; \8\ (iv) provide priority rules for Complex Orders traded on
Phlx XL II; and (v) provide for the communication of the stock or ETF
component of a Complex Order by the Exchange to NASDAQ Options Services
LLC (``NOS''), the Phlx's affiliated broker-dealer, for execution.
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\7\ For the full definition of Complex Order, see Commentary
.08(a)(i) to Rule 1080. See also Securities Exchange Act Release No.
63777 (January 26, 2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-
2010-157) (order granting approval of a proposed rule change
relating to Complex Orders in Phlx Commentary .08 to Rule 1080 and
establishing, among other things, six-legged Complex Orders) (the
``Complex Order filing''). Prior to the Complex Order filing, a
Complex Order could be composed of two option legs and could not
have a stock component.
Six other options exchanges have rules that provide for the
trading of complex orders. See C2 Rule 6.13; CBOE Rules 6.42, 6.45,
6.53C; ISE Rule 722; NYSE Arca Rules 6.62(e), 6.91; NYSE MKT Rules
900.3NY(e), 963NY, 980NY.
\8\ The Exchange proposes to add language to Rule 1080(n)(i)(C)
to codify the principle that Complex Orders consisting of a ratio
other than a conforming ratio will not be accepted. See footnote 20
in Securities Exchange Act Release No. 63509 (December 9, 2010), 75
FR 78320 (December 15, 2010) (SR-Phlx-2010-157) (notice of Complex
Order filing).
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Currently, PIXL does not accommodate auctions for Complex Orders as
is allowed on other options exchanges that have price-improving
electronic auctions like PIXL.\9\ However, Complex Orders are becoming
an increasingly important segment of options trading. This proposal
allows Complex Orders of up to six legs, as defined in Commentary .08
of Rule 1080, to be entered into the Exchange's PIXL Auction, and
proposes changes to Rule 1080 to facilitate this process without making
any modifications to the PIXL process in place today for orders which
are not Complex Orders, or to the Complex Order rules.\10\
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\9\ See Securities Exchange Act Release No. 64805 (July 5,
2011), 76 FR 40758 (July 11, 2011) (SR-ISE-2011-30) (order granting
approval of a proposed rule change relating to Complex Orders in
ISE's Price Improvement Mechanism, PIM). See also Securities
Exchange Act Release No. 66235 (January 25, 2012), 77 FR 4844
(January 31, 2012) (SR-CBOE-2011-114) (order granting approval of a
proposed rule change relating to Complex Order processing in CBOE's
Hybrid 3.0 classes).
\10\ The Exchange notes that, as in many filings, it proposes
technical housecleaning changes that are described below.
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The Proposal
Changes to Rule 1080(n)--PIXL
The Exchange proposes to enhance PIXL so that Complex Orders may be
entered into PIXL and may have the benefit of price improvement
functionality (known as ``Complex PIXL'').
The Exchange intends to change PIXL, which is codified in Rule
1080(n), only to the extent needed to accommodate Complex PIXL Orders.
The Exchange does so by exempting Complex PIXL Orders from those
sections of PIXL which are not wholly applicable to Complex Orders.
Specifically, Complex Orders are exempted from the following portions
of subsection (n) of Rule 1080: (i) The current PIXL auction
eligibility requirements for the account of a public customer and not a
public customer that differentiate whether a PIXL Order is for a size
of less than 50 contracts or 50 contracts or more; \11\ (ii) the
current procedure for initiating a PAN Auction, how an Initiating
Member must mark the PIXL Order and what the member must specify; \12\
(iii) the current minimum price increment for PAN responses and for an
Initiating Member's stop price and/or NWT price; \13\ (iv) the current
rejection of PAN responses that are not equal to or better than the
NBBO at the time of receipt of the PAN response; \14\ (v) the current
allocation process whereby after public customer interest at a
particular price level has been satisfied, remaining contracts will be
allocated among all Exchange quotes, orders and PAN responses; \15\
(vi) the current process whereby if there are PAN responses that cross
the then-existing NBBO (provided such NBBO is not crossed) at the time
of the conclusion of the Auction, such PAN responses will be executed,
if possible, at their limit price(s); \16\ (vii) the current process
whereby if the PIXL Auction price is the same as that of an order on
the limit order book on the same side of the market as the PIXL Order,
the PIXL Order may only be executed at a price that is at least one
minimum price improvement increment better than the resting order's
limit price or, if such resting order's limit price crosses the stop
price, then the entire PIXL Order will trade at the stop price with all
better priced interest being considered for execution at the stop
price; \17\ and (viii) that currently the execution price for a PIXL
Order for the account of a public customer paired with an order for the
account of a public customer must be expressed in the quoting increment
applicable to the affected series, and that such an execution may not
trade through the NBBO or at the same price as any resting customer
order.\18\
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\11\ Rule 1080(n)(i)(A) and (B). The analogous provision for
Complex PILX Orders is in (n)(i)(C), as described below.
\12\ Rule 1080(n)(ii)(A). Regarding initiation of a PIXL
Auction, the Exchange is adding (n)(ii)(A)(2).
\13\ Rule 1080(n)(ii)(A)(6) (re-numbered as (n)(ii)(A)(7)).
Regarding the minimum price increment for PAN responses and for an
Initiating Member's stop price and/or for an NWT price in the case
of a Complex Order ($0.01), the Exchange is adding(n)(ii)(A)(7)(b).
\14\ Rule 1080(n)(ii)(A)(9). The Exchange proposes new language
in subsection (9) stating that a Complex Order PAN response must be
equal to or better than the cPBBO, as defined in Commentary .08(a)
of this Rule 1080 at the time of receipt of the PAN response. PAN
responses may be modified or cancelled during the Auction. A PAN
response (except if it is a Complex Order) submitted with a price
that is outside the NBBO will be rejected. A Complex Order PAN
response submitted with a price that is outside the cPBBO will be
rejected. A PAN or Complex Order PAN response which is inferior to
the stop price of the PIXL order will be rejected.
Commentary .08(a)(iv) defines the term cPBBO as the best net
debit or credit price for a Complex Order Strategy based on the PBBO
for the individual options components of such Complex Order
Strategy, and, where the underlying security is a component of the
Complex Order, the National Best Bid and/or Offer for the underlying
security.
\15\ Rule 1080(n)(ii)(E)(2)(a), (b), and (c). Regarding the PIXL
Order allocation process, the Exchange is adding or modifying
(n)(ii)(E)(2)(d), (e), (f), and (g).
\16\ Rule 1080(n)(ii)(F). The Exchange proposes new language
adding the alternative that if there are Complex Order PAN responses
that cross the then-existing cPBBO at the time of the conclusion of
the Auction, such PAN responses will be executed, if possible, at
their limit price(s). The Exchange believes that this behavior is,
at best, highly unlikely as participants will cancel PAN responses
when better priced interest that they could trade against is present
in the marketplace.
\17\ Rule 1080(n)(ii)(G). Regarding an Auction price on the
limit order book on the same side of the market as the Complex PIXL
Order, the Exchange is adding 1080(n)(ii)(H).
\18\ Proposed Rule 1080(n)(vi). The Exchange clarifies that the
subsection applies to the execution price for a PIXL Order and
proposes new language stating that the execution price for a Complex
Order PIXL may be in $0.01 increments and may not trade at a price
equal to or through the cPBBO or at the same price as a resting
customer Complex Order.
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The Exchange is proposing several rule provisions in respect of
Complex Orders so that they can participate in PIXL Auctions. First,
the Exchange proposes new Rule 1080(n)(i)(C) regarding stopping the
entire Complex Order when submitting such order into
[[Page 28657]]
PIXL. Specifically, new sub-paragraph (C) states that if the PIXL Order
is a Complex Order and of a conforming ratio, as defined in Commentary
.08(a)(i) and (a)(ix) to Rule 1080, the Initiating Member must stop the
entire PIXL order at a price that is better than the best net price
(debit or credit) (i) available on the Complex Order book regardless of
the Complex Order book size; and (ii) achievable from the best Phlx
bids and offers for the individual options (an ``improved net price''),
provided in either case that such price is equal to or better than the
PIXL Order's limit price.\19\ Complex Orders consisting of a ratio
other than a conforming ratio will not be accepted. New sub-paragraph
(C) shall apply to all Complex Orders submitted into PIXL and, where
applied to Complex Orders where the smallest leg is less than 50
contracts in size, shall be effective for a pilot period scheduled to
expire July 18, 2013. New sub-paragraph (C) maintains the core complex
order spread priority principal which stipulates that a Complex Order
may be executed at a total credit or debit price with priority over
individual bids or offers established in the marketplace (including
customers) that are not better than the bids or offers comprising such
total credit or debit, provided that at least one option leg is
executed at a better price than the established bid or offer for that
option contracts and no option leg is executed at a price outside of
the established bid or offer for that option contract.\20\ New sub-
paragraph (C) does so by requiring a Complex Order submitted into PIXL
to be stopped at a net debit/credit price which improves upon the
stated markets present for the individual components of the Complex
Order. By definition, requiring a Complex Order to be stopped at a net
debit/credit price which improves upon the stated markets present for
the individual components of the Complex Order ensures that at least
one option leg will be executed at a better price than the established
bid or offer for such leg. For example, a Complex Order that is of a
conforming ratio to buy one of option A with a PBBO market of $1.00
bid, offered at $1.20, and sell one of option B with a PBBO market of
$0.50 bid, offered at $0.60, would need to be stopped by the Initiating
Member at a net price better than the calculated cPBBO market of $0.40
bid, offered at $0.70.\21\ If in this same example there was also a
resting Complex Order to buy one of option A and sell one of option B
on Phlx for a net debit price of $0.50, the Initiating Member would
need to stop the Complex Order entered into PIXL at a net price better
than $0.50 bid and the calculated net best offer (cPBBO) of $0.70.
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\19\ Subsection (n)(i)(D) (re-numbered from current subsection
(C)) indicates under what circumstances PIXL Orders are not eligible
to initiate an Auction and will be rejected. Reference to proposed
new subsection (C) is added to subsection (D) as re-numbered.
\20\ The complex order spread priority principal in respect of
Complex Orders is set forth in Rule 1080, Commentary .08(c)(iii).
\21\ $0.40 bid = $1.00 bid of A less $0.60 offer of B; and $0.70
offer = $1.20 offer of A less $0.50 bid of B.
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Second, the Exchange is adding proposed new Rule (n)(ii)(A)(2) to
explain the process for initiating a PIXL Complex Auction, which is
similar to initiating a PIXL Auction today. Specifically, proposed new
subsection (2) language states that to initiate the PIXL Complex Order
Auction, the Initiating Member must mark the PIXL Order for Auction
processing, and specify either: (a) A single price at which it seeks to
execute the PIXL Order (a ``stop price''); or (b) that it is willing to
either: (i) Stop the entire order at a single stop price and auto-match
PAN responses and trading interest at a price or prices that improve
the stop price to a specified price (a ``Not Worse Than'' or ``NWT''
price); or (ii) stop the entire order at a single stop price and auto-
match all PAN responses and trading interest at or better than the stop
price. Once the Initiating Member has submitted a Complex Order into
PIXL for processing pursuant to this subparagraph, such order may not
be modified or cancelled. Under any of the circumstances described in
sub-paragraphs (a)-(b) of subsection (2), the stop price or NWT price
may be improved to the benefit of the PIXL Order during the Auction,
but may not be cancelled.
The procedure set forth in new Rule 1080(n)(ii)(A)(2) for Complex
Orders is similar to the procedure set forth in Rule 1080(n)(ii)(A)(1)
for initiating a PIXL Auction for orders which are not complex.
However, new Rule 1080(n)(ii)(A)(2) does not allow for Initiating
Members to enter Complex Orders into PIXL and specify, without
stipulating a specific stop price, that they are willing to
automatically match as principal or as agent on behalf of an Initiating
Order the price and size of all PAN responses, and trading interest.
Initiating Members entering orders into PIXL which are not Complex
Orders may indicate that they are willing to stop the PIXL Order at the
NBBO on the Initiating Order side (if 50 contracts or more) or the PBBO
on the opposite side of the market from the PIXL Order improved by one
minimum price improvement increment (if the PIXL Order is for less than
50 contracts), provided such price is no worse than the NBBO, by
submitting the order with a market price and a NWT market price.
When submitted in this manner, the trading system stops the PIXL
order at a price based on the disseminated markets in that series at
the time of order receipt, in accordance with PIXL rules stated above.
The Exchange is not offering this particular functionality for Complex
Orders in order to avoid stopping an order at a net debit/credit price
which may be unexpected by the Initiating Member due to the fact that
there are multiple legs in Complex Orders and prices may change
rapidly. Requiring the Initiating Member to use an exact limit price as
the stop price, yet allow the use of a NWT market price, will ensure
that the stop price will meet the Initiating Member's expectations and
still allow the Initiating Member to automatically match other interest
if desired.
Third, the Exchange is proposing new language in Rule
1080(n)(ii)(B)(3) to add a Complex Order PIXL alternative for
concluding a Complex Order PIXL Auction. Specifically, new subsection
(3) states that a Complex Order PIXL Auction will conclude any time the
cPBBO or the Complex Order book crosses the PIXL Order stop price on
the same side of the market as the PIXL Order (defined for these
purposes as a ``Complex PIXL Order'' or, as the context requires, a
``PIXL Order'').\22\ This language introduces proposed new Rule
1080(n)(ii)(B)(2) [sic] for Complex Order PIXL Auctions that is similar
to what is available for PIXL Auctions today. Today, PIXL Auctions end
at the earlier of (i) the end of the Auction period, (ii) any time
there is a trading halt on the Exchange in the affected series, or
(iii) any time the PBBO crosses the PIXL order stop price on the same
side as the PIXL Order. The PBBO includes both orders and quotes on the
Exchange. Complex PIXL Auctions will also conclude (i) at the end of
the Auction period or (ii) any time there is a trading halt on the
Exchange in the affected series as stipulated in the rule today. In
addition, the language of proposed new Rule 1080(n)(ii)(B)(3) is being
added to explicitly state that the end of a Complex PIXL Auction can
also occur either when the cPBBO or the Complex Order book crosses the
PIXL
[[Page 28658]]
Order stop price on the same side of the market as the PIXL Order.
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\22\ The Exchange also clarifies the end of the Auction
alternative in Rule 1080(n)(ii)(B)(2) to state that, for a PIXL
Auction (except if it is a Complex Order), any time the PBBO crosses
the PIXL Order stop price on the same side of the market as the PIXL
Order.
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Fourth, the Exchange is proposing new language in Rule
1080(n)(ii)(C) to add a Complex Order PIXL alternative for execution
when a Complex PIXL Auction ended due to the cPBBO or the Complex Order
book crossing the Complex Order PIXL stop price on the same side as the
Complex PIXL Order. Specifically, new language in subsection (C)(2)
states that at the conclusion of the PIXL Auction, in the case of the
cPBBO or the Complex Order book crossing the Complex PIXL Order stop
price on the same side as the Complex PIXL Order, the entire Complex
PIXL Order will be executed at the stop price against executable PAN
responses and executable Complex Order interest. For example, if a
Complex PIXL Auction is in progress where the Complex PIXL Order is a
buy order stopped at $0.60, if either the cPBBO (calculated Phlx Best
Bid) moves to be $0.61 bid or better, or if a Complex Order is entered
onto the Phlx book with a bid price of $0.61 or more, the Complex PIXL
Auction will be terminated as set forth in proposed Rule
1080(n)(ii)(B)(3). In such case, any complex sell interest, both
Complex Orders and PAN responses, at a price of $0.60 or lower will be
considered for trade against the Complex PIXL Order at $0.60.
The execution process described above for Complex PIXL Orders is
simpler than the process in place for PIXL Auctions terminated due to
the PBBO crossing the PIXL Order stop price on the same side of the
market as the PIXL Order. Currently, when a PIXL Auction is terminated
due to the PBBO crossing the PIXL Order stop price on the same side of
the market as the PIXL Order, the PIXL Order is executed at best
response prices or, if the stop price is the best price in the Auction,
the PIXL Order is executed at the stop price, unless the best response
price is equal to the price of a limit order resting on the Phlx book
on the same side of the market as the PIXL Order, in which case the
PIXL Order will be executed against that response (but at a price that
is at least one minimum price improvement increment better than the
price of such limit order).\23\ For example, assume a PIXL Order to buy
20 contracts is stopped at a price of $0.60 when the market is $0.40
bid, offered at $0.70. Additionally, assume a PAN response is received
to sell 10 contracts at $0.55 and an order is submitted and entered
onto the Phlx book to sell 10 contracts at $0.60. If a buy order (or
quote) with a limit of $0.65 is entered into the Phlx XL system, the
buy order (or quote) will trade immediately against the 10 contract
order offered at $0.60. The buy order (or quote) will not trade against
the PAN response offered at $0.55 since it is an Auction response and
is only eligible to trade as part of the Auction. Any residual interest
of the buy order (or quote) is reflected in the PBBO causing the market
to move to $0.65 bid, offered at $0.70, the PIXL Auction is terminated.
Provided, in the unlikely event that the PAN response to sell at $0.55
had not been cancelled, the PAN response will trade 10 contracts
against the PIXL Order at $0.55 and any residual PIXL Order contracts
will trade at $0.60 against the Initiating Order. The Exchange is
proposing that when a Complex PIXL Auction is terminated due to either
the cPBBO or the Complex Order book crossing the Complex Order PIXL
stop price on the same side as the Complex PIXL Order, such order is
only executed through the cPBBO and/or the Complex Order book at one
price, the stop price.\24\ Consider a scenario similar to the stopped
PIXL Order example set forth above. Assume that a Complex PIXL Order to
buy is stopped at a price of $0.60. The Complex PIXL Order is to buy
option A and sell option B, where option A is $0.90 bid, offered at
$1.00 and option B is $0.30 bid, offered at $0.40. The individual
option markets imply a cPBBO market of $0.50 bid, offered at $0.70. As
before, assume a PAN response is received to sell the strategy at
$0.55. If the market for option A becomes $1.05 bid, offered at $1.15,
the implied (calculated) cPBBO market becomes $0.65 bid, offered at
$0.85 causing the Complex PIXL Auction to terminate. As proposed, the
PAN response at $0.55 will trade against the Complex PIXL Order at the
stop price of $0.60. To trade at $.60, at least one of the option
components of the Complex Order will need to be executed at a price
which is outside of the current market where cPBBO is $0.65 bid. Since
this event may have up to six components, the Exchange believes that
limiting the prices trading through the cPBBO and/or the Complex Order
book to only the stop price is important. Furthermore, combined with
the improbability that responses will still be available which are
crossing the cPBBO or the Complex Order book, the Exchange believes the
price continuity of this approach is also more rational and fair to all
participants. When executing at the stop price, the Initiating Order as
well as all better priced PAN responses and Complex Order interest will
be considered for trade against the Complex PIXL Order.
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\23\ Rule 1080(n)(ii)(B).
\24\ Proposed Rule 1080(n)(ii)(B)(3).
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Fifth, the Exchange is proposing new language in Rule
1080(n)(ii)(E)(2)(d) regarding allocation of Complex Order PIXL.
Specifically, new subsection (2)(d) states that in the case of a
Complex Order PIXL, if the Initiating Member selected the single stop
price option of the PIXL Auction, PIXL executions will occur at prices
that improve the stop price, and then at the stop price with up to 40%
of the remaining contracts after public customer complex interest is
satisfied being allocated to the Initiating Member at the stop price.
If only one other participant matches the stop price, then the
Initiating Member may be allocated up to 50% of the contracts remaining
after public customer complex interest is satisfied at such price.
Complex Orders on the PHLX Complex Order Book, PAN responses, and
quotes and orders which comprise the cPBBO at the end of the Auction
will be considered for allocation against the Complex PIXL order. Such
interest will be allocated in the following order: (i) To public
customer Complex Orders and PAN responses in time priority; (ii) to
SQT, RSQT, and non-SQT ROT Complex Orders and PAN responses on a size
pro-rata basis; (iii) to non-market maker off-floor broker-dealer
Complex Orders and PAN responses on a size pro-rata basis, and (iv) to
quotes and orders which comprise the cPBBO at the end of the Auction
with public customer interest being satisfied first in time priority,
then to SQT, RSQT, and non-SQT ROT interest satisfied on a size pro-
rata basis, and lastly to non-market maker off-floor broker-dealers on
a size pro-rata basis. Thereafter, remaining contracts, if any, shall
be allocated to the Initiating Member, after public customer Complex
Orders and PAN responses have been satisfied.
For example, a Complex Order to buy one of option A and sell one of
option B, 100 times, with a cPBBO of $0.40 bid, $0.70 offer, may be
submitted into PIXL by the Initiating Member with a single stop price
of $0.60. Assume that during the Auction, Phlx receives the following
responses and order interest:
--MM1 responds to sell the strategy 10 times at a price of $0.55
--MM1 responds to sell the strategy 10 times at a price of $0.60
--BD responds to sell the strategy 5 times at a price of $0.60
--Customer Complex Order to sell the strategy 30 times at a price of
$0.60
--MM2 responds to sell the strategy 20 times at $0.60.
After all of the aforementioned responses and orders are received,
[[Page 28659]]
option A of the simple market moves causing the cPBBO to become offered
20 times at $0.55. Option A is quoted in the simple market as $1.00
bid, $1.05 offer, with the $1.05 offer representing a Customer offer.
Option B is quoted in the simple market as $0.50 bid, $0.60 offer.
At the end of the Auction, the Complex PIXL Order will be executed
30 times at a price of $0.55. Of those 30 strategies, MM1 will trade 10
and an additional 20 contracts will be traded by legging into the
interest that represents the cPBBO, including the Customer offered at
$1.05 in Option A. The Complex PIXL Order will then be traded against
interest at $0.60. First, the Customer offering the strategy 30 times
will be satisfied. Next, the Initiating Member will be allocated 40% of
the remaining 40 strategy contracts, i.e. 16 strategy contracts at his
stop price of $0.60. The residual 24 strategy contracts will trade
against the two market maker responses in a pro-rata fashion with MM1
executing 8 strategy contracts and MM2 executing 16 strategy contracts.
The broker dealer offering 5 strategies at $0.60 would not receive any
allocation and the response is cancelled back to the participant.
An additional example illustrating the execution algorithm proposed
for Complex Order PIXL is as follows. Assume a Complex Order to buy one
of option A and sell one of option B, 100 times, with a cPBBO of $0.40
bid, $0.70 offer, may be submitted into PIXL by the Initiating Member
with a single stop price of $0.60. Assume that during the Auction, Phlx
receives the following responses and order interest:
--MM1 responds to sell the strategy 10 times at a price of $0.55
--MM1 responds to sell the strategy 10 times at a price of $0.60
--BD responds to sell the strategy 5 times at a price of $0.60
--Customer Complex Order to sell the strategy 30 times at a price of
$0.60
--MM2 responds to sell the strategy 20 times at $0.60.
After all of the aforementioned responses and orders are received,
option A of the simple market moves causing the cPBBO to become offered
20 times at $0.60. Option A is quoted in the simple market as $1.00
bid, $1.10 offer, with the $1.10 offer representing a Customer offer.
Option B is quoted in the simple market as $0.50 bid, $0.60 offer.
At the end of the Auction, the Complex PIXL Order will be executed
10 times at a price of $0.55 against MM1. The Complex PIXL Order will
then be traded against interest at $0.60. First, the Customer offering
the strategy 30 times will be satisfied. Next, the Initiating Member
will be allocated 40% of the remaining 60 strategy contracts, i.e. 24
strategy contracts at his stop price of $0.60. The residual 36 strategy
contracts will trade against the two market maker responses with MM1
executing 10 strategy contracts and MM2 executing 20 strategy
contracts. The broker dealer offering 5 strategies at $0.60 would then
be executed. The last 1 contract would be traded against the cPBBO
interest with the Customer offering Option A at $1.10 receiving
priority over any other interest offered at that price.
Similarly to PIXL, all interest in the Phlx system at the end of a
Complex PIXL auction will be considered for execution against the
Complex PIXL Order. Interest will be traded first based on the prices
available at the end of the Auction. At all prices, other than the
final price point, all interest, including Complex Orders, PAN
response, and interest comprising the cPBBO will be fully satisfied. At
the final price point, the Initiating Member will be allocated up to
40% (50% if matching only one other participant) of the Complex PIXL
Order after public customer complex interest has been satisfied. After
public customer complex interest and the Initiating Member have been
allocated contracts, other complex interest will be considered for
allocation with SQT, RSQT, and non-SQT ROT interest being allocated in
a size pro-rata fashion followed by non-market maker off-floor broker
dealer complex interest in a size pro-rata fashion. Once all complex
interest, including both Complex Orders and PAN responses, has been
satisfied, interest comprising the cPBBO will be considered for
allocation. Public customer interest comprising the cPBBO will be
afforded priority over non-public customer interest comprising the
cPBBO and will be allocated in a price time manner. After public
customer interest comprising the cPBBO has been satisfied, SQT, RSQT,
and non-SQT ROT interest comprising the cPBBO will be allocated in a
size pro-rata fashion followed by non-market maker off-floor broker
dealer complex interest in a size pro-rata fashion.
Complex Orders today which are executed as part of a Complex Order
Live Auction (COLA) trade first based on the best prices available at
the end of the COLA timer. If markets for the individual components of
the Complex Order independently improve during the COLA Timer and match
the best price of COLA Sweeps(s) and/or responsive Complex Order
interest, the responses will be executed before executing the
individual components of the Complex Order. Since a Complex PIXL Order
must be stopped at a price which improves upon all interest in the Phlx
XL system at time of receipt, the proposed Complex PIXL execution
algorithm ensures and maintains the priority of established interest.
In the event that the individual components of the Complex PIXL Order
independently improve during the Auction and new interest is received
during the auction, Complex Orders and PAN responses will be afforded
priority over individual component interest comprising the cPBBO at a
given price point just as auction responses and Complex Orders are
afforded priority over individual components of a Complex Order that
independently improve during a COLA. It is important to note, however,
that public customer complex interest will maintain priority over non-
public customer complex interest and public customer interest
comprising the cPBBO will be afforded priority over non-public customer
interest comprising the cPBBO. The Complex PIXL Auction allows for all
participant types, including public customers, to respond to the
auction notification.\25\ Public customers responding to the auction or
submitting complex order interest during the auction will be afforded
priority over non-customer interest. Public customer interest
comprising the cPBBO will be afforded priority over non-customer
interest comprising the cPBBO but not over complex order or PAN
response interest. Such public customer interest was provided the
opportunity to respond to the auction and/or submit complex interest
during the auction. Since public customer interest comprising the cPBBO
chose not to avail themselves of the opportunity to respond to the
auction, the public customer interest representing individual
components of the cPBBO will not be afforded priority over participants
offering contra-side interest to the Complex PIXL for all components of
the Complex PIXL Order at the same price point.
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\25\ Rule 1080(n)(ii)(A)(5) (re-numbered from subsection (A)(4))
provides that any person or entity may submit responses to the PAN,
provided such response is properly marked specifying price, size and
side of the market.
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Sixth, the Exchange is proposing new language in Rule
1080(n)(ii)(E)(2)(e) regarding allocation of Complex Order PIXL where
an Initiating Member selected ``stop and NWT'' in respect to the stop
price of a PIXL Order submission. Specifically, new subsection (2)(e)
states that in the case of a Complex Order PIXL, if the
[[Page 28660]]
Initiating Member selected the ``stop and NWT'' option for the Complex
PIXL Order submission, contracts shall be allocated as follows: (i)
First to Complex Orders and PAN responses at prices better than the NWT
price, as well as to quotes and orders which comprise the cPBBO if such
cPBBO is better than the NWT price, pursuant to the algorithm set forth
above in (n)(ii)(E)(2)(d)(i) through (iv) of Rule 1080 and (ii) next,
to Complex Orders and PAN responses, as well as to quotes and orders
which comprise the cPBBO at the end of the Auction, at the Initiating
Member's NWT price and at prices better than or equal to the Initiating
Member's stop price, beginning with the NWT price. The Initiating
Member shall be allocated an equal number of contracts as the aggregate
size of all other interest at each price point, except that the
Initiating Member shall be entitled to receive up to 40% (or 50% if
matching only one other participant) of the contracts remaining at the
final price point (including situations where the final price is the
stop price), after public customer Complex Orders and PAN responses
have been satisfied. In the case of an Initiating Order with a NWT
price at the market, the Initiating Member shall be allocated an equal
number of contracts as the aggregate size of all other interest at all
price points, except that the Initiating Member shall be entitled to
receive up to 40% (or 50% if matching only one other participant) of
the contracts remaining at the final price point (including situations
where the final price is the stop price), after public customer Complex
Orders and PAN responses have been satisfied. If there is other
interest at the final price point the contracts will be allocated to
such interest pursuant to the algorithm set forth in
(n)(ii)(E)(2)(d)(i) through (iv) of this rule. Any remaining contracts
shall be allocated to the Initiating Member.\26\
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\26\ Proposed new subsection (n)(ii)(E)(2)(f) states that a
single quote, order or PAN response shall not be allocated a number
of contracts that is greater than its size.
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For example, a Complex Order to buy one of option A and sell one of
option B, 100 times, with a cPBBO of $0.40 bid, $0.70 offer, could be
submitted into PIXL by the Initiating Member with a single stop price
of $0.60 and a NWT price of $0.55. Assume that during the Auction, a
market maker (MM1) responds to the auction notification and offers to
sell the same Complex Order strategy 10 times at a price of $0.55 as
well as offers to sell the strategy 25 times at a price of $0.60. In
addition, assume that a public customer Complex Order to sell the
strategy 10 times at $0.60 is received and another market maker (MM2)
responds to sell the strategy 25 times at $0.60. At the end of the
Auction, the Complex PIXL Order will be executed 10 times at a price of
$0.55 against MM1 and an additional 10 times at a price of $0.55
against the Initiating Member since he indicated he was willing to
match all interest down to $0.55 by using the NWT functionality. The
Complex PIXL Order will then execute 10 times at a price of $0.60
against the public customer offer. Then, the Initiating Member will be
allocated 40% of the remaining 70 strategy contracts, i.e. 28 strategy
contracts, of the Complex PIXL Order at the stop price of $0.60. The
two market maker responders will execute the remaining 42 contracts in
a pro-rata fashion with both MM1 and MM2 trading 21 strategy contracts
each.
Seventh, the Exchange is proposing new language in Rule
1080(n)(ii)(E)(2)(g) to stipulate that Complex PIXL Orders which
include a stock/ETF component will only execute against Complex Orders
or PAN responses that also include the stock/ETF component. Such orders
will not ``leg'' to the simple market and will therefore not trade
against interest comprising the cPBBO at the end of the Auction.\27\
This behavior is consistent with the handling of Complex Orders that
include a stock/ETF component and are entered into the Phlx system.\28\
Legging of a stock/ETF component would introduce the risk of a
participant not receiving an execution on all components of the Complex
Order and is therefore not considered as a means of executing a Complex
Order which includes a stock/ETR component. The Exchange believes that
introducing the risk of not having the ability to fully execute a
complex strategy is counter-productive to, and inconsistent with, the
effort to allow Complex Orders in PIXL. If there are Complex Orders and
PAN responses which satisfy all components of the Complex Order in
PIXL, including the stock component, the stock will be executed in the
same manner as it is done today for Complex Orders.\29\
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\27\ Complex Orders that include a stock/ETF component and are
submitted to the Phlx Complex Order book or entered into a Complex
Order Live Auction (COLA) also have a similar restriction. Rule
1080, Commentary .08(a)(i).
\28\ Commentary.08 (a)(i) to Rule 1080 states, for example, that
stock-option orders can only be executed against other stock-option
orders and cannot be executed by the System against orders for the
individual components.
\29\ The Exchange electronically communicates the underlying
security component of the order to NOS for immediate execution as
per Exchange Rule 1080 Commentary .08(h). In addition, only those
participants with the appropriate documentation (e.g. a Qualified
Special Representative (``QSR'') arrangement with NOS), as required
by Exchange Rule 1080 Commentary .08(a)(i), will be allowed to
submit Complex Orders which include a stock component into PIXL.
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Eighth, the Exchange is proposing new language in Rule
1080(n)(ii)(H) regarding a Complex Order PIXL Auction price matching a
Complex Order Book price on the same side of the market as the PIXL
Order. Specifically, new subsection (H) states that if the Complex
Order PIXL Auction price is the same as that of a Complex Order on the
Complex Order Book on the same side of the market as the Complex PIXL
Order, the PIXL Order may only be executed at a price that is at least
one minimum price improvement increment better than the resting order's
limit price; or if such resting order's limit price is equal to or
crosses the stop price, then the entire PIXL Order will trade at the
stop price with all better priced interest being considered for
execution at the stop price. This is similar to how PIXL executions are
handled today when an order on the same side as the PIXL Order is on
the book.\30\ Rule 1080(n)(ii)(H) is being proposed in order to provide
for the same behavior when a Complex Order on the same side of the
market as the Complex PIXL Order is resting on the book. For example,
assume a Complex PIXL Order to buy 20 strategy contracts is stopped at
a price of $0.60 when the cPBBO market is $0.40 bid, offered at $0.70.
Additionally, assume a PAN response is received to sell 10 strategy
contracts at $0.58. In addition, assume a Complex Order is received
during the Auction to buy 10 strategy contracts for $0.58. The Complex
Order received during the Auction will rest on the order book since it
is not marketable against the cPBBO or against other resting Complex
Order interest. At the end of the Auction, 10 strategy contracts of the
Complex PIXL Order will be executed at $0.59, one price improvement
increment better than the resting Complex Order bid of $0.58, against
the PAN response and 10 strategy contracts of the Complex PIXL Order
will be executed at $0.60 against the Initiating Order of the Complex
PIXL. Considering a similar scenario where the Complex Order received
during the Auction is to buy 10 strategy contracts for $0.60, at the
end of the Auction, the entire Complex PIXL Order will be executed at
$0.60 with the Initiating Order and the PAN response each executing 10
[[Page 28661]]
strategy contracts. This is similar to how PIXL executions are handled
today.
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\30\ Rule 1080(n)(ii)(G).
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The Exchange is also proposing to add language to existing Rule
1080(n)(ii)(G) to state that if there is an order on the limit order
book, on the same side of the market as the PIXL Order, which is
``equal to or crosses'' the stop price, then the entire PIXL Order will
trade at the stop price with all better priced interest being
considered for execution at the stop price. Currently, the rule does
not address the case where the order on the limit order book is ``equal
to'' the stop price. This change does not impact behavior since the
order on the limit order book has been considered by the Phlx system to
``cross'' the stop price when its limit was equal to the stop price.
Not adding the consideration when the limit order ``crossed'' the stop
price would have resulted in PIXL Orders not being able to execute
since they would be forced to improve the limit of the resting order
which was also the PIXL Order stop price.
Ninth, the Exchange is proposing new language in Rule
1080(n)(ii)(J) regarding Complex Order PIXL Orders with stock
components. Specifically, subsection (J)(1) states that a member
organizations may only submit Complex PIXL Orders, Initiating Orders,
Complex Orders, and/or PAN responses with a stock/ETF component if such
orders/responses comply with the Qualified Contingent Trade Exemption
from Rule 611(a) of Regulation NMS pursuant to the Act. Member
organizations submitting such orders with a stock/ETF component
represent that such orders comply with the Qualified Contingent Trade
Exemption. Members of FINRA or the NASDAQ Stock Market (``NASDAQ'') are
required to have a Uniform Service Bureau/Executing Broker Agreement
(``AGU'') with Nasdaq Options Services LLC in order to trade orders
containing a stock/ETF component; firms that are not members of FINRA
or NASDAQ are required to have a Qualified Special Representative
(``QSR'') arrangement with Nasdaq Options Services LLC (``NOS'') in
order to trade orders containing a stock/ETF component.
New subsection (J)(2) states that where one component of a Complex
PIXL Order, Initiating Order, Complex Order, or PAN response is the
underlying security, the Exchange shall electronically communicate the
underlying security component of a Complex PIXL Order (together with
the Initiating Order, Complex Order, or PAN response, as applicable) to
NOS, its designated broker-dealer, for immediate execution. Such
execution and reporting will occur otherwise than on the Exchange and
will be handled by NOS pursuant to applicable rules regarding equity
trading.
And, new subsection (J)(3) states that when the short sale price
test in Rule 201 of Regulation SHO \31\ is triggered for a covered
security, NOS will not execute a short sale order in the underlying
covered security component of a Complex PIXL Order, Initiating Order,
Complex Order, or PAN response if the price is equal to or below the
current national best bid.\32\ However, NOS will execute a short sale
order in the underlying covered security component of a Complex PIXL
Order, Initiating Order Complex Order, or PAN response if such order is
marked ``short exempt,'' regardless of whether it is at a price that is
equal to or below the current national best bid.\33\ If short sale
restrictions of Rule 201 are in effect at the end of the Auction and
either the Complex PIXL Order or the Initiating Order consists of a
stock/ETF component which is a short sale, NOS will execute the short
sale order in the underlying covered security component if such order
is able to be executed at a price which is above than [sic] the
national best bid at the time of execution. If NOS cannot execute the
underlying covered security component of a Complex PIXL Order or
Initiating Order in accordance with Rule 201 of Regulation SHO, the
Exchange will cancel back the Complex PIXL Order and Initiating Order
to the entering member organization. Similarly, if short sale
restrictions of Rule 201 are in effect at the end of the Auction and
there exist Complex Orders or PAN responses which consist of a stock/
ETF component which is a short sale, NOS will execute the short sale
order in the underlying covered security component if such order is
able to be executed at a price which is above the national best bid at
the time of execution. If NOS cannot execute the underlying covered
security component of a Complex Order or PAN response in accordance
with Rule 201 of Regulation SHO, the Exchange will cancel back the
Complex Order and/or PAN response to the entering member organization.
For purposes of this paragraph, the term ``covered security'' shall
have the same meaning as in Rule 201(a)(1) of Regulation SHO.
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\31\ 17 CFR 242.201. See Securities Exchange Act Release No.
61595 (February 26, 2010), 75 FR 11232 (March 10, 2010). See also
Division of Trading and Markets: Responses to Frequently Asked
Questions Concerning Rule 201 of Regulation SHO, January 20, 2011
(``SHO FAQs'') at http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm.
\32\ The term ``national best bid'' is defined in Rule
201(a)(4). 17 CFR 242.201(a)(4).
\33\ The Exchange notes that a broker or dealer may mark a sell
order ``short exempt'' only if the provisions of Rule 201(c) or (d)
are met. 17 CFR 242.200(g)(2). Since NOS and the Exchange do not
display the stock or ETF portion of a complex order, however, a
broker-dealer should not be in a position to mark the short sale
order ``short exempt'' under Rule 201(c). See SHO FAQs Question and
Answer Nos. 4.2, 5.4, and 5.5. See also Securities Exchange Act
Release No. 63967 (February 25, 2011), 76 FR 12206 (March 4, 2011)
(SR-Phlx-2011-27) (discussing, among other things, Complex Orders
marked ``short exempt'').
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The Exchange is also proposing two additional minor changes to the
Phlx rules in order to accommodate Complex Order submission into the
PIXL mechanism, and one clarifying change to the current PIXL rule. The
first of these rule changes is to current Rule 1080(n)(i)(E),\34\ which
states that PIXL Orders submitted during the final second of the
trading session in the affected series are not eligible to initiate an
Auction and will be rejected. The Exchange is proposing to alter the
language to state that orders submitted during the final ``two
seconds'' of the trading session will not be eligible to initiate an
Auction and will be rejected. The Exchange is increasing this duration
from one to two seconds in order to accommodate the execution of
multiple components of a Complex Order. Since this time allowance is
set for PIXL as a whole, and not only for PIXL versus Complex PIXL, no
orders submitted into the PIXL mechanism will be accepted when there
remains less than two seconds in the trading session for the components
of the order. Second, the Exchange is proposing to add language to
Commentary .08(e)(i)(B)(2) of Rule 1080 to stipulate that a Complex
Order that would otherwise be a COLA-eligible order that is received in
a strategy where there is currently a Complex Order PIXL Auction in
progress shall not be COLA-eligible. The Phlx XL system allows for only
one Auction to be ongoing in a given series or strategy at a time. This
rule will be changed slightly to include ``strategy'' as well as
``series''. With the allowance of Complex Orders into PIXL, the Complex
Order rules will also be changed to stipulate that only one Auction,
including both COLA and PIXL, may be conducted at a time in a given
strategy.\35\
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\34\ Sub-section (n)(i)(E) of Rule 1080 is re-numbered to
(n)(i)(F); and for conformity the re-numbering is reflected in the
opening paragraph of subsection (n). In a similar vein, other
subsections are re-numbered as needed (e.g. sub-section (n)(i)(C) is
re-numbered to sub-section (n)(i)(D), (n)(i)(D) is re-numbered to
(n)(i)(E), and (n)(i)(F) is re-numbered to (n)(i)(G)).
\35\ Proposed Rule 1080(n)(ii).
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Lastly, the Exchange is submitting a clarifying change to current
Rule 1080(n)(ii)(E)(2)(a). The rule currently states that if the
Initiating Member is
[[Page 28662]]
matched by only one specialist, SQT or RSQT at the stop price, then the
Initiating Member is entitled to 50% of the contracts executed at such
price. The rule is being clarified to state that if the Initiating
Member is matched by only one other ``participant,'' which includes a
specialist, SQT or RSQT, as well as any other exchange member, then the
Initiating Member is entitled to 50% of the contracts executed at such
price.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \36\ in general, and furthers the objectives of Section
6(b)(5) of the Act \37\ 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. This will be effectuated by rule changes that allow Complex
Orders to be submitted into the Phlx price improvement (PIXL)
mechanism.
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\36\ 15 U.S.C. 78f(b).
\37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
PIXL is the Exchange's electronic order, trade, and execution
system that allows a member of the Exchange known as an Initiating
Member to electronically submit for execution an order it represents as
agent on behalf of a public customer, broker-dealer, or any other
entity against principal interest or against any other order it
represents as agent provided it submits the PIXL Order for electronic
execution into the PIXL Auction pursuant to the Rule. During the one-
second blind PIXL Auction (PAN), the Initiating Member's stop price or
NWT price may be improved to the benefit of the PIXL Order during the
Auction, but may not be cancelled. Anyone may respond to the PAN by
sending orders or quotes. At the conclusion of the Auction, the PIXL
Order will be allocated at the best price(s). PIXL has proven to be,
since its institution several years ago, an effective electronic price
improvement and trading tool on the Exchange that, until this proposal,
was not able to accept Complex Orders.
Complex Orders allow the simultaneous purchase and/or sale of two
or more different options series in the same underlying security and
for the same account. These orders are priced at a net debit or credit
based on the relative prices of no more than six individual components
for the purpose of executing a particular investment strategy. Complex
Orders may also be stock-option orders, which enable buying or selling
a stated number of units of an underlying stock or ETF coupled with the
purchase or sale of options contract(s). Complex Orders allow the
execution of spread and other multifaceted trading and hedging
strategies that could not be done effectively, if at all, with multiple
simple orders.
Currently, PIXL does not accommodate Complex Orders as is allowed
on other options exchanges, such as ISE and the Chicago Board Options
Exchange, Incorporated (``CBOE''), which have price-improving
electronic auctions like PIXL. Clearly, Complex Orders are and will
continue to become an increasingly important hedging and trading
segment of the options industry. This proposal simply allows Complex
Orders to be entered into the Exchange's PIXL Auction mechanism just as
is allowed on ISE and CBOE.
The Exchange is proposing several rule changes to establish how
Complex Orders will be accommodated in PIXL, including the following.
First, new Rule 1080(n)(i)(C) regarding stopping the entire Complex
Order of a conforming ratio when submitting such order into PIXL.
Second, new Rule (n)(ii)(A)(2) to explain the process for initiating a
PIXL Complex Auction. Third, new language in Rule 1080(n)(ii)(B)(3) to
add a Complex Order PIXL alternative for concluding a Complex Order
PIXL Auction. Fourth, new language in Rule 1080(n)(ii)(C) to add a
Complex Order PIXL alternative for execution when a Complex PIXL
Auction ended due to the cPBBO or the Complex Order book crossing the
Complex Order PIXL stop price on the same side as the Complex PIXL
Order. Fifth, new language in Rule 1080(n)(ii)(E)(2)(d) regarding
allocation of Complex Order PIXL. Sixth, new language in Rule
1080(n)(ii)(E)(2)(e) regarding allocation of Complex Order PIXL where
an Initiating Member selected ``stop and NWT'' in respect to the stop
price of a PIXL Order submission. Seventh, new language in Rule
1080(n)(ii)(E)(g) to stipulate that Complex PIXL Orders which include a
stock/ETF component will only execute against Complex Orders or PAN
responses that also include the stock/ETF component. Eighth, new
language in Rule 1080(n)(ii)(H) regarding a Complex Order PIXL Auction
price matching a Complex Order Book price on the same side of the
market as the PIXL Order. Ninth, new language in Rule 1080(n)(ii)(J)
regarding Complex Order PIXL Orders with stock components. In addition,
the three pilots applicable to Complex Orders (stopping the entire PIXL
Order where the order is for a size less than 50 contracts, early
conclusion of the PIXL Auction, and no minimum size requirement of
orders entered into PIXL) are applicable to Complex Orders in PIXL.
The Exchange believes this proposal reflects reasonable and proper
amendments to accommodate Complex Orders in PIXL, the Exchange's price-
improvement mechanism that is a component of the fully automated
options trading system Phlx XL. This ensures a dynamic, real-time
trading mechanism that maximizes the opportunity for trade executions
for Complex Orders.
The proposed changes are consistent with Section 6(b)(5) of the Act
in that they are 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 to protect investors and
the public interest. In particular, the Exchange believes the proposed
changes will result in more efficient trading and reduce the risk that
Complex Orders fail to execute for investors by providing additional
opportunities to accommodate Complex Orders in PIXL. The interaction of
orders, including complex strategies and the Complex Book, will benefit
investors by increasing the opportunity for Complex Orders to receive
execution, while also enhancing execution quality for orders on the
Complex Book. The Exchange believes that increased interaction, where
possible, on a continuous and real-time basis of the bids and offers
regarding a complex strategy, and the potential for price improvement
through PIXL, will benefit market participants, investors, and traders.
The proposal would be of significant benefit to investors and
traders as well as the public, which will gain the opportunity to
submit additional orders types seeking price improvement through the
PIXL mechanism. This may lead to an increase in Exchange volume. As
such, the proposal is decidedly pro-competitive. In addition to
increasing volume, the proposal would allow the Exchange to better
compete against other markets that already offer accommodation of
complex orders in their electronic auctions.
For all of the foregoing reasons and as discussed in the proposal,
the Exchange believes the proposed rule changes are consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the Exchange.
[[Page 28663]]
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 Exchange
believes the proposal is pro-competitive. First, the proposal would
enable the Exchange to provide market participants with an expanded
opportunity to realize price improvement of Complex Orders through
PIXL. And second, the proposal would diminish the potential for
foregone market opportunities on the Exchange by allowing Complex
Orders in PIXL to be entered by all Phlx members, similarly to
electronic price improvement functionality for complex orders that is
allowed on other options 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 email to [email protected]. Please include
File Number SR-Phlx-2013-46 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-2013-46. This file
number should be included on the subject line if email 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 on official business
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for inspection and copying at the
principal offices 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 Number SR-Phlx-2013-46, and should be submitted on or before June
5, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11521 Filed 5-14-13; 8:45 am]
BILLING CODE 8011-01-P