[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62891-62893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24649]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70654; File No. SR-Phlx-2013-76]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Granting Approval to Proposed Rule Change Relating to the
Discontinuation of the Differentiation of Price Improvement XL Orders
of Less Than 50 Contracts
October 10, 2013.
I. Introduction
On August 16, 2013, NASDAQ OMX PHLX LLC (the ``Exchange'' or
``Phlx'') 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\ a
proposed rule change to end the different treatment of orders of less
than 50 contracts entered into Phlx's Price Improvement XL auction
(``PIXL,'' ``PIXL Auction,'' or ``Auction''). The proposed rule change
was published for comment in the Federal Register on August 27,
2013.\3\ The Commission received no comments on the proposal. This
order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70242 (August 21,
2013), 78 FR 52991 (August 27, 2013) (``Notice'').
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II. Description of the Proposal
Phlx Rule 1080(n) provides a price improvement mechanism in which a
member (an ``Initiating Member'') may electronically submit for
execution an order it represents as agent on behalf of
[[Page 62892]]
a public customer, broker-dealer, or any other entity (the ``PIXL
Order'') against principal interest or against any other order it
represents as agent, provided that such Initiating Member submits the
PIXL Order for electronic execution into the one-second long PIXL
Auction. Phlx rules currently provide that if a PIXL Order \4\ is a
public customer order and is for 50 contracts or more, the Initiating
Member must stop the entire PIXL Order at a price that is equal to or
better than the National Best Bid or Offer (``NBBO'') on the opposite
side of the market from the PIXL Order, provided that such price must
be at least one minimum price improvement increment (as determined by
the Exchange but not smaller than one cent) better than any limit order
on the limit order book on the same side of the market as the PIXL
Order.\5\ Phlx rules also provide that if the PIXL Order is for a non-
public customer and is for 50 contracts or more, the Initiating Member
must stop the entire PIXL Order at a price that is the better of: (i)
the PBBO price improved by at least one minimum price improvement
increment on the same side of the market as the PIXL Order; or (ii) the
PIXL Order's limit price (if the order is a limit order), provided in
either case that such price is at or better than the NBBO.\6\
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\4\ Phlx Rule 1080(n)(1)(A)-(B) does not apply to Complex
Orders. For Complex Orders, see Phlx Rule 1080(n)(i)(C).
\5\ Phlx Rule 1080(n)(i)(A)(1).
\6\ Phlx Rule 1080(n)(i)(B)(1)
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However, Phlx rules currently provide different treatment if the
PIXL Order is for fewer than 50 contracts. Specifically, if the PIXL
Order is a public customer order and is less than 50 contracts, the
Initiating Member must stop the entire PIXL Order at a price that is
the better of: (i) the 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 such price is at or better
than the NBBO, and at least one price improvement increment better than
any limit order on the book on the same side of the market as the PIXL
Order.\7\
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\7\ Phlx Rule 1080(n)(i)(A)(2)
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Phlx rules also provide that if the PIXL Order is for a non-public
customer and is for less than 50 contracts, the Initiating Member must
stop the entire PIXL Order at a price that is the better of: (i) the
PBBO price improved by at least one minimum price improvement increment
on the same side of the market as the PIXL Order; or (ii) the PIXL
Order's limit price (if the order is a limit order), provided in either
case that such price is at or better than the NBBO and at least one
price improvement increment better than the PBBO on the opposite side
of the market from the PIXL Order.\8\
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\8\ Phlx Rule 1080(n)(i)(B)(2).
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The Exchange is proposing to discontinue the differentiation
between PIXL Orders for less than 50 contracts and PIXL Orders for 50
contracts or greater.\9\ As a result, all PIXL Orders, regardless of
their size, will be treated the same as PIXL Orders that are 50
contracts or greater.\10\ To initiate an Auction for public customer
orders, the Initiating Member will be required to stop the entire PIXL
Order at a price that is equal to or better than the NBBO on the
opposite side of the market from the PIXL Order, provided that such
price was at least one price improvement increment (no smaller than one
cent) better than any limit order on the limit order book on the same
side of the market as the PIXL Order. To initiate an Auction for non-
public customer orders where the order is for the account of a broker-
dealer or any other person or entity that is not a public customer, the
Initiating Member will be required to stop the entire PIXL Order at a
price that is the better of: (i) the PBBO price improved by at least
one minimum price improvement increment on the same side of the market
as the PIXL Order; or (ii) the PIXL Order's limit price (if the order
is a limit order), provided that in either case that such price is at
or better than the NBBO.
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\9\ The Exchange is making conforming changes throughout
subsection (n) of Rule 1080 to delete any rule text that
differentiates PIXL procedures based on size.
\10\ This proposal does not affect the pilot program established
in Phlx Rule 1080(n)(vii) regarding no required minimum size for
orders to be eligible for PIXL Auctions. The Exchange notes that it
will continue periodically providing the pilot reports to the
Commission through July 18, 2014, or as required pursuant to the
subsection (n)(vii) pilot. See Notice, supra note 3, at 78 FR 52992,
fn. 5.
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All public customers will continue to have priority at each price
level in accordance with Phlx Rule 1080(n)(ii)(E).\11\ Consistent with
the current treatment of PIXL Orders of 50 contracts or greater in
size, Phlx will consider resting quotes and orders for allocation at
the end of the Auction with all prices that improve the stop price
being considered first. At each given price point, Phlx will execute
public customer interest in a price/time fashion such that all public
customer interest that was resting on the order book is satisfied
before any other interest that arrived after the Auction was initiated.
After public customer interest at a given price point has been
satisfied, remaining contracts will be allocated among all Exchange
quotes, orders and Auction responses in accordance with the rules set
forth in 1080(n)(ii)(E)(2) based on the manner in which the PIXL Order
was submitted.
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\11\ See Notice, supra note 3, at 78 FR 52992.
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III. Discussion and Commission Findings
After carefully considering the proposal, the Commission finds that
the proposed rule change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange \12\ and, in particular, the requirements of
Section 6 of the Act.\13\ Specifically, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\14\
which requires, among other things, that the rules of a national
securities exchange be designed to promote just and equitable
principles of trade, remove impediments to and perfect the mechanisms
of a free and open market and a national market system and, in general,
to protect investors and the public interest.
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\12\ In approving this proposed rule change the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\13\ 15 U.S.C. 78f.
\14\ 15 U.S.C. 78f(b)(5).
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Under this proposal, a PIXL Order submitted to the PIXL Auction,
regardless of its size, will be guaranteed an execution price of at
least the NBBO and, moreover, will be given an opportunity to receive
an execution at a price better than the NBBO. Public customer orders of
fewer than 50 contracts will not, however, be guaranteed price
improvement over the NBBO.
In the Notice, the Exchange explained that, when it first
implemented PIXL, the differentiation provision ``was a means to ensure
some level of price improvement for smaller orders.'' \15\ Phlx now
believes the differentiation provision ``is unnecessary and indeed is
counterproductive to the [Exchange's] goal of treating all PIXL Orders
equally regardless of PIXL Order size.'' \16\ Phlx argued that, while
the proposal removes the guarantee of price improvement for smaller
initiating orders, it should benefit customers ``because it will
encourage the entry of more orders into PIXL, thus it is more likely
that such orders may receive price improvement.'' \17\ Phlx asserted
that its proposal is consistent with the
[[Page 62893]]
Exchange Act because, among other things, Phlx ``believes strongly that
it should encourage such price discovery, and the removal of the
[d]ifferentiation [p]rovision would help to achieve this and more
generally, benefit investors by offering more opportunities for
customers and non-customers to receive price improvement.'' \18\ Thus,
Phlx believes that removing the differentiation provision ``will
attract new order flow that might not currently be afforded any price
improvement opportunity into PIXL.'' \19\
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\15\ Notice, supra note 3, at 78 FR 52992.
\16\ Id.
\17\ Id. at 52993.
\18\ Id.
\19\ Id. at 52992.
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In further support of its proposal, Phlx noted that other
exchanges, including the International Securities Exchange and the BOX
Options Exchange, do not guarantee price improvement over the NBBO
today, and that Phlx is at a competitive disadvantage in continuing the
differentiation provision.\20\ Phlx also cited to the BOX Options
Exchange as having rules that do not differentiate price improvement
opportunities based on the order size.\21\
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\20\ See id. at 52993.
\21\ See id. at 52992.
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While Phlx's proposal will eliminate the current guarantee of price
improvement it provides to public customer orders of fewer than 50
contracts, the Commission notes that some other exchanges do not
provide such benefit in their price improvement mechanisms.\22\ Phlx
asserts that removal of the differentiation provision may remove this
competitive disadvantage and may increase the likelihood of members
entering orders into PIXL, which can benefit such orders by exposing
them for price improvement. For example, a member may only be willing
to trade with a PIXL Order at the NBBO but not better than the NBBO. In
that scenario, Phlx's proposal could remove the disincentive for such
member to submit the order to a PIXL Auction, which ultimately could
result in price improvement for the PIXL Order if a competitive
responder to the Auction offers to trade with the PIXL Order at an
improved price. The Commission therefore believes that, to the extent
it may encourage greater submission of customer orders to the PIXL
price improvement auction, Phlx's proposal is designed to promote just
and equitable principles of trade and protect investors and the public
interest.
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\22\ See, e.g., BOX Rule 7150 and ISE Rule 723.
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The Commission notes that Phlx is not proposing to change any other
provision of PIXL in this proposal. For example, orders entered into
PIXL will continue to be exposed to all Phlx members before the
initiating member can execute against the PIXL order. Further, Phlx is
not proposing any changes to the fact that public customer orders are
afforded priority at each price point in a PIXL Auction. Further, once
an order is entered into PIXL, it may not be cancelled by the
initiating member and thus is exposed for possible price improvement.
In addition, the PIXL Order will still be guaranteed an execution price
of at least the NBBO.
The Commission also notes that the proposal does not have any
impact on the pilot program established in Phlx Rule 1080(n)(vii)
regarding no required minimum size for orders to be eligible for the
PIXL. Thus, the Commission and the Exchange will continue to have
access to data that will help assess competition within the PIXL.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-Phlx-2013-76) be, and hereby
is, approved.
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\23\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24649 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P