[Federal Register Volume 79, Number 95 (Friday, May 16, 2014)]
[Notices]
[Pages 28561-28564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-11295]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72152; File No. SR-Phlx-2014-32]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Regarding
the Limitation on Entering Electronic Limit Orders From Off the Floor
of the Exchange
May 12, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on May 2, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange is filing with the Commission a proposal to amend Phlx
Rule 1080 (Phlx XL and Phlx XL II) to change the limitation on Exchange
members entering, or facilitating entry of, electronic limit orders in
the same option series from off the floor of the Exchange, so that the
limitation does not apply to off floor broker dealers or Professionals
as defined in Rule 1000(b)(14).\3\
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\3\ As discussed in the proposal, the limitation will continue
to apply to Professional all-or-none orders.
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The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqomxphlx.cchwallstreet.com, 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 the proposed rule change is to amend Phlx Rule
1080(j) to change the limitation on Exchange members entering, or
facilitating entry of, electronic limit orders in the same option
series from off the floor of the Exchange (known as ``limitation'' or
``limitation on orders''), so that the limitation does not apply to off
floor broker dealers or Professionals as defined in Rule
1000(b)(14).\4\
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\4\ Per Rule 1000(b)(14), the term ``Professional'' means any
person or entity that (i) is not a broker or dealer in securities,
and (ii) places more than 390 orders in listed options per day on
average during a calendar month for its own beneficial account(s).
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This proposal will align the Exchange with other options markets
that do not limit the entry of off floor broker dealer and Professional
limit orders, and effectively acting as market makers.\5\
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\5\ See subsection (b) of International Securities Exchange
(``ISE'') Rule 717 (Limitations on Orders). As discussed, while the
language of the ISE Rule 717 and Exchange Rule 1080(j) is different,
as a result of this filing the practical effect of the rules will be
similar.
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There are, along with specialists, several types of Registered
Option Traders (``ROTs'') on the Exchange. These include market makers
that are Streaming Quote Traders (``SQTs''),\6\ Directed Streaming
Quote Traders (``DSQTs''), Remote Streaming Quote Traders (``RSQTs'')
\7\ and Directed Remote Streaming Quote Traders (``DRSQTs'').\8\
Specialists may function
[[Page 28562]]
on the floor of the Exchange as well as off floor (``Remote
Specialists'').\9\
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\6\ An SQT is an ROT who has received permission from the
Exchange to generate and submit option quotations electronically in
eligible options to which such SQT is assigned. An SQT may only
submit such quotations while such SQT is physically present on the
floor of the Exchange. See Phlx Rule 1014(b)(ii)(A).
\7\ An RSQT is an ROT that is a member or member organization
with no physical trading floor presence who has received permission
from the Exchange to generate and submit option quotations
electronically in eligible options to which such RSQT has been
assigned. An RSQT may only submit such quotations electronically
from off the floor of the Exchange. See Phlx Rule 1014(b)(ii)(B). As
many as three RSQTs may be affiliated with an RSQT Organization.
\8\ A DSQT is an SQT and a DRSQT is an RSQT that receives a
Directed Order. Exchange Phlx Rule 1080(l)(i)(A) defines Directed
Order as any customer order (other than a stop or stop-limit order
as defined in Phlx Rule 1066) to buy or sell which has been directed
to a particular specialist, RSQT, or SQT by an Order Flow Provider
and delivered to the Exchange via its electronic quoting, execution
and trading system.
\9\ A Remote Specialist is an options specialist in one or more
classes that does not have a physical presence on an Exchange floor
and is approved by the Exchange pursuant to Phlx Rule 501. Phlx Rule
1020.
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Current Phlx Rule 1080 developed from a decades-old pilot program
to operate the Exchange's Automated Options market (``AUTOM'') system
to allow electronic delivery of options orders from member firms
directly to the appropriate specialist on the Exchange options trading
floor (with electronic confirmation of order executions).\10\ The AUTOM
order delivery system grew over the years into the current fully
automated Phlx options trading system XL II \11\ that is codified in
Phlx Rule 1080. In addition to XL II, Phlx Rule 1080 deals with, among
other things, eligibility and processing of electronic orders, how PIXL
works, complex PIXL orders,\12\ qualified contingent cross orders,\13\
and acceptable trade range.\14\
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\10\ See Securities Exchange Act Release No. 25540, 53 FR 11390
(April 6, 1988) (SR-Phlx-88-10) (order granting approval of pilot
program establishing AUTOM). See also Phlx Rule 1080(a) discussing
AUTOM: (a) AUTOM is the Exchange's electronic order delivery and
reporting system, which provides for the automatic entry and routing
of Exchange-listed equity options, index options and U.S. dollar-
settled foreign currency options orders to the Exchange trading
floor. Orders delivered through AUTOM may be executed manually, or
certain orders are eligible for AUTOM's automatic execution feature,
AUTO-X, in accordance with the provisions of this Rule. Equity
option, index option and U.S. dollar-settled foreign currency option
specialists are required by the Exchange to participate in AUTOM and
its features and enhancements. Option orders entered by Exchange
member organizations into AUTOM are routed to the appropriate
specialist unit on the Exchange trading floor. AUTOM and AUTO-X were
replaced by the Phlx XL System, such that references to both terms
refer to Phlx XL.
\11\ See Securities Exchange Act Release No. 50100 (July 27,
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59) (order
granting approval of the Exchange's new electronic trading system
Phlx XL, now known as XL II). The electronic trading system has
continued being enhanced. See, e.g., Securities Exchange Act Release
Nos. 63027 (October 1, 2010), 75 FR 62160 (October 7, 2010) (SR-
Phlx-2010-108) (order granting approval of Price Improvement XL,
PIXL); and 69845 (June 25, 2013), 78 FR 39429 (July 1, 2013) (SR-
Phlx-2013-46) (order granting approval of Complex Order PIXL).
\12\ Phlx Rule 1080(n). This section allows six-legged complex
orders into PIXL.
\13\ Phlx Rule 1080(o).
\14\ Phlx Rule 1080(p).
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Subsection (j) of Phlx Rule 1080 sets forth the limitation on
orders. Subsection (j) states that members \15\ shall not enter, or
facilitate entry into AUTOM, as principal or agent, limit orders in the
same options series from off the floor of the Exchange, for the account
or accounts of the same or related beneficial owners, in such a manner
that the off-floor member or the beneficial owner(s) effectively is
operating as a market maker by holding itself out as willing to buy and
sell such options contract on a regular or continuous basis.\16\ The
current restriction on all limit orders is no longer needed or
advisable.
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\15\ Phlx Rule 900.2 indicates how potential members may seek
admission to the Exchange.
\16\ In determining whether an off-floor member or beneficial
owner effectively is operating as a market maker, the Exchange will
consider, among other things: The simultaneous or near-simultaneous
entry of limit orders to buy and sell the same options contract; the
multiple acquisition and liquidation of positions in the same
options series during the same day; and the entry of multiple limit
orders at different prices in the same options series. Phlx Rule
1080(j).
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The Exchange proposes to change the limitation in subsection (j) of
Phlx Rule 1080 so that it is not applicable to off floor broker dealer
limit orders or Professional limit orders (except Professional all-or-
none orders). Specifically, the Exchange proposes at the end of
subsection (j) to state that the limitation set forth in this rule
1080(j) does not apply to the accounts of off floor broker dealers or
Professionals as the term is defined in Rule 1000(b)(14).
Notwithstanding the foregoing, the limitation set forth in Rule 1080(j)
will continue to apply to all-or-none orders submitted by Professionals
to the Exchange.\17\ This is because Professionals are treated in the
same manner as off-floor broker dealers for purposes of priority, but
would have priority akin to customers in terms of all-or none order
submitted to the Exchange.\18\ Moreover, non-Professional, non-broker-
dealer customer orders have priority over Professional orders.\19\ The
proposed language change would make the Exchange limitation similar to
that found on another options market, namely ISE.
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\17\ Post filing, in addition to Professional all-or-none orders
submitted to the Exchange, the limitation would continue to apply to
non-Professional customer orders. The Exchange defines customer per
Rule 1083(f) as an individual or organization that is not a broker
dealer; non-Professional customer refers to an individual or
organization that is neither a Professional nor a broker dealer.
\18\ See, e.g., Rule 1014(g).
\19\ Rule 1014(g)(vii).
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Subsection (j) of Phlx Rule 1080, as amended, is substantially
similar in its practical effect to ISE Rule 717, which disallows entry
of Priority Customer \20\ limit orders in the same options series. In a
similar manner, the Exchange proposal in subsection (j) disallows entry
of limit orders in the same options series from off the floor of the
Exchange, except for off floor broker dealers and Professionals. As
such, the proposal is pro-competitive because it would allow entry of
orders on the Exchange similar to those that are allowed on other
markets. Changing the limitation to exclude off floor broker dealers
and Professionals, being competitive in nature, is beneficial for
market participants and investors.
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\20\ Unlike ISE, the Exchange does not currently have a separate
category called Priority Customer. However, as discussed, after this
filing the practical effect of the ISE and Exchange rules will be
similar. As proposed herein the limitation would not be applicable
to broker dealer orders and Professional Orders, similarly to ISE.
See Securities Exchange Act Release No. 63017 (September 29, 2010),
75 FR 61795 (October 6, 2010) (SR-ISE-2010-95) (ISE does not believe
necessary to impose ISE Rule 717 limitations on Priority Orders,
which exclude broker dealers, and Voluntary Professionals because
they are not subject to priority that is any better than market
makers). In note 7 of its filing, ISE noted that the Commission has
previously found that it is consistent with the Act for an options
exchange not to prohibit a user of its market from effectively
operating as a market maker by holding itself out as willing to buy
and sell options contracts on a regular or continuous basis without
registering as a market maker. See Securities Exchange Act Release
No. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-
2007-004).
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Moreover, the current limitation for all limit orders is no longer
needed or desirable. The limitation was added more than a dozen years
ago \21\ when Exchange options trading was rooted in the on-floor
auction model with a traditional open outcry trading floor. When the
limitation was added for all limit orders, electronic market makers
such as Remote Specialists, SQTs, and RSQTs (together known as
``electronic market makers'') did not exist; \22\ the options trading
floor was principally populated by on-floor trading crowds. At the time
of the limitation filing, when rules and processes for electronic
market makers were not yet fully established, there was a concern that
certain off-floor traders had the ability to engage in simultaneous or
near-simultaneous entry of limit orders, thereby effectively
functioning as market makers from off the floor of the Exchange.\23\
Over the last eight years, however, the traditional open outcry trading
floor on the Exchange has evolved into a robust, predominantly
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electronic trading environment, with significantly fewer on-floor
traders than off-floor traders and electronic market makers working
through the Exchange's electronic trading system, XL II. As such,
although the limitation was developed for a traditional trading floor
that was only beginning to introduce electronic trading, the limitation
on all limit orders from off the floor no longer makes sense in the
current well-developed, predominantly electronic trading environment on
the Exchange, where electronic market makers (and electronic market
making including from off the floor) are no longer the exception but
rather the norm.
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\21\ See Securities Exchange Act Release No. 43939 (February 7,
2001), 66 FR 10547 (February 15, 2001) (SR-Phlx-2001-05) (notice of
filing and immediate effectiveness adopting Phlx Rule 1080(j)) (the
``limitation filing'').
\22\ Electronic market makers including RSQTs and Remote
Specialists were introduced, and became prevalent, in the last eight
years. See Securities Exchange Act Release Nos. 51126 (February 2,
2005), 70 FR 6915 (February 9, 2005) (SR-Phlx-2004-90) (approval
order relating to establishment of RSQTs); and 63717 (January 14,
2011), 76 FR 4141 (January 24, 2011) (SR-Phlx-2010-145) (approval
order relating to establishment of options Remote Specialists).
\23\ See 66 FR 10547, 10548.
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The Exchange is also proposing to change the word ``AUTOM'' to
``Phlx XL'' to conform subsection (j) of Phlx Rule 1080 to the language
of Rule 1080.\24\ Because AUTOM does not exist anymore, this change is
done for purposes of clarity and to minimize potential confusion.
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\24\ See supra note 10.
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The Exchange notes that changing the limitation as proposed would
ensure that the current limitation against all members and market
participants entering limit orders into Phlx XL in the same options
series from off the floor of the Exchange, does not apply to off floor
broker dealers or Professionals. This makes sense in the current
highly-developed electronic trading environment that operates alongside
the traditional on-floor trading system.\25\ Off-floor electronic
market makers, including those that are broker dealers or
Professionals, are now a known and time-tested component of the
Exchange that adds significant liquidity and depth to the benefit of
market participants. The Exchange believes that changing the limitation
should result in tighter bid ask spreads for all market participants
wishing to access posted liquidity.
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\25\ The Exchange notes that like other older options markets
(e.g., Chicago Board Options Exchange), it continues to operate a
hybrid trading system.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \26\ in general, and furthers the objectives of Section
6(b)(5) of the Act \27\ 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, by changing the current order limitation so that the
limitation no longer applies to off floor broker dealers or
Professionals.
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\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(5).
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First, although the limitation on orders was added more than a
dozen years ago when Exchange options trading was rooted in the on-
floor auction model with a traditional open outcry trading floor, the
Exchange trading system has developed into the robust, predominantly
electronic trading system where most orders, whether limit or other
orders, are entered from off the floor of the Exchange. The current
expansive limitation is no longer needed, and is counter-productive in
its current form. Second, because broker dealer and Professional
orders, which tend to increase liquidity, are not subject to priority
on the Exchange that is any better than other market makers, or, for
that matter, non-Professional customers (except for Professional all-
or-none orders), the Exchange does not believe that it is necessary to
impose the Rule 1080(j) restrictions on the entry of off floor broker
dealer or Professional limit orders (except for Professional all-or-
none orders). In that non-Professional customer orders are provided
with certain benefits such as priority on the Exchange, see Phlx Rule
1014(g) and 1080(n)(ii)(E), the Exchange believes that the limitation
applicable to non-Professional customers is counterbalanced by their
priority and it is proper for the limitation to continue to apply. The
Exchange believes that the removal of the limitation on off floor
broker dealers and Professionals, while continuing to apply the
limitation to all-or-none orders submitted by Professionals to the
Exchange \28\ will permit entry of orders on both sides of the market
more freely, resulting in more orders on the Exchange book and
therefore increase liquidity on the Exchange market, all to the benefit
of investors. And third, changing the limitation is competitive vis a
vis other options exchanges that have a limitation that, as proposed
herein, effectively does not apply to off floor broker dealers or
Professionals. By promoting competition, the proposal may also lead to
tighter, more efficient markets to the benefit of market participants
including public investors that engage in trading and hedging on the
Exchange.
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\28\ See supra notes 18 and 19 and text regarding priority.
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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 proposal
further promotes competition on the Exchange which should lead to
tighter, more efficient markets to the benefit of market participants
including public investors that engage in trading and hedging on the
Exchange, and thereby make the Exchange a desirable market vis a vis
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(ii) [sic] of the Act \29\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\30\
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\29\ 15 U.S.C. 78s(b)(3)(a) [sic].
\30\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or 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
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Send an email to [email protected]. Please include
File Number SR-Phlx-2014-32 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2014-32. 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, 100 F Street NE.,
Washington, DC 20549, 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-2014-32,
and should be submitted on or before June 6, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-11295 Filed 5-15-14; 8:45 am]
BILLING CODE 8011-01-P