[Federal Register Volume 79, Number 235 (Monday, December 8, 2014)]
[Notices]
[Pages 72740-72743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-28646]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73719; File No. SR-Phlx-2014-76]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Anti-Internalization Functionality for Registered Market Makers on the
PHLX Options Market
December 2, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 28, 2014, NASDAQ OMX PHLX LLC (``Phlx,'' ``PHLX,'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt anti-internalization functionality
for registered market makers on the PHLX Options Market.
While these amendments are effective upon filing, the Exchange has
designated the proposed amendments to be operative on or before January
15, 2015.
The text of the proposed rule change is below; proposed new
language is italicized; proposed deletions are in brackets.
* * * * *
Rule 1080. Phlx XL and Phlx XL II
(a)-(o) No Change.
(p) Execution Protections
(1) Acceptable Trade Range.
(A) After the opening, the System will calculate an Acceptable
Trade Range to limit the range of prices at which an order or quote
(except an All-or-none order) will be allowed to execute. The
Acceptable Trade Range is calculated by taking the Reference Price,
plus or minus a value to be determined by the Exchange. (i.e., the
Reference Price - (x) for sell orders/quotes and the Reference Price +
(x) for buy orders/quotes). Upon receipt of a new order/quote, the
Reference Price is the National Best Bid (``NBB'') for sell orders and
the National Best Offer (``NBO'') for buy orders/quotes or the last
price at which the order/quote is posted whichever is higher for a buy
order/quote or lower for a sell order/quote.
(B) If an order/quote reaches the outer limit of the Acceptable
Trade Range (the ``Threshold Price'') without being fully executed, it
will be posted at the Threshold Price for a brief period, not to exceed
one second (``Posting Period''), to allow more liquidity to be
collected, unless a Quote Exhaust has occurred, in which case the Quote
Exhaust process in Rule 1082(a)(ii)(B)(3) will ensue, triggering a new
Reference Price. Upon posting, either the current Threshold Price of
the order or an updated NBB for buy orders or the NBO for sell orders
(whichever is higher for a buy order/lower for a sell order) then
becomes the Reference Price for calculating a new Acceptable Trade
Range. If the order/quote remains unexecuted, a New Acceptable Trade
Range will be calculated and the order/quote will execute, route, or
post up to the new Acceptable Trade Range Threshold Price, unless a
member organization has requested that their orders be returned if
posted at the outer limit of the Acceptable Trade Range (in which case,
the order will be returned). This process will repeat until either (i)
the order/quote is executed, cancelled, or posted at its limit price or
(ii) the order has been subject to a configurable number of instances
of the Acceptable Trade Range as determined by the Exchange (in which
case it will be returned).
(C) During the Posting Period, the Exchange will disseminate as a
quotation: (i) The Threshold Price for the remaining size of the order
triggering the Acceptable Trade Range and (ii) on the opposite side of
the market, the best price will be displayed using the ``non-firm''
indicator message in accordance with the specifications of the network
processor. Following the Posting Period, the Exchange will return to a
normal trading state and disseminate its best bid and offer.
(2) Anti-Internalization--Quotes and orders entered by Specialists
and Registered Options Traders (as defined in Rule 1014) using the same
Phlx badge will not be executed against quotes and orders entered on
the opposite side of the market using the same badge. In such a case,
the System will cancel the resting quote or order back to the entering
party prior to execution. This functionality shall not apply in any
auction or with respect to complex transactions.
(3) Order Price Protection (``OPP''). OPP is a feature of Phlx XL
that prevents certain day limit, good til cancelled, immediate or
cancel, and all-or-none orders at prices outside of pre-set standard
limits from being accepted by the system. OPP applies to all options
but does not apply to market orders, stop limit orders, Intermarket
Sweep Orders or complex orders.
(A) OPP is operational each trading day after the opening until the
close of trading, except during trading halts. The Exchange may also
temporarily deactivate OPP from time to time on an intraday basis at
its discretion if it determines that volatility warrants deactivation.
Members will be notified of intraday OPP deactivation due to volatility
and any subsequent intraday reactivation by the Exchange through the
issuance of system status messages.
(B) OPP will reject incoming orders that exceed certain parameters
according to the following algorithm.
[[Page 72741]]
(i) If the NBBO on the contra-side of an incoming order is greater
than $1.00, orders with a limit more than 50% through such contra-side
NBBO will be rejected by Phlx XL upon receipt. For example, if the NBBO
on the offer side is $1.10, an order to buy options for more than $1.65
would be rejected. Similarly, if the NBBO on the bid side is $1.10, an
order to sell options for less than $0.55 will be rejected.
(ii) If the NBBO on the contra-side of an incoming order is less
than or equal to $1.00, orders with a limit more than 100% through such
contra-side NBBO will be rejected by Phlx XL upon receipt. For example,
if the NBBO on the offer side is $1.00, an order to buy options for
more than $2.00 would be rejected. However, if the NBBO of the bid side
of an incoming order to sell is less than or equal to $1.00, the OPP
limits set forth above will result in all incoming sell orders being
accepted regardless of their limit. To illustrate, if the NBBO on the
bid side is equal to $1.00, the OPP limits provide protection such that
all orders to sell with a limit less than $0.00 would be rejected.
(iii) For purposes of this rule, the NBBO is defined as the PBBO
for singly-listed issues.
Commentary .01-.06 No Change.
[Commentary .07--Order Price Protection (``OPP''). OPP is a feature
of Phlx XL that prevents certain day limit, good til cancelled,
immediate or cancel, and all-or-none orders at prices outside of pre-
set standard limits from being accepted by the system. OPP applies to
all options but does not apply to market orders, stop limit orders,
Intermarket Sweep Orders or complex orders.
(a) OPP is operational each trading day after the opening until the
close of trading, except during trading halts. The Exchange may also
temporarily deactivate OPP from time to time on an intraday basis at
its discretion if it determines that volatility warrants deactivation.
Members will be notified of intraday OPP deactivation due to volatility
and any subsequent intraday reactivation by the Exchange through the
issuance of system status messages.
(b) OPP will reject incoming orders that exceed certain parameters
according to the following algorithm.
(i) If the NBBO on the contra-side of an incoming order is greater
than $1.00, orders with a limit more than 50% through such contra-side
NBBO will be rejected by Phlx XL upon receipt. For example, if the NBBO
on the offer side is $1.10, an order to buy options for more than $1.65
would be rejected. Similarly, if the NBBO on the bid side is $1.10, an
order to sell options for less than $0.55 will be rejected.
(ii) If the NBBO on the contra-side of an incoming order is less
than or equal to $1.00, orders with a limit more than 100% through such
contra-side NBBO will be rejected by Phlx XL upon receipt. For example,
if the NBBO on the offer side is $1.00, an order to buy options for
more than $2.00 would be rejected. However, if the NBBO of the bid side
of an incoming order to sell is less than or equal to $1.00, the OPP
limits set forth above will result in all incoming sell orders being
accepted regardless of their limit. To illustrate, if the NBBO on the
bid side is equal to $1.00, the OPP limits provide protection such that
all orders to sell with a limit less than $0.00 would be rejected.
(iii) For purposes of this rule, the NBBO is defined as the PBBO
for singly-listed issues.]
Commentary .08--Renumbered as Commentary .07.
Commentary .09--Renumbered as Commentary .08.
* * * * *
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
PHLX is proposing to provide anti-internalization (``AIQ'')
functionality to Specialists and Registered Options Traders on the PHLX
Options Market.\3\ Anti-internalization functionality is widely
available and has been for many years.\4\ It is designed to assist
market participants in complying with certain rules and regulations of
the Employee Retirement Income Security Act (``ERISA'') that preclude
and/or limit managing broker-dealers of such accounts from trading as
principal with orders generated for those accounts. It can also assist
market makers in reducing trading costs from unwanted executions
potentially resulting from the interaction of executable buy and sell
trading interest from the same firm when performing the same market
making function.
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\3\ See PHLX Rule 1014. The category of Specialist and
Registered Options Traders (``ROTs'') as defined in Rule 1014 are
all considered market makers on the Exchange. This category includes
the subcategories of Streaming Quote Traders (``SQTs''), Remote
Streaming Quote Traders (``RSQTs''), and Non-SQT ROTs, all of which
have market making obligations also defined in Rule 1014.
\4\ See, e.g., NASDAQ Rule 4757(a)(4), NASDAQ Options Market
Rule Chapter VI, Section 10(6), NYSE Arca Equities Rule 7.31(qq)(2),
and BATS Rule 11.9(f)(2). PSX Rule 3307(c) governing trading on the
PHLX equity facility provides similar self-match prevention for
equities trading.
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Under the proposal, quotes and orders entered by Specialists and
Registered Options Traders using the same PHLX badge will automatically
be prevented from interacting with each other in the System. Rather
than executing quotes or orders from the same badge, the System will
instead cancel the resting quotes and orders back to the entering
party. PHLX uses ``badges'' to identify the party or parties entering
trades into the System, similar to Market Participant Identifiers
(MPIDs) and other mnemonic devices used at other exchanges. Because
firms have multiple badges associated with multiple functions, linking
AIQ to specific badges ensures that the functionality will be limited
to the appropriate function, as explained in more detail below. Tying
AIQ to specific PHLX badges will also enable market participants to
carefully and systematically target the orders that should be prevented
from interacting.
AIQ will apply in the PHLX XL system with respect to simple orders
only; it will not apply in any auction or with respect to complex
transactions. AIQ is difficult to apply during auctions, and there is
limited benefit in doing so. The difficulty stems from the need to
freeze the order book and quickly arrange and match large quantities of
orders based upon simple instructions. Even if that could be
accomplished, there is limited benefit because, generally speaking,
auctions do not raise the same policy concerns for wash sales and ERISA
due to the semi-random manner in which trades are matched.\5\ AIQ is
unnecessary with respect to complex orders due to the highly
specialized nature of such orders and the high level of control that
market participants exercise over complex orders. In addition, owing to
the number of different legs involved in complex orders, applying AIQ
to complex orders would also require freezing the book, which market
participants and PHLX view as detrimental to the market.
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\5\ See NYSE Arca Equities Rule 7.31(qq).
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Anti-internalization functionality was requested by Specialists and
Registered
[[Page 72742]]
Options Traders on PHLX. Anti-internalization processing is available
only to market makers and only on an individual badge basis.
Specialists and Registered Options Traders that conduct order entry
business via alternative badges will not be afforded the protection of
AIQ functionality with respect to such alternative badges. PHLX
considered making AIQ functionality available to other participants,
but rejected that approach. Limiting AIQ to Specialists and Registered
Options Traders also helps to maintain simplicity of System
processing.\6\
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\6\ If demand should arise from other participants, PHLX will
reconsider providing this functionality to all participants at that
time.
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PHLX notes that use of the functionality does not relieve or
otherwise modify the duty of best execution owed to orders received
from public customers. Options market makers generally do not display
customer orders in market making quotations, opting instead to enter
customer orders using separate identifiers. In the event that an
options market maker opts to include a customer order within a market
making quotation, the market maker must take appropriate steps to
ensure that public customer orders that do not execute due to anti-
internalization functionality ultimately receive the same execution
price (or better) they would have originally obtained if execution of
the order was not inhibited by the functionality.
Finally, the Exchange is proposing to combine several existing
price protection mechanisms in Rule 1080(p) and to rename that
subsection as ``Execution Protections, [sic] PHLX believes the rules
will become clearer by adding AIQ and moving current Commentary .07
governing Order Price Protection to existing Rule 1080(p) governing the
Acceptable Trade Range. As a result, PHLX will renumber existing
Commentaries .08 and .09 as Commentaries .07 and .08. The proposed
changes will not impact the substance and operation of the existing
functionality of the Acceptable Trade Range, Order Price Protection or
Commentaries .08 and .09.
2. Statutory Basis
PHLX believes that the proposed rule change is consistent with the
provisions of Section 6 of the Act,\7\ in general, and with Section
6(b)(5) of the Act \8\ in particular, in that the proposal is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, 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. Specifically, PHLX believes
that the change, which is responsive to member input, will facilitate
transactions in securities and perfect the mechanism of a free and open
market by providing Specialists and Registered Options Traders with
additional functionality that will assist them with managing the book
of orders that they submit to PHLX and the associated execution costs.
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\7\ 15 U.S.C. 78f.
\8\ 15 U.S.C. 78f(b)(5).
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PHLX believes the proposal is consistent with the Act because it
provides tools for Specialists and Registered Options Traders to comply
with existing rules against internalization in certain circumstances.
Limiting AIQ to Specialists and Registered Options Traders is
consistent with the Act because inadvertent internalization is much
more likely to impact market makers than other participants and
offering AIQ more broadly would burden the System and provide little or
no offsetting regulatory benefit. Finally, PHLX believes that it is
reasonable to limit AIQ to simple options orders, as opposed to complex
options and auctions, because the execution risk is much lower with
respect to complex options and auctions and because those functions
operate quite differently than individual orders in simple options.
B. Self-Regulatory Organization's Statement on Burden on Competition
PHLX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Specifically, by
providing market participants additional tools to prevent inadvertent
internalization of orders submitted to PHLX, the change has the
potential to improve the trading environment on the Exchange, which
will enhance PHLX's competitiveness with respect to other trading
venues, thereby promoting greater competition. Moreover, the change
does not burden competition in that it will be provided at no
additional cost to members.
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 \9\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(a)(ii) [sic].
\10\ 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
Send an email to [email protected]. Please include
File Number SR-Phlx-2014-76 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-2014-76. This file
[[Page 72743]]
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-2014-76,
and should be submitted on or before December 29, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28646 Filed 12-5-14; 8:45 am]
BILLING CODE 8011-01-P