[Federal Register Volume 80, Number 22 (Tuesday, February 3, 2015)]
[Notices]
[Pages 5865-5875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02017]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74167; File No. SR-Phlx-2014-66]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Adopt New Exchange Rule 1081, Solicitation
Mechanism, To Introduce a New Electronic Solicitation Mechanism
January 28, 2015.
I. Introduction
On October 14, 2014, NASDAQ OMX PHLX LLC (``Exchange'' or ``Phlx'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant
[[Page 5866]]
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 adopt new
Exchange Rule 1081, Solicitation Mechanism, to introduce a new
electronic solicitation mechanism pursuant to which a member can
electronically submit all-or-none orders of 500 contracts or more (or,
in the case of mini options, 5000 contracts or more) that the member
represents as agent against contra orders that the member solicited.
The proposed rule change was published for comment in the Federal
Register on October 31, 2014.\3\ On December 8, 2014, the Commission
extended the time period in which to either approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to approve or disapprove the proposed rule change
to January 29, 2015.\4\ The Commission has received no comment letters
on the proposal. This order institutes proceedings under Section
19(b)(2)(B) of the Act \5\ to determine whether to approve or
disapprove 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. 73441 (October 27,
2014), 79 FR 64862 (``Notice'').
\4\ See Securities Exchange Act Release No. 73791 (December 8,
2014), 79 FR 73924 (December 12, 2014).
\5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal
The Exchange proposes to adopt new Rule 1081, Solicitation
Mechanism, to introduce a new electronic solicitation mechanism
pursuant to which a member can electronically submit all-or-none orders
of 500 contracts or more (or, in the case of mini options, 5000
contracts or more) that the member represents as agent against contra
orders that the member solicited. Currently, under Phlx Rule
1080(c)(ii)(C)(2), Order Entry Firms \6\ must expose orders they
represent as agent for at least one second before such orders may be
automatically executed, in whole or in part, against orders solicited
from members and non-member broker-dealers to transact with such
orders.\7\ The proposed rule change would provide an alternative
method, enabling a member to electronically execute orders it
represents on behalf of a public customer, broker-dealer, or any other
entity (an ``Agency Order'') \8\ against solicited limit orders of a
public customer, broker-dealer, or any other entity (a ``Solicited
Order'') through a solicitation mechanism designed for this purpose.\9\
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\6\ Rule 1080(c)(ii)(A)(1) defines ``Order Entry Firm'' as a
member organization of the Exchange that is able to route orders to
AUTOM. (AUTOM is the Exchange's electronic quoting and trading
system, which has been denoted in Exchange rules as XL II, XL and
AUTOM.)
\7\ Section (c), Solicited Orders, of Rule 1064, Crossing,
Facilitation and Solicited Orders, governs execution of solicited
orders by open outcry, on the Exchange trading floor, and is
unaffected by proposed Rule 1081. The Exchange states that many
aspects of the functionality of the proposed solicitation mechanism
are similar to those provided for in Rule 1080(n), PIXL, and certain
of the proposed rules track the existing PIXL rules.
\8\ Rule 1080(b)(i)(A) provides in part that ``[f]or purposes of
Exchange options trading, an agency order is any order entered on
behalf of a public customer, and does not include any order entered
for the account of a broker-dealer, or any account in which a
broker-dealer or an associated person of a broker-dealer has any
direct or indirect interest.'' According to the Exchange, that
provision did not contemplate, and is not applicable to, the
capitalized and defined term ``Agency Order'' as used in proposed
Rule 1081.
\9\ The Exchange states that participants must ensure that their
records adequately demonstrate the solicitation of an order that is
entered into the mechanism for execution. against an Agency Order as
a Solicited Order prior to entry of such order into this mechanism.
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The new mechanism is a process by which a member (the ``Initiating
Member'') can electronically submit all-or-none orders \10\ of 500
contracts or more (or, in the case of mini options,\11\ 5000 contracts
or more) that it represents as agent against contra orders that it has
solicited, and initiate an auction (the ``Solicitation Auction'').\12\
As noted below, at the end of the Solicitation Auction, allocation
would occur with all contracts of the Agency Order trading at an
improved price against non-solicited contra-side interest or at the
stop price, defined below, against the Solicited Order. The
solicitation mechanism would accommodate both simple orders and Complex
Orders.\13\ Prior to the first time a member enters an Agency Order
into the solicitation mechanism on behalf of a customer, the member
would be required to deliver to the customer a written notification
informing the customer that its Agency Orders may be executed using the
Phlx's solicitation mechanism. Such written notification would be
required to disclose the terms and conditions contained in proposed
Rule 1081 and to be in a form approved by the Exchange.\14\
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\10\ Rule 1066(c)(4) defines an ``all-or-none'' order as a
market or limit order which is to be executed in its entirety or not
at all.
\11\ A given Solicitation Auction may be for options contracts
exclusively or for mini options contracts exclusively, but cannot be
used for a combination of both options contracts and mini options
contracts together.
\12\ The Exchange noted that similar electronic functionality is
offered today by other option exchanges. See Chicago Board Options
Exchange (``CBOE'') Rule 6.74B, Solicitation Auction Mechanism (the
``CBOE Mechanism''), and International Securities Exchange (``ISE'')
Rule 716(e), Solicited Order Mechanism (the ``ISE Mechanism'').
\13\ A Complex Order is any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying 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.
\14\ See proposed Rule 1081(i)(H). The rule would require
delivery of this disclosure only prior to the first submission of an
Agency Order on behalf of a customer rather than prior to the
submission of each and every Agency Order on behalf of such
customer.
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Solicitation Auction Eligibility Requirements
All options traded on the Exchange, including mini options, would
be eligible for the Solicitation Auction. Proposed Rule 1081(i)
describes the circumstances under which an Initiating Member may
initiate a Solicitation Auction.
Proposed Rule 1081(i)(A) provides that the Agency Order and the
Solicited Order must each be limit orders for at least 500 contracts
(or, in the case of mini options, at least 5000 contracts) and must be
designated as all-or-none. The orders must match in size, and their
limit prices must match or cross in price.\15\ If the orders cross in
price, the price at which the Agency Order and the Solicited Order may
be considered for submission pursuant to proposed Rules 1081(i)(B) and
(C) shall be the limit price of the Solicited Order.\16\ The orders may
not be stop or stop limit orders, must be marked with a time in force
of day, good till cancelled or immediate or cancel, and would not be
routed regardless of routing strategy indicated on the order.\17\
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\15\ In the case of Complex Orders, the underlying components of
both Complex Orders must also match. Additionally, all the option
legs of each Complex Order must consist entirely of options or
entirely of mini options.
\16\ For example, assume an Agency Order to buy 1000 contracts
for $2.00 and a Solicited Order to sell 1000 contracts at $1.90 are
entered into the solicitation mechanism. Since the limits of these
orders cross in price, the Agency Order and Solicited Order are
considered to be submitted into the mechanism with a stop price
equal to the Solicited Order price of $1.90.
\17\ Whether an order is marked with a time in force of day as
opposed to, for example, good till cancelled or immediate or cancel
is irrelevant to the manner in which they would be treated once they
are entered into the solicitation mechanism.
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Pursuant to proposed Rule 1081(i)(B), the Initiating Member must
stop the entire Agency Order at a price (the ``stop price'') that is
equal to or better than the National Best Bid/Offer (``NBBO'') on both
sides of the market, provided that
[[Page 5867]]
such price must be at least $0.01 better than any public customer non-
contingent limit order on the Phlx order book and must be equal to the
Agency Order's limit price or provide the Agency Order with a better
price than its limit price. Stop prices may be submitted in $0.01
increments, regardless of the applicable Minimum Price Variation (the
``MPV''). Contingent orders \18\ (including all-or-none, stop or stop-
limit orders) on the book would not be considered when checking the
acceptability of the stop price. Contingent orders are not represented
as part of the Exchange Best Bid/Offer since they may only be executed
if specific conditions are met. Given that these orders are not
represented as part of the Exchange Best Bid/Offer, they are not
included in the NBBO and thus are not considered when checking the
acceptability of the stop price.\19\
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\18\ A contingent order is a limit or market order to buy or
sell that is contingent upon a condition being satisfied. PIXL also
does not consider contingent orders on the book when checking the
acceptability of the stop price.
\19\ Proposed Rule 1081(i)(B) does not apply if the Agency Order
is a Complex Order (a ``Complex Agency Order''). Rather, proposed
Rule 1081(i)(C) applies to Complex Agency Orders and requires them
to be of a conforming ratio, as defined in Commentary.08(a)(ix) to
Rule 1080. A Complex Agency Order which is not of a conforming ratio
would be rejected. Proposed Rule 1081(i)(C) requires all component
option legs of the order to be for at least 500 contracts (or, in
the case of mini options, at least 5000 contracts). It also provides
that the Initiating Member must stop the entire Complex Agency Order
at a price that is better by at least $0.01 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'') regardless of size, provided in either case that such price
is equal to or better than the Complex Agency Order's limit price.
Stop prices for Complex Agency Orders may be submitted in $0.01
increments, regardless of MPV, and contingent orders on the book
would not be considered when checking the acceptability of the stop
price. See proposed Rule 1081(i)(C).
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Orders that are submitted but that do not comply with the
eligibility requirements set forth in proposed Rule 1081(i)(A) through
(C) would be rejected upon receipt and ineligible to initiate a
Solicitation Auction.\20\ In addition, Agency Orders submitted at or
before the opening of trading are not eligible to initiate a
Solicitation Auction and would be rejected.\21\ Orders submitted during
a specified period of time, as determined by the Exchange and
communicated to Exchange membership on the Exchange's Web site, prior
to the end of the trading session in the affected series \22\
(including, in the case of Complex Orders, in any series which is a
component of the Complex Order) are not eligible to initiate a
Solicitation Auction and would be rejected.\23\ Agency Orders which are
not Complex Orders received while another electronic auction (including
any Solicitation Auction, PIXL auction, or any other kind of auction)
involving the same option series is in progress would not be eligible
to initiate a Solicitation Auction and would be rejected.\24\
Similarly, a Complex Agency Order received while another auction in the
same Complex Order strategy is in progress is not eligible to initiate
a Solicitation Auction and would be rejected.\25\
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\20\ See proposed Rule 1081(i)(D).
\21\ See proposed Rule 1081(i)(E).
\22\ The term ``series'' of options means all option contracts
of the same class having the same expiration date and exercise
price. A ``class'' of options means all option contracts of the same
``type'' of option covering the same underlying stock. A ``type'' of
option means the classification of an option contract as a put or a
call. See Rule 1000, Applicability, Definitions and References.
\23\ See proposed Rule 1081(i)(F).
\24\ A similar restriction applies with respect to PIXL
auctions. See PIXL Rule 1080(n)(ii) which provides that ``[o]nly one
Auction may be conducted at a time in any given series or
strategy.''
\25\ However, a simple Agency Order in one series that is
submitted while an electronic auction is already in process with
respect to a Complex Agency Order that includes the same series
would not be rejected. Instead, a Solicitation Auction would be
initiated for that incoming Agency Order offering each unique
strategy or individual series the same opportunity to initiate an
auction. This behavior is consistent with the handling of
overlapping PIXL and Complex PIXL auctions. See PIXL Rule
1080(n)(ii). Complex Orders submitted during normal trading hours in
a strategy which has not yet opened under Commentary .08 of Rule
1080 would cause the strategy to immediately open and a Solicitation
Auction may be initiated. See proposed Rule 1081(i)(E). In addition,
neither a Solicitation Auction for a simple Agency Order or Complex
Agency Order may be initiated prior to the regular opening of all
individual components of the Solicited simple or Complex Agency
Order.
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Finally a solicited order for the account of any Exchange
specialist, streaming quote trader (``SQT''), remote streaming quote
trader (``RSQT'') or non-streaming registered options trader (``ROT'')
assigned in the affected series may not be a Solicited Order.\26\
Consistent with the explanation the Exchange made in its filing
proposing PIXL, the Exchange believes that in order to maintain fair
and orderly markets, a market maker assigned in an option should not be
solicited for participation in a Solicitation Auction by an Initiating
Member. The Exchange believes that market makers interested in
participating in transactions on the Exchange should do so by way of
his/her quotations, and should respond to Solicitation Auction
notifications rather than create them by having an Initiating Member
submitting Solicited Orders on the market maker's behalf.
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\26\ See proposed Rule 1081(i)(G). An SQT is an Exchange
Registered Options Trader (``ROT'') who has received permission from
the Exchange to generate and submit option quotations electronically
through AUTOM 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 Rule 1014(b)(ii)(A). A
RSQT is defined in Rule 1014(b)(ii)(B) as an ROT that is a member
affiliated with a Remote Streaming Quote Trader Organization
(``RSQTO'') with no physical trading floor presence who has received
permission from the Exchange to generate and submit option
quotations electronically in options to which such RSQT has been
assigned. A qualified RSQT may function as a Remote Specialist upon
Exchange approval. An RSQT may only submit such quotations
electronically from off the floor of the Exchange. An RSQT may not
submit option quotations in eligible options to which such RSQT is
assigned to the extent that the RSQT is also approved as a Remote
Specialist in the same options. An RSQT may only trade in a market
making capacity in classes of options in which he is assigned or
approved as a Remote Specialist. An RSQTO is a member organization
in good standing that satisfies the SQTO readiness requirements in
Rule 507(a).
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Solicitation Auction Process
Pursuant to proposed Rule 1081(ii)(A)(1), to begin the process the
Initiating Member must mark the Agency Order and the Solicited Order
for Solicitation Auction processing, and specify the stop price at
which it seeks to cross the Agency Order with the Solicited Order. Once
the Initiating Member has submitted an Agency Order and Solicited Order
for processing pursuant to this subparagraph, such Agency Order and
Solicited Order may not be modified or cancelled.\27\
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\27\ For clarity, Rule 1080(ii)(A)(l) does not apply to Complex
Agency Orders. Rather, in a parallel provision, proposed Rule
1081(ii)(A)(2) provides that to initiate a Solicitation Auction in
the case of a Complex Agency Order and Complex Solicited Order (a
``Complex Solicitation Auction''), the Initiating Member must mark
the orders for Solicitation Auction processing, and specify the
price (``stop price'') at which it seeks to cross the Complex Agency
Order with the Complex Solicited Order. Once the Initiating Member
has submitted the orders for processing pursuant to proposed Rule
1081(ii)(A)(1)-(2), they may not be modified or cancelled.
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Crossing Two Public Customer Orders Without a Solicitation Auction
As noted above, the proposed rule change would enable a member to
electronically execute an Agency Order, which is an order it represents
on behalf of a public customer, broker-dealer, or any other entity,
against a Solicited Order, which is a solicited limit order of a public
customer, broker-dealer, or any other entity through the solicitation
mechanism.
However, pursuant to proposed Rule 1081(v), if a member enters an
Agency Order for the account of a public customer paired with a
Solicited Order for the account of public customer and if the paired
orders adhere to the eligibility requirements of proposed Rule 1081(i),
such paired orders would
[[Page 5868]]
be automatically executed without a Solicitation Auction.\28\ The
execution price for such paired public customer orders (except if they
are Complex Orders) must be expressed in the minimum quoting increment
applicable to the affected series.\29\ Such an execution may not trade
through the NBBO or at the same price as any resting public customer
order. If all-or-none orders are on the order book in the affected
series, the public customer-to-public customer order may not be
executed at a price at which the all-or-none order would be eligible to
trade based on its limit price and size.\30\
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\28\ The eligibility requirements require the orders to each be
limit orders for at least 500 contracts (or, in the case of mini
options, at least 5000 contracts) and be designated as all-or-none.
The orders must match in size, and the limit prices must match or
cross in price. The orders may not be stop or stop limit orders,
must be marked with a time in force of day, good till cancelled or
immediate or cancel. In the case of Complex Orders, the orders must
be of a conforming ratio, and all component option legs of the order
must be for at least 500 contracts (or, in the case of mini options,
at least 5000 contracts). See proposed Rule 1081(i). The Exchange
also accommodates the crossing of two public customer orders in
PIXL. See Rule 1080(n).
\29\ The execution price for a Complex Order may be in $.01
increments.
\30\ All-or-none orders can only be submitted for non-broker-
dealer customers. As stated above, all-or-none orders are not
considered when checking the acceptability of the stop price of an
Agency Order.
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In the case of a Complex Order, a public customer-to-public
customer cross may only occur at a price which improves the calculated
Phlx Best Bid/Offer or ``cPBBO'' and improves upon the net limit price
of any Complex Orders (excluding all-or-none) on the Complex Order book
in the same strategy.\31\ If all-or-none Complex Orders \32\ are on the
Complex Order book in the same strategy, the public customer-to-public
customer Complex Order may not be executed at a price at which the all-
or-none Complex Order would be eligible to trade based on its limit
price and size.
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\31\ The term ``cPBBO'' means 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. See Rule
1080.08(a)(iv).
\32\ The Exchange's trading system is capable of accepting all-
or-none Complex Orders which are not, however, affirmatively
permitted to be submitted under Exchange rules. Rule 1080.08 (b)(v)
provides in part that ``Complex Orders may be submitted as: All-or-
none orders--to be executed in its entirety or not at all.'' See
Securities Exchange Act Release No. 72351 (June 9, 2014), 79 FR
33977 (June 13, 2014) (SR-Phlx-2014-39). Nevertheless, all-or-none
Complex Orders may not be submitted at this time. The Exchange
anticipates that it will file a proposed rule change to provide for
the handling and execution of all-or-none Complex Orders and
thereafter permit the trading system to accept them. The instant
proposed rule change describes how the solicitation mechanism would
deal with all-or-none Complex Orders once they are permitted under
Exchange rules. Complex Agency Orders and Complex Solicited Orders
provided for herein are not Complex Orders that would require filing
of a proposed rule change in order to be submitted into the system.
Complex Agency Orders and Complex Solicited Orders, while all-or-
none in character, are unique to the solicitation mechanism and are
explicitly provided for herein.
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The Exchange believes that permitting such executions would benefit
public customers on both sides of the crossing transaction by providing
speedy and efficient executions to public customer orders in this
circumstance while maintaining the priority of public customer interest
on the book. The proposed handling of a public customer Agency Order
paired with a public customer Solicited Order is similar to the
handling of a public customer PIXL Order paired with a public customer
Initiating Order which is submitted into the PIXL mechanism.\33\
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\33\ See Rule 1080(n)(vi).
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Solicitation Auction Notification
Pursuant to proposed Rule 1081(ii)(A)(3), when the Exchange
receives an order for Solicitation Auction processing, a Request for
Response with the option details (meaning, the security, strike price,
and expiration date), size and stop price, but not the side \34\ of the
Agency Order and the Solicitation Auction start time is then sent over
the PHLX Orders data feed \35\ and Specialized Quote Feed
(``SQF'').\36\ The Exchange believes that providing option details,
size, and stop price is sufficient information for participants to
determine whether to submit responses to the Solicitation Auction.\37\
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\34\ The Exchange states that, by omitting the side in the
Request for Response, the system avoids disclosure of potentially
material information that could move the market in the event the
Agency Order does not trade at the conclusion of the Solicitation
Auction. Market participants may enter Responses on both sides of
the market.
\35\ The PHLX Orders data feed is designed to provide the real-
time status of simple and Complex Orders on the Phlx order book
directly to subscribers. This includes new orders and changes to
orders resting on the Phlx book for all Phlx listed options. PHLX
Orders also includes opening imbalance information, PIXL information
and Complex Order Live Auction (``COLA'') data.
\36\ SQF is an interface that allows specialists and market
makers to connect and send quotes into Phlx XL and assists them in
responding to auctions and providing liquidity to the market.
\37\ CBOE Rule 6.74B(b)(1)(B) suggests that Agency Orders
submitted to CBOE's Solicitation Auction Mechanism include the
proposed price at which an Agency Order is to be crossed with a
solicited order, as well as the size of the order. According to
Phlx, the rule does not specify that the side is to be indicated on
the order. See also C2 Rule 6.52(b)(1)(B), which is similar.
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Solicitation Auction
The Solicitation Auction process is described in proposed Rules
1081(ii)(A)(4)-(10). Following the issuance of the Request for
Response, the Solicitation Auction would last for a period of 500
milliseconds \38\ unless it is concluded as the result of any of the
circumstances described below.\39\
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\38\ In April/May 2014, to determine whether the proposed
Solicitation Auction timer would provide sufficient time to respond
to a Request for Response, the Exchange polled all Phlx market
makers, 20 of which responded. Of those that responded to the
survey, 15 are currently responding to auctions on Phlx or intend to
do so. 100% of those respondents indicated that their firm could
respond to auctions with a duration of at least 50 milliseconds.
Thus, the Exchange believes that the proposed Solicitation Auction
duration of 500 milliseconds would provide a meaningful opportunity
for participants on Phlx to respond to a Solicitation Auction,
whether initiated by an Agency Order or a Complex Agency Order,
while at the same time facilitating the prompt execution of orders.
The Exchange notes that both ISE and Miami International Securities
Exchange LLC (``MIAX'') rules provide for a 500 millisecond response
time. See ISE Rule 716, Supplementary Material .04 and MIAX Rule
515A(b)(2)(i)(C).
\39\ Rule 1080(c)(ii)(C)(2), which states that Order Entry Firms
must expose orders they represent as agent for at least one second
before such orders may be automatically executed against solicited
orders, is being amended to clarify that it does not apply to
proposed Rule 1081, Solicitation Mechanism. See also proposed Rule
1081(ii)(A)(4).
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Any person or entity may submit Responses to the Request for
Response, provided such Response is properly marked specifying the
price, size and side of the market at which it would be willing to
participate in the execution of the Agency Order. The Exchange believes
that permitting any person or entity to submit Responses to the Request
for Response should attract Responses from all sources, maximizing the
potential for liquidity in the Solicitation Auction and thus affording
the Agency Order the best opportunity for price improvement. Responses
would not be visible to Solicitation Auction participants, and would
not be disseminated to the Options Price Reporting Authority
(``OPRA''). A Response may be for any size up to the size of the Agency
Order.\40\ The minimum price increment for Responses would be $0.01. A
Response must be equal to or better than the NBBO on both sides of the
market at the time of receipt of the Response. A Response with a price
that is outside the NBBO at the time of receipt would be rejected.\41\
Multiple Responses from the
[[Page 5869]]
same member may be submitted at different prices on either or both
sides of the market during the Solicitation Auction. Responses may be
modified or cancelled during the Solicitation Auction. The acceptance
and handling of Responses to a Solicitation Auction is the same as the
acceptance and handling of Responses today for a PIXL Auction.\42\
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\40\ Responses may not be submitted with an all-or-none
contingency. (Note, however, that all-or-none orders entered and
present in the system at the end of the Solicitation Auction would
be considered for execution, as discussed below.)
\41\ Similarly, in the case of Complex Order Responses, the
Response must be equal to or better than the cPBBO on both sides, as
defined in Commentary .08(a)(iv) of Rule 1080 at the time of receipt
of the Complex Order Response but need not improve upon the limit of
orders on the CBOOK. A Complex Order Response submitted with a price
that is outside the cPBBO at the time of receipt would be rejected.
See proposed Rule 1081(ii)(A)(9).
\42\ See Rule 1080(n).
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Conclusion of the Solicitation Auction
Proposed Rules 1081(ii)(B)(1)-(4) describe a number of
circumstances that would cause the Solicitation Auction to conclude.
Generally, it would conclude at the end of the Solicitation Auction
period, except that it may conclude earlier: (i) any time the Phlx Best
Bid/Offer (``PBBO'') on the same side of the market as the Agency Order
crosses the stop price (since further price improvement would be
unlikely and any Responses offering improvement would be likely to be
cancelled),\43\ or (ii) any time there is a trading halt on the
Exchange in the affected series (or, in the case of a Complex
Solicitation Auction, any time there is a trading halt on the Exchange
in any component of a Complex Agency Order).\44\
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\43\ In the case of a Complex Solicitation Auction, it would end
any time the cPBBO or the Complex Order book, excluding all-or-none
Complex Orders, on the same side of the market as the Complex Agency
Order, crosses the stop price. See proposed Rule 1081(ii)(B)(3).
\44\ Trading on the Exchange in any option contract is halted
whenever trading in the underlying security has been paused or
halted by the primary listing market. See Rule 1047(e). See also
Securities Exchange Act Release No. 62269 (June 10, 2010), 75 FR
34491 (June 17, 2010) (SR-Phlx-2010-82). Any executions that occur
during any latency between the pause or halt in the underlying
security and the processing of the halt on the Exchange are
nullified pursuant to Rule 1092(c)(iv)(B).
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Pursuant to proposed Rule 1081(ii)(C), if the Solicitation Auction
concludes before the expiration of the Solicitation Auction period as
the result of the PBBO, cPBBO or Complex Order book (excluding all-or-
none Complex Orders) crossing the stop price as described in proposed
Rules 1081(ii)(B)(2) and 1081(ii)(B)(3), the entire Agency Order would
be executed using the allocation algorithm set forth in proposed Rule
1081(ii)(E). The algorithm is described below under the heading ``Order
Allocation''.
Also pursuant to proposed Rule 1081(ii)(C), if the Solicitation
Auction concludes before the expiration of the Solicitation Auction
period as the result of a trading halt, the entire Agency Order or
Complex Agency Order would be executed solely against the Solicited
Order or Complex Solicited Order at the stop price and any unexecuted
Responses would be cancelled.\45\ Responses and other interest present
in the system would not be considered for trading against the Agency
Order in the case of a trading halt. The Exchange believes that this is
appropriate since the participants representing tradable interest in
the Solicitation Auction have not `stopped' the Agency Order in its
entirety and would have no means after the auction executions occur to
offset the trading risk they would incur because the market is halted
if they were permitted to execute against the Agency Order in this
instance. However, the Solicited Order `stopped' the Agency Order when
the order was submitted into the Solicitation Auction and would
therefore execute against the Agency Order if the Solicitation Auction
concludes before the expiration of the Solicitation Auction period as
the result of a trading halt.
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\45\ The Exchange's PIXL auction features similar functionality.
Pursuant to Rule 1080(n)(ii)(C), in the case of a trading halt on
the Exchange in the affected series, a PIXL Order will be executed
solely against the Initiating Order at the stop price and any
unexecuted PAN responses will be cancelled.
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Furthermore, when Agency and Solicited Orders are submitted into
the Solicitation Auction, the stop price must be equal to or improve
the NBBO and be at least $0.01 better than any public customer non-
contingent limit orders on the Phlx order book. The Exchange believes
that public customer interest submitted to Phlx after submission of the
Agency and Solicited Orders but prior to the trading halt should not
prevent the Agency Order from being executed at the stop price since
such public customer interest was not present at the time the Agency
Order was `stopped' by the Solicited Order.
Entry of an unrelated market or marketable limit order on the
opposite side of the market from the Agency Order received during the
Solicitation Auction would not cause the Solicitation Auction to end
early. Rather, the unrelated order would execute against interest
outside the Solicitation Auction (if marketable against the PBBO) or
would post to the book and then route if eligible for routing (in the
case of an order marketable against the NBBO but not against the PBBO),
pursuant to proposed Rule 1081(ii)(D). If contracts remain from such
unrelated order at the time the Solicitation Auction ends, the total
unexecuted volume of such unrelated interest would be considered for
participation in the order allocation process, regardless of the number
of contracts in relation to the Solicitation Auction size, described in
proposed Rule 1081(ii)(E).\46\ The handling of unrelated opposite side
interest which is received during the Solicitation Auction is the same
as the handling of unrelated opposite side interest which is received
during a PIXL Auction.\47\ Participants submitting such unrelated
interest may not be aware that an auction is in progress and should
therefore be able to access firm quotes that comprise the NBBO without
delay. Considering such unrelated interest which remains unexecuted
upon receipt for participation in the order allocation process
described in proposed Rule 1081(ii)(E) would increase the number of
contracts against which an Agency Order could be executed, and should
therefore create more opportunities for the Agency Order to be executed
at better prices.
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\46\ Similarly, pursuant to proposed Rule 1081(ii)(D), in the
case of a Complex Solicitation Auction, an unrelated market or
marketable limit Complex Order on the opposite side of the market
from the Complex Agency Order as well as orders for the individual
components of the unrelated Complex Order received during the
Complex Solicitation Auction would not cause the Complex
Solicitation Auction to end early and would execute against interest
outside of the Complex Solicitation Auction. If contracts remain
from such unrelated Complex Order at the time the Complex
Solicitation Auction ends, the total unexecuted volume of such
unrelated interest would be considered for participation in the
order allocation process, regardless of the number of contracts in
relation to the Complex Solicitation Auction size, described in
proposed Rule 1081(ii)(E).
\47\ See Rule 1080(n)(ii)(D).
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Order Allocation
The allocation of orders executed upon the conclusion of a
Solicitation Auction would depend upon whether the Solicitation Auction
has yielded sufficient improving interest to improve the price of the
entire Agency Order. As noted above, all contracts of the Agency Order
would trade at an improved price against non-solicited contra-side
interest or, in the event of insufficient improving interest to improve
the price of the entire Agency Order, at the stop price against the
Solicited Order.
Consideration of All-or-None Interest. All-or-none interest of a
size which could potentially be executed consistent with its all-or-
none contingency is considered when determining whether there is
sufficient size to execute Agency Orders which are not Complex Agency
Orders at price(s) better than the stop price. However, pursuant to
proposed Rule 1081(ii)(E)(5), when
[[Page 5870]]
determining if there is sufficient size to execute Complex Agency
Orders at a price(s) better than the stop price, no all-or-none
interest of any size would be considered. If there is sufficient size
to execute the entire Complex Agency Order at a price(s) better than
the stop price irrespective of any all-or-none interest that may be
present, then all-or-none interest would be considered for trade and
executed if possible. This difference in behavior is due to a system
limitation relating to all-or-none Complex Orders.\48\ The Exchange
believes this behavior is not impactful since all-or-none Complex
Orders are rare \49\ and if sufficient size exists to execute the
entire Complex Agency Order at an improved price, the all-or-none
Complex Order would be considered for trade and executed if possible.
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\48\ All-or-none simple orders reside with simple orders on the
book. By contrast, all-or-none Complex Orders reside in a separate
book, in a different part of the trading system. Thus aggregation of
all-or-none Complex Orders with other Complex Orders is a more
difficult process than aggregation of all-or-none simple orders with
other simple orders.
\49\ The Exchange reviewed six months of data which showed that
all-or-none Complex Orders represented only 0.12% of all Complex
Orders.
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In all Solicitation Auctions, all-or-none interest would be
executed pursuant to normal priority rules, except that it would not be
executed if the all-or-none contingency cannot be satisfied. If an
execution which can adhere to the all-or-none contingency is not
possible, such all-or-none interest would be ignored and would remain
on the order book or be cancelled if such interest is an immediate or
cancel order.
For example, assume an Agency Order to buy 1000 contracts stopped
by a Solicited Order at $2.00 is entered when the PBBO is $1.90-$2.10.
Assume that during the Solicitation Auction, Responses are received to
sell 700 contracts at $1.97 and sell 150 contracts at $1.99. In
addition, assume an order to sell 300 contracts at $1.98 with an all-
or-none contingency is received. At the end of the Solicitation
Auction, the system would consider the all-or-none order when
determining if there is sufficient size to execute the Agency Order at
a price(s) better than the stop price since the all-or-none contingency
can be satisfied by an execution. In this example, at the end of the
Solicitation Auction, the Agency Order would execute against improving
interest with 700 contracts executing at $1.97 and 300 contracts
(representing the all-or-none order) executing at $1.98. Consider a
similar scenario whereby the Responses received were to sell 700
contracts at $1.97 and sell 300 contracts at $1.99 and an all-or-none
order to sell 500 contracts at $1.98 was received. In this scenario,
the system would not consider the all-or-none order when determining if
there is sufficient size to execute the Agency Order at a price(s)
better than the stop price since the all-or-or none contingency cannot
be satisfied by an execution. However, excluding the all-or-none order,
the Agency Order can still be satisfied at a price(s) better than the
stop price. In this scenario, at the end of the Solicitation Auction,
the Agency Order would execute against improving interest with 700
contracts executing at $1.97 and 300 contracts executing at $1.99. The
500 contract all-or-none order does not execute because the all-or-none
contingency cannot be satisfied.
Similarly, assume a Complex Agency Order to buy 1000 contracts
stopped by a Complex Solicited Order at $2.00 is entered when the cPBBO
is $1.90-$2.10. Assume that during the Solicitation Auction a Response
is received to sell 900 contracts at $1.98 and an all-or-none Complex
Order is received to sell 150 contracts at $1.99. At the end of the
Solicitation Auction involving a Complex Order, the system does not
consider all-or-none interest in determining whether it can execute the
Complex Agency Order at a better price than the stop price. In this
case, excluding the all-or-none Complex Order, only 900 contracts are
available to sell at a better price than the stop price. Therefore, the
Complex Agency Order would trade against the Solicited Order at the
$2.00 stop price. The all-or-none contracts would not be included
because although more than 1000 contracts are offered at a better price
than the $2.00 stop price, the system cannot both trade best prices
first and adhere to the contingency of the all-or-none order while
ensuring that the Agency Order trades 1000 contracts. If, however, the
example is changed and Responses are received to sell 900 contracts at
$1.98 and sell 100 contracts at $1.99 and an order to sell 100
contracts at $1.98 all-or-none is received, at the end of the
Solicitation Auction involving this Complex Order, there is enough
interest which is not all-or-none to satisfy the Complex Agency Order
at a better price than the $2.00 stop price. Therefore, the Agency
Order would be executed against the 900 lot at $1.98 and the remaining
100 contracts executed against the all-or-none Complex Order at $1.98.
Solicitation Auction with Sufficient Improving Interest. Pursuant
to the proposed Rule 1081(ii)(E)(1) algorithm, if there is sufficient
size (considering all resting orders, quotes and Responses) to execute
the entire Agency Order at a price or prices better than the stop
price, the Agency Order would be executed against such better priced
interest with public customers having priority at each price level.
After public customer interest at a particular price level has been
satisfied, including all-or-none orders with a size which can be
satisfied, remaining contracts would be allocated among all Exchange
quotes, orders and Responses in accordance with Rules
1014(g)(vii)(B)(1)(b) and (d), and the Solicited Order would be
cancelled.\50\
---------------------------------------------------------------------------
\50\ Similarly, pursuant to proposed Rule 1081(ii)(E)(3), in the
case of a Complex Solicitation Auction, if there is sufficient size
(considering resting Complex Orders and Responses) to execute the
entire Complex Agency Order at a price(s) better than the stop
price, the Complex Agency Order would be executed against better
priced Complex Orders, Responses, as well as quotes and orders which
comprise the cPBBO at the end of the Complex Solicitation Auction.
(The cPBBO is not considered in determining whether there is
sufficient improving size because the market and/or size of the
individual components can change between the calculation of
sufficient size and the actual execution.) Such interest would be
allocated at a given price in the following order: (i) to public
customer Complex Orders and Responses in time priority; (ii) to SQT,
RSQT, and non-SQT ROT Complex Orders and Responses on a size pro-
rata basis; (iii) to non-market maker off-floor broker-dealer
Complex Orders and Responses on a size pro-rata basis, and (iv) to
quotes and orders which comprise the cPBBO at the end of the Complex
Solicitation 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. This allocation
methodology is consistent with the allocation methodology utilized
for a Complex Order executed in PIXL. In addition, providing public
customer's with priority over SQT, RSQT, and non-SQT ROTs, who in
turn have priority over non-market maker off-floor broker-dealers is
the same priority scheme used for regular orders. See Rule 1014(g).
When determining if there is sufficient size to execute the
entire Complex Agency Order at a price(s) better than the stop
price, if the short sale price test in Rule 201 of Regulation SHO is
triggered for a covered security, Complex Orders and Responses which
are marked ``short'' will not be considered because of the
possibility that a short sale price restriction may apply during the
interval between assessing for adequate size and the execution of
the Complex Agency Order. However, if there is sufficient size to
execute the entire Complex Agency Order at a price(s) better than
the stop price irrespective of any covered securities for which the
price test is triggered that may be present, then all Complex Orders
and Responses which are marked ``short'' will be considered for
allocation in accordance with proposed Rule 1081(ii)(J)(3).
---------------------------------------------------------------------------
Example of Solicitation Auction with Sufficient Improving Interest.
To illustrate a case where a Solicitation Auction yields enough
improving interest to better the stop price and the application of the
proposed Rule 1081(ii)(E)(1) algorithm, assume the NBBO is $0.95-$1.03,
and a buy side Agency Order for 1000 contracts is
[[Page 5871]]
submitted with a contra-side Solicited Order to stop the Agency Order
at $1.00. During the Solicitation Auction, assume a market maker
(``MM1'') Response is submitted to sell 800 contracts at $0.97, a
broker-dealer Response is submitted to sell 100 contracts at $0.99, and
a public customer sends in an order, outside of the Solicitation
Auction, to sell 100 contracts at $0.99. Upon receipt of the public
customer order, the NBBO changes to $0.95-$0.99. In addition, assume
two market makers send in quotes of $0.95-$0.99 during the Solicitation
Auction. Market Maker 2 (``MM2'') quotes $0.95-$0.99 with 100 contracts
and Market Maker 3 (``MM3'') quotes $0.95-$0.99 with 50 contracts. At
the end of the Solicitation Auction, since there is enough interest to
execute the entire Agency Order at a price(s) better than the stop
price, the Agency Order would be executed against the better priced
interest as follows:
-- the Agency Order trades 800 contracts at $0.97 against MM1
Response;
-- the Agency Order trades 100 contracts at $0.99 against public
customer;
-- the Agency Order trades 67 contracts at $0.99 against MM2 quote
(pro-rata allocation); and
-- the Agency Order trades 33 contracts at $0.99 against MM3 quote
(pro-rata allocation).
The broker-dealer does not trade any contracts since broker-dealer
orders execute only after all public customer and market maker interest
is satisfied. The unexecuted Solicited Order and broker-dealer Response
are cancelled back to the sending participants.\51\
---------------------------------------------------------------------------
\51\ To illustrate a Complex Solicitation Auction with enough
improving interest and the operation of proposed Rule
1081(ii)(E)(3), assume that a Complex Order to buy one of option A
and sell one of option B, 1000 times, with a cPBBO of $0.40 bid,
$0.70 offer, is submitted with a stop price of $0.65. Assume that
during the Solicitation Auction, the following Responses and order
interest are received: a market maker (``MM1'') responds to sell the
strategy 100 times at a price of $0.55; MM1 responds to sell the
strategy 100 times at a price of $0.60; a broker-dealer responds to
sell the strategy 400 times at a price of $0.60; a public customer
Complex Order to sell the strategy 300 times at a price of $0.60;
and another market maker (``MM2'') responds to sell the strategy 200
times at $0.60.
After all these Responses and orders are received, option A of
the simple market moves causing the cPBBO to become offered 200
times at $0.60. Option A is quoted in the simple market as $1.00-
$1.10 and Option B is quoted in the simple market as $0.50-$0.60. At
the end of the Solicitation Auction, the Complex Agency Order would
be executed as follows: the Complex Agency Order trades 100
contracts at $0.55 against MM1; the Complex Agency Order trades 300
contracts at $0.60 against public customer; the Complex Agency Order
trades 100 contracts at $0.60 against MM1; the Complex Agency Order
trades 200 contracts at $0.60 against MM2; the Complex Agency Order
trades 300 contracts at $0.60 against the broker-dealer; and the
Solicited Order and the residual unexecuted contracts of the broker-
dealer Response are cancelled.
---------------------------------------------------------------------------
Solicitation Auction with Insufficient Improving Interest. Pursuant
to proposed Rule 1081(ii)(E)(2), if there is not sufficient size
(considering all resting orders, quotes and Responses) to execute the
entire Agency Order at a price(s) better than the stop price, the
Agency Order would be executed against the Solicited Order at the stop
price provided such price is better than the limit of any public
customer order (excluding all-or-none) on the limit order book, on
either the same side as or the opposite side of the Agency Order, and
equal to or better than the contra-side PBBO.\52\ Otherwise, both the
Agency Order and Solicited Order would be cancelled without a trade
occurring. This proposed behavior ensures non-contingent public
customer orders on the limit order book maintain priority. While the
Exchange recognizes that at least one other solicitation mechanism
offered by another exchange considers public customer orders on the
limit order book at the stop price when determining if there is
sufficient improving interest to satisfy the Agency Order, the proposed
solicitation mechanism offered on Phlx would not consider such
interest.\53\ The Exchange believes that requiring the stop price to be
at least $0.01 better than any public customer interest on the limit
order book ensures public customer priority of existing interest and in
turn provides the Solicited Order participant certainty that if an
execution occurs at the stop price, such execution would represent the
Solicited Order and not interest which arrived after the Solicited
Order participant stopped the Agency Order for its entire size.
---------------------------------------------------------------------------
\52\ Proposed Rule 1081(ii)(E)(2) does not apply to Complex
Solicitation Auctions. Rather, a parallel provision, proposed Rule
1081(ii)(E)(4), provides that in a Complex Solicitation Auction, if
there is not sufficient size (considering resting Complex Orders and
Responses) to execute the entire Complex Agency Order at a price(s)
better than the stop price, the Complex Agency Order would be
executed against the Solicited Order at the stop price, provided
such stop price is better than the limit of any public customer
Complex Order (excluding all-or-none) on the Complex Order book,
better than the cPBBO when a public customer order (excluding all-
or-none) is resting on the book in any component of the Complex
Agency Order, and equal to or better than the cPBBO on the opposite
side of the Complex Agency Order. This proposed behavior ensures
non-contingent public customers on the limit order book maintain
priority. Otherwise, both the Complex Agency Order and the Solicited
Order would be cancelled with no trade occurring.
\53\ See ISE Rule 716(e)(2)(i) which provides in part that in
the case of insufficient improving interest ``[i]f there are
Priority Customer Orders on the Exchange on the opposite side of the
Agency Order at the proposed execution price and there is sufficient
size to execute the entire size of the Agency Order, the Agency
Order will be executed against the bid or offer, and the solicited
order will be cancelled.''
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Example of Solicitation Auction with Insufficient Improving
Interest. To illustrate a case where the Solicitation Auction has not
yielded sufficient interest to improve the price for the entire Agency
Order, assume the NBBO is $0.97-$1.03, and a buy side Agency Order for
1000 contracts is submitted with a contra-side Solicited Order to stop
the Agency Order at $1.00. During the Solicitation Auction, assume a
Response is submitted to sell 100 contracts at $0.97 and another to
sell 100 contracts at $0.99. At the end of the Solicitation Auction
period, since there is not enough interest to execute the entire Agency
Order at a price(s) better than the stop price, the Agency Order would
be executed at $1.00 against the Solicited Order. The unexecuted
Responses are then cancelled back to the sending participant.\54\
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\54\ To illustrate a Complex Solicitation Auction that yields
insufficient improving interest and the operation of proposed Rule
1081(ii)(E)(4), assume a Complex Order to buy one of option A and
sell one of option B, 1000 times, with a cPBBO of $0.40 bid, $0.70
offer, is submitted with a stop price of $0.65. Assume that during
the Complex Solicitation Auction, the following Responses and order
interest are received: a market maker (``MM1'') responds to sell the
strategy 100 times at a price of $0.55; MM1 responds to sell the
strategy 100 times at a price of $0.60; a broker-dealer responds to
sell the strategy 300 times at a price of $0.60; and another market
maker (``MM2'') responds to sell the strategy 200 times at $0.60.
At the end of the Complex Solicitation Auction, since there is
not sufficient size to execute the entire Complex Agency Order at a
price(s) better than the stop price, the Complex Agency Order
executes at the stop price of $0.65 against the Solicited Order. All
unexecuted Responses are cancelled back to the sending participants.
---------------------------------------------------------------------------
Proposed Rule 1081(ii)(E)(6) provides that a single quote, order or
Response shall not be allocated a number of contracts that is greater
than its size.
Finally, proposed Rule 1081(ii)(E)(7) provides that a Complex
Agency Order consisting of a stock/ETF component would not execute
against interest comprising the cPBBO at the end of the Complex
Solicitation Auction.\55\ 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
[[Page 5872]]
of executing a Complex Order which includes a stock/ETF component. The
Exchange believes that introducing the risk of inability to fully
execute a complex strategy is counterproductive to, and inconsistent
with, the effort to allow Complex Orders in the solicitation mechanism.
---------------------------------------------------------------------------
\55\ This provision parallels PIXL Rule 1080(n)(ii)(E)(2)(g) and
is being proposed for the same reasons explained in the Complex PIXL
Filing. This limitation is also consistent with the handling of
Complex Orders that include a stock/ETF component and are entered
into the Phlx XL system. 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.
---------------------------------------------------------------------------
Miscellaneous Provisions
Proposed Rules 1081(ii)(F) through (I) address the handling of the
Agency Order and other orders, quotes and Responses when certain
conditions are present. Pursuant to proposed Rule 1081(ii)(F), if the
market moves following the receipt of a Response, such that there are
Responses that cross the then-existing NBBO (provided such NBBO is not
crossed) at the time of the conclusion of the Solicitation Auction,
such Responses would be executed, if possible, at their limit
price(s).\56\ Since Responses may be cancelled at any time prior to the
conclusion of the Solicitation Auction, the Exchange believes that this
behavior is, at best, highly unlikely as participants would cancel
Responses when better priced interest that they could trade against is
present in the marketplace. This behavior is consistent with the
current handling of PAN Responses in a PIXL Auction.
---------------------------------------------------------------------------
\56\ Similarly, in the case of a Complex Solicitation Auction,
if there are Responses that cross the then-existing cPBBO at the
time of conclusion of the Complex Solicitation Auction, such
Responses would be executed, if possible, at their limit prices.
This provision parallels PIXL Rule 1080(n)(ii)(F).
---------------------------------------------------------------------------
Proposed Rule 1081(ii)(G) provides that if the Solicitation Auction
price when trading against non-solicited interest (except if it is a
Complex Solicitation Auction) would be the same as or cross the limit
of an order (excluding an all-or-none order) on the limit order book on
the same side of the market as the Agency Order, the Agency Order may
only be executed at a price that is at least $0.01 better than the
resting order's limit price provided such execution price improves the
stop price. If such execution price would not improve the stop price,
the Agency Order would be executed at a price which is $0.01 better for
the Agency Order than the stop price provided the price does not equal
or cross a public customer order and is equal to or improves upon the
PBBO on the opposite side of the Agency Order.\57\ If such price is not
possible, the Agency Order and Solicited Order would be cancelled with
no trade occurring. For example, assume the NBBO is $1.03-$1.10 when an
order is submitted into the Solicitation Auction, that the Agency Order
is buying and that the order is stopped at $1.05. The $1.03 bid is an
order on Phlx. During the Solicitation Auction a Response arrives to
sell at $1.03. At the end of the Solicitation Auction, if the Response
to sell at $1.03 can fully satisfy the Agency Order, the auction price
would be $1.03 but, since that price is the same as the price of a
resting order on the book, the Agency Order would trade against the
Response at $1.04 (an improvement of $0.01 over the resting order's
limit). By contrast, assume a case where the NBBO is $1.03-$1.10 and
where during the Auction an unrelated non-customer order to pay $1.04
is received. This order rests on the book and the NBBO becomes $1.04-
$1.10. Assume the same stop price of $1.05 for an Agency Order to buy,
and the receipt of a Response to sell at $1.04 which can fully satisfy
the Agency order. At the end of the Solicitation Auction, the auction
price would be $1.04 which equals the resting order on the book. In
this case, if the trade were executed with $0.01 improvement over the
resting order limit (that is, if the trade were executed at $1.05) the
execution would be at the stop price. The system would not consider the
origin of the resting order but ensures the priority of such order,
regardless of origin by requiring that any execution occur at a price
which improves upon the limit of a resting order by at least $0.01. In
addition, the system only would permit the Solicited Order and no other
interest to trade against the Agency Order at the stop price since the
Solicited Order stopped the entire size Agency Order at a price which
was required upon receipt to be equal to or improve the NBBO and to be
at least $0.01 improvement over any public customer orders resting on
the Phlx limit order book, thereby establishing priority at the stop
price. Therefore, the execution price in this case ($1.04) would be
$0.01 better than the stop price. This system logic ensures that the
Agency Order receives a better priced execution than the stop price
when trading against interest other than the Solicited Order.
---------------------------------------------------------------------------
\57\ See also PIXL Rule 1080(n)(ii)(H). Proposed Rule
1081(ii)(G) does not apply to Complex Solicitation Auctions. Rather,
a parallel provision, proposed Rule 1081(ii)(H), provides that if
the Complex Solicitation Auction price when trading against non-
solicited interest would be the same as or cross the limit of that
of a Complex Order (excluding all-or-none) on the Complex Order Book
on the same side of the market as the Complex Agency Order, the
Complex Agency Order may only be executed at a price that improves
the resting order's limit price by at least $0.01, provided such
execution price improves the stop price. If such execution price
would be equal to or would not improve the stop price, the Agency
Order would be executed $0.01 better than the stop price provided
the price does not equal or cross a non-all-or-none public customer
Complex Order or a non-all-or-none public customer order present in
the cPBBO on the same side as the Complex Agency Order in a
component of the Complex Order Strategy and is equal to or better
than the cPBBO on the opposite side of the Complex Agency Order. If
such price is not possible, the Agency Order and Solicited Order
would be cancelled with no trade occurring. This functionality is
consistent with that of Complex PIXL auctions.
---------------------------------------------------------------------------
Proposed Rule 1081(ii)(I) provides that any unexecuted Responses or
Solicited Orders would be cancelled at the end of the Solicitation
Auction. This behavior is consistent with the handling of unexecuted
PAN Responses and Initiating Orders in PIXL.\58\ Both Responses and
Solicited Orders are specifically entered into the Solicitation Auction
to trade against the Agency Order. The Exchange believes that
cancelling the unexecuted portion of Responses and Solicited Orders is
consistent with the expected behavior of such interest by the
submitting participants.
---------------------------------------------------------------------------
\58\ See Rule 1080(n)(ii)(I).
---------------------------------------------------------------------------
Complex Agency Orders With Stock/ETF Components
Proposed Rule 1081(ii)(J) deals with Complex Agency Orders with
stock or ETF components and generally tracks Rule 1080(n)(ii)(J)
applicable to PIXL. Proposed Rule 1081(ii)(J)(1) states that member
organizations may only submit Complex Agency Orders, Complex Solicited
Orders, Complex Orders and/or 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 Execution Services LLC (``NES'') 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 NES in order to trade orders
containing a stock/ETF component.
Proposed Rule 1081(ii)(J)(2) provides that where one component of a
Complex Agency Order, Complex Solicited Order, Complex Order or
Response is the underlying security, the Exchange shall electronically
communicate the underlying security component of the Complex Agency
Order (together with the Complex Solicited Order or
[[Page 5873]]
Response, as applicable) to NES, its designated broker-dealer, for
immediate execution.
Such execution and reporting would occur otherwise than on the
Exchange and would be handled by NES pursuant to applicable rules
regarding equity trading.
Finally, proposed Rule 1081(ii)(J)(3) states that when the short
sale price test in Rule 201 of Regulation SHO \59\ is triggered for a
covered security, NES would not execute a short sale order in the
underlying covered security component of a Complex Agency Order,
Complex Solicited Order, Complex Order or Response if the price is
equal to or below the current national best bid.\60\ However, NES would
execute a short sale order in the underlying covered security component
of a Complex Agency Order, Complex Solicited Order, Complex Order or
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.\61\ If NES could not execute the underlying covered security
component of a Complex Agency Order, Complex Solicited Order, Complex
Order or Response in accordance with Rule 201 of Regulation SHO, the
Exchange would cancel back the Complex Agency Order, Complex Solicited
Order, Complex Order or Response to the entering member organization.
For purposes of this paragraph, the term ``covered security'' has the
same meaning as in Rule 201(a)(1) of Regulation SHO.\62\
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\59\ 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 www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm.
\60\ The term ``national best bid'' is defined in SEC Rule
201(a)(4). 17 CFR 242.201(a)(4).
\61\ The Exchange notes that a broker or dealer may mark a sell
order ``short exempt'' only if the provisions of SEC Rule 201(c) or
(d) are met. 17 CFR 242.200(g)(2). Since NES and the Exchange do not
display the stock or ETF portion of a Complex Order, however, a
broker-dealer should not 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'') and the Complex PIXL Filing. The system would handle short
sales of the orders and Responses described herein the same way it
handles the short sales discussed in the Complex PIXL Filing.
\62\ 17 CFR 242.201(a)(4).
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Regulatory Issues
The proposed rule change contains two paragraphs describing
prohibited practices when participants use the solicitation mechanism.
These new provisions track similar provisions in the PIXL rule.\63\
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\63\ See Rules 1080(n)(iii) and (iv).
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Proposed Rule 1081(iii) states that the Solicitation Auction may be
used only where there is a genuine intention to execute a bona fide
transaction. It would be considered a violation of proposed Rule 1081
and would be deemed conduct inconsistent with just and equitable
principles of trade and a violation of Rule 707 if an Initiating Member
submits an Agency Order (thereby initiating a Solicitation Auction) and
also submits its own Response in the same Solicitation Auction. The
purpose of this provision is to prevent Solicited Members from
submitting an inaccurate or misleading stop price or trying to improve
their allocation entitlement by participating with multiple expressions
of interest.
Proposed Rule 1081(iv) states that a pattern or practice of
submitting unrelated orders or quotes that cross the stop price causing
a Solicitation Auction to conclude before the end of the Solicitation
Auction period would be deemed conduct inconsistent with just and
equitable principles of trade and a violation of Rule 707.
Definition of Professional in Rule 1000(b)(14)
In addition to proposing Rule 1081, the Exchange also proposes an
amendment to Rule 1000(b)(14). In 2010, the Exchange amended its
priority rules to give certain non-broker-dealer orders the same
priority as broker-dealer orders. In so doing, the Exchange adopted a
new defined term, the ``professional,'' for certain persons or
entities.\64\ Rule 1000(b)(14) defines professional as a 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). A professional
account is treated in the same manner as an off-floor broker-dealer for
purposes of Phlx Rule 1014(g), to which the trade allocation algorithm
described in proposed Rule 1081(ii)(E)(1) refers. However, Rule
1000(b)(14) also currently states that all-or-none professional orders
would be treated like customer orders. The Exchange proposes to amend
Rule 1000(b)(14) by (i) specifying that orders submitted pursuant to
Rule 1081 for the accounts of professionals would be treated in the
same manner as off-floor broker-dealer orders for purposes of Rule
1014(g), and (ii) adding proposed Rule 1081 to the list of rules for
the purpose of which a professional would be treated in the same manner
as an off-floor broker-dealer. The effect of these changes to Rule 1014
is that professionals would not receive the same priority afforded to
public customers in a Solicitation Auction under proposed Rule 1081,
and instead would be treated as broker-dealers in this regard.
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\64\ See Securities Exchange Act Release No. 61802 (March 30,
2010), 75 FR 17193 (April 5, 2010) (approving SR-Phlx-2010-05).
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III. Proceedings to Determine Whether to Approve or Disapprove SR-Phlx-
2014-66 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \65\ to determine whether the proposed rule
change should be approved or disapproved.\66\ Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues that are raised by the proposal and are discussed below.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described in greater detail below, the Commission seeks and
encourages interested persons to comment on the proposal and inform the
Commission's analysis whether to approve or disapprove the proposed
rule change.
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\65\ 15 U.S.C. 78s(b)(2)(B).
\66\ Section 19(b)(2)(B) of the Act provides that proceedings to
determine whether to disapprove a proposed rule change must be
concluded within 180 days of the date of publication of notice of
the filing of the proposed rule change. The time for conclusion of
the proceedings may be extended for up to an additional 60 days if
the Commission finds good cause for such extension and publishes its
reasons for so finding or if the self-regulatory organization
consents to the extension.
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Pursuant to Section 19(b)(2)(B) of the Act, the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of, and input from, commenters with regard to the proposed
rule change's consistency with Section 6 of the Act, and in particular
Sections 6(b)(5).\67\ Section 6(b)(5) requires that the rules of an
exchange be designed, among other things, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system and, in general,
to protect investors and the public interest; and are not designed to
[[Page 5874]]
permit unfair discrimination between customers, issuers, brokers, or
dealers.\68\
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\67\ 15 U.S.C. 78f(b)(5).
\68\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data and arguments with respect to the
concerns identified above, as well as any others they may have with the
proposal. In particular, the Commission invites the written views of
interested persons concerning whether the proposed rule change is
inconsistent with Section 6 or any other provision, of the Act, or the
rules and regulations thereunder. Although there do not appear to be
any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\69\
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\69\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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In addition to any other facets of the proposal on which persons
may seek to comment, the Commission is soliciting the views of
interested persons regarding provisions of the proposed rule change
concerning the handling of all-or-none orders. The Commission notes
that, in the case of a Solicitation Auction for simple orders, all
interest on the opposite side of the Agency Order would be considered
in determining whether the price has been improved for the full size of
the Agency Order.\70\ However, in the case of a Complex Order auction,
all-or-none interest would not be considered.\71\ As discussed above,
the Exchange explains that this difference is due to a system
limitation relating to all-or-none Complex Orders: ``All-or-none simple
orders reside with simple orders on the book. By contrast, all-or-none
Complex Orders reside in a separate book, in a different part of the
trading system. Thus aggregation of all-or-none Complex Orders with
other Complex Orders in order to determine the presence of sufficient
improving interest is a more difficult process than aggregation of all-
or-none simple orders with other simple orders.''
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\70\ See proposed Rule 1081(ii)(E)(1).
\71\ See proposed Rule 1081(ii)(E)(5).
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The Commission notes the impact that the proposed difference in
treatment of all-or-none Complex Orders would have. For example, if a
proposed cross was submitted to the Solicitation Auction for 1000
contracts at a certain price, and during the auction period an all-or-
none order for the full 1000 contracts was received by the Exchange in
its Complex Order book at a superior price, the Agency Order
nonetheless would be awarded to the solicited party at the stop price.
As discussed above, Phlx argues that not counting all-or-none interest
in the case of all-or-none Complex Orders would not be impactful,
maintaining that all-or-none Complex Orders are rare.\72\
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\72\ The Exchange states that it reviewed six months of data
which showed that all-or-none Complex Orders represented only 0.12%
of all Complex Orders. See supra note 49. The Exchange also notes
that the proposed rule provides that, if sufficient size exists to
execute the entire Complex Agency Order at an improved price, an
all-or-none Complex Order would be considered for trade and executed
if possible.
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The Commission seeks comment on this feature of the Solicitation
Mechanism. The Commission notes that a critical factor in its
consideration of prior solicited order mechanism proposals has been
whether the Agency Order was adequately exposed to all potential price
improvement before the Solicited Order may trade against it at the
proposed cross price.
In addition, the Commission seeks comment on the proposal's
consideration of all-or-none orders that are resting on the book at the
stop price at the conclusion of the auction (in both simple and Complex
Order solicitations). The proposed rules provide, generally, that if,
upon the conclusion of an auction, a public customer order is resting
on the book opposite the Agency Order at the Solicited Order's stop
price, both the Solicited Order and the Agency Order are canceled.
However, if the public customer order was an all-or-none order, the
proposal provides that the execution of the Solicited Order against the
Agency Order can take place.\73\ The Commission understands this result
to apply even if the size of the all-or-none public customer order was
such that it otherwise would be eligible to trade against the Agency
Order. The Commission seeks commenters' views on this feature of the
Solicitation Mechanism.\74\
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\73\ See proposed Rule 1081(ii)(E)(2).
\74\ See also supra, text accompanying footnote 30, regarding
deference to all-or-none orders in the context of crossing two
public customer orders.
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The Commission further requests commenters' views on Phlx's
proposed cancellation of the Agency Order (along with the Solicited
Order) in certain cases where non-solicited interest is present that
could fill the Agency Order. The Commission notes, for example, one
result of proposed Rule 1081(ii)(G), which concerns a situation (in the
case of simple orders) where the non-solicited interest has improved
the price to a price that is the same as, or would cross, the limit of
an order on the limit order book on the same side of the market as the
Agency Order. The Commission understands the proposed rule as providing
that the Agency Order would be permitted to be executed only at a price
that is at least $0.01 better (i.e., toward the opposite side) than the
resting order's limit price. However, if that price, as adjusted by
$.01, would be equal to (i.e., would not improve) the stop price, the
non-solicited interest would not be permitted to execute against the
Agency Order at that price. In such case, as the Commission understands
the proposal, the price would be adjusted back to $.01 better (for the
Agency Order) than the stop price, but only if the resting limit order
on the Agency Order side is not a public customer order. Otherwise, the
Agency Order and Solicited Order would be cancelled with no trade
occurring.
With respect to this cancellation scenario, as discussed above,
Phlx explains that ``the system only would permit the Solicited Order
and no other interest to trade against the Agency Order at the stop
price since the Solicited Order stopped the entire size Agency Order at
a price which was required upon receipt to be equal to or improve the
NBBO and to be at least $0.01 improvement over any public customer
orders resting on the Phlx limit order book, thereby establishing
priority at the stop price.'' The Commission seeks comment on this
rationale and its result.
Another example concerns a case where, at the conclusion of the
auction period, a public customer order is resting on the book on the
opposite side of the Agency Order at the stop price. As noted by the
Exchange, its proposed rule and another exchange's solicited order
mechanism rule \75\ prohibit the execution of the Solicited Order in
such a case. However, the proposed Phlx rule differs from the other
exchange's rule in a case where, in addition to the public customer
order at the stop price, there is price-improving interest of a size
that is of insufficient size to fill the entire Agency Order on its
own, but, when aggregated with the size of the public customer order,
could fill the Agency
[[Page 5875]]
Order. On the other exchange, while the Solicited Order is cancelled,
the public customer order at the stop price and the improving interest
trade against the Agency Order. Under the Phlx's proposal, the Agency
Order and Solicited Order are cancelled.
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\75\ See ISE Rule 716(e), Solicited Order Mechanism.
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The Exchange explains that its system ``only permits the Solicited
Order and no other interest to trade against the Agency Order at the
stop price, thus ensuring that the Agency Order receives a better
priced execution than the stop price when trading against interest
other than the Solicited Order.'' The Commission notes that, when there
is a public customer order on the book at the stop price, the Solicited
Order would not be permitted to trade in any case, because a public
customer on the book cannot be bypassed by another order. The
Commission seeks comment on the aspect of the Exchange's proposal that
would cancel the Agency Order and the Solicited Order in a case where
there is public customer interest at the stop price, and together with
any improving interest, the Agency Order otherwise could be satisfied.
The Commission further seeks commenters' views regarding the
proposal's provisions regarding participation and priority in the
allocation of the Agency Order, with respect to the Solicited Order and
with respect to Responses, quotes and orders.
For example, under the proposal, one of the scenarios in which a
Solicitation Auction would conclude early is if there is a trading halt
on the Exchange in the option series that is the subject of the
auction.\76\ In such case, the Exchange's proposal provides that the
entire Agency Order would be executed solely against the Solicited
Order at the stop price, and any unexecuted Responses would be
cancelled.\77\ The Commission notes that there can be instances in
which an unrelated order on the side opposite the Agency Order has
arrived on the Exchange and is resting on the book at a price that is
superior to the stop price (from the point of view of the Agency Order)
when the trading halt occurs. By crossing the Agency Order against the
Solicited Order at the stop price in this situation, the Exchange would
be executing a trade at a price that is inferior to a price on the
Exchange's book. As noted above, the Exchange believes that public
customer interest submitted to Phlx after submission of the Agency and
Solicited Orders but prior to the trading halt should not prevent the
Agency Order from being executed at the stop price since such public
customer interest was not present at the time the Agency Order was
`stopped' by the Solicited Order.\78\ The Commission solicits comment
on this functionality and the Exchange's rationale.
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\76\ See proposed Rule 1081(ii)(B)(4). The described scenario
applies in a simple Solicitation Auction. In a Complex Solicitation
Auction, the auction would end early any time there is a trading
halt on the Exchange in any component of the Complex Agency Order.
Id.
\77\ See proposed Rule 1081(ii)(C).
\78\ In explaining generally why Responses and other interest
present in the system would not be considered for trading against
the Agency Order in the case of a trading halt--which, the
Commission notes, would apply even when the aggregate of such
Responses and other interest was sufficient to fill the entire
Agency Order at an improved price--the Exchange stated that ``this
is appropriate since the participants representing tradable interest
in the Solicitation Auction have not `stopped' the Agency Order in
its entirety and would have no means after the auction executions
occur to offset the trading risk they would incur because the market
is halted if they were permitted to trade against the Agency Order
in this instance.''
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Interested persons are invited to submit written data, views and
arguments regarding whether the proposed rule change should be approved
or disapproved by [insert date 21 days from publication in the Federal
Register]. Any person who wishes to file a rebuttal to any other
person's submission must file that rebuttal by [insert date 35 days
from publication in the Federal Register].
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-2014-66 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2014-66. 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 office 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 publicly available. All
submissions should refer to File Number SR-Phlx-2014-66 and should be
submitted on or before February 24, 2015. If comments are received, any
rebuttal comments should be submitted by March 10, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\79\
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\79\ 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-02017 Filed 2-2-15; 8:45 am]
BILLING CODE 8011-01-P