[Federal Register Volume 83, Number 88 (Monday, May 7, 2018)]
[Notices]
[Pages 20123-20126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09571]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83141; File No. SR-Phlx-2018-32]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt a New
Market Order Spread Protection
May 1, 2018.
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 April 20, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II 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 a new Market Order Spread
Protection.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule change is to adopt a new Market Order
Spread Protection rule similar to The Nasdaq
[[Page 20124]]
Options Market LLC (``NOM'').\3\ The Exchange also proposes an
amendment to Rule 1099, entitled ``Order Protections.''
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\3\ See NOM Rules at Chapter VI, Section 6(c).
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Today, Phlx Rule 1099 includes various order protections which
apply only to simple orders. The Exchange is proposing to amend Rule
1099 to include rule text which makes clear that the order protections
within Rule 1099 apply only to simple orders. Further, the Exchange
proposes to adopt Market Order Spread Protection functionality within
Rule 1099(d), which protection would similarly apply only to simple
orders.
This new mandatory risk protection entitled Market Order Spread
Protection protects Market Orders \4\ from being executed in very wide
markets. This feature would be set at the same preset threshold \5\ for
all options traded on Phlx. The proposed new rule provides that a
Market Order will be rejected if the best of the NBBO and the internal
market PBBO \6\ is wider than a preset threshold, which is selected by
the Exchange and announced to members, at the time the Market Order is
received by the System. NOM has two non-displayed order types, Price-
Improving and Post-Only Orders, which may cause the order book on NOM
to be better than the NBBO. Phlx similarly has non-displayed order
types, all-or-none,\7\ stop orders \8\ and legging orders \9\
(collectively ``Non-Displayed Orders''). These Non-Displayed Orders may
cause the order book on Phlx to be better than the NBBO. The Exchange
also notes that orders which lock or cross another market \10\ will
cause the PBBO to reprice and also could result in the internal market
PBBO being better than the NBBO. The Exchange notes that Non-Displayed
Orders would be considered when validating orders on entry for the
proposed Market Order Spread Protection, except for all-or-none orders.
All-or-none orders have a quantity contingency requiring the full
quantity of the order to execute in order for any trade to take place,
which may cause the order to not execute. If an all-or-none contingency
cannot be met, the all-or-none order would be bypassed until such time
as the contingency could be met. For this reason, an all-or-none order
will not be considered during the validation of orders on entry for
purposes of Market Order Spread Protection. Below are some examples:
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\4\ Market Orders are orders to buy or sell at the best price
available at the time of execution.
\5\ This preset threshold would initially be $5, as explained in
more detail below.
\6\ This is the best bid and offer on the Phlx order book
including non-displayed legging and stop orders. Resting AON orders
are not considered as part of the internal market PBBO in applying
the Market Order Spread Protection. Resting AON orders may be passed
by in allocation if the incoming order does have sufficient quantity
to satisfy the resting AON.
\7\ An all-or-none order is a limit or market order that is to
be executed in its entirety or not at all.
\8\ A stop order is a limit or market order to buy or sell at a
limit price when a trade or quote on the Exchange for a particular
option contract reaches a specified price. A stop-market or stop-
limit order shall not be elected by a trade that is reported late or
out of sequence or by a complex order trading with another complex
order.
\9\ A legging order is a limit order on the regular order book
in an individual series that represents one leg of a two-legged
Complex Order (which improves the cPBBO) that is to buy or sell an
equal quantity of two options series resting on the CBOOK. Legging
orders are firm orders that are included in the Exchange's displayed
best bid or offer. Legging orders are not routable and are limit
orders with a time-in-force of DAY, as they represent an individual
component of a Complex Order. Legging orders are non-displayed
orders that are automatically generated. See Phlx Rule
1098(f)(iii)(C).
\10\ Options Order Protection and Locked and Crossed Market
Rules are located at Phlx Rule 1083. In the event of a locked and
crossed market, the PBBO will be repriced and displayed in
accordance with Phlx Rule 1082(a)(ii)(3)(g)(v).
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Example No. 1
If the Market Order Spread Protection threshold is set to $5.00,
and a Market Order to buy is received while the NBBO and internal PBBO
are both $1.00-$6.05 and there are no Non-Displayed Orders resting on
the book, such Market Order will be rejected. . [sic]
Example No. 2
The following is an example of how a legging order interacts with
the Market Order Spread Protection. Assume an option minimum price
increment (MPV) is scaled in $0.05 increments and a limit buy order of
$0.05 exists on the Exchange. If the system generates a legging order
to sell at $ 0.11, this order will not be displayed at its limit of
$0.11, because the order is priced at a non-MPV increment. This order
will be displayed at the nearest MPV price of $0.15 (because of the
option's $0.05 MPV increment). Thus, the displayed spread is $0.10;
however the PBBO is $0.06. Assume this order makes up the best offer on
the Exchange. For this example, assume the Market Order Spread
Threshold in the System is set at $ 0.09. Further assume a Market Order
to buy is submitted to the Exchange. Based on the Exchange's proposed
implementation of Market Order Spread Protection, the Market Order to
buy would execute against the resting sell order at $0.11, since $0.11
is the best available offer and the internal market PBBO spread is
$0.06 (spread between the best bid of $0.05 and the best offer of $
0.11) which is less than the Market Order Spread Threshold of $0.09.
Example No. 3
The following is an example of how an all-or-none order interacts
with Market Order Spread Protection. Assume an NBBO: 0 x 5.50 and a
PBBO of 0 x 5.45. Also assume an all-or-none order is resting in the
order book to sell 1000 at 4.95 and an incoming Market Order to buy 10.
The all-or-none order would not be considered in the validation and the
incoming Market Order would be rejected. In this example, if the all-
or-none order had been considered in the validation that Market Order
would have executed at 5.45, an inferior price because the full
quantity of the resting all-or-none order could not be satisfied.
The proposed feature would assist with the maintenance of fair and
orderly markets by ensuring that the best bid and offer displayed on
the Exchange are within a reasonable range and preventing market orders
from trading outside of the reasonable range when the best bid and
offer displayed are not within the allowable range. The Exchange
proposes this feature to avoid executions of Market Orders when the
market is too wide for a reasonable execution.
Today, the NOM threshold is set at $5. Phlx will initially set the
threshold to $5. Similar to NOM, the Exchange will notify Members of
the threshold with advanced notice to members through an Options Trader
Alert, and, thereafter, members will be notified in advance of any
subsequent changes to the threshold. NOM set the differential at $5 to
match the bid/ask differential permitted for quotes on the
Exchange.\11\ The Exchange would consider a subsequent change to the
threshold if it believed that the $5 initial threshold was too wide or
too restrictive as between the bid and offer to create a reasonable
range for executions. Phlx has the same differential.\12\ Thus, the
presence of a quote on the Exchange will ensure the NBBO is at least $5
wide. The Exchange believes the
[[Page 20125]]
presence of a quote on the Exchange, or a bid/ask differential of the
NBBO, which is no more than $5 wide affords Market Orders proper
protection against erroneous execution and in the event a bid/ask
differential is more than $5, then a Market Order is rejected. The
threshold is appropriate because it seeks to ensure that the displayed
bid and offer are within reasonable ranges and do not represent
erroneous prices. The protection would reject Market Orders which are
outside of the parameters of the Market Order Spread Protection. The
Exchange's proposed threshold is a reasonable measure to ensure prices
remain within the preset threshold set by the Exchange, which will be
initially set at $5. This protection will bolster the normal resilience
and market behavior that persistently produces robust reference prices.
This feature should create a level of protection that prevents Market
Orders from entering the Order Book outside of an acceptable range for
the Market Order to execute.
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\11\ See Chapter VII, Section 6(d)(ii) of NOM Rules which
describes the bid/ask differentials. Options on equities (including
Exchange-Traded Fund Shares), and on index options must be quoted
with a difference not to exceed $5 between the bid and offer
regardless of the price of the bid, including before and during the
opening. However, respecting in-the-money series where the market
for the underlying security is wider than $5, the bid/ask
differential may be as wide as the quotation for the underlying
security on the primary market. The Exchange may establish
differences other than the above for one or more series or classes
of options.
\12\ See Phlx Rule 1014(c)(i)(A)(2).
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Finally, the Market Order Spread Protection will be the same for
all options traded on the Exchange, and is applicable to all Members
that submit Market Orders. The Market Order Spread Protection would not
apply during the Opening Process and trading halts, similar to the
manner in which it operates today on NOM. Both the Opening Process and
trading halts have their own more restrictive boundaries than those
proposed for the Market Order Spread Protection. With respect to the
Opening Process, a Quality Opening Market is required. A Quality
Opening Market requires a bid/ask differential applicable to the best
bid and offer from all Valid Width Quotes defined in a table \13\ to be
determined by the Exchange.\14\ The Exchange's requirements during the
Opening Process are more restrictive than the proposed initial setting
for the Market Order Spread Protection, which is proposed at $5. As
provided in Phlx Rule 1047(g), trading halts are subject to the
reopening process as provided for in Phlx Rule 1017(e). The same
protections noted for the Opening Process above will apply for trading
halts. The Exchange believes that the Market Order Spread Protection is
unnecessary during the Opening Process and during a trading halt
because other protections are in place to ensure that the best bid and
offer displayed on the Exchange are within a reasonable range.
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\13\ The table is published on the Exchange's website at: http://www.nasdaqtrader.com/content/phlx/phlx_systemtime.pdf.
\14\ The calculation of Quality Opening Market is based on the
best bid and offer of Valid Width Quotes. The differential between
the best bid and offer are compared to reach this determination. The
allowable differential, as determined by the Exchange, takes into
account the type of security (for example, Penny Pilot versus non-
Penny Pilot issue), volatility, option premium, and liquidity. The
Quality Opening Market differential is intended to ensure the price
at which the Exchange opens reflects current market conditions. See
Phlx Rule 1017(a)(viiii).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\15\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\16\ in particular, in that it is designed to
promote just and equitable principles of trade and to protect investors
and the public interest by mitigating risk to market participants. By
adopting this mandatory risk protection, similar to NOM, the Exchange
will protect market participants from the execution of erroneous Market
Orders. The proposed feature would assist with the maintenance of fair
and orderly markets by ensuring that the best bid and offer displayed
on the Exchange are within a reasonable range and further the
protection would prevent market orders from trading outside of the
reasonable range when the best bid and offer displayed are not within
the allowable range.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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This feature should create a level of protection that prevents
erroneous Market Orders from entering the Order Book and thereby reduce
the negative impacts of sudden, unanticipated volatility, and serve to
preserve an orderly market in a transparent and uniform manner,
increase overall market confidence, and promote fair and orderly
markets and the protection of investors. This feature is not optional
and is applicable to all members submitting Market Orders.
Permitting the rejection of the Market Order at the better of the
NBBO or Reference PBBO does not otherwise create an impediment to a
free and open market because Non-Displayed Orders exist today on NOM
with this same protection and provide investors the opportunity to
trade at a better price than would otherwise be available, e.g., inside
the disseminated best bid and offer for a security, which could result
in better executions for investors. The Exchange's exclusion of all-or-
none orders when validating orders on entry for purposes of Market
Order Spread Protection is consistent with the protection of investors
and the public interest. This contingency order is already bypassed
today for purposes of priority when the contingency cannot be
satisfied. The Exchange notes that because all-or-none orders have a
size contingency, which may cause this order type not to execute, the
result of including the all-or-none order in the validation of incoming
orders could result in executions at inferior prices.
The Exchange's proposal to not apply the Market Order Spread
Protection during the Opening Process and during is consistent with the
Act because protections exist within those mechanisms to ensure that
the best bid and offer displayed on the Exchange are within a
reasonable range. The Exchange's Opening Process Rule 1017 \17\ and the
Trading Halt Rule 1047 \18\ both contain more restrictive boundaries
than those proposed for the Market Order Spread Protection. With
respect to the Opening Process, a Quality Opening Market is required. A
Quality Opening Market requires a bid/ask differential applicable to
the best bid and offer from all Valid Width Quotes defined in a table
to be determined by the Exchange. The Exchange's requirements during
the Opening Process are more restrictive than the proposed initial
setting for the Market Order Spread Protection, which is proposed at
$5. As provided in Phlx Rule 1047(g), trading halts are subject to the
reopening process as provided for in Phlx Rule 1017(e). The same
protections noted for the Opening Process above will apply for trading
halts. The Exchange believes that the Market Order Spread Protection is
unnecessary during the Opening Process and during a trading halt
because other protections are in place to ensure that the best bid and
offer displayed on the Exchange are within a reasonable range.
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\17\ With respect to the Opening Process, a Quality Opening
Market is required. A Quality Opening Market a bid/ask differential
applicable to the best bid and offer from all Valid Width Quotes
defined in a table to be determined by the Exchange and published on
the Exchange's website. See Phlx Rule 1017(a)(viiii).
\18\ With respect to trading halts, Opening Process procedures
will be used to reopen an option series after a trading halt,
therefore, the same protections noted for the Opening Process will
apply for a trading halt and the same restrictive boundaries would
apply. See Phlx Rule 1017(e).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes that the
proposed amendments do not impose an undue burden on competition
because the Market Order Spread Protection will be mandatory for all
market participants.
[[Page 20126]]
The Marker Order Spread Protection feature will provide market
participants with additional price protection from anomalous
executions. The Exchange does not believe the proposal creates any
significant impact on competition.
The Exchange does not believe that accounting for Non-Displayed
Orders, except for all-or-none orders, or repricing due to trade-
through and locked and crossed market restrictions creates an undue
burden on competition because it will serve to provide members with
additional information in the rule text to anticipate the impact of the
Market Order Spread Protection feature. Today, members are able to
submit orders or quotes priced between the MPV for display at the
nearest MPV.
The Exchange does not believe that not applying the Market Order
Spread Protection during the Opening Process and during a trading halt
creates an undue burden on competition because these mechanisms offer
more restrictive protections than the proposed initial setting for the
Market Order Spread Protection, which is proposed at $5.
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)(iii) of the Act \19\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\20\
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\19\ 15 U.S.C. 78s(b)(3)(A)(iii).
\20\ 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, along
with a brief description and text of 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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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of its filing. However,
Rule 19b-4(f)(6)(iii) \21\ permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. The Exchange has requested that the
Commission waive the 30-day operative delay so that the proposed rule
change will become operative on filing. The Exchange states that waiver
of the 30-day operative delay would allow the Exchange to immediately
offer a mandatory risk protection, similar to NOM, for all market
participants transacting in simple orders to protect market
participants from entering Market Orders outside of a reasonable range
for execution. Based on the foregoing, the Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission hereby
waives the operative delay and designates the proposed rule change
operative upon filing.\22\
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\21\ 17 CFR 240.19b-4(f)(6)(iii).
\22\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 necessary or
appropriate in the public interest, for the protection of investors, or
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 change 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-2018-32 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2018-32. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (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 website 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 the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2018-32, and should be submitted on
or before May 29, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09571 Filed 5-4-18; 8:45 am]
BILLING CODE 8011-01-P