[Federal Register Volume 83, Number 95 (Wednesday, May 16, 2018)]
[Notices]
[Pages 22717-22720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10379]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83209; File No. SR-Phlx-2018-22]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Granting
Approval of Proposed Rule Change To Create a New Rule 1081, To Amend
Electronic Market Maker Obligations and Quoting Requirements for
Electronic ROTs, Which Will Be Defined To Include SQTs, RSQTs, Directed
SQTs, Directed RSQTs, Specialists, and Remote Specialists
May 10, 2018.
I. Introduction
On March 20, 2018, Nasdaq PHLX LLC (``Phlx'' or the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend the market maker obligations and quoting requirements for an SQT,
RSQT, Directed SQT, Directed RSQT, and Specialist (including Remote
Specialist) who enters electronic quotations into the Exchange's
System.\3\ The proposed rule change was published for comment in the
Federal Register on April 5, 2018.\4\ The Commission received no
comments on the proposed rule change. This order grants approval of the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See infra notes 5-9 for definitions of SQT, RSQT, Directed
SQT, Directed RSQT, Specialist, Remote Specialist, and System.
\4\ See Securities Exchange Act Release No. 82975 (March 30,
2018), 83 FR 14690 (April 5, 2018) (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to amend the market maker obligations and
quoting requirements for an ``electronic ROT,'' which would be defined
to include an SQT,\5\ RSQT,\6\ Directed SQT, Directed RSQT,\7\ and
Specialist (including Remote Specialist) \8\ who enters electronic
quotations into the Exchange's System,\9\ and move these modified
provisions to new Phlx Rule 1081.\10\ The Exchange notes that non-SQT
ROTs \11\ would not be subject to the proposed quoting requirements
[[Page 22718]]
described herein; instead, they are subject to quarterly trading
requirements as specified in Phlx Rule 1014, Commentary .01.\12\
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\5\ An ``ROT'' is a regular member of the Exchange located on
the trading floor who has received permission from the Exchange to
trade in options for his own account. See Phlx Rule 1014(b)(i). A
``Streaming Quote Trader'' or ``SQT'' is an ROT who has received
permission from the Exchange to generate and submit option
quotations electronically in 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. An SQT may only trade in a
market making capacity in classes of options in which the SQT is
assigned. See Phlx Rule 1014(b)(ii)(A).
\6\ A ``Remote Streaming Quote Trader'' or ``RSQT'' is an ROT
that is a member affiliated with a ``Remote Streaming Quote Trader
Organization'' or ``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. See Phlx Rule 1014(b)(ii)(B). See also Phlx Rule
507(a).
\7\ A ``Directed SQT'' or ``Directed RSQT'' is an SQT or RSQT
that receives a Directed Order. A ``Directed Order'' is any order
(other than a stop or stop-limit order as defined in Phlx Rule 1066)
to buy or sell which has been directed to a particular Specialist,
RSQT, or SQT by an Order Flow Provider. An ``Order Flow Provider''
is any member or member organization that submits, as agent, orders
to the Exchange. See Phlx Rule 1068(a)(i).
\8\ A ``Specialist'' is an Exchange member who is registered as
an options specialist pursuant to Phlx Rule 501 and Phlx Rule
1020(a). A ``Remote Specialist'' is an options specialist that does
not have a physical presence on an Exchange floor. See Phlx Rule
1020(a)(i) and (ii).
\9\ The ``System'' is the automated system for order execution
and trade reporting owned and operated by the Exchange which
comprises: (A) An order execution service that enables members to
automatically execute transactions in ``System Securities'' (defined
as all options that are currently trading on the System); and
provides members with sufficient monitoring and updating capability
to participate in an automated execution environment; (B) a trade
reporting service that submits ``locked-in'' trades for clearing to
a registered clearing agency for clearance and settlement; transmits
last-sale reports of transactions automatically to the Options Price
Reporting Authority for dissemination to the public and industry;
and provides participants with monitoring and risk management
capabilities to facilitate participation in a ``locked-in'' trading
environment; and (C) the data feeds described in Phlx Rule 1070. See
Phlx Rule 1000(b)(45) and (46).
\10\ See proposed Phlx Rule 1081.
\11\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT.
See Phlx Rule 1014(b)(ii)(C).
\12\ See Notice, supra note 4, at 14690.
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A. Market Maker Obligations
The Exchange proposes first to amend the generalized description of
the market making obligations of an electronic ROT on the Exchange.
Today, the Exchange provides that transactions of a Specialist and an
ROT should constitute a course of dealings reasonably calculated to
contribute to the maintenance of a fair and orderly market, and that
those members should not enter into transactions or make bids or offers
that are inconsistent with such a course of dealings.\13\ In the
Exchange's proposal, new Phlx Rule 1081 would specify that, in
registering as an electronic ROT, a member organization would be
committing to various obligations. Transactions of an electronic ROT in
its market making capacity\14\ would be required to constitute a course
of dealings reasonably calculated to contribute to the maintenance of a
fair and orderly market, and those member organizations would not be
permitted to make bids or offers or enter into transactions that are
inconsistent with such course of dealings. Electronic ROTs would be
prohibited from effecting purchases or sales except in a reasonable and
orderly manner.\15\
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\13\ See Phlx Rule 1014(a).
\14\ According to the Exchange, orders, which electronic ROTs
may enter pursuant to Phlx Rule 1080(b)(i)(B), are not considered
market making activity for purposes of fulfilling the proposed
quoting requirements or other obligations. See Notice, supra note 4,
at 14690 n.5.
\15\ See proposed Phlx Rule 1081(a).
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In addition, ordinarily during trading hours, an electronic ROT
would be required to: (i) Maintain a two-sided market in those options
in which the electronic ROT is registered to trade, in a manner that
enhances the depth, liquidity, and competitiveness of the market; (ii)
engage, to a reasonable degree under the existing circumstances, in
dealings for its own account when there exists, or it is reasonably
anticipating that there will exist, a lack of price continuity, a
temporary disparity between the supply of (or demand for) a particular
option contract, or a temporary distortion of price relationships
between option contracts of the same class; (iii) compete with other
electronic ROTs in all options in all capacities in which the
electronic ROT is registered to trade; (iv) make markets that will be
honored for the number of contracts entered into the System in all
options in which the electronic ROT is registered to trade; (v) update
quotations in response to changed market conditions in all options in
which the electronic ROT is registered to trade; (vi) maintain active
markets in all options in which the electronic ROT is registered; and
(vii) honor all orders attributed to the electronic ROT that the System
routes to away markets pursuant to Phlx Rule 1080(m).\16\
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\16\ See proposed Phlx Rule 1081(a).
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The proposed rules provide further that, if Phlx Regulation found
any substantial or continued failure to engage in a course of dealings
as described above, the electronic ROT would be subject to disciplinary
action or suspension or revocation of registration in one or more of
the securities in which the electronic ROT is registered. The proposed
rule stipulates that nothing in the rule would limit any other power of
the Board under the rules, or procedures of the Exchange, with respect
to the registration of an ROT or any violation by an ROT pursuant to
the rule.\17\ The Exchange states that the proposed obligations are
similar to those imposed on market makers by another options
exchange.\18\
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\17\ See proposed Phlx Rule 1081(b). The Exchange explains that
it added this rule text to make clear that the obligations noted
within this proposed rule are not an exclusive list, because an
electronic ROT may be found to have violated other by-laws and rules
of the Exchange that are separate and apart from these obligations.
See Notice, supra note 4, at 14691 n.9.
\18\ See Notice, supra note 4, at 14690-91 & n.8. See also BX
Rules at Chapter VII, Section 5.
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B. Quoting Requirements
The Exchange further proposes to amend the quoting requirements for
electronic ROTs. Electronic ROTs would be required to enter bids and
offers for the options to which they are registered, except in an
assigned options series listed intra-day on the Exchange. On a daily
basis, an electronic ROT would be required to make markets consistent
with the applicable quoting requirements, as described further below. A
member organization would be required to meet each quoting requirement
separately depending on the role that the member organization plays
with respect to different options series.\19\
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\19\ See proposed Phlx Rule 1081(c). Specifically, the proposed
rule states that an SQT and RSQT who is also the Specialist would be
held to the quoting requirements for Specialists in options series
in which the Specialist is assigned and would be held to the quoting
requirements for SQTs and RSQTs in all other options series where
assigned. An SQT or RSQT who receives a Directed Order would be held
to the quoting requirements for Directed SQTs and Directed RSQTs.
See id.
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The proposed rules would state explicitly that an electronic ROT's
bid and offer for a series of options contracts would need to be
accompanied by the number of contracts at that price that the
electronic ROT is willing to buy or sell. Similar to under current
rules, the best bid or best offer submitted by an electronic ROT would
be required to have a size of not less than the minimum number of
contracts determined by the Exchange on a class-by-class basis, which
minimum will be at least one contract.\20\ The new rule would also
state that an electronic ROT that enters a bid in a registered option
series would be required to enter an offer and vice versa. The
quotations would need to meet the legal quote width requirements in
Phlx Rule 1014(c)(i)(A)(1) and (2).\21\
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\20\ See proposed Phlx Rule 1081(c)(i). See also Phlx Rule
1014(b)(ii)(D)(3) (specifying the minimum contract size for SQTs,
RSQTs, and Specialists), the current equivalent provision that is
being replaced.
\21\ See proposed Phlx Rule 1081(c)(ii).
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With respect to the specific quoting requirements, currently, the
Exchange requires an SQT and an RSQT to quote two-sided markets in not
less than 60% of the series in which such SQT or RSQT is assigned. To
satisfy these requirements when quoting a series, an SQT or RSQT must
quote such series 90% of the trading day (as a percentage of the total
number of minutes in such trading day) or such higher percentage as the
Exchange may announce in advance. These obligations apply collectively
to all appointed issues, rather than on an issue-by-issue basis.\22\
Under the proposal, SQTs and RSQTs associated with the same member
organization would be collectively required to provide two-sided
quotations in 60% of the cumulative number of seconds, or such higher
percentage as the Exchange may announce in advance, for which that
member organization's assigned option series are open for trading.\23\
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\22\ See Phlx Rule 1014(b)(ii)(D)(1).
\23\ See proposed Phlx Rule 1081(c)(ii)(A). See infra, notes 35-
36 and accompanying text, regarding the method by which the
percentage would be calculated.
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In addition, currently, the Exchange requires a Specialist,
including an RSQT functioning as a Remote Specialist, to quote two-
sided markets in the lesser of 99% of the series or 100% of the series
minus one call-put pair in each option in which such Specialist is
assigned. To satisfy these requirements when quoting a series, a
Specialist must quote such series 90% of the trading day (as a
percentage of the total number of minutes in such trading day) or such
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higher percentage as the Exchange may announce in advance. These
obligations apply collectively to all appointed issues, rather than on
an issue-by-issue basis.\24\ Under the proposal, Specialists (including
Remote Specialists) associated with the same member organization would
be collectively required to provide two-sided quotations in 90% of the
cumulative number of seconds, or such higher percentage as the Exchange
may announce in advance, for which that member organization's assigned
options series are open for trading.\25\ The Exchange states that the
Specialists' heightened quoting requirements as compared to SQTs and
RSQTs allow for Specialists to receive certain participation
rights.\26\
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\24\ See Phlx Rule 1014(b)(ii)(D)(2).
\25\ See proposed Phlx Rule 1081(c)(ii)(B). See infra, notes 35-
36 and accompanying text, regarding the method by which the
percentage would be calculated.
\26\ See Notice, supra note 4, at 14693. See also Phlx Rules
1014(g)(ii) and 1014(g)(vii)(B)(1)(c).
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Further, currently, the Exchange requires a Directed SQT and a
Directed RSQT to quote two-sided markets in the lesser of 99% of the
series listed on the Exchange or 100% of the series listed on the
Exchange minus one call-put pair,\27\ in each case in at least 60% of
the options in which such Directed SQT or Directed SQT is assigned.\28\
To satisfy these requirements when quoting a series, a Directed SQT or
Directed RSQT must quote such series 90% of the trading day (as a
percentage of the total number of minutes in such trading day) or such
higher percentage as the Exchange may announce in advance. These
obligations apply collectively to all appointed issues, rather than on
an issue-by-issue basis.\29\ Under the proposal, Directed SQTs and
Directed RSQTs associated with the same member organization would be
collectively required to provide two-sided quotations in 90% of the
cumulative number of seconds, or such higher percentage as the Exchange
may announce in advance, for which that member organization's assigned
options series are open for trading. A member organization would be
considered directed in all assigned options once the member
organization receives a Directed Order in any option in which they are
assigned and would be considered a Directed SQT or Directed RSQT until
such time as the member organization notifies the Exchange that they
are no longer directed.\30\ The Exchange notes that the Directed SQTs
and Directed RSQTs' heightened quoting requirements as compared to SQTs
and RSQTs allow for Directed SQTs and Directed RSQTs to receive certain
participation rights.\31\
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\27\ ``Call-put pair'' refers to one call and one put that cover
the same underlying instrument and have the same expiration date and
exercise price. See Phlx Rule 1014(b)(ii)(D)(6).
\28\ See Phlx Rule 1014(b)(ii)(D)(1). Whenever a Directed SQT or
Directed RSQT enters a quotation in an option in which such Directed
SQT or Directed RSQT is assigned, such Directed SQT or Directed RSQT
must maintain until the close of that trading day quotations for the
lesser of 99% of the series of the option listed on the Exchange or
100% of the series of the option listed on the Exchange minus one
call-put pair. See id.
\29\ See id.
\30\ See proposed Phlx Rule 1081(c)(ii)(C). See infra, notes 35-
36 and accompanying text, regarding the method by which the
percentage would be calculated.
\31\ See Notice, supra note 4, at 14693. See also Phlx Rule
1014(g)(viii)(B).
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The Exchange states that the proposal better accommodates the
occasional issues that may arise in a particular series, arguing that
the existing quoting requirements may at times discourage liquidity in
particular options series because an electronic ROT is forced to focus
on a momentary lapse, rather than using the appropriate resources to
focus on the options series that need and consume additional
liquidity.\32\
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\32\ See Notice, supra note 4, at 14695.
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For SQTs, RSQTs, Directed SQTs, and Directed RSQTs, the Exchange
would continue to exclude from the above quoting requirements any
Quarterly Option Series, Adjusted Option Series, and any option series
until the time to expiration for such series is less than nine
months.\33\ Specialists would continue to be subject to the above
quoting requirements for all assigned option series, including
Quarterly Option Series, Adjusted Option Series, and any option series
with an expiration of nine months or greater.\34\
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\33\ See proposed Phlx Rule 1081(c)(ii)(A) and (C). See also
Phlx Rule 1014(b)(ii)(D)(4), the current equivalent provision that
is being replaced. An ``Adjusted Option Series'' would be defined as
an option series wherein one option contract in the series
represents the delivery of other than 100 shares of underlying stock
or Exchange-Traded Fund Shares. See proposed Phlx Rule
1081(c)(ii)(A)(i). See also Phlx Rule 1014(b)(ii)(D)(4).
\34\ See proposed Phlx Rule 1081(c)(ii)(B).
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The Exchange would calculate compliance with the above quoting
requirements by (i) taking the total number of seconds the member
organization disseminates quotes in each assigned option series; \35\
and (ii) dividing that time by the eligible total number of seconds
each assigned option series is open for trading that day. Quoting would
not be required in every assigned options series and compliance with
this requirement would be determined by reviewing the aggregate of
quoting in assigned options series for the member organization.\36\
Similar to current requirements, the Exchange would consider exceptions
to the quoting requirements based on demonstrated legal or regulatory
requirements or other mitigating circumstances. The Exchange would
determine compliance with quoting requirements on a monthly basis.
However, this monthly compliance evaluation would not relieve a member
organization of the obligation to provide continuous two-sided quotes
on a daily basis or prohibit the Exchange from taking disciplinary
action against a member organization for failure to meet the quoting
requirements each trading day.\37\ If a technical failure or limitation
of a System of the Exchange prevents a member organization from
maintaining, or prevents a member organization from communicating to
the Exchange timely and accurate quotes, the duration of such failure
or limitation would not be included in any calculation of quoting
requirements with respect to the affected quotes.\38\
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\35\ With respect to SQTs, RSQTs, Directed SQTs, and Directed
RSQTs, such calculation would exclude Quarterly Option Series,
Adjusted Option Series, and any option series with an expiration of
nine months or greater. See proposed Phlx Rule 1081(c)(ii)(D).
\36\ See proposed Phlx Rule 1081(c)(ii)(D). See Notice, supra
note 4, at 14694, for an example of how the Exchange would calculate
compliance with the quoting requirements.
\37\ See proposed Phlx Rule 1081(c)(iii). See also Phlx Rule
1014(b)(ii)(D)(1) and (2), the current equivalent provision that is
being replaced.
\38\ See proposed Phlx Rule 1081(c)(iv). See also Phlx Rule
1014(b)(ii)(D)(5), the current equivalent provision that is being
replaced.
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The Exchange states that the proposed quoting requirements as
described above are similar to those of another options exchange.\39\
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\39\ See Notice, supra note 4, at 14692-93. See also BX Rules at
Chapter VII, Sections 6, 14, and 15.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\40\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\41\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and
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coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\40\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\41\ 15 U.S.C. 78f(b)(5).
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The Exchange proposes to add specificity regarding the general
description in its rules regarding market maker obligations of an
electronic ROT. The Commission finds that the changes it is making in
this regard are consistent with the Act and notes that, as the Exchange
maintains, the changes are consistent with the rules of another options
exchange.\42\
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\42\ See BX Rules, Chapter VII, Section 5.
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The Exchange proposes to reduce the specific quoting requirements
for electronic ROTs of the various types. SQTs and RSQTs associated
with the same member organization would be collectively required to
provide two-sided quotations in 60% of the cumulative number of seconds
for which that member organization's assigned option series are open
for trading. Specialists (including Remote Specialists) associated with
the same member organization would be collectively required to provide
two-sided quotations in 90% of the cumulative number of seconds for
which that member organization's assigned option series are open for
trading. Similarly, Directed SQTs and Directed RSQTs associated with
the same member organization would be collectively required to provide
two-sided quotations in 90% of the cumulative number of seconds for
which that member organization's assigned option series are open for
trading. The Exchange would be able to designate a higher percentage
for any of these quoting requirements by announcing such percentage in
advance.
These quoting requirements would apply to all of an electronic
ROT's assigned options on a daily basis. These quoting requirements
would be reviewed on a monthly basis, and would allow the Exchange to
review the electronic ROT's daily compliance in the aggregate and
determine the appropriate disciplinary action for single or multiple
failures to comply with the continuous quoting requirement during the
month period. The Commission notes that the proposed rules provide that
determining compliance with the continuous quoting requirements on a
monthly basis would not relieve the electronic ROT of the obligation to
provide continuous two-sided quotes on a daily basis, nor would it
prohibit the Exchange from taking disciplinary action against an
electronic ROT for failing to meet the continuous quoting requirements
each trading day.
The Commission finds that the proposed changes to the quoting
requirements of electronic ROTs are consistent with the Act. The
Exchange believes that the revised requirements will enable electronic
ROTs to focus on the options series that need and consume more
liquidity than others. To the extent this is true, the proposal will
enhance trading opportunities on the Exchange. Moreover, the Commission
believes that, although the proposal would reduce the quoting
requirements for the various electronic ROTs from their current levels,
the proposed changes are consistent, as the Exchange argues, with the
market maker quoting requirements in place on other markets.\43\ The
Commission further notes that, notwithstanding the proposed changes to
the quoting requirements for Specialists, Directed SQTs, and Directed
RSQTs, the revised quoting requirements continue to reflect meaningful
market making obligations. Additionally, the proposed rules reflect a
balance of rights and obligations consistent with the balance reflected
in the rules of other exchanges for market participants fulfilling a
similar role.\44\ In addition, the Commission believes that the
proposed changes to provide additional detail about how the Exchange
will apply these quoting requirements adds further clarity to the
rules.
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\43\ See, e.g, BX Rules, Chapter VII, Sections 6, 14, and 15;
NYSE American Rules 925.1NY and 964.1NY; NYSE Arca Rules 6.37B-O and
6.88-O.
\44\ See, e.g., Nasdaq GEMX Rules 713 and 804; Nasdaq ISE Rules
713 and 804; Nasdaq MRX Rules 713 and 804. See also supra notes 26
and 31 and accompanying text.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\45\ that the proposed rule change (SR-Phlx-2018-22), be, and
hereby is, approved.
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\45\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10379 Filed 5-15-18; 8:45 am]
BILLING CODE 8011-01-P