80 FR 22569 - Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Amendment No. 2 and Designation of Longer Period for Commission Action on Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change, as Modified by Amendment No. 2, To Adopt New Exchange Rule 1081, Solicitation Mechanism, To Introduce a New Electronic Solicitation Mechanism
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 80, Issue 77 (April 22, 2015)
Federal Register Volume 80, Issue 77 (April 22, 2015)
| Page Range | 22569-22580 | |
| FR Document | 2015-09265 |
[Federal Register Volume 80, Number 77 (Wednesday, April 22, 2015)] [Notices] [Pages 22569-22580] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-09265] [[Page 22569]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-74746; File No. SR-Phlx-2014-66] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Amendment No. 2 and Designation of Longer Period for Commission Action on Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change, as Modified by Amendment No. 2, To Adopt New Exchange Rule 1081, Solicitation Mechanism, To Introduce a New Electronic Solicitation Mechanism April 16, 2015. I. Introduction 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 9, 2015, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') Amendment No. 2 to the proposed rule change as described in Items II and III below, which Items have been substantially prepared by the Exchange.\3\ Amendment No. 2 replaces the original filing in its entirety.\4\ The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 2, from interested persons and to designate a longer period within which to issue an order approving or disapproving the proposed rule change, as modified by Amendment No. 2. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ The Exchange filed Amendment No. 1 on April 1, 2015. Amendment No. 1 was withdrawn on April 8, 2015. \4\ See infra note 7. See also infra note 14 for the Exchange's description of the changes in Amendment No. 2. --------------------------------------------------------------------------- On October 14, 2014, the Exchange filed with the Commission, pursuant to Section 19(b)(1) of the Act \5\ and Rule 19b-4 thereunder,\6\ a proposed rule change to adopt new Exchange Rule 1081, Solicitation Mechanism, to introduce a new electronic solicitation mechanism pursuant to which a member would be able to electronically submit all-or-none orders of 500 contracts or more (or, in the case of mini options, 5,000 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.\7\ 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.\8\ On January 28, 2015, the Commission instituted proceedings under Section 19(b)(2)(B) of the Act \9\ to determine whether to approve or disapprove the proposed rule change.\10\ The Commission received one comment letter regarding the proposal,\11\ as well as a response to the comment letter from the Exchange.\12\ --------------------------------------------------------------------------- \5\ 15 U.S.C. 78s(b)(1). \6\ 17 CFR 240.19b-4. \7\ See Securities Exchange Act Release No. 73441 (October 27, 2014), 79 FR 64862 (``Notice''). \8\ See Securities Exchange Act Release No. 73791 (December 8, 2014), 79 FR 73924 (December 12, 2014). \9\ 15 U.S.C. 78s(b)(2)(B). \10\ See Securities Exchange Act Release No. 74167 (January 28, 2015), 80 FR 5865 (February 3, 2015) (``Order Instituting Proceedings''). \11\ See Letter from Michael J. Simon, Secretary and General Counsel, International Securities Exchange LLC, dated February 25, 2015. \12\ See Letter from Carla Behnfeldt, Associate General Counsel, Nasdaq, dated March 11, 2015. --------------------------------------------------------------------------- II. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes 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, 5,000 contracts or more) the member represents as agent against contra orders the member solicited. The Exchange is also proposing a corresponding amendment to the definition of ``professional'' in Rule 1,000(b)(14) and a clarification to Rule 1080, Phlx XL and Phlx XL II. The proposed rule change was filed on October 14, 2014.\13\ Amendment No. 2 amends and replaces the original filing in its entirety.\14\ --------------------------------------------------------------------------- \13\ See Securities Exchange Act Release No. 73441 (October 27, 2014), 79 FR 64862 (October 31, 2014). The Exchange filed Amendment No. 1 on April 1, 2015. Amendment No. 1 was withdrawn on April 8, 2015. \14\ The amendment makes certain changes to Exchange Rule 1080(n) regarding the PIXL auction process, clarifies that the trading system does not currently accept all-or-none Complex Orders, provides that the side of the Agency Order will be disseminated at the commencement of an auction, clarifies the treatment of responsive all-or-none interest in the auction, adds examples and makes certain other technical and clarifying changes. --------------------------------------------------------------------------- The text of the proposed rule change is available on the Exchange's Web site at http://nasdaqomxphlx.cchwallstreet.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. III. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposal is to introduce an electronic solicitation mechanism. Currently, under Phlx Rule 1080(c)(ii)(C)(2), Order Entry Firms \15\ 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.\16\ The proposed rule change would provide an alternative, enabling a member to electronically execute orders it represents on behalf of a public customer, broker-dealer, or any other [[Page 22570]] entity (an ``Agency Order'') \17\ 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.\18\ --------------------------------------------------------------------------- \15\ 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.) \16\ Section (c), Solicited Orders, of Exchange 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. Additionally, 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 rules proposed herein consequently track the existing PIXL rules. The Exchange adopted PIXL in October 2010 as a price-improvement mechanism that is a component of the Exchange's fully automated options trading system, Phlx XL, now known as XL II. Like the solicitation mechanism, PIXL is a mechanism whereby an initiating member submits a two-sided (buy and sell) order into an auction process soliciting price improvement. See Securities Exchange Act Release Nos. 63027 (October 1, 2010), 75 FR 62160 (October 7, 2010) (order approving SR-Phlx-2010-108, for purposes of this proposed rule change, the ``PIXL Filing'') and 69845 (June 25, 2013), 78 FR 39429 (July 1, 2013) (SR-Phlx-2013-46 and, for purposes of this proposed rule change, the ``Complex PIXL Filing'') (Order Granting Approval To Proposed Rule Change, as Modified by Amendment No. 1, Regarding Complex Order PIXL). \17\ 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.'' However, that provision did not contemplate, and is not applicable to, the capitalized and defined term ``Agency Order'' as used in proposed Rule 1081. \18\ To be clear, 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. --------------------------------------------------------------------------- The new mechanism is a process by which a member (the ``Initiating Member'') can electronically submit all-or-none orders \19\ of 500 contracts or more (or, in the case of mini options,\20\ 5,000 contracts or more) that it represents as agent against contra orders that it has solicited, and initiate an auction (the ``Solicitation Auction'').\21\ As explained below, at the end of the Solicitation Auction, allocation will 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.\22\ 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 Rule 1081 and to be in a form approved by the Exchange.\23\ --------------------------------------------------------------------------- \19\ Exchange 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. \20\ 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. \21\ Similar electronic functionality is offered today by competing 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''). \22\ 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 .07 to Rule 1080. \23\ See 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. --------------------------------------------------------------------------- Solicitation Auction Eligibility Requirements All options traded on the Exchange, including mini options, are 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 5,000 contracts) and be designated as all-or-none. The orders must match in size, and their limit prices must match or cross in price.\24\ If the orders cross in price, the price at which the Agency Order and the Solicited Order may be considered for submission pursuant to Rules 1081(i)(B) and (C) shall be the limit price of the Solicited Order.\25\ 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 will not be routed regardless of routing strategy indicated on the order.\26\ --------------------------------------------------------------------------- \24\ 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. \25\ For example, assume an Agency Order to buy 1000 contracts for $2.00 and a Solicited Order to sell 1,000 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. \26\ 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 will be treated once they are entered into the solicitation mechanism. --------------------------------------------------------------------------- Pursuant to 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 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 \27\ (including all- or-none, stop or stop-limit orders) on the book will 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 these orders are not represented as part of the Exchange Best Bid/Offer, they are not included in the NBBO and thus not considered when checking the acceptability of the stop price.\28\ --------------------------------------------------------------------------- \27\ 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. \28\ Rule 1081(i)(B) does not apply if the Agency Order is a Complex Order (a ``Complex Agency Order''). Rather, Rule 1081(i)(C) applies to Complex Agency Orders and requires them to be of a conforming ratio, as defined in Commentary .07(a)(ix) to Rule 1080. A Complex Agency Order which is not of a conforming ratio will be rejected. (PIXL operates in the same manner. See Rule 1080(n)(i)(C).) 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 5,000 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 will not be considered when checking the acceptability of the stop price. See proposed Rule 1081(i)(C). --------------------------------------------------------------------------- Orders which are submitted which do not comply with the eligibility requirements set forth in proposed Rule 1081(i)(A) through (C) will be rejected upon receipt and ineligible to initiate a Solicitation Auction.\29\ In addition, Agency Orders submitted at or before the opening of trading are not eligible to initiate a Solicitation Auction and will be rejected.\30\ 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 \31\ (including, in the case of Complex Orders, in any series which is a component of the Complex Order) are [[Page 22571]] not eligible to initiate a Solicitation Auction and will be rejected.\32\ 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 are not eligible to initiate a Solicitation Auction and will be rejected.\33\ 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 will be rejected.\34\ --------------------------------------------------------------------------- \29\ See Rule 1081(i)(D). \30\ See Rule 1081(i)(E). \31\ 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. \32\ See Rule 1081(i)(F). \33\ 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.'' The Exchange is proposing to revise this provision to make clear that only one electronic auction of any kind may be conducted at a time in any given series or strategy. The Exchange is proposing to further amend the PIXL rule by adding Rule 1080(n)(i)(H) to provide that PIXL Orders that are received while another electronic auction involving the same option series or the same Complex Order strategy is in progress are not eligible to initiate a PIXL Auction and will be rejected. \34\ 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 will not be rejected. Instead, a Solicitation Auction will 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). Any Legging Orders will automatically be removed from the order book upon receipt of an Agency or Complex Agency Order which consists of a component in which there is a Legging Order (whether a buy order or a sell order) that initiates a Solicitation Auction. See Rule 1080.07(f)(iii)(C)(4)(vi). Complex Orders submitted during normal trading hours in a strategy which has not yet opened under Commentary .07 of Exchange Rule 1080 will cause the strategy to immediately open and a Solicitation Auction may be initiated. See 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 the individual option in the case of a simple Agency Order, or the regular opening of all individual components in the case of a Complex Agency Order. --------------------------------------------------------------------------- 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.\35\ Consistent with the explanation the Exchange made in the PIXL Filing, 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. --------------------------------------------------------------------------- \35\ See 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 Exchange Rule 1014(b)(ii)(A). A RSQT is defined in Exchange 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). --------------------------------------------------------------------------- Solicitation Auction Process Pursuant to 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. The system will determine the stop price based upon the submitted limit prices if such prices do not match as discussed above. 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.\36\ --------------------------------------------------------------------------- \36\ 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. The system will determine the stop price based upon the submitted limit prices if such prices do not match as discussed above. Once the Initiating Member has submitted the orders for processing pursuant to this subparagraph, they may not be modified or cancelled. --------------------------------------------------------------------------- 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 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 Rule 1081(i), such paired orders will be automatically executed without a Solicitation Auction.\37\ 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.\38\ 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.\39\ --------------------------------------------------------------------------- \37\ 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 Rule 1081(i). The Exchange also accommodates the crossing of two public customer orders in PIXL. See Rule 1080(n). \38\ The execution price for a Complex Order may be in $.01 increments. \39\ 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. --------------------------------------------------------------------------- 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.\40\ If all-or-none Complex Orders \41\ are on the Complex Order [[Page 22572]] 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. --------------------------------------------------------------------------- \40\ 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 1080.07(a)(iv). \41\ 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 1080.07(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. To make this clear, the Exchange proposes to add a sentence at the end of Rule 1080.07(b)(v) stating that ``[n]otwithstanding the above, the trading system does not currently accept all-or-none Complex Orders.'' 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 Exchange therefore intends to delete this new sentence if the Exchange submits and the Commission approves a proposed rule change that provides for all-or-none orders to be submitted through the trading system. The instant proposed rule change describes how the solicitation mechanism will 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 will 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. --------------------------------------------------------------------------- The Exchange believes that permitting such executions will 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.\42\ --------------------------------------------------------------------------- \42\ See Rule 1080(n)(vi). --------------------------------------------------------------------------- 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, side and stop price of the Agency Order and the Solicitation Auction start time is then sent over the PHLX Orders data feed \43\ and Specialized Quote Feed (``SQF'').\44\ The Exchange believes that providing option details, size, side and stop price is sufficient information for participants to determine whether to submit responses to the Solicitation Auction.\45\ --------------------------------------------------------------------------- \43\ 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. \44\ 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. \45\ In the case of a Complex Agency Order, the Request for Response will include the strategy, side, size, and stop price of the Agency Order as well as the Solicitation Auction start time. --------------------------------------------------------------------------- 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 will last for a period of 500 milliseconds \46\ unless it is concluded as the result of any of the circumstances described below.\47\ --------------------------------------------------------------------------- \46\ 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). \47\ 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 Rule 1081, Solicitation Mechanism. See also Rule 1081(ii)(A)(4). --------------------------------------------------------------------------- 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.\48\ 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 will not be visible to Solicitation Auction participants, and will 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.\49\ The minimum price increment for Responses will 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 will be rejected.\50\ Multiple Responses from the same member may be submitted at different prices 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.\51\ --------------------------------------------------------------------------- \48\ In the case of a Complex Agency Order, the Response must also specify the price, size and side of the market at which the person submitting the Response would be willing to participate in the execution of the Complex Agency Order. \49\ Responses may not be submitted with an all-or-none contingency. All-or-none (as a Response) is not available for any type of auction in the Phlx market because all-or-none orders may be submitted only for Customer accounts under Exchange rules, and Customers typically do not respond to auctions in any event. (Note, however, that all-or-none orders entered and present in the system at the end of the Solicitation Auction will be considered for execution, as discussed below.) \50\ 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 .07(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 since the CBOOK is not displayed on OPRA and may not be known to the responding participant. If a Complex Order Response was received which was equal to or crossed the limit of orders on the CBOOK, such Responses will only be executed at a price which improves the resting order's limit price by at least $0.01. See proposed rule 1081(ii)(H). A Complex Order Response submitted with a price that is outside the cPBBO at the time of receipt will be rejected. See proposed Rule 1081(ii)(A)(9). \51\ See Exchange Rule 1080(n). --------------------------------------------------------------------------- Conclusion of the Solicitation Auction Rules 1081(ii)(B)(1)-(4) describe a number of circumstances that will cause the Solicitation Auction to conclude. Generally, it will 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 will be unlikely and any Responses offering improvement are likely to be cancelled),\52\ or (ii) any time there is a [[Page 22573]] 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).\53\ --------------------------------------------------------------------------- \52\ 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 Rule 1081(ii)(B)(3). The Exchange believes that when either the cPBBO or Complex Order interest, excluding all-or-none, is present on the Exchange on the same side as the Complex Agency Order and crosses the stop price that further price improvement will be unlikely and Responses offering improvement are likely to be cancelled. The Exchange also believes that an all-or-none Complex Order crossing the stop price should not end the Complex Solicitation Auction since the order is contingent and may not actually be tradable based on its size contingency. The Exchange believes continuing to run the Complex Solicitation Auction for the duration of the auction timer benefits the Agency Order in allowing for interest to continue to be collected which may offer price improvement over the stop price. This behavior is consistent with Solicitation Auctions involving simple orders. Simple Solicitation Auctions conclude early when the PBBO on the same side of the market as the Agency Order crosses the stop price. All-or- none orders are not part of the PBBO as they are contingent and not displayed on OPRA. \53\ 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 Exchange 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 Exchange Rule 1092(c)(iv)(B). --------------------------------------------------------------------------- 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 Rules 1081(ii)(B)(2) and 1081(ii)(B)(3), the entire Agency Order will be executed using the allocation algorithm set forth in 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 will be executed solely against the Solicited Order or Complex Solicited Order at the stop price and any unexecuted Responses will be cancelled.\54\ Responses and other interest present in the system will not be considered for trade against the Agency Order in the case of a trading halt. The Exchange believes 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 will 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. --------------------------------------------------------------------------- \54\ The Exchange's PIXL auction features similar functionality. Pursuant to Exchange 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. --------------------------------------------------------------------------- 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 will not cause the Solicitation Auction to end early. Rather, the unrelated order will execute against interest outside the Solicitation Auction (if marketable against the PBBO) or will 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 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 will be considered for participation in the order allocation process, regardless of the number of contracts in relation to the Solicitation Auction size, described in Rule 1081(ii)(E).\55\ 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.\56\ 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 Rule 1081(ii)(E) will 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. --------------------------------------------------------------------------- \55\ Similarly, pursuant to 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 will not cause the Complex Solicitation Auction to end early and will 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 will 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 Rule 1081(ii)(E). \56\ See Exchange Rule 1080(n)(ii)(D). --------------------------------------------------------------------------- Order Allocation The allocation of orders executed upon the conclusion of a Solicitation Auction will 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 will 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. The treatment of all-or-none interest in assessing the presence of sufficient improving interest differs between simple Solicitation Auctions and Complex Solicitation Auctions. In all Solicitation Auctions, whether simple or complex, the system will not consider an all-or-none order when determining if there is sufficient size to execute the Agency Order (or Complex Agency Order) at a price(s) better than the stop price if the all-or-or none contingency cannot be satisfied by an execution. However, 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 simple Agency Orders at price(s) better than the stop price. By contrast, pursuant to proposed Rule 1081(ii)(E)(5), when 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 will be considered. This difference in behavior is due to a system limitation relating to all-or-none Complex Orders.\57\ The Exchange believes this behavior is not impactful since all-or-none Complex Orders are [[Page 22574]] rare \58\ and if sufficient size exists to execute the entire Complex Agency Order at an improved price, the all-or-none Complex Order will be considered for trade and executed if possible as explained below. --------------------------------------------------------------------------- \57\ 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. \58\ The Exchange reviewed six months of data which showed that all-or-none Complex Orders represented only 0.12% of all Complex Orders. --------------------------------------------------------------------------- Assessing Sufficiency of Improving Interest in a Simple Solicitation Auction. 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 will 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.\59\ In this example, at the end of the Solicitation Auction, the Agency Order will execute against improving interest with 700 contracts executing at $1.97 and 300 contracts (representing the all-or-none order) executing at $1.98. --------------------------------------------------------------------------- \59\ 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 will 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 will 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. --------------------------------------------------------------------------- Assessing Sufficiency of Improving Interest in a Complex Solicitation Auction. 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 100 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.\60\ 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. --------------------------------------------------------------------------- \60\ 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, 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. --------------------------------------------------------------------------- In both simple Solicitation Auctions and Complex Solicitation Auctions, once a determination is made that sufficient improving interest exists, all-or-none interest will be executed pursuant to normal priority rules, except that it will 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 will be ignored and will remain on the order book. Solicitation Auction with Sufficient Improving Interest. Pursuant to the 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 will 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 will be allocated among all Exchange quotes, orders and Responses in accordance with Exchange Rules 1014(g)(vii)(B)(1)(b) and (d), and the Solicited Order will be cancelled.\61\ --------------------------------------------------------------------------- \61\ Similarly, pursuant to 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 will 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 will 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 Exchange 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 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 Rule 1081(ii)(E)(1) algorithm, assume the NBBO is $0.95-$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 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 will 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 [[Page 22575]] and market maker interest is satisfied. The unexecuted Solicited Order and broker-dealer Response are cancelled back to the sending participants.\62\ --------------------------------------------------------------------------- \62\ To illustrate a Complex Solicitation Auction with enough improving interest and the operation of 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 will 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 will 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.\63\ Otherwise, both the Agency Order and Solicited Order will 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 will not consider such interest.\64\ 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 will represent the Solicited Order and not interest which arrived after the Solicited Order participant stopped the Agency Order for its entire size. --------------------------------------------------------------------------- \63\ Rule 1081(ii)(E)(2) does not apply to Complex Solicitation Auctions. Rather, a parallel provision, 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 will 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 will be cancelled with no trade occurring. \64\ See ISE Rule 716(e)(2) 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.'' --------------------------------------------------------------------------- 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 will be executed at $1.00 against the Solicited Order. The unexecuted Responses are then cancelled back to the sending participant.\65\ --------------------------------------------------------------------------- \65\ To illustrate a Complex Solicitation Auction that yields insufficient improving interest and the operation of 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, Rule 1081(ii)(E)(7) provides that a Complex Agency Order consisting of a stock/ETF component will not execute against interest comprising the cPBBO at the end of the Complex Solicitation Auction.\66\ 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 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. --------------------------------------------------------------------------- \66\ 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 .07(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 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 will be executed, if possible, at their limit price(s).\67\ Although Exchange Rule 1084, Order Protection, generally prohibits trade-throughs, an exception to the prohibition exists pursuant to Rule 1084(b)(x) when the transaction that constituted the trade-through was the execution of an order that was stopped at a price that did not trade-through at the time of the stop. --------------------------------------------------------------------------- \67\ 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 will be executed, if possible, at their limit prices. This provision parallels PIXL Rule 1080(n)(ii)(F). --------------------------------------------------------------------------- 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 will cancel Responses when better priced [[Page 22576]] 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. 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 \68\ provided such execution price improves the stop price. If such execution price would not improve the stop price, the Agency Order will 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.\69\ If such price is not possible, the Agency Order and Solicited Order will 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 theoretically be $1.03 but, since that price is the same as the price of a resting order on the book, the Agency Order will 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 theoretically executed at $1.05 due to the $1.04 order on the book) the execution would be at the stop price. However, the system only permits 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 example will be $1.04, which is the same price as the $1.04 resting non-customer order on the book, in order to execute at a price which is $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. --------------------------------------------------------------------------- \68\ The system does not consider the origin of the resting order but seeks to ensure the priority of all resting orders on the book by requiring that any execution occur at a price which improves upon the limit of a resting order by at least $0.01 if possible. If an execution cannot occur at least $0.01 better than the limit of a resting order on the book, the system will permit the Solicited Order to trade against the Agency Order at the resting limit order price provided the resting order is not for a public customer. \69\ See also PIXL Rule 1080(n)(ii)(H). Proposed Rule 1081(ii)(G) does not apply to Complex Solicitation Auctions. Rather, a parallel provision, 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 will 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 will be cancelled with no trade occurring. This functionality is consistent with that of Complex PIXL auctions. --------------------------------------------------------------------------- Rule 1081(ii)(I) provides that any unexecuted Responses or Solicited Orders will 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.\70\ 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. --------------------------------------------------------------------------- \70\ See Exchange Rule 1080(n)(ii)(I). --------------------------------------------------------------------------- Complex Agency Orders With Stock/ETF Components 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 . 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. New 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 stock or ETF share, the Exchange shall electronically communicate the underlying security component of the Complex Agency Order (together with the Complex Solicited Order or Response, as applicable) to NES, its designated broker-dealer, for immediate execution. Such execution and reporting will occur otherwise than on the Exchange and will be handled by NES pursuant to applicable rules regarding equity trading. Finally, new Rule 1081(ii)(J)(3) states that when the short sale price test in Rule 201 of Regulation SHO \71\ is triggered for a covered security, NES will 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.\72\ However, NES will execute a short sale [[Page 22577]] 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.\73\ If NES cannot 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 will 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.\74\ --------------------------------------------------------------------------- \71\ 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. \72\ The term ``national best bid'' is defined in SEC Rule 201(a)(4). 17 CFR 242.201(a)(4). \73\ 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 will handle short sales of the orders and Responses described herein the same way it handles the short sales discussed in the Complex PIXL Filing. \74\ 17 CFR 242.201(a)(4). --------------------------------------------------------------------------- The Exchange believes that this approach is consistent with Rule 201. Under this proposal, the Exchange and NES, as trading centers, will prevent the execution or display of a short sale of the stock/ETF component of a complex order priced at or below the current national best bid when the short sale price test restriction is triggered. Specifically, while the Exchange and NES are determining, respectively, the prices of the options component and of the stock or ETF component of the complex order, as described above, NES will check the current national best bid of the stock or ETF component at the time of execution. The execution of one component is contingent upon the execution of all other components and once a complex order is accepted and validated by the Phlx trading System, the entire package is processed as a single transaction and both the option leg and stock/ETF components are simultaneously processed. 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.\75\ --------------------------------------------------------------------------- \75\ See Rules 1080(n)(iii) and (iv). --------------------------------------------------------------------------- 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 will be considered a violation of Rule 1081 and will be deemed conduct inconsistent with just and equitable principles of trade and a violation of Exchange 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 will 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 adopting Rule 1081, the Exchange is amending 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.\76\ 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 will 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 will 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 will be treated in the same manner as an off-floor broker- dealer. The effect of these changes to Rule 1000(b)(14) is that professionals will not receive the same execution priority afforded to public customers in a Solicitation Auction under new Rule 1081, and instead will be treated as broker-dealers in this regard. Therefore, Agency Orders or Solicited Orders submitted for professionals are not public customer orders and will not be paired with a public customer order or another professional order and automatically executed without a Solicitation Auction pursuant to Rule 1081(v) discussed above. Additionally, unrelated professional orders, excluding all-or-none orders, or responses for the account of a professional will be treated as broker-dealers for purposes of execution priority. Unrelated professional all-or-none orders will continue to receive customer priority as stipulated in rule 1000(b)(14). --------------------------------------------------------------------------- \76\ See Securities Exchange Act Release No. 61802 (March 30, 2010), 75 FR 17193 (April 5, 2010) (approving SR-Phlx-2010-05). --------------------------------------------------------------------------- Deployment The Exchange anticipates that it will deploy the solicitation mechanism within 30 days of the Commission's approval of this proposed rule change. Members will be notified of the deployment date by an Options Trader Alert posted on the Exchange's Web site. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act \77\ in general, and furthers the objectives of Section 6(b)(5) of the Act \78\ in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest by providing new functionality that offers the potential for price improvement. Specifically, the new functionality may lead to an increase in Exchange volume and should allow the Exchange to better compete against other markets that already offer an electronic solicitation mechanism, while providing an opportunity for price improvement for Agency Orders. --------------------------------------------------------------------------- \77\ 15 U.S.C. 78f(b). \78\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- As discussed below, the proposed solicitation mechanism on Phlx is similar in relevant respects to solicitation mechanisms on other exchanges. The Commission previously has found such mechanisms consistent with the Act, stating that they should allow for greater flexibility in pricing large-sized orders and may provide a greater opportunity for price [[Page 22578]] improvement.\79\ The Exchange believes that its proposal will allow the Exchange to better compete for solicited transactions, while providing an opportunity for price improvement for Agency Orders and assuring that public customers on the book are protected. The new solicitation mechanism should promote and foster competition and provide more options contracts with the opportunity for price improvement, which should benefit market participants, investors, and traders. --------------------------------------------------------------------------- \79\ See Securities Exchange Act Release Nos. 49141 (January 28, 2004), 69 FR 5625 (February 5, 2004) (SR-ISE-2001-22) (approval of ISE Solicited Order Mechanism); and 57610 (April 3, 2008), 73 FR 19535 (April 10, 2008) (SR-CBOE-2008-14) (approval of CBOE Solicitation Auction Mechanism). --------------------------------------------------------------------------- Section 11(a)(1) of the Act \80\ prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises discretion (collectively, ``covered accounts'') unless an exception applies. Rule 11a2-2(T) under the Act,\81\ known as the ``effect versus execute'' rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute transactions on the exchange. To comply with Rule 11a2-2(T)'s conditions, a member: (i) Must transmit the order from off the exchange floor; (ii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; \82\ (iii) may not be affiliated with the executing member; and (iv) with respect to an account over which the member has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule. The Exchange believes that this proposed rule change is consistent with Section 11(a)(1) of the Act and the Commission's regulations thereunder. --------------------------------------------------------------------------- \80\ 15 U.S.C. 78k(a)(1). \81\ 17 CFR 240.11a2-2(T). \82\ The member may, however, participate in clearing and settling the transaction. --------------------------------------------------------------------------- The Rule's first condition is that orders for covered accounts be transmitted from off the exchange floor. In the context of automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange's floor by electronic means.\83\ Only specialists and on-floor SQTs \84\ have the ability to submit orders into the solicitation mechanism from on the floor of the Exchange. These members, however, would be subject to the ``market maker'' exception to Section 11(a) of the Act and Rule 11a2- 2(T)(a)(1) thereunder.\85\ RSQTs may only submit orders into the solicitation mechanism from off the floor of the Exchange.\86\ While Floor Brokers have the ability to submit orders they represent as agent to the electronic limit order book through the Exchange's Options Floor Broker Management System (``FBMS''), there is no mechanism by which such Floor Brokers can directly submit orders to the solicitation mechanism or send orders to off-floor broker-dealers through FBMS for indirect submission into the solicitation mechanism.\87\ Because no Exchange members, other than specialists and SQTs, may submit orders into the solicitation mechanism from on the floor of the Exchange, the Exchange believes that the solicitation mechanism satisfies the off- floor transmission requirement. --------------------------------------------------------------------------- \83\ See, e.g., Securities Exchange Act Release Nos. 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) (approving BATS options trading); 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity securities listing and trading on BSE); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007- 080) (approving NOM options trading); 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90- 53) (approving NYSE's Off-Hours Trading Facility); and 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 Release''). \84\ As discussed above, 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 Exchange Rule 1014(b)(ii)(A). \85\ See 15 U.S.C. Section 78k(a)(1)(A); 17 CFR 240.11a2- 2(T)(a)(1). There are no other on-floor members, other than Exchange specialists and SQTs, who have the ability to submit orders into the Solicitation Auction. \86\ As discussed above, an RSQT is defined in Exchange 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). While RSQTs may only submit orders into the Auction from off the Exchange floor, RSQTs also would be subject to the ``market maker'' exception to Section 11(a) of the Act and Rule 11a2-2(T)(a)(1) thereunder. \87\ Because FBMS does not have the coding required to enter orders into the Solicitation Auction, it is impossible for such Floor Brokers to submit orders into the Solicitation Auction. --------------------------------------------------------------------------- Second, the Rule requires that the member not participate in the execution of its order. At no time following the submission of an order is a member organization able to acquire control or influence over the result or timing of an order's execution. The execution of a member's order is determined by what other orders are present in the solicitation mechanism and the priority of those orders.\88\ Accordingly, the Exchange believes that a member does not participate in the execution of an order submitted to the solicitation mechanism. --------------------------------------------------------------------------- \88\ A member may cancel or modify the order, or modify the instruction for executing the order, but only from off the floor. The Commission has stated that the non-participation requirement is satisfied under such circumstances, so long as such modifications or cancellations are also transmitted from off the floor. See Securities Exchange Act Release No. 14713 (April 27, 1978), 43 FR 18557 (May 1, 1978) (``1978 Release'') (stating that the ``non- participation requirement does not prevent initiating members from canceling or modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor''). --------------------------------------------------------------------------- Third, Rule 11a2-2(T) requires that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that this requirement is satisfied when automated systems, such as the solicitation mechanism, are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange.\89\ The design of the solicitation mechanism ensures that no member organization has any special or unique trading advantage in the handling of its [[Page 22579]] orders after transmitting its orders to the solicitation mechanism. The Exchange therefore believes the solicitation mechanism satisfies this requirement. --------------------------------------------------------------------------- \89\ In considering the operation of automated execution systems operated by an exchange, the Commission has noted that, while there is not an independent executing exchange member, the execution of an order is automatic once it has been transmitted into the system. Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2-2(T). --------------------------------------------------------------------------- Fourth, in the case of a transaction effected for an account with respect to which the Initiating Member or an associated person thereof exercises investment discretion, neither the Initiating Member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2- 2(T) thereunder.\90\ Member organizations relying on Rule 11a2-2(T) for transactions effected through the solicitation mechanism must comply with this condition of the Rule. --------------------------------------------------------------------------- \90\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2- 2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated persons thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release (stating ``[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction- related compensation do so only after deciding that such arrangements are suitable to their interests''). --------------------------------------------------------------------------- For all of the foregoing reasons and as discussed in the proposal, the Exchange believes the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the Exchange. B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, the Exchange believes the proposal is pro-competitive. The proposal would diminish the potential for foregone market opportunities on the Exchange by allowing Agency Orders to be entered into the solicitation mechanism by all members. The solicitation mechanism is similar to electronic solicitation mechanism functionality that is allowed on two other options exchanges. The Exchange believes that the new solicitation mechanism functionality should help it compete with these other exchanges. With respect to intra-market competition, the solicitation mechanism will be available to all Phlx members for the execution of Agency Orders. Moreover, as explained above, the proposal should encourage Phlx participants to compete amongst each other by responding with their best price and size for a particular Solicitation Auction. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange did not solicit or receive written comments prior to filing the proposed rule change. Written comments on the proposed rule change were solicited by the Commission in response to the institution of proceedings for SR-Phlx-2014-66. The Commission received one comment letter and one letter from the Exchange in response.\91\ --------------------------------------------------------------------------- \91\ See supra notes 11 and 12. The letters are available on the Commission's Web site at http://www.sec.gov/comments/sr-phlx-2014-66/phlx201466.shtml. --------------------------------------------------------------------------- IV. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 180 days after the date of publication of the initial notice in the Federal Register (i.e., October 31, 2014) or within such longer period up to an additional 60 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will issue an order approving or disapproving such proposed rule change, as amended. As discussed in Item VI below, the Commission is designating an additional 60 days within which to issue an order approving or disapproving the proposed rule change. V. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment No. 2, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to rule-comments@sec.gov. 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 20549-1090, 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 available publicly. All submissions should refer to File Number SR- Phlx-2014-66, and should be submitted on or before May 7, 2015. VI. Designation of Longer Period for Commission Action Section 19(b)(2) of the Act \92\ provides that, after initiating disapproval proceedings, the Commission shall issue an order approving or disapproving the proposed rule change not later than 180 days after the date of publication of notice of the filing of the proposed rule change. The Commission may extend the period for issuing an order approving or disapproving the proposed rule change, however, by not more than 60 days if the Commission determines that a longer period is appropriate and publishes the reasons for such determination. The proposed rule change was published for comment in the Federal Register on October 31, 2014. April 29, 2015 is 180 days from [[Page 22580]] that date, and June 28, 2015 is an additional 60 days from that date. --------------------------------------------------------------------------- \92\ 15 U.S.C. 78s(b)(2). --------------------------------------------------------------------------- The Commission finds it appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider the proposed rule change, the issues raised in the comment letter that has been submitted in connection with the proposal and the response from the Exchange and any comments that may be submitted on the proposed rule change, as modified by Amendment No. 2. As the Commission noted in the Order Instituting Proceedings, the proposal raises questions as to whether the Exchange's proposed rule change is consistent with the requirements of Sections 6(b)(5) \93\ of the Act.\94\ Extending the time within which to approve or disapprove the proposed rule change, as modified by Amendment No. 2, will enable the Commission to more fully consider the issues raised by the proposed rule change, the comment letter received to date and the Exchange's response and any comments that may be submitted on the proposed rule change, as modified by Amendment No. 2. --------------------------------------------------------------------------- \93\ 15 U.S.C. 78f(b)(5). \94\ See supra note 10. --------------------------------------------------------------------------- Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,\95\ designates June 28, 2015, as the date by which the Commission should either approve or disapprove the proposed rule change, as modified by Amendment No. 2 (File No. SR-Phlx-2014-66). --------------------------------------------------------------------------- \95\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\96\ --------------------------------------------------------------------------- \96\ 17 CFR 200.30-3(a)(12) and (a)(57). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2015-09265 Filed 4-21-15; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Notices 22569
SECURITIES AND EXCHANGE Register on October 31, 2014.7 On at the Commission’s Public Reference
COMMISSION December 8, 2014, the Commission Room.
extended the time period in which to
III. Self-Regulatory Organization’s
[Release No. 34–74746; File No. SR–Phlx– either approve the proposed rule
Statement of the Purpose of, and
2014–66] change, disapprove the proposed rule
change, or institute proceedings to Statutory Basis for, the Proposed Rule
Self-Regulatory Organizations; determine whether to approve or Change
NASDAQ OMX PHLX LLC; Notice of disapprove the proposed rule change to In its filing with the Commission, the
Filing of Amendment No. 2 and January 29, 2015.8 On January 28, 2015, Exchange included statements
Designation of Longer Period for the Commission instituted proceedings concerning the purpose of and basis for
Commission Action on Proceedings To under Section 19(b)(2)(B) of the Act 9 to the proposed rule change and discussed
Determine Whether To Approve or determine whether to approve or any comments it received on the
Disapprove Proposed Rule Change, as disapprove the proposed rule change.10 proposed rule change. The text of these
Modified by Amendment No. 2, To The Commission received one comment statements may be examined at the
Adopt New Exchange Rule 1081, letter regarding the proposal,11 as well places specified in Item IV below. The
Solicitation Mechanism, To Introduce a as a response to the comment letter from Exchange has prepared summaries, set
New Electronic Solicitation Mechanism the Exchange.12 forth in sections A, B, and C below, of
II. Self-Regulatory Organization’s the most significant aspects of such
April 16, 2015.
Statement of the Terms of Substance of statements.
I. Introduction the Proposed Rule Change A. Self-Regulatory Organization’s
Pursuant to Section 19(b)(1) of the The Exchange proposes to adopt new Statement of the Purpose of, and
Securities Exchange Act of 1934 Exchange Rule 1081, Solicitation Statutory Basis for, the Proposed Rule
(‘‘Act’’) 1, and Rule 19b–4 thereunder,2 Mechanism, to introduce a new Change
notice is hereby given that on April 9, electronic solicitation mechanism 1. Purpose
2015, NASDAQ OMX PHLX LLC pursuant to which a member can
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the electronically submit all-or-none orders The purpose of the proposal is to
Securities and Exchange Commission of 500 contracts or more (or, in the case introduce an electronic solicitation
(‘‘SEC’’ or ‘‘Commission’’) Amendment of mini options, 5,000 contracts or mechanism. Currently, under Phlx Rule
No. 2 to the proposed rule change as more) the member represents as agent 1080(c)(ii)(C)(2), Order Entry Firms 15
described in Items II and III below, against contra orders the member must expose orders they represent as
which Items have been substantially solicited. The Exchange is also agent for at least one second before such
prepared by the Exchange.3 Amendment proposing a corresponding amendment orders may be automatically executed,
No. 2 replaces the original filing in its to the definition of ‘‘professional’’ in in whole or in part, against orders
entirety.4 The Commission is publishing Rule 1,000(b)(14) and a clarification to solicited from members and non-
this notice to solicit comments on the Rule 1080, Phlx XL and Phlx XL II. The member broker-dealers to transact with
proposed rule change, as modified by proposed rule change was filed on such orders.16 The proposed rule change
Amendment No. 2, from interested October 14, 2014.13 Amendment No. 2 would provide an alternative, enabling
persons and to designate a longer period amends and replaces the original filing a member to electronically execute
within which to issue an order in its entirety.14 orders it represents on behalf of a public
approving or disapproving the proposed The text of the proposed rule change customer, broker-dealer, or any other
rule change, as modified by Amendment is available on the Exchange’s Web site
No. 2. at http:// 15 Rule 1080(c)(ii)(A)(1) defines ‘‘Order Entry
On October 14, 2014, the Exchange nasdaqomxphlx.cchwallstreet.com, at Firm’’ as a member organization of the Exchange
filed with the Commission, pursuant to the principal office of the Exchange, and that is able to route orders to AUTOM. (AUTOM is
the Exchange’s electronic quoting and trading
Section 19(b)(1) of the Act 5 and Rule system, which has been denoted in Exchange rules
19b–4 thereunder,6 a proposed rule 7 See Securities Exchange Act Release No. 73441
as XL II, XL and AUTOM.)
(October 27, 2014), 79 FR 64862 (‘‘Notice’’).
change to adopt new Exchange Rule 8 See Securities Exchange Act Release No. 73791
16 Section (c), Solicited Orders, of Exchange Rule
1081, Solicitation Mechanism, to 1064, Crossing, Facilitation and Solicited Orders,
(December 8, 2014), 79 FR 73924 (December 12, governs execution of solicited orders by open
introduce a new electronic solicitation 2014). outcry, on the Exchange trading floor, and is
mechanism pursuant to which a 9 15 U.S.C. 78s(b)(2)(B).
unaffected by proposed Rule 1081. Additionally,
10 See Securities Exchange Act Release No. 74167
member would be able to electronically many aspects of the functionality of the proposed
(January 28, 2015), 80 FR 5865 (February 3, 2015) solicitation mechanism are similar to those
submit all-or-none orders of 500 (‘‘Order Instituting Proceedings’’). provided for in Rule 1080(n), PIXL, and certain of
contracts or more (or, in the case of mini 11 See Letter from Michael J. Simon, Secretary and
the rules proposed herein consequently track the
options, 5,000 contracts or more) that General Counsel, International Securities Exchange existing PIXL rules. The Exchange adopted PIXL in
the member represents as agent against LLC, dated February 25, 2015. October 2010 as a price-improvement mechanism
12 See Letter from Carla Behnfeldt, Associate
contra orders that the member solicited. that is a component of the Exchange’s fully
General Counsel, Nasdaq, dated March 11, 2015. automated options trading system, Phlx XL, now
The proposed rule change was 13 See Securities Exchange Act Release No. 73441 known as XL II. Like the solicitation mechanism,
published for comment in the Federal (October 27, 2014), 79 FR 64862 (October 31, 2014). PIXL is a mechanism whereby an initiating member
The Exchange filed Amendment No. 1 on April 1, submits a two-sided (buy and sell) order into an
asabaliauskas on DSK5VPTVN1PROD with NOTICES
1 15 U.S.C. 78s(b)(1). 2015. Amendment No. 1 was withdrawn on April auction process soliciting price improvement. See
2 17 8, 2015. Securities Exchange Act Release Nos. 63027
CFR 240.19b–4.
3 The Exchange filed Amendment No. 1 on April
14 The amendment makes certain changes to (October 1, 2010), 75 FR 62160 (October 7, 2010)
Exchange Rule 1080(n) regarding the PIXL auction (order approving SR–Phlx–2010–108, for purposes
1, 2015. Amendment No. 1 was withdrawn on April of this proposed rule change, the ‘‘PIXL Filing’’)
process, clarifies that the trading system does not
8, 2015. and 69845 (June 25, 2013), 78 FR 39429 (July 1,
currently accept all-or-none Complex Orders,
4 See infra note 7. See also infra note 14 for the
provides that the side of the Agency Order will be 2013) (SR–Phlx–2013–46 and, for purposes of this
Exchange’s description of the changes in disseminated at the commencement of an auction, proposed rule change, the ‘‘Complex PIXL Filing’’)
Amendment No. 2. clarifies the treatment of responsive all-or-none (Order Granting Approval To Proposed Rule
5 15 U.S.C. 78s(b)(1).
interest in the auction, adds examples and makes Change, as Modified by Amendment No. 1,
6 17 CFR 240.19b–4. certain other technical and clarifying changes. Regarding Complex Order PIXL).
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![22570 Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Notices
entity (an ‘‘Agency Order’’) 17 against executed using the Phlx’s solicitation submitted in $0.01 increments,
solicited limit orders of a public mechanism. Such written notification regardless of the applicable Minimum
customer, broker-dealer, or any other would be required to disclose the terms Price Variation (the ‘‘MPV’’). Contingent
entity (a ‘‘Solicited Order’’) through a and conditions contained in Rule 1081 orders 27 (including all-or-none, stop or
solicitation mechanism designed for this and to be in a form approved by the stop-limit orders) on the book will not
purpose.18 Exchange.23 be considered when checking the
The new mechanism is a process by acceptability of the stop price.
which a member (the ‘‘Initiating Solicitation Auction Eligibility
Contingent orders are not represented as
Member’’) can electronically submit all- Requirements
part of the Exchange Best Bid/Offer
or-none orders 19 of 500 contracts or All options traded on the Exchange, since they may only be executed if
more (or, in the case of mini options,20 including mini options, are eligible for specific conditions are met. Given these
5,000 contracts or more) that it the Solicitation Auction. Proposed Rule orders are not represented as part of the
represents as agent against contra orders 1081(i) describes the circumstances Exchange Best Bid/Offer, they are not
that it has solicited, and initiate an under which an Initiating Member may included in the NBBO and thus not
auction (the ‘‘Solicitation Auction’’).21 initiate a Solicitation Auction. considered when checking the
As explained below, at the end of the Proposed Rule 1081(i)(A) provides acceptability of the stop price.28
Solicitation Auction, allocation will that the Agency Order and the Solicited Orders which are submitted which do
occur with all contracts of the Agency Order must each be limit orders for at not comply with the eligibility
Order trading at an improved price least 500 contracts (or, in the case of requirements set forth in proposed Rule
against non-solicited contra-side interest mini options, at least 5,000 contracts) 1081(i)(A) through (C) will be rejected
or at the stop price, defined below, and be designated as all-or-none. The upon receipt and ineligible to initiate a
against the Solicited Order. The orders must match in size, and their Solicitation Auction.29 In addition,
solicitation mechanism would limit prices must match or cross in Agency Orders submitted at or before
accommodate both simple orders and price.24 If the orders cross in price, the the opening of trading are not eligible to
Complex Orders.22 Prior to the first time price at which the Agency Order and initiate a Solicitation Auction and will
a member enters an Agency Order into the Solicited Order may be considered be rejected.30 Orders submitted during a
the solicitation mechanism on behalf of for submission pursuant to Rules specified period of time, as determined
a customer, the member would be 1081(i)(B) and (C) shall be the limit by the Exchange and communicated to
required to deliver to the customer a price of the Solicited Order.25 The Exchange membership on the
written notification informing the orders may not be stop or stop limit Exchange’s Web site, prior to the end of
customer that its Agency Orders may be orders, must be marked with a time in the trading session in the affected
force of day, good till cancelled or series 31 (including, in the case of
17 Rule 1080(b)(i)(A) provides in part that ‘‘[f]or
immediate or cancel, and will not be Complex Orders, in any series which is
purposes of Exchange options trading, an agency routed regardless of routing strategy
order is any order entered on behalf of a public a component of the Complex Order) are
customer, and does not include any order entered indicated on the order.26
for the account of a broker-dealer, or any account Pursuant to Rule 1081(i)(B) the 27 A contingent order is a limit or market order
in which a broker-dealer or an associated person of Initiating Member must stop the entire to buy or sell that is contingent upon a condition
a broker-dealer has any direct or indirect interest.’’ Agency Order at a price (the ‘‘stop being satisfied. PIXL also does not consider
However, that provision did not contemplate, and contingent orders on the book when checking the
is not applicable to, the capitalized and defined price’’) that is equal to or better than the acceptability of the stop price.
term ‘‘Agency Order’’ as used in proposed Rule National Best Bid/Offer (‘‘NBBO’’) on 28 Rule 1081(i)(B) does not apply if the Agency
1081. both sides of the market, provided that Order is a Complex Order (a ‘‘Complex Agency
18 To be clear, participants must ensure that their
such price must be at least $0.01 better Order’’). Rather, Rule 1081(i)(C) applies to Complex
records adequately demonstrate the solicitation of Agency Orders and requires them to be of a
an order that is entered into the mechanism for
than any public customer non-
conforming ratio, as defined in Commentary
execution against an Agency Order as a Solicited contingent limit order on the Phlx order .07(a)(ix) to Rule 1080. A Complex Agency Order
Order prior to entry of such order into this book and must be equal to the Agency which is not of a conforming ratio will be rejected.
mechanism. Order’s limit price or provide the (PIXL operates in the same manner. See Rule
19 Exchange Rule 1066(c)(4) defines an ‘‘all-or- 1080(n)(i)(C).) Rule 1081(i)(C) requires all
Agency Order with a better price than
none’’ order as a market or limit order which is to component option legs of the order to be for at least
be executed in its entirety or not at all. its limit price. Stop prices may be 500 contracts (or, in the case of mini options, at
20 A given Solicitation Auction may be for options least 5,000 contracts). It also provides that the
23 See Rule 1081(i)(H). The rule would require Initiating Member must stop the entire Complex
contracts exclusively or for mini options contracts
exclusively, but cannot be used for a combination delivery of this disclosure only prior to the first Agency Order at a price that is better by at least
of both options contracts and mini options contracts submission of an Agency Order on behalf of a $0.01 than the best net price (debit or credit) (i)
together. customer rather than prior to the submission of available on the Complex Order book regardless of
21 Similar electronic functionality is offered today each and every Agency Order on behalf of such the Complex Order book size; and (ii) achievable
by competing exchanges. See Chicago Board customer. from the best Phlx bids and offers for the individual
Options Exchange (‘‘CBOE’’) Rule 6.74B, 24 In the case of Complex Orders, the underlying options (an ‘‘improved net price’’) regardless of
Solicitation Auction Mechanism (the ‘‘CBOE components of both Complex Orders must also size, provided in either case that such price is equal
Mechanism’’), and International Securities match. Additionally, all the option legs of each to or better than the Complex Agency Order’s limit
Exchange (‘‘ISE’’) Rule 716(e), Solicited Order Complex Order must consist entirely of options or price. Stop prices for Complex Agency Orders may
Mechanism (the ‘‘ISE Mechanism’’). entirely of mini options. be submitted in $0.01 increments, regardless of
22 A Complex Order is any order involving the 25 For example, assume an Agency Order to buy MPV, and contingent orders on the book will not
simultaneous purchase and/or sale of two or more 1000 contracts for $2.00 and a Solicited Order to be considered when checking the acceptability of
sell 1,000 contracts at $1.90 are entered into the the stop price. See proposed Rule 1081(i)(C).
asabaliauskas on DSK5VPTVN1PROD with NOTICES
different options series in the same underlying
29 See Rule 1081(i)(D).
security, priced at a net debit or credit based on the solicitation mechanism. Since the limits of these
relative prices of the individual components, for the orders cross in price, the Agency Order and 30 See Rule 1081(i)(E).
same account, for the purpose of executing a Solicited Order are considered to be submitted into 31 The term ‘‘series’’ of options means all option
particular investment strategy. A Complex Order the mechanism with a stop price equal to the contracts of the same class having the same
may also be a stock-option order, which is an order Solicited Order price of $1.90. expiration date and exercise price. A ‘‘class’’ of
to buy or sell a stated number of units of an 26 Whether an order is marked with a time in options means all option contracts of the same
underlying stock or exchange-traded fund (‘‘ETF’’) force of day as opposed to, for example, good till ‘‘type’’ of option covering the same underlying
coupled with the purchase or sale of options cancelled or immediate or cancel is irrelevant to the stock. A ‘‘type’’ of option means the classification
contract(s). Complex Orders on Phlx are discussed manner in which they will be treated once they are of an option contract as a put or a call. See Rule
in Commentary .07 to Rule 1080. entered into the solicitation mechanism. 1000, Applicability, Definitions and References.
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![Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Notices 22571
not eligible to initiate a Solicitation Consistent with the explanation the Order, which is a solicited limit order
Auction and will be rejected.32 Agency Exchange made in the PIXL Filing, the of a public customer, broker-dealer, or
Orders which are not Complex Orders Exchange believes that in order to any other entity through the solicitation
received while another electronic maintain fair and orderly markets, a mechanism.
auction (including any Solicitation market maker assigned in an option However, pursuant to Rule 1081(v), if
Auction, PIXL auction, or any other should not be solicited for participation a member enters an Agency Order for
kind of auction) involving the same in a Solicitation Auction by an Initiating the account of a public customer paired
option series is in progress are not Member. The Exchange believes that with a Solicited Order for the account
eligible to initiate a Solicitation Auction market makers interested in of public customer and if the paired
and will be rejected.33 Similarly, a participating in transactions on the orders adhere to the eligibility
Complex Agency Order received while Exchange should do so by way of his/ requirements of Rule 1081(i), such
another auction in the same Complex her quotations, and should respond to paired orders will be automatically
Order strategy is in progress is not Solicitation Auction notifications rather executed without a Solicitation
eligible to initiate a Solicitation Auction than create them by having an Initiating Auction.37 The execution price for such
and will be rejected.34 Member submitting Solicited Orders on paired public customer orders (except if
Finally a solicited order for the the market maker’s behalf. they are Complex Orders) must be
account of any Exchange specialist, Solicitation Auction Process expressed in the minimum quoting
streaming quote trader (‘‘SQT’’), remote increment applicable to the affected
streaming quote trader (‘‘RSQT’’) or Pursuant to Rule 1081(ii)(A)(1), to series.38 Such an execution may not
non-streaming registered options trader begin the process the Initiating Member trade through the NBBO or at the same
(‘‘ROT’’) assigned in the affected series must mark the Agency Order and the price as any resting public customer
may not be a Solicited Order.35 Solicited Order for Solicitation Auction order. If all-or-none orders are on the
processing, and specify the stop price at order book in the affected series, the
32 See Rule 1081(i)(F). which it seeks to cross the Agency public customer-to-public customer
33 A similar restriction applies with respect to Order with the Solicited Order. The order may not be executed at a price at
PIXL auctions. See PIXL Rule 1080(n)(ii) which system will determine the stop price which the all-or-none order would be
provides that ‘‘[o]nly one Auction may be based upon the submitted limit prices if
conducted at a time in any given series or strategy.’’ eligible to trade based on its limit price
The Exchange is proposing to revise this provision
such prices do not match as discussed and size.39
to make clear that only one electronic auction of above. Once the Initiating Member has In the case of a Complex Order, a
any kind may be conducted at a time in any given submitted an Agency Order and public customer-to-public customer
series or strategy. The Exchange is proposing to Solicited Order for processing pursuant cross may only occur at a price which
further amend the PIXL rule by adding Rule to this subparagraph, such Agency
1080(n)(i)(H) to provide that PIXL Orders that are improves the calculated Phlx Best Bid/
received while another electronic auction involving Order and Solicited Order may not be Offer or ‘‘cPBBO’’ and improves upon
the same option series or the same Complex Order modified or cancelled.36 the net limit price of any Complex
strategy is in progress are not eligible to initiate a
PIXL Auction and will be rejected. Crossing Two Public Customer Orders Orders (excluding all-or-none) on the
34 However, a simple Agency Order in one series Without a Solicitation Auction Complex Order book in the same
that is submitted while an electronic auction is
As noted above, the proposed rule strategy.40 If all-or-none Complex
already in process with respect to a Complex Orders 41 are on the Complex Order
Agency Order that includes the same series will not change would enable a member to
be rejected. Instead, a Solicitation Auction will be electronically execute an Agency Order, 37 The eligibility requirements require the orders
initiated for that incoming Agency Order offering which is an order it represents on behalf
each unique strategy or individual series the same to each be limit orders for at least 500 contracts (or,
opportunity to initiate an auction. This behavior is
of a public customer, broker-dealer, or in the case of mini options, at least 5000 contracts)
consistent with the handling of overlapping PIXL any other entity, against a Solicited and be designated as all-or-none. The orders must
and Complex PIXL auctions. See PIXL Rule match in size, and the limit prices must match or
1080(n)(ii). Any Legging Orders will automatically cross in price. The orders may not be stop or stop
and submit option quotations electronically in
be removed from the order book upon receipt of an limit orders, must be marked with a time in force
options to which such RSQT has been assigned. A
Agency or Complex Agency Order which consists of day, good till cancelled or immediate or cancel.
qualified RSQT may function as a Remote Specialist
of a component in which there is a Legging Order In the case of Complex Orders, the orders must be
upon Exchange approval. An RSQT may only
(whether a buy order or a sell order) that initiates of a conforming ratio, and all component option
submit such quotations electronically from off the
a Solicitation Auction. See Rule floor of the Exchange. An RSQT may not submit legs of the order must be for at least 500 contracts
1080.07(f)(iii)(C)(4)(vi). Complex Orders submitted option quotations in eligible options to which such (or, in the case of mini options, at least 5000
during normal trading hours in a strategy which has RSQT is assigned to the extent that the RSQT is also contracts). See Rule 1081(i). The Exchange also
not yet opened under Commentary .07 of Exchange approved as a Remote Specialist in the same accommodates the crossing of two public customer
Rule 1080 will cause the strategy to immediately options. An RSQT may only trade in a market orders in PIXL. See Rule 1080(n).
38 The execution price for a Complex Order may
open and a Solicitation Auction may be initiated. making capacity in classes of options in which he
See Rule 1081(i)(E). In addition, neither a is assigned or approved as a Remote Specialist. An be in $.01 increments.
39 All-or-none orders can only be submitted for
Solicitation Auction for a simple Agency Order or RSQTO is a member organization in good standing
Complex Agency Order may be initiated prior to the that satisfies the SQTO readiness requirements in non-broker dealer customers. As stated above, all-
regular opening of the individual option in the case Rule 507(a). or-none orders are not considered when checking
of a simple Agency Order, or the regular opening 36 For clarity, Rule 1080(ii)(A)(l) does not apply the acceptability of the stop price of an Agency
of all individual components in the case of a to Complex Agency Orders. Rather, in a parallel Order.
Complex Agency Order. 40 The term ‘‘cPBBO’’ means the best net debit or
provision, proposed Rule 1081(ii)(A)(2) provides
35 See Rule 1081(i)(G). An SQT is an Exchange that to initiate a Solicitation Auction in the case of credit price for a Complex Order Strategy based on
Registered Options Trader (‘‘ROT’’) who has a Complex Agency Order and Complex Solicited the PBBO for the individual options components of
such Complex Order Strategy, and, where the
asabaliauskas on DSK5VPTVN1PROD with NOTICES
received permission from the Exchange to generate Order (a ‘‘Complex Solicitation Auction’’), the
and submit option quotations electronically through Initiating Member must mark the orders for underlying security is a component of the Complex
AUTOM in eligible options to which such SQT is Solicitation Auction processing, and specify the Order, the National Best Bid and/or Offer for the
assigned. An SQT may only submit such quotations price (‘‘stop price’’) at which it seeks to cross the underlying security. See Rule 1080.07(a)(iv).
while such SQT is physically present on the floor Complex Agency Order with the Complex Solicited 41 The Exchange’s trading system is capable of
of the Exchange. See Exchange Rule 1014(b)(ii)(A). Order. The system will determine the stop price accepting all-or-none Complex Orders which are
A RSQT is defined in Exchange Rule 1014(b)(ii)(B) based upon the submitted limit prices if such prices not, however, affirmatively permitted to be
as an ROT that is a member affiliated with a Remote do not match as discussed above. Once the submitted under Exchange rules. Rule 1080.07(b)(v)
Streaming Quote Trader Organization (‘‘RSQTO’’) Initiating Member has submitted the orders for provides in part that ‘‘Complex Orders may be
with no physical trading floor presence who has processing pursuant to this subparagraph, they may submitted as: All-or-none orders—to be executed in
received permission from the Exchange to generate not be modified or cancelled. Continued
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![22572 Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Notices
book in the same strategy, the public option details, size, side and stop price minimum price increment for
customer-to-public customer Complex is sufficient information for participants Responses will be $0.01. A Response
Order may not be executed at a price at to determine whether to submit must be equal to or better than the
which the all-or-none Complex Order responses to the Solicitation Auction.45 NBBO on both sides of the market at the
would be eligible to trade based on its time of receipt of the Response. A
Solicitation Auction
limit price and size. Response with a price that is outside the
The Exchange believes that permitting The Solicitation Auction process is NBBO at the time of receipt will be
such executions will benefit public described in proposed Rules rejected.50 Multiple Responses from the
customers on both sides of the crossing 1081(ii)(A)(4)–(10). Following the same member may be submitted at
transaction by providing speedy and issuance of the Request for Response, different prices during the Solicitation
efficient executions to public customer the Solicitation Auction will last for a Auction. Responses may be modified or
orders in this circumstance while period of 500 milliseconds 46 unless it is cancelled during the Solicitation
maintaining the priority of public concluded as the result of any of the Auction. The acceptance and handling
customer interest on the book. The circumstances described below.47 of Responses to a Solicitation Auction is
proposed handling of a public customer Any person or entity may submit the same as the acceptance and
Agency Order paired with a public Responses to the Request for Response, handling of Responses today for a PIXL
customer Solicited Order is similar to provided such Response is properly Auction.51
the handling of a public customer PIXL marked specifying the price, size and
Order paired with a public customer side of the market at which it would be Conclusion of the Solicitation Auction
Initiating Order which is submitted into willing to participate in the execution of Rules 1081(ii)(B)(1)–(4) describe a
the PIXL mechanism.42 the Agency Order.48 The Exchange number of circumstances that will cause
believes that permitting any person or the Solicitation Auction to conclude.
Solicitation Auction Notification Generally, it will conclude at the end of
entity to submit Responses to the
Pursuant to proposed Rule Request for Response should attract the Solicitation Auction period, except
1081(ii)(A)(3), when the Exchange Responses from all sources, maximizing that it may conclude earlier: (i) Any
receives an order for Solicitation the potential for liquidity in the time the Phlx Best Bid/Offer (‘‘PBBO’’)
Auction processing, a Request for Solicitation Auction and thus affording on the same side of the market as the
Response with the option details the Agency Order the best opportunity Agency Order crosses the stop price
(meaning, the security, strike price, and for price improvement. Responses will (since further price improvement will be
expiration date), size, side and stop not be visible to Solicitation Auction unlikely and any Responses offering
price of the Agency Order and the participants, and will not be improvement are likely to be
Solicitation Auction start time is then disseminated to the Options Price cancelled),52 or (ii) any time there is a
sent over the PHLX Orders data feed 43 Reporting Authority (‘‘OPRA’’). A
and Specialized Quote Feed (‘‘SQF’’).44 Response may be for any size up to the market because all-or-none orders may be submitted
The Exchange believes that providing size of the Agency Order.49 The only for Customer accounts under Exchange rules,
and Customers typically do not respond to auctions
in any event. (Note, however, that all-or-none
its entirety or not at all.’’ See Securities Exchange 45 In the case of a Complex Agency Order, the
orders entered and present in the system at the end
Act Release No. 72351 (June 9, 2014), 79 FR 33977 Request for Response will include the strategy, side, of the Solicitation Auction will be considered for
(June 13, 2014) (SR–Phlx–2014–39). Nevertheless, size, and stop price of the Agency Order as well as execution, as discussed below.)
all-or-none Complex Orders may not be submitted the Solicitation Auction start time. 50 Similarly, in the case of Complex Order
at this time. To make this clear, the Exchange 46 In April/May 2014, to determine whether the
proposes to add a sentence at the end of Rule Responses, the Response must be equal to or better
1080.07(b)(v) stating that ‘‘[n]otwithstanding the proposed Solicitation Auction timer would provide than the cPBBO on both sides, as defined in
above, the trading system does not currently accept sufficient time to respond to a Request for Commentary .07(a)(iv) of Rule 1080 at the time of
all-or-none Complex Orders.’’ The Exchange Response, the Exchange polled all Phlx market receipt of the Complex Order Response but need
anticipates that it will file a proposed rule change makers, 20 of which responded. Of those that not improve upon the limit of orders on the CBOOK
to provide for the handling and execution of all-or- responded to the survey, 15 are currently since the CBOOK is not displayed on OPRA and
none Complex Orders and thereafter permit the responding to auctions on Phlx or intend to do so. may not be known to the responding participant. If
trading system to accept them. The Exchange 100% of those respondents indicated that their firm a Complex Order Response was received which was
therefore intends to delete this new sentence if the could respond to auctions with a duration of at least equal to or crossed the limit of orders on the
Exchange submits and the Commission approves a 50 milliseconds. Thus, the Exchange believes that CBOOK, such Responses will only be executed at
proposed rule change that provides for all-or-none the proposed Solicitation Auction duration of 500 a price which improves the resting order’s limit
orders to be submitted through the trading system. milliseconds would provide a meaningful price by at least $0.01. See proposed rule
The instant proposed rule change describes how the opportunity for participants on Phlx to respond to 1081(ii)(H). A Complex Order Response submitted
solicitation mechanism will deal with all-or-none a Solicitation Auction, whether initiated by an with a price that is outside the cPBBO at the time
Complex Orders once they are permitted under Agency Order or a Complex Agency Order, while of receipt will be rejected. See proposed Rule
Exchange rules. Complex Agency Orders and at the same time facilitating the prompt execution 1081(ii)(A)(9).
Complex Solicited Orders provided for herein are of orders. The Exchange notes that both ISE and 51 See Exchange Rule 1080(n).
not Complex Orders that will require filing of a Miami International Securities Exchange LLC 52 In the case of a Complex Solicitation Auction,
proposed rule change in order to be submitted into (‘‘MIAX’’) rules provide for a 500 millisecond it would end any time the cPBBO or the Complex
the system. Complex Agency Orders and Complex response time. See ISE Rule 716, Supplementary Order book, excluding all-or-none Complex Orders,
Solicited Orders, while all-or-none in character, are Material .04 and MIAX Rule 515A(b)(2)(i)(C). on the same side of the market as the Complex
unique to the solicitation mechanism and are 47 Rule 1080(c)(ii)(C)(2), which states that Order
Agency Order, crosses the stop price. See Rule
explicitly provided for herein. Entry Firms must expose orders they represent as 1081(ii)(B)(3). The Exchange believes that when
42 See Rule 1080(n)(vi). agent for at least one second before such orders may either the cPBBO or Complex Order interest,
43 The PHLX Orders data feed is designed to be automatically executed against solicited orders, excluding all-or-none, is present on the Exchange
is being amended to clarify that it does not apply
asabaliauskas on DSK5VPTVN1PROD with NOTICES
provide the real-time status of simple and Complex on the same side as the Complex Agency Order and
Orders on the Phlx order book directly to to Rule 1081, Solicitation Mechanism. See also Rule crosses the stop price that further price
subscribers. This includes new orders and changes 1081(ii)(A)(4). improvement will be unlikely and Responses
48 In the case of a Complex Agency Order, the
to orders resting on the Phlx book for all Phlx listed offering improvement are likely to be cancelled.
options. PHLX Orders also includes opening Response must also specify the price, size and side The Exchange also believes that an all-or-none
imbalance information, PIXL information and of the market at which the person submitting the Complex Order crossing the stop price should not
Complex Order Live Auction (‘‘COLA’’) data. Response would be willing to participate in the end the Complex Solicitation Auction since the
44 SQF is an interface that allows specialists and execution of the Complex Agency Order. order is contingent and may not actually be tradable
market makers to connect and send quotes into Phlx 49 Responses may not be submitted with an all- based on its size contingency. The Exchange
XL and assists them in responding to auctions and or-none contingency. All-or-none (as a Response) is believes continuing to run the Complex Solicitation
providing liquidity to the market. not available for any type of auction in the Phlx Auction for the duration of the auction timer
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![Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Notices 22575
and market maker interest is satisfied. contingent public customer orders on Proposed Rule 1081(ii)(E)(6) provides
The unexecuted Solicited Order and the limit order book maintain priority. that a single quote, order or Response
broker-dealer Response are cancelled While the Exchange recognizes that at shall not be allocated a number of
back to the sending participants.62 least one other solicitation mechanism contracts that is greater than its size.
Solicitation Auction with Insufficient offered by another exchange considers Finally, Rule 1081(ii)(E)(7) provides
Improving Interest. Pursuant to public customer orders on the limit that a Complex Agency Order consisting
proposed Rule 1081(ii)(E)(2), if there is order book at the stop price when of a stock/ETF component will not
not sufficient size (considering all determining if there is sufficient execute against interest comprising the
resting orders, quotes and Responses) to improving interest to satisfy the Agency cPBBO at the end of the Complex
execute the entire Agency Order at a Order, the proposed solicitation Solicitation Auction.66 Legging of a
price(s) better than the stop price, the mechanism offered on Phlx will not stock/ETF component would introduce
Agency Order will be executed against consider such interest.64 The Exchange the risk of a participant not receiving an
the Solicited Order at the stop price believes that requiring the stop price to execution on all components of the
provided such price is better than the be at least $0.01 better than any public Complex Order and is therefore not
limit of any public customer order customer interest on the limit order considered as a means of executing a
(excluding all-or-none) on the limit book ensures public customer priority of Complex Order which includes a stock/
order book, on either the same side as existing interest and in turn provides ETF component. The Exchange believes
or the opposite side of the Agency the Solicited Order participant certainty that introducing the risk of inability to
Order, and equal to or better than the that if an execution occurs at the stop fully execute a complex strategy is
contra-side PBBO.63 Otherwise, both the price, such execution will represent the counterproductive to, and inconsistent
Agency Order and Solicited Order will Solicited Order and not interest which with, the effort to allow Complex Orders
be cancelled without a trade occurring. arrived after the Solicited Order in the solicitation mechanism.
This proposed behavior ensures non- participant stopped the Agency Order Miscellaneous Provisions
for its entire size.
62 To illustrate a Complex Solicitation Auction Example of Solicitation Auction with Proposed Rules 1081(ii)(F) through (I)
with enough improving interest and the operation Insufficient Improving Interest. To address the handling of the Agency
of Rule 1081(ii)(E)(3), assume that a Complex Order illustrate a case where the Solicitation Order and other orders, quotes and
to buy one of option A and sell one of option B, Responses when certain conditions are
1000 times, with a cPBBO of $0.40 bid, $0.70 offer, Auction has not yielded sufficient
is submitted with a stop price of $0.65. Assume that interest to improve the price for the present. Pursuant to Rule 1081(ii)(F), if
during the Solicitation Auction, the following entire Agency Order, assume the NBBO the market moves following the receipt
Responses and order interest are received: A market is $0.97–$1.03, and a buy side Agency of a Response, such that there are
maker (‘‘MM1’’) responds to sell the strategy 100 Responses that cross the then-existing
times at a price of $0.55; MM1 responds to sell the
Order for 1000 contracts is submitted
strategy 100 times at a price of $0.60; a broker- with a contra-side Solicited Order to NBBO (provided such NBBO is not
dealer responds to sell the strategy 400 times at a stop the Agency Order at $1.00. During crossed) at the time of the conclusion of
price of $0.60; a public customer Complex Order to the Solicitation Auction, assume a the Solicitation Auction, such
sell the strategy 300 times at a price of $0.60; and Responses will be executed, if possible,
another market maker (‘‘MM2’’) responds to sell the
Response is submitted to sell 100
strategy 200 times at $0.60. contracts at $0.97 and another to sell at their limit price(s).67 Although
After all these Responses and orders are received, 100 contracts at $0.99. At the end of the Exchange Rule 1084, Order Protection,
option A of the simple market moves causing the Solicitation Auction period, since there generally prohibits trade-throughs, an
cPBBO to become offered 200 times at $0.60. is not enough interest to execute the exception to the prohibition exists
Option A is quoted in the simple market as $1.00– pursuant to Rule 1084(b)(x) when the
$1.10 and Option B is quoted in the simple market
entire Agency Order at a price(s) better
as $0.50–$0.60. At the end of the Solicitation than the stop price, the Agency Order transaction that constituted the trade-
Auction, the Complex Agency Order will be will be executed at $1.00 against the through was the execution of an order
executed as follows: The Complex Agency Order Solicited Order. The unexecuted that was stopped at a price that did not
trades 100 contracts at $0.55 against MM1; the trade-through at the time of the stop.
Complex Agency Order trades 300 contracts at
Responses are then cancelled back to
the sending participant.65 Since Responses may be cancelled at
$0.60 against public customer; the Complex Agency
Order trades 100 contracts at $0.60 against MM1; any time prior to the conclusion of the
the Complex Agency Order trades 200 contracts at 64 See ISE Rule 716(e)(2) which provides in part Solicitation Auction, the Exchange
$0.60 against MM2; the Complex Agency Order that in the case of insufficient improving interest believes that this behavior is, at best,
trades 300 contracts at $0.60 against the broker- ‘‘[i]f there are Priority Customer Orders on the highly unlikely as participants will
dealer; and the Solicited Order and the residual Exchange on the opposite side of the Agency Order
unexecuted contracts of the broker-dealer Response at the proposed execution price and there is
cancel Responses when better priced
are cancelled. sufficient size to execute the entire size of the
63 Rule 1081(ii)(E)(2) does not apply to Complex Agency Order, the Agency Order will be executed than the stop price, the Complex Agency Order
Solicitation Auctions. Rather, a parallel provision, against the bid or offer, and the solicited order will executes at the stop price of $0.65 against the
Rule 1081(ii)(E)(4), provides that in a Complex be cancelled.’’ Solicited Order. All unexecuted Responses are
Solicitation Auction, if there is not sufficient size 65 To illustrate a Complex Solicitation Auction cancelled back to the sending participants.
(considering resting Complex Orders and that yields insufficient improving interest and the 66 This provision parallels PIXL Rule
Responses) to execute the entire Complex Agency operation of Rule 1081(ii)(E)(4), assume a Complex 1080(n)(ii)(E)(2)(g) and is being proposed for the
Order at a price(s) better than the stop price, the Order to buy one of option A and sell one of option same reasons explained in the Complex PIXL
Complex Agency Order will be executed against the B, 1000 times, with a cPBBO of $0.40 bid, $0.70 Filing. This limitation is also consistent with the
Solicited Order at the stop price, provided such offer, is submitted with a stop price of $0.65. handling of Complex Orders that include a stock/
stop price is better than the limit of any public Assume that during the Complex Solicitation ETF component and are entered into the Phlx XL
system. Commentary .07(a)(i) to Rule 1080 states,
asabaliauskas on DSK5VPTVN1PROD with NOTICES
customer Complex Order (excluding all-or-none) on Auction, the following Responses and order interest
the Complex Order book, better than the cPBBO are received: A market maker (‘‘MM1’’) responds to for example, that stock-option orders can only be
when a public customer order (excluding all or sell the strategy 100 times at a price of $0.55; MM1 executed against other stock-option orders and
none) is resting on the book in any component of responds to sell the strategy 100 times at a price of cannot be executed by the System against orders for
the Complex Agency Order, and equal to or better $0.60; a broker-dealer responds to sell the strategy the individual components.
than the cPBBO on the opposite side of the 300 times at a price of $0.60; and another market 67 Similarly, in the case of a Complex Solicitation
Complex Agency Order. This proposed behavior maker (‘‘MM2’’) responds to sell the strategy 200 Auction, if there are Responses that cross the then-
ensures non-contingent public customers on the times at $0.60. existing cPBBO at the time of conclusion of the
limit order book maintain priority. Otherwise, both At the end of the Complex Solicitation Auction, Complex Solicitation Auction, such Responses will
the Complex Agency Order and the Solicited Order since there is not sufficient size to execute the be executed, if possible, at their limit prices. This
will be cancelled with no trade occurring. entire Complex Agency Order at a price(s) better provision parallels PIXL Rule 1080(n)(ii)(F).
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![Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Notices 22579
orders after transmitting its orders to the the execution of Agency Orders. Paper Comments
solicitation mechanism. The Exchange Moreover, as explained above, the
therefore believes the solicitation proposal should encourage Phlx • Send paper comments in triplicate
mechanism satisfies this requirement. participants to compete amongst each to Brent J. Fields, Secretary, Securities
Fourth, in the case of a transaction other by responding with their best and Exchange Commission, 100 F Street
effected for an account with respect to price and size for a particular NE., Washington, DC 20549–1090.
which the Initiating Member or an Solicitation Auction. All submissions should refer to File
associated person thereof exercises Number SR–Phlx–2014–66. This file
investment discretion, neither the C. Self-Regulatory Organization’s number should be included on the
Initiating Member nor any associated Statement on Comments on the subject line if email is used. To help the
person thereof may retain any Proposed Rule Change Received From Commission process and review your
compensation in connection with Members, Participants, or Others comments more efficiently, please use
effecting the transaction, unless the only one method. The Commission will
The Exchange did not solicit or
person authorized to transact business post all comments on the Commission’s
receive written comments prior to filing
for the account has expressly provided Internet Web site (http://www.sec.gov/
the proposed rule change. Written
otherwise by written contract referring rules/sro.shtml). Copies of the
comments on the proposed rule change
to Section 11(a) of the Act and Rule submission, all subsequent
were solicited by the Commission in
11a2–2(T) thereunder.90 Member amendments, all written statements
response to the institution of
organizations relying on Rule 11a2–2(T) with respect to the proposed rule
proceedings for SR–Phlx–2014–66. The
for transactions effected through the change that are filed with the
Commission received one comment
solicitation mechanism must comply Commission, and all written
letter and one letter from the Exchange
with this condition of the Rule. communications relating to the
For all of the foregoing reasons and as in response.91
proposed rule change between the
discussed in the proposal, the Exchange IV. Date of Effectiveness of the Proposed Commission and any person, other than
believes the proposed rule change is Rule Change and Timing for those that may be withheld from the
consistent with the requirements of the Commission Action public in accordance with the
Act and the rules and regulations provisions of 5 U.S.C. 552, will be
thereunder applicable to the Exchange. Within 180 days after the date of available for Web site viewing and
publication of the initial notice in the printing in the Commission’s Public
B. Self-Regulatory Organization’s Federal Register (i.e., October 31, 2014)
Statement on Burden on Competition Reference Room, 100 F Street NE.,
or within such longer period up to an Washington, DC 20549–1090, on official
The Exchange does not believe that additional 60 days (i) as the business days between the hours of
the proposed rule change will impose Commission may designate if it finds 10:00 a.m. and 3:00 p.m. Copies of such
any burden on competition not such longer period to be appropriate filing also will be available for
necessary or appropriate in furtherance and publishes its reasons for so finding inspection and copying at the principal
of the purposes of the Act. To the or (ii) as to which the self-regulatory office of the Exchange. All comments
contrary, the Exchange believes the organization consents, the Commission received will be posted without change;
proposal is pro-competitive. The will issue an order approving or the Commission does not edit personal
proposal would diminish the potential disapproving such proposed rule identifying information from
for foregone market opportunities on the change, as amended. As discussed in submissions. You should submit only
Exchange by allowing Agency Orders to Item VI below, the Commission is information that you wish to make
be entered into the solicitation designating an additional 60 days available publicly. All submissions
mechanism by all members. The within which to issue an order should refer to File Number SR–Phlx–
solicitation mechanism is similar to approving or disapproving the proposed 2014–66, and should be submitted on or
electronic solicitation mechanism rule change. before May 7, 2015.
functionality that is allowed on two
other options exchanges. The Exchange V. Solicitation of Comments VI. Designation of Longer Period for
believes that the new solicitation Commission Action
Interested persons are invited to
mechanism functionality should help it submit written data, views, and Section 19(b)(2) of the Act 92 provides
compete with these other exchanges. arguments concerning the foregoing, that, after initiating disapproval
With respect to intra-market including whether the proposed rule proceedings, the Commission shall issue
competition, the solicitation mechanism change, as modified by Amendment No. an order approving or disapproving the
will be available to all Phlx members for 2, is consistent with the Act. Comments proposed rule change not later than 180
90 See 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition,
may be submitted by any of the days after the date of publication of
Rule 11a2–2(T)(d) requires a member or associated following methods: notice of the filing of the proposed rule
person authorized by written contract to retain change. The Commission may extend
compensation, in connection with effecting Electronic Comments the period for issuing an order
transactions for covered accounts over which such approving or disapproving the proposed
member or associated persons thereof exercises • Use the Commission’s Internet
investment discretion, to furnish at least annually comment form (http://www.sec.gov/ rule change, however, by not more than
60 days if the Commission determines
asabaliauskas on DSK5VPTVN1PROD with NOTICES
to the person authorized to transact business for the rules/sro.shtml); or
account a statement setting forth the total amount that a longer period is appropriate and
of compensation retained by the member in • Send an email to rule-comments@ publishes the reasons for such
connection with effecting transactions for the sec.gov. Please include File Number SR– determination. The proposed rule
account during the period covered by the statement. Phlx–2014–66 on the subject line.
See 17 CFR 240.11a2–2(T)(d). See also 1978 Release change was published for comment in
(stating ‘‘[t]he contractual and disclosure the Federal Register on October 31,
requirements are designed to assure that accounts 91 See supra notes 11 and 12. The letters are
2014. April 29, 2015 is 180 days from
electing to permit transaction-related compensation available on the Commission’s Web site at http://
do so only after deciding that such arrangements are www.sec.gov/comments/sr-phlx-2014-66/
suitable to their interests’’). phlx201466.shtml. 92 15 U.S.C. 78s(b)(2).
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![22580 Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Notices
that date, and June 28, 2015 is an (‘‘Act’’),1 and Rule 19b–4 thereunder,2 the proposed rule change and discussed
additional 60 days from that date. notice is hereby given that on April 1, any comments it received on the
The Commission finds it appropriate 2015, BATS Exchange, Inc. (‘‘Exchange’’ proposed rule change. The text of these
to designate a longer period within or ‘‘BATS’’) filed with the Securities statements may be examined at the
which to issue an order approving or and Exchange Commission places specified in Item IV below. The
disapproving the proposed rule change (‘‘Commission’’) the proposed rule Exchange has prepared summaries, set
so that it has sufficient time to consider change as described in Items I and II forth in Sections A, B, and C below, of
the proposed rule change, the issues below, which Items have been the most significant parts of such
raised in the comment letter that has substantially prepared by the Exchange. statements.
been submitted in connection with the The Exchange has designated this
proposal and the response from the A. Self-Regulatory Organization’s
proposal as a ‘‘non-controversial’’ Statement of the Purpose of, and
Exchange and any comments that may proposed rule change pursuant to
be submitted on the proposed rule Statutory Basis for, the Proposed Rule
Section 19(b)(3)(A) of the Act 3 and Rule Change
change, as modified by Amendment No. 19b–4(f)(6) thereunder,4 which renders
2. As the Commission noted in the it effective upon filing with the 1. Purpose
Order Instituting Proceedings, the Commission. The Commission is Pursuant to Rule 17d–2 under the
proposal raises questions as to whether publishing this notice to solicit Act,7 the Exchange and FINRA entered
the Exchange’s proposed rule change is comments on the proposed rule change into an agreement to allocate regulatory
consistent with the requirements of from interested persons. responsibility for common rules
Sections 6(b)(5) 93 of the Act.94 (‘‘17d–2 Agreement’’). The 17d–2
Extending the time within which to I. Self-Regulatory Organization’s
Statement of the Terms of Substance of Agreement covers common members of
approve or disapprove the proposed the Exchange and FINRA (‘‘Common
rule change, as modified by Amendment the Proposed Rule Change
Members’’) and allocates to FINRA
No. 2, will enable the Commission to The Exchange filed a proposal to: (i) regulatory responsibility, with respect to
more fully consider the issues raised by Amend Exchange Rule 3.5 (Advertising Common Members, for the following: (i)
the proposed rule change, the comment Practices); and (ii) repeal Exchange Rule Examination of Common Members for
letter received to date and the 3.20 (Initial or Partial Payments) to compliance with federal securities laws,
Exchange’s response and any comments conform with the rules of the Financial rules, and regulations, and rules of the
that may be submitted on the proposed Industry Regulatory Authority, Inc. Exchange that the Exchange has
rule change, as modified by Amendment (‘‘FINRA’’) for purposes of an agreement certified as identical or substantially
No. 2. between the Exchange and FINRA similar to FINRA rules; (ii) investigation
Accordingly, the Commission, pursuant to Rule 17d–2 under the Act.5 of Common Members for violations of
pursuant to Section 19(b)(2) of the The proposed rule change is identical to federal securities laws, rules, and
Act,95 designates June 28, 2015, as the proposed rule changes submitted by the regulations, and Exchange rules that the
date by which the Commission should EDGX Exchange, Inc. (‘‘EDGX’’) and the Exchange has certified as identical or
either approve or disapprove the EDGA Exchange, Inc. (‘‘EDGA’’) that substantially identical to FINRA rules;
proposed rule change, as modified by were published by the Commission.6 and (iii) enforcement of compliance by
Amendment No. 2 (File No. SR–Phlx– The text of the proposed rule change Common Members with the federal
2014–66). is available at the Exchange’s Web site securities laws, rules, and regulations,
For the Commission, by the Division of at www.batstrading.com, at the and the rules of the Exchange that the
Trading and Markets, pursuant to delegated principal office of the Exchange, and at Exchange has certified as identical or
authority.96 the Commission’s Public Reference substantially similar to FINRA rules.8
Brent J. Fields, Room. The 17d–2 Agreement included a
Secretary. II. Self-Regulatory Organization’s certification by the Exchange that states
[FR Doc. 2015–09265 Filed 4–21–15; 8:45 am] Statement of the Purpose of, and that the requirements contained in
BILLING CODE 8011–01–P Statutory Basis for, the Proposed Rule certain Exchange rules are identical to,
Change or substantially similar to, certain
FINRA rules that have been identified as
SECURITIES AND EXCHANGE In its filing with the Commission, the comparable. To conform with
COMMISSION Exchange included statements comparable FINRA rules for purposes of
concerning the purpose of, and basis for, the 17d–2 Agreement, the Exchange
[Release No. 34–74743; File No. SR–BATS–
2015–30] 1 15
proposes to: (i) Amend Exchange Rule
U.S.C. 78s(b)(1).
2 17
3.5 (Advertising Practices); and (ii)
CFR 240.19b–4.
Self-Regulatory Organizations; BATS 3 15 U.S.C. 78s(b)(3)(A). repeal Exchange Rule 3.20 (Initial or
Exchange, Inc.; Notice of Filing and 4 17 CFR 240.19b–4(f)(6). Partial Payments).
Immediate Effectiveness of a Proposed 5 17 CFR 240.17d–2.
Rule 3.5 (Advertising Practices)
Rule Change To Amend Exchange 6 See Securities Exchange Act Release Nos. 70837
Rule 3.5 (Advertising Practices) and (Nov. 8, 2013), 78 FR 68889 (Nov. 15, 2013) (SR– The Exchange proposes to delete the
Repeal Exchange Rule 3.20 (Initial or EDGA–2013–32) (Notice of Filing and Immediate current text of Rule 3.5 and adopt text
Effectiveness of Proposed Rule Change to Amend that would require Exchange members 9
Partial Payments)
asabaliauskas on DSK5VPTVN1PROD with NOTICES
EDGA Rule 3.5 (Advertising Practices) and to
Repeal Rule 3.20 (Initial or Partial Payments) to
April 16, 2015. Conform with the Rules of the Financial Industry
7 17 CFR 240.17d–2.
Pursuant to Section 19(b)(1) of the Regulatory Authority); and 70836 (Nov. 8, 2013), 78 8 See Securities and Exchange Release No. 61698
Securities Exchange Act of 1934 FR 68897 (Nov. 15, 2013) (SR–EDGX–2013–40) (Mar. 12, 2010), 75 FR 13151 (Mar. 18, 2010)
(Notice of Filing and Immediate Effectiveness of (approving File No. 10–196).
93 15
Proposed Rule Change to Amend EDGX Rule 3.5 9 ‘‘Member’’ is defined as ‘‘any registered broker
U.S.C. 78f(b)(5). (Advertising Practices) and to Repeal Rule 3.20 or dealer, or any person associated with a registered
94 See supra note 10. (Initial or Partial Payments) to Conform with the broker or dealer, that has been admitted to
95 15 U.S.C. 78s(b)(2).
Rules of the Financial Industry Regulatory membership in the Exchange. A Member will have
96 17 CFR 200.30–3(a)(12) and (a)(57). Authority). the status of a ‘member’ of the Exchange as that
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Document Created: 2015-12-16 08:27:43
Document Modified: 2015-12-16 08:27:43
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| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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