81 FR 44079 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Detection of Loss of Connection
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 129 (July 6, 2016)
Federal Register Volume 81, Issue 129 (July 6, 2016)
| Page Range | 44079-44083 | |
| FR Document | 2016-15915 |
[Federal Register Volume 81, Number 129 (Wednesday, July 6, 2016)] [Notices] [Pages 44079-44083] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-15915] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-78192; File No. SR-Phlx-2016-72] Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Detection of Loss of Connection June 29, 2016. 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 June 15, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I and II, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Phlx Rule 1019, entitled ``Acceptance of Bid or Offer'' to adopt functionality which is designed to assist Phlx members and member organizations (hereinafter ``member(s)'') in the event that they lose communication with their assigned Financial Information eXchange (``FIX'') \3\ or Specialized Quote Feed (``SQF'') \4\ Ports due to a loss of connectivity. --------------------------------------------------------------------------- \3\ FIX permits the entry of orders. \4\ SQF permits the transmission of quotes to the Exchange by a Market Maker using its Client Application. SQF Auction Responses would not be cancelled pursuant to this Rule 1019 because other rules govern auction specific responses. Market Sweeps would not be cancelled pursuant to this Rule 1019 because these type of orders are Immediate or Cancel (``IOC''). --------------------------------------------------------------------------- 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. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Phlx proposes to amend Rule 1019 entitled ``Acceptance of Bid or Offer'' to adopt a new section ``c'' entitled ``Detection of Loss of Connection,'' a new automated process which Phlx proposes to adopt for its SQF \5\ and FIX Ports in the event that they lose communication with a Client Application due to a loss of connectivity. This feature is designed to protect Market Makers \6\ and other market participants from inadvertent exposure to excessive risk. --------------------------------------------------------------------------- \5\ Today, SQF has capability to cancel quotes for technical disconnects, although there is no automated process triggered by pre-set conditions. The rule change would adopt a formalized process to automatically cancel quotes when there is a loss of communication with the member's Client Application. \6\ Phlx Market Makers include Specialists and Registered Options Traders or ``ROTs.'' A Specialist is an Exchange member who is registered as an options specialist. See Phlx Rule 1020(a). An ROT is defined in Exchange Rule 1014(b) as a regular member or a foreign currency options participant of the Exchange located on the trading floor who has received permission from the Exchange to trade in options for his own account. See Exchange Rule 1014 (b)(i) and (ii). A ROT includes a Streaming Quote Trader or ``SQT,'' a Remote Streaming Quote Trader or ``RSQT'' and a Non-SQT, which by definition is neither a SQT nor a RSQT. For purposes of this filing, Specialists and ROTs shall be defined broadly as ``Market Makers.'' --------------------------------------------------------------------------- By way of background, Phlx members currently enter quotes and orders utilizing either an SQF or FIX Port. SQF is utilized by Phlx Market Makers and FIX is utilized by all market participants. These ports are trading system components through which a member communicates its quotes and/or orders to the Phlx match engine through the member's Client Application. Under the proposed rule change, an SQF Port would be defined as the Exchange's system component through which members communicate their quotes from the member's Client Application at proposed Rule 1019(c)(i)(B). A FIX Port would be defined as the Exchange's system component through which members communicate their orders from the member's Client Application at proposed Rule 1019(c)(i)(C). Market Makers may submit quotes to the Exchange from one or more SQF Ports. Similarly, market participants may submit orders to the Exchange from one or more FIX Ports. The proposed cancellation feature will be mandatory for each Market Maker utilizing SQF for the removal of quotes and optional for any market participant utilizing FIX for the removal of orders. When the SQF Port detects the loss of communication with a member's Client Application because the Exchange's server does not receive a Heartbeat message \7\ for a certain period of time (a period of ``nn'' seconds), the Exchange will automatically logoff the member's affected Client Application and automatically cancel all of the member's open quotes. Quotes will be cancelled across all Client Applications that are associated with the same Specialist or Registered Options Trader (collectively ``Market Maker'') ID and underlying issues. --------------------------------------------------------------------------- \7\ It is important to note that the Exchange separately sends a connectivity message to the member as evidence of connectivity. --------------------------------------------------------------------------- The Exchange proposes to define ``Client Application'' as the system component of the member through which the Exchange member or member organization communicates its quotes and orders to the Exchange at proposed Rule 1019(c)(i)(D). The Exchange proposes to define a ``Heartbeat'' message as a communication which acts as a virtual pulse between the SQF or FIX Port and the Client Application at proposed Rule 1019(c)(i)(A). The Heartbeat message sent by the member and subsequently received by the Exchange allows the SQF or FIX Port to continually monitor its connection with the member. [[Page 44080]] SQF Ports The Exchange's system has a default time period, which will trigger a disconnect from the Exchange and remove quotes, set to fifteen (15) seconds for SQF Ports. A member may change the default period of ``nn'' seconds of no technical connectivity to trigger a disconnect from the Exchange and remove quotes to a number between one hundred (100) milliseconds and 99,999 milliseconds for SQF Ports prior to each session of connectivity to the Exchange. This feature is enabled for each Market Maker and may not be disabled. There are two ways to change the number of ``nn'' seconds: (1) Systemically or (2) by contacting the Exchange's operations staff. If the member systemically changes the default number of ``nn'' seconds, that new setting shall be in effect throughout the current session of connectivity \8\ and will then default back to fifteen seconds.\9\ The member may change the default setting systemically prior to each session of connectivity. The member may also communicate the time to the Exchange by calling the Exchange's operations staff. If the time period is communicated to the Exchange by calling Exchange operations, the number of ``nn'' seconds selected by the member shall persist for each subsequent session of connectivity until the member either contacts Exchange operations and changes the setting or the member systemically selects another time period prior to the next session of connectivity. --------------------------------------------------------------------------- \8\ Each time the member connects to the Exchange's system is a new period of connectivity. For example, if the member were to connect and then disconnect within a trading day several times, each time the member disconnected the next session would be a new session of connectivity. \9\ The Exchange's system would capture the new setting information that was changed by the member and utilize the amended setting for that particular session. The setting would not persist beyond the current session of connectivity and the setting would default back to 15 seconds for the next session if the member did not change the setting again. --------------------------------------------------------------------------- FIX Ports The Exchange's system has a default time period, which will trigger a disconnect from the Exchange and remove orders, set to thirty (30) seconds for FIX Ports. The Phlx member may disable the removal of orders feature but not the disconnect feature. If the Phlx member elects to have its orders removed, in addition to the disconnect, the Phlx member may determine a time period of no technical connectivity to trigger the disconnect and removal of orders between one hundred (100) milliseconds and 99,999 milliseconds [sic]. There are two ways to change the number of ``nn'' seconds: (1) Systemically or (2) by contacting the Exchange's operations staff. If the member systemically changes the default number of ``nn'' seconds, that new setting shall be in effect throughout that session of connectivity and will then default back to thirty seconds at the end of that session. The member may change the default setting systemically prior to each session of connectivity. The member may also communicate the time to the Exchange by calling the Exchange's operations staff. If the time period is communicated to the Exchange by calling Exchange operations, the number of ``nn'' seconds selected by the member shall persist for each subsequent session of connectivity until the member either contacts Exchange operations and changes the setting or the member systemically selects another time period prior to the next session of connectivity. Similar to SQF Ports, when a FIX Port detects the loss of communication with a member's Client Application for a certain time period (a period of ``nn'' seconds), the Exchange will automatically logoff the member's affected Client Application and if elected, automatically cancel all open orders. The member may have an order which has routed away prior to the cancellation, in the event that the order returns to the Order Book, because it was either not filled or partially filled, that order will be subsequently cancelled. The disconnect feature is mandatory for FIX users however the user has the ability to elect to also enable a removal feature, which will cancel all open orders submitted through that FIX Port. If the removal of orders feature is not enabled, the system will simply disconnect the FIX user and not cancel any orders. The FIX user would have to commence a new session to add, modify or cancel its orders once disconnected. The Exchange will issue an Options Trader Alert advising members on the manner in which they should communicate the number of ``nn'' seconds to the Exchange for SQF and FIX Ports. The trigger for the SQF and FIX Ports is event and Client Application specific. The automatic cancellation of the Market Maker's quotes for SQF Ports and open orders, if elected by the member for FIX Ports, entered into the respective SQF or FIX Ports via a particular Client Application will neither impact nor determine the treatment of the quotes of other Market Makers entered into SQF Ports or orders of the same or other members entered into the FIX Ports via a separate and distinct Client Application. In other words, with respect to quotes, each Market Maker only maintains one quote in a given option in the order book. A new quote would replace the existing quote. Orders on the other hand do not replace each other in the order book as multiple orders may exist in a given option at once. Therefore the difference in the impact as between Market Makers submitting quotes and members submitting orders is that quotes may continue to be submitted and/or refreshed by unaffected Market Makers because these market participants are cancelled based on ID when an SQF Port disconnects, whereas all of the open orders submitted by a given firm will be impacted when a FIX port disconnects, if the firm elected to have orders cancelled. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act \10\ in general, and furthers the objectives of Section 6(b)(5) of the Act \11\ 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 imposing this mandatory removal functionality on Market Makers to prevent disruption in the marketplace and also offering this removal feature to other market participants. --------------------------------------------------------------------------- \10\ 15 U.S.C. 78f(b). \11\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- Market Makers will be required to utilize this removal functionality with respect to SQF Ports. This feature will remove impediments to and perfect the mechanism of a free and open market and a national market system and protect investors and the public interest by requiring Market Makers quotes to be removed in the event of a loss of connectivity with the Exchange's system. Market Makers provide liquidity to the market place and have obligations unlike other market participants.\12\ This risk feature is important because it will enable Market Makers to avoid risks associated with inadvertent executions in the event of a loss of connectivity with the Exchange. The proposed rule change is designed to not permit unfair discrimination among market participants, as it would apply [[Page 44081]] uniformly to all Market Makers utilizing SQF. --------------------------------------------------------------------------- \12\ See Rule 1014 titled ``Obligations and Restrictions Applicable to Specialists and Registered Options Traders.'' --------------------------------------------------------------------------- The disconnect feature of FIX is mandatory, however market participants will have the option to either enable or disable the cancellation feature, which would result in the cancellation of all orders submitted over a FIX port when such port disconnects. It is appropriate to offer this removal feature as optional to all market participants utilizing FIX, because unlike Market Makers who are required to provide quotes in all products in which they are registered, market participants utilizing FIX do not bear the same magnitude of risk of potential erroneous or unintended executions. In addition, market participants utilizing FIX may desire their orders to remain on the order book despite a technical disconnect, so as not to miss any opportunities for execution of such orders while the FIX session is disconnected. Utilizing a time period for SQF Ports of fifteen (15) seconds and permitting the Market Maker to modify the setting to between 100 milliseconds and 99,999 milliseconds is consistent with the Act because the Exchange does not desire to trigger unwarranted logoffs of members and therefore allows members the ability to set their time in order to enable the Exchange the authority to disconnect the member with this feature. Each Market Maker has different levels of sensitivity with respect to this disconnect setting and each Market Maker has their own system safeguards as well. A default setting of fifteen (15) seconds is appropriate to capture the needs of all Market Makers and high enough not to trigger unwarranted removal of quotes. Further, Market Makers are able to customize their setting. The Exchange's proposal to permit a timeframe for SQF Ports between 100 milliseconds and 99,999 milliseconds is consistent with the Act and the protection of investors because the purpose of this feature is to mitigate the risk of potential erroneous or unintended executions associated with a loss in communication with a Client Application. Members are able to better anticipate the appropriate time within which they may require prior to a logoff as compared to the Exchange. The member is being offered a timeframe by the Exchange within which to select the appropriate time. The Exchange does not desire to trigger unwarranted logoffs of members and therefore permits members to provide an alternative time to the Exchange, within the Exchange's prescribed timeframe, which authorized the Exchange to disconnect the member. The ``nn'' seconds serve as the member's instruction to the Exchange to act upon the loss of connection and remove quotes from the system. This range will accommodate members in selecting their appropriate times within the prescribed timeframes. Also, Market Makers have quoting obligations \13\ and are more sensitive to price movements as compared to other market participants. It is consistent with the Act to provide a wider timeframe within which to customize settings for FIX Ports as compared to SQF Ports. Market Makers need to remain vigilant of market conditions and react more quickly to market movements as compared to other members entering orders into the system. The proposal acknowledges this sensitivity borne by Market Makers and reflects the reaction time of Market Makers as compared to members entering orders. Of note, the proposed customized timeframe for FIX would be too long for Market Makers given their quoting requirements and sensitivity to price movements. Market Makers would be severely impacted by a loss of connectivity of more than several seconds. The Market Maker would have exposure during the time period in which they are unable to manage their quote and update that quote. The member is best positioned to determine their setting. --------------------------------------------------------------------------- \13\ Id. --------------------------------------------------------------------------- The Exchange's proposal is further consistent with the Act because it will mitigate the risk of potential erroneous or unintended executions associated with a loss in communication with a Client Application which protects investors and the public interest. Also, any interest that is executable against a Market Maker's quotes that is received \14\ by the Exchange prior to the trigger of the disconnect to the Client Application, which is processed by the system, automatically executes at the price up to the Market Maker's size. In other words, the system will process the request for cancellation in the order it was received by the system. --------------------------------------------------------------------------- \14\ The time of receipt for an order or quote is the time such message is processed by the Exchange book. --------------------------------------------------------------------------- The system operates consistently with the firm quote obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS. Specifically, with respect to Market Makers, their obligation to provide continuous two-sided quotes on a daily basis is not diminished by the removal of such quotes triggered by the disconnect. Market Makers are required to provide continuous two-sided quotes on a daily basis.\15\ Market Makers will not be relieved of the obligation to provide continuous two-sided quotes on a daily basis, nor will it prohibit the Exchange from taking disciplinary action against a Market Maker for failing to meet the continuous quoting obligation each trading day as a result of disconnects. --------------------------------------------------------------------------- \15\ See note 12 above. --------------------------------------------------------------------------- Today, BOX Options Exchange LLC offers its market makers a similar feature to the one proposed by the Exchange for the automatic removal of quotes when connectivity issues arise.\16\ BOX automatically cancels a market maker's quotes for all appointed classes when BOX loses communication with a market maker's trading host for a specified time period. Phlx also proposes to similarly cancel Market Maker open quotes associated with the same Market Maker ID and underlyings. Phlx proposes to cancel all Market Maker's quotes in options which are assigned to that particular Market Maker. BOX appears to similarly cancel all open quotes in options which are assigned to a specific Market Maker. BOX's timeframe is no less than 1 second or no greater than 9 seconds. Phlx proposes a default timeframe for SQF Ports of fifteen (15) seconds with the ability to modify this setting with a value between 100 milliseconds and 99,999 milliseconds. The proposal to permit Market Makers to amend the default setting at the beginning of each session of connectivity is consistent with the Act because it avoids unwarranted logoffs of members and provides members the opportunity to set a time, within the prescribed timeframe, to authorize the Exchange to disconnect the member. --------------------------------------------------------------------------- \16\ See BOX Rule 8140. --------------------------------------------------------------------------- Another distinction to note is that while BOX sets the time for the participant, Phlx permits members to modify the default setting for SQF Ports to a more appropriate time within a set of parameters. While BOX does not offer the cancellations of orders, Chicago Board Options Exchange, Incorporated's (``CBOE'') does offer its members a similar mechanism to cancel orders. CBOE's proposal is discussed further below. With respect to FIX Ports, the Exchange will offer this optional removal functionality to all market participants. Offering the removal feature on a voluntary basis to all other non-Market Maker market participants is consistent with the Act because it permits them an opportunity to utilize this risk feature, if desired, and avoid risks associated with inadvertent executions in the event of a loss of connectivity with the Exchange. The removal feature is designed to mitigate [[Page 44082]] the risk of missed and/or unintended executions associated with a loss in communication with a Client Application. The proposed rule change is designed to not permit unfair discrimination among market participants, as this removal feature will be offered uniformly to all Phlx members utilizing FIX. The Exchange will disconnect members from the Exchange and not cancel its orders if the removal feature is disabled. The disconnect feature is mandatory and will cause the member to be disconnected within the default timeframe or the timeframe otherwise specified by the member. This feature is consistent with the Act because it enables FIX users the ability to disconnect from the Exchange, assess the situation and make a determination concerning their risk exposure. The Exchange notes that in the event that orders need to be removed, the Phlx market participant may elect to utilize the Kill Switch \17\ feature. The Exchange believes that it is consistent with the Act to require other market participants to be disconnected because the participant is otherwise not connected to the Exchange's system and the member simply needs to reconnect to commence submitting and cancelling orders. The Exchange believes requiring a disconnect when a loss of communication is detected is a rational course of action for the Exchange to alert the member of the technical connectivity issue. --------------------------------------------------------------------------- \17\ See Phlx Rule 1019(b). --------------------------------------------------------------------------- The Exchange's proposal to set a default timeframe of thirty (30) seconds and permit a FIX user to modify the timeframe for FIX ports to between 1 second and 30 seconds for the removal of orders is consistent with the Act and the protection of investors because the purpose of this optional feature is to mitigate the risk of potential erroneous or unintended executions associated with a loss in communication with a Client Application. Members selecting the removal feature are able to better anticipate the appropriate time that they require prior to a logoff as compared to the Exchange, within the Exchange's prescribed timeframes. The Exchange does not desire to trigger unwarranted logoffs of members and therefore permits members to provide a time to the Exchange, within the Exchange's prescribed timeframe, to authorize the Exchange to disconnect the member and remove orders. The ``nn'' seconds serve as the member's instruction to the Exchange to act upon the loss of connection and remove orders from the system. The member is also best positioned to determine that they only desire the disconnect feature, which is mandatory, and do not desire to have their orders removed. The Exchange's proposal to offer other market participants the removal feature on a voluntary basis is similar to CBOE's Rule.\18\ CBOE offers market participants, on a voluntary basis, the ability to cancel orders entered through FIX when a technical disconnect occurs, similar to the Phlx proposal. CBOE's Rule offers members the opportunity to cancel orders within a timeframe determined by the Trading Permit Holder. The default value selected by the CBOE is no less than 5 seconds. The Exchange's default timeframe for the disconnect and removal of orders for FIX is 30 seconds with the ability to modify that timeframe to between 1 second and 30 seconds, on a session by session basis, in contrast to CBOE. Also, in contrast to CBOE, FIX users may choose to enable or disable the cancellation feature when a disconnect occurs. The proposed timeframe for the FIX feature is consistent with the Act because the Exchange seeks to provide its members with the ability to select the amount of time that they desire for a loss of communication prior to taking action to cancel open orders or simply disconnect. The member should have the ability to select the appropriate time, within a prescribed timeframe, for authorizing the Exchange to cancel its open orders or simply disconnect from the Exchange. Inadvertent cancellations may create a greater risk of harm to investors and the member is better positioned to determine the appropriate time, with the prescribed timeframe, to remove orders or disconnect. CBOE's rule also offers members the ability to cancel orders as proposed by Phlx, on a voluntary basis. --------------------------------------------------------------------------- \18\ See CBOE Rule 6.23C. --------------------------------------------------------------------------- The proposed rule change will help maintain a fair and orderly market which promotes efficiency and protects investors. This mandatory removal feature for Market Makers and optional removal for all other market participants will mitigate the risk of potential erroneous or unintended executions associated with a loss in communication with a Client Application. 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. Specifically, the Exchange does not believe the proposed rule change will cause an undue burden on intra-market competition because Market Makers, unlike other market participants, have greater risks in the market place. Quoting across many series in an option creates large principal positions that expose Market Makers, who are required to continuously quote in assigned options, to potentially significant market risk. Providing a broader timeframe for the disconnect and removal of orders for FIX as compared to the removal of quotes for SQF Ports does not create an undue burden on competition. Market Makers have quoting obligations \19\ and are more sensitive to price movements as compared to other market participants. The proposal is consistent with the Act because it provides a tighter timeframe for the disconnect and removal of quotes for SQF Ports as compared to the removal of orders for FIX Ports. Market Makers need to remain vigilant of market conditions and react more quickly to market movements as compared to other members entering multiple orders into the system. The proposal reflects this sensitivity borne by Market Makers and reflects the reaction time of Market Makers as compared to other members entering orders. Offering the removal feature to other market participants on an optional basis does not create an undue burden on intra-market competition because unlike Market Makers, other market participants do not bear the same risks of potential erroneous or unintended executions. FIX users have the opportunity to disable the cancellation feature and simply disconnect from the Exchange. FIX users may also set a timeframe that is appropriate for their business. It is appropriate to offer this optional cancellation functionality to other market participants for open orders, because those orders are subject to risks of missed and/or unintended executions due to a lack of connectivity which the participants needs to weigh. Finally, the Exchange does not believe that such change will impose any burden on inter-market competition that is not necessary or appropriate in furtherance of the purposes of the Act. Other options exchanges offer similar functionality.\20\ --------------------------------------------------------------------------- \19\ See note 12 above. \20\ See BOX's Rule 8140 and CBOE's Rule 6.23C. --------------------------------------------------------------------------- C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. [[Page 44083]] III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6) thereunder.\22\ --------------------------------------------------------------------------- \21\ 15 U.S.C. 78s(b)(3)(A). \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intention to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. --------------------------------------------------------------------------- A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative for 30 days from the date of filing. However, Rule 19b-4(f)(6)(iii) \23\ permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that it may immediately offer the proposed risk protection feature. The Commission believes that waiving the 30- day operative delay is consistent with the protection of investors and the public interest. The Exchange proposes to adopt a functionality designed to assist Phlx members with managing certain risks in the event that a member loses communication with their FIX or SQF Ports due to a loss of connectivity. The Commission notes that two other options exchanges currently have similar risk protection functionalities for their members.\24\ Therefore, the Commission hereby waives the 30-day operative delay and designates the proposal effective upon filing.\25\ At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. --------------------------------------------------------------------------- \23\ 17 CFR 240.19b-4(f)(6)(iii). \24\ See BOX Rule 8140 and CBOE Rule 6.23C. \25\ For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). --------------------------------------------------------------------------- IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-Phlx-2016-72 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-Phlx-2016-72. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; 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-2016-72 and should be submitted on or before July 27, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\26\ --------------------------------------------------------------------------- \26\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-15915 Filed 7-5-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices 44079
The subject matter of the Closed Feed (‘‘SQF’’) 4 Ports due to a loss of market participants from inadvertent
Meeting will be: connectivity. exposure to excessive risk.
Institution and settlement of The text of the proposed rule change By way of background, Phlx members
injunctive actions; is available on the Exchange’s Web site currently enter quotes and orders
Institution and settlement of at http:// utilizing either an SQF or FIX Port. SQF
administrative proceedings; nasdaqomxphlx.cchwallstreet.com/, at is utilized by Phlx Market Makers and
Resolution of litigation claims; and the principal office of the Exchange, and FIX is utilized by all market
Other matters relating to enforcement at the Commission’s Public Reference participants. These ports are trading
proceedings. Room. system components through which a
At times, changes in Commission member communicates its quotes and/or
II. Self-Regulatory Organization’s
priorities require alterations in the orders to the Phlx match engine through
Statement of the Purpose of, and
scheduling of meeting items. the member’s Client Application. Under
Statutory Basis for, the Proposed Rule
For further information and to the proposed rule change, an SQF Port
Change
ascertain what, if any, matters have been would be defined as the Exchange’s
In its filing with the Commission, the system component through which
added, deleted or postponed, please Exchange included statements
contact Brent J. Fields from the Office of members communicate their quotes
concerning the purpose of and basis for from the member’s Client Application at
the Secretary at (202) 551–5400. the proposed rule change and discussed proposed Rule 1019(c)(i)(B). A FIX Port
Dated: June 30, 2016. any comments it received on the would be defined as the Exchange’s
Brent J. Fields, proposed rule change. The text of these system component through which
Secretary. statements may be examined at the members communicate their orders
[FR Doc. 2016–16076 Filed 7–1–16; 11:15 am] places specified in Item IV below. The from the member’s Client Application at
BILLING CODE 8011–01–P
Exchange has prepared summaries, set proposed Rule 1019(c)(i)(C). Market
forth in sections A, B, and C below, of Makers may submit quotes to the
the most significant aspects of such Exchange from one or more SQF Ports.
SECURITIES AND EXCHANGE statements. Similarly, market participants may
COMMISSION A. Self-Regulatory Organization’s submit orders to the Exchange from one
Statement of the Purpose of, and or more FIX Ports. The proposed
[Release No. 34–78192; File No. SR–Phlx– Statutory Basis for, the Proposed Rule cancellation feature will be mandatory
2016–72] Change for each Market Maker utilizing SQF for
the removal of quotes and optional for
Self-Regulatory Organizations; 1. Purpose any market participant utilizing FIX for
NASDAQ PHLX LLC; Notice of Filing Phlx proposes to amend Rule 1019 the removal of orders.
and Immediate Effectiveness of entitled ‘‘Acceptance of Bid or Offer’’ to When the SQF Port detects the loss of
Proposed Rule Change Relating to adopt a new section ‘‘c’’ entitled communication with a member’s Client
Detection of Loss of Connection ‘‘Detection of Loss of Connection,’’ a Application because the Exchange’s
new automated process which Phlx server does not receive a Heartbeat
June 29, 2016.
proposes to adopt for its SQF 5 and FIX message 7 for a certain period of time (a
Pursuant to Section 19(b)(1) of the period of ‘‘nn’’ seconds), the Exchange
Ports in the event that they lose
Securities Exchange Act of 1934 will automatically logoff the member’s
communication with a Client
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 affected Client Application and
Application due to a loss of
notice is hereby given that on June 15, automatically cancel all of the member’s
connectivity. This feature is designed to
2016, NASDAQ PHLX LLC (‘‘Phlx’’ or open quotes. Quotes will be cancelled
protect Market Makers 6 and other
‘‘Exchange’’) filed with the Securities across all Client Applications that are
and Exchange Commission (‘‘SEC’’ or 4 SQF permits the transmission of quotes to the associated with the same Specialist or
‘‘Commission’’) the proposed rule Exchange by a Market Maker using its Client Registered Options Trader (collectively
change as described in Items I and II, Application. SQF Auction Responses would not be ‘‘Market Maker’’) ID and underlying
below, which Items have been prepared cancelled pursuant to this Rule 1019 because other
rules govern auction specific responses. Market issues.
by the Exchange. The Commission is Sweeps would not be cancelled pursuant to this The Exchange proposes to define
publishing this notice to solicit Rule 1019 because these type of orders are ‘‘Client Application’’ as the system
comments on the proposed rule change Immediate or Cancel (‘‘IOC’’). component of the member through
from interested persons. 5 Today, SQF has capability to cancel quotes for
which the Exchange member or member
technical disconnects, although there is no
I. Self-Regulatory Organization’s automated process triggered by pre-set conditions. organization communicates its quotes
Statement of the Terms of Substance of The rule change would adopt a formalized process and orders to the Exchange at proposed
to automatically cancel quotes when there is a loss Rule 1019(c)(i)(D). The Exchange
the Proposed Rule Change of communication with the member’s Client
Application.
proposes to define a ‘‘Heartbeat’’
The Exchange proposes to amend message as a communication which acts
6 Phlx Market Makers include Specialists and
Phlx Rule 1019, entitled ‘‘Acceptance of as a virtual pulse between the SQF or
Registered Options Traders or ‘‘ROTs.’’ A Specialist
Bid or Offer’’ to adopt functionality is an Exchange member who is registered as an FIX Port and the Client Application at
which is designed to assist Phlx options specialist. See Phlx Rule 1020(a). An ROT proposed Rule 1019(c)(i)(A). The
members and member organizations is defined in Exchange Rule 1014(b) as a regular
Heartbeat message sent by the member
(hereinafter ‘‘member(s)’’) in the event member or a foreign currency options participant of
the Exchange located on the trading floor who has and subsequently received by the
ehiers on DSK5VPTVN1PROD with NOTICES
that they lose communication with their received permission from the Exchange to trade in Exchange allows the SQF or FIX Port to
assigned Financial Information options for his own account. See Exchange Rule continually monitor its connection with
eXchange (‘‘FIX’’) 3 or Specialized Quote 1014 (b)(i) and (ii). A ROT includes a Streaming
the member.
Quote Trader or ‘‘SQT,’’ a Remote Streaming Quote
Trader or ‘‘RSQT’’ and a Non-SQT, which by
1 15 U.S.C. 78s(b)(1). 7 It is important to note that the Exchange
definition is neither a SQT nor a RSQT. For
2 17 CFR 240.19b–4. purposes of this filing, Specialists and ROTs shall separately sends a connectivity message to the
3 FIX permits the entry of orders. be defined broadly as ‘‘Market Makers.’’ member as evidence of connectivity.
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![44080 Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices
SQF Ports milliseconds and 99,999 milliseconds Makers entered into SQF Ports or orders
The Exchange’s system has a default [sic]. of the same or other members entered
time period, which will trigger a There are two ways to change the into the FIX Ports via a separate and
disconnect from the Exchange and number of ‘‘nn’’ seconds: (1) distinct Client Application. In other
remove quotes, set to fifteen (15) Systemically or (2) by contacting the words, with respect to quotes, each
seconds for SQF Ports. A member may Exchange’s operations staff. If the Market Maker only maintains one quote
change the default period of ‘‘nn’’ member systemically changes the in a given option in the order book. A
seconds of no technical connectivity to default number of ‘‘nn’’ seconds, that new quote would replace the existing
trigger a disconnect from the Exchange new setting shall be in effect throughout quote. Orders on the other hand do not
and remove quotes to a number between that session of connectivity and will replace each other in the order book as
one hundred (100) milliseconds and then default back to thirty seconds at multiple orders may exist in a given
99,999 milliseconds for SQF Ports prior the end of that session. The member option at once. Therefore the difference
to each session of connectivity to the may change the default setting in the impact as between Market Makers
Exchange. This feature is enabled for systemically prior to each session of submitting quotes and members
each Market Maker and may not be connectivity. The member may also submitting orders is that quotes may
disabled. communicate the time to the Exchange continue to be submitted and/or
There are two ways to change the by calling the Exchange’s operations refreshed by unaffected Market Makers
number of ‘‘nn’’ seconds: (1) staff. If the time period is communicated because these market participants are
Systemically or (2) by contacting the to the Exchange by calling Exchange cancelled based on ID when an SQF
Exchange’s operations staff. If the operations, the number of ‘‘nn’’ seconds Port disconnects, whereas all of the
member systemically changes the selected by the member shall persist for open orders submitted by a given firm
default number of ‘‘nn’’ seconds, that each subsequent session of connectivity will be impacted when a FIX port
new setting shall be in effect throughout until the member either contacts disconnects, if the firm elected to have
the current session of connectivity 8 and Exchange operations and changes the orders cancelled.
will then default back to fifteen setting or the member systemically
selects another time period prior to the 2. Statutory Basis
seconds.9 The member may change the
default setting systemically prior to each next session of connectivity. The Exchange believes that its
session of connectivity. The member Similar to SQF Ports, when a FIX Port proposal is consistent with Section 6(b)
may also communicate the time to the detects the loss of communication with of the Act 10 in general, and furthers the
Exchange by calling the Exchange’s a member’s Client Application for a objectives of Section 6(b)(5) of the Act 11
operations staff. If the time period is certain time period (a period of ‘‘nn’’ in particular, in that it is designed to
communicated to the Exchange by seconds), the Exchange will promote just and equitable principles of
calling Exchange operations, the automatically logoff the member’s trade, to remove impediments to and
number of ‘‘nn’’ seconds selected by the affected Client Application and if perfect the mechanism of a free and
member shall persist for each elected, automatically cancel all open open market and a national market
subsequent session of connectivity until orders. The member may have an order system, and, in general to protect
which has routed away prior to the investors and the public interest, by
the member either contacts Exchange
cancellation, in the event that the order imposing this mandatory removal
operations and changes the setting or
returns to the Order Book, because it functionality on Market Makers to
the member systemically selects another
was either not filled or partially filled, prevent disruption in the marketplace
time period prior to the next session of
that order will be subsequently and also offering this removal feature to
connectivity.
cancelled.
other market participants.
FIX Ports The disconnect feature is mandatory
Market Makers will be required to
The Exchange’s system has a default for FIX users however the user has the
ability to elect to also enable a removal utilize this removal functionality with
time period, which will trigger a respect to SQF Ports. This feature will
disconnect from the Exchange and feature, which will cancel all open
orders submitted through that FIX Port. remove impediments to and perfect the
remove orders, set to thirty (30) seconds mechanism of a free and open market
for FIX Ports. The Phlx member may If the removal of orders feature is not
enabled, the system will simply and a national market system and
disable the removal of orders feature but protect investors and the public interest
disconnect the FIX user and not cancel
not the disconnect feature. If the Phlx by requiring Market Makers quotes to be
any orders. The FIX user would have to
member elects to have its orders removed in the event of a loss of
commence a new session to add, modify
removed, in addition to the disconnect, connectivity with the Exchange’s
or cancel its orders once disconnected.
the Phlx member may determine a time system. Market Makers provide liquidity
The Exchange will issue an Options
period of no technical connectivity to to the market place and have obligations
Trader Alert advising members on the
trigger the disconnect and removal of unlike other market participants.12 This
manner in which they should
orders between one hundred (100) risk feature is important because it will
communicate the number of ‘‘nn’’
seconds to the Exchange for SQF and enable Market Makers to avoid risks
8 Each time the member connects to the
FIX Ports. associated with inadvertent executions
Exchange’s system is a new period of connectivity.
For example, if the member were to connect and The trigger for the SQF and FIX Ports in the event of a loss of connectivity
then disconnect within a trading day several times, is event and Client Application specific. with the Exchange. The proposed rule
each time the member disconnected the next The automatic cancellation of the change is designed to not permit unfair
session would be a new session of connectivity. discrimination among market
ehiers on DSK5VPTVN1PROD with NOTICES
9 The Exchange’s system would capture the new Market Maker’s quotes for SQF Ports
and open orders, if elected by the participants, as it would apply
setting information that was changed by the
member and utilize the amended setting for that member for FIX Ports, entered into the 10 15
particular session. The setting would not persist U.S.C. 78f(b).
respective SQF or FIX Ports via a 11 15
beyond the current session of connectivity and the U.S.C. 78f(b)(5).
setting would default back to 15 seconds for the
particular Client Application will 12 See Rule 1014 titled ‘‘Obligations and
next session if the member did not change the neither impact nor determine the Restrictions Applicable to Specialists and
setting again. treatment of the quotes of other Market Registered Options Traders.’’
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![Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices 44083
III. Date of Effectiveness of the whether the proposed rule should be For the Commission, by the Division of
Proposed Rule Change and Timing for approved or disapproved. Trading and Markets, pursuant to delegated
Commission Action authority.26
IV. Solicitation of Comments Robert W. Errett,
Because the foregoing proposed rule
Deputy Secretary.
change does not: (i) Significantly affect Interested persons are invited to
[FR Doc. 2016–15915 Filed 7–5–16; 8:45 am]
the protection of investors or the public submit written data, views, and
interest; (ii) impose any significant BILLING CODE 8011–01–P
arguments concerning the foregoing,
burden on competition; and (iii) become including whether the proposed rule
operative for 30 days from the date on change is consistent with the Act.
which it was filed, or such shorter time SECURITIES AND EXCHANGE
Comments may be submitted by any of COMMISSION
as the Commission may designate, the the following methods:
proposed rule change has become Sunshine Act Meeting
effective pursuant to Section 19(b)(3)(A) Electronic Comments
of the Act 21 and Rule 19b–4(f)(6) Notice is hereby given, pursuant to
thereunder.22 • Use the Commission’s Internet the provisions of the Government in the
A proposed rule change filed under comment form (http://www.sec.gov/ Sunshine Act, Public Law 94–409, that
Rule 19b–4(f)(6) normally does not rules/sro.shtml); or the Securities and Exchange
become operative for 30 days from the • Send an email to rule-comments@ Commission Equity Market Structure
date of filing. However, Rule 19b– sec.gov. Please include File Number SR– Advisory Committee will hold a
4(f)(6)(iii) 23 permits the Commission to Phlx–2016–72 on the subject line. telephonic meeting on Friday, July 8,
designate a shorter time if such action 2016. The meeting will begin at 2:00
is consistent with the protection of Paper Comments p.m. (ET) and will be open to the public
investors and the public interest. The via webcast on the Commission’s Web
Exchange has asked the Commission to • Send paper comments in triplicate site at www.sec.gov.
waive the 30-day operative delay so that to Secretary, Securities and Exchange On June 10, 2016, the Commission
it may immediately offer the proposed Commission, 100 F Street NE., published notice of the Committee
risk protection feature. The Commission Washington, DC 20549–1090. meeting (Release No. 34–78040),
believes that waiving the 30-day All submissions should refer to File indicating that the meeting is open to
operative delay is consistent with the Number SR–Phlx–2016–72. This file the public and inviting the public to
protection of investors and the public number should be included on the submit written comments to the
interest. The Exchange proposes to Committee. This Sunshine Act notice is
subject line if email is used. To help the
adopt a functionality designed to assist being issued because a majority of the
Commission process and review your
Phlx members with managing certain Commission may attend the meeting.
risks in the event that a member loses comments more efficiently, please use The agenda for the meeting includes
communication with their FIX or SQF only one method. The Commission will presentations by the Regulation NMS
Ports due to a loss of connectivity. The post all comments on the Commission’s and Trading Venues Regulation
Commission notes that two other Internet Web site (http://www.sec.gov/ subcommittees and consideration of a
options exchanges currently have rules/sro.shtml). Copies of the recommendation for an access fee pilot
similar risk protection functionalities submission, all subsequent and recommendations related to trading
for their members.24 Therefore, the amendments, all written statements venues regulation.
Commission hereby waives the 30-day with respect to the proposed rule For further information, please
operative delay and designates the change that are filed with the contact Brent J. Fields from the Office of
proposal effective upon filing.25 At any Commission, and all written the Secretary at (202) 551–5400.
time within 60 days of the filing of the communications relating to the Dated: June 30, 2016.
proposed rule change, the Commission proposed rule change between the Brent J. Fields,
summarily may temporarily suspend Commission and any person, other than Secretary.
such rule change if it appears to the those that may be withheld from the [FR Doc. 2016–16075 Filed 7–1–16; 11:15 am]
Commission that such action is public in accordance with the BILLING CODE 8011–01–P
necessary or appropriate in the public provisions of 5 U.S.C. 552, will be
interest, for the protection of investors, available for Web site viewing and
or otherwise in furtherance of the printing in the Commission’s Public
purposes of the Act. If the Commission DEPARTMENT OF STATE
Reference Room, 100 F Street NE.,
takes such action, the Commission shall Washington, DC 20549, on official [Public Notice: 9628]
institute proceedings to determine
business days between the hours of Advisory Committee for the Study of
21 15 U.S.C. 78s(b)(3)(A).
10:00 a.m. and 3:00 p.m. Copies of the Eastern Europe and the Independent
22 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– filing also will be available for States of the Former Soviet Union
4(f)(6) requires a self-regulatory organization to give inspection and copying at the principal (Title VIII)
the Commission written notice of its intention to office of the Exchange. All comments
file the proposed rule change at least five business The Advisory Committee for the
days prior to the date of filing of the proposed rule
received will be posted without change;
change, or such shorter time as designated by the the Commission does not edit personal Study of Eastern Europe and the
Commission. The Exchange has satisfied this identifying information from Independent States of the Former Soviet
ehiers on DSK5VPTVN1PROD with NOTICES
requirement. submissions. You should submit only Union (Title VIII) will convene on
23 17 CFR 240.19b–4(f)(6)(iii).
information that you wish to make Monday, August 1, 2016, from 12:00
24 See BOX Rule 8140 and CBOE Rule 6.23C.
p.m. until approximately 3:00 p.m. The
25 For purposes only of waiving the 30-day available publicly. All submissions
meeting will take place at the U.S.
operative delay, the Commission has also should refer to File Number SR–Phlx–
considered the proposed rule’s impact on Department of State, Harry S. Truman
2016–72 and should be submitted on or
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f). before July 27, 2016. 26 17 CFR 200.30–3(a)(12).
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Document Created: 2016-07-06 07:56:14
Document Modified: 2016-07-06 07:56:14
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 44079 |
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