81 FR 45337 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing of Proposed Rule Change To Adopt Limit Order Protection

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 134 (July 13, 2016)

[Federal Register Volume 81, Number 134 (Wednesday, July 13, 2016)]
[Notices]
[Pages 45337-45339]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-16486]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78245; File No. SR-Phlx-2016-58]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Adopt Limit Order Protection

July 7, 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 24, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NASDAQ PSX Rule 3307, entitled 
``Processing of Orders'' to adopt a Limit Order Protection or ``LOP'' 
for members accessing PSX.
    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
    The Exchange proposes to adopt a new mechanism to protect against

[[Page 45338]]

erroneous Limit Orders which are entered into PSX. Specifically, this 
new feature addresses risks to market participants of human error in 
entering Limit Orders at unintended prices. LOP would prevent certain 
Limit Orders from executing or being placed on the Order Book at prices 
outside pre-set standard limits. The System would reject those Limit 
Orders, rather than executing them automatically.
    The Exchange proposes to adopt a new feature, LOP for Limit Orders, 
which would reject Limit Orders back to the member when the order 
exceeds certain defined logic. The Exchange intends to apply LOP system 
wide. The Exchange reserves the ability to temporarily disable LOP for 
certain securities in the event of extraordinary market conditions in a 
certain symbol.\3\ Specifically, the LOP feature would prevent certain 
Limit Orders at prices outside of pre-set standard limits (``LOP 
Limit'') from being accepted by the System. LOP shall apply to all 
Quotes and Orders, including any modified Orders.\4\ LOP would not 
apply to Market Orders, Market Maker Peg Orders \5\ or Intermarket 
Sweep Orders (ISO).\6\ A Market Maker Peg Order is a passive order type 
which will not otherwise remove liquidity from the Order Book. This 
order type was designed to assist Market Makers with meeting their 
quoting obligations. Market Makers have a diverse business model as 
compared with other market participants. Excluding the Market Maker Peg 
Order from the LOP will assist Market Makers in meeting their quoting 
obligations. The Exchange believes that because Market Makers have 
other risk protections in place to prevent them from quoting outside of 
their financial means, the risk level for erroneous trades is not the 
same as with other market participants. Market Makers have more 
sophisticated infrastructures than other market participants and are 
able to manage their risk, particularly with quoting, utilizing other 
tools which may not be available to other market participants. An ISO 
is immediately executable within PSX against orders against which they 
are marketable. The ISO designation on an order presumes that the 
market participant has satisfied their obligation to all protected 
quotes up to the limit of the ISO.
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    \3\ For example, LOP may cause a greater number of orders to be 
rejected in a very volatile market. In the event that the Exchange 
were to disable LOP in a particular symbol temporarily, the Exchange 
would immediately notify market participants by sending an alert via 
an Equities Trader Alert. The Exchange would enable LOP in that 
symbol as soon as is reasonably practicable and send an updated 
alert notifying participants that LOP was enabled.
    \4\ If an Order is modified, LOP will review the order anew and, 
if LOP is triggered, such modification will not take effect and the 
original order will be rejected [sic]
    \5\ A ``Market Maker Peg Order'' is an Order Type designed to 
allow a Market Maker to maintain a continuous two-sided quotation at 
a displayed price that is compliant with the quotation requirements 
for Market Makers set forth in Rule 3213 (a)(2). The displayed price 
of the Market Maker Peg Order is set with reference to a ``Reference 
Price'' in order to keep the displayed price of the Market Maker Peg 
Order within a bounded price range. A Market Maker Peg Order may be 
entered through RASH or FIX. A Market Maker Peg Order must be 
entered with a limit price beyond which the Order may not be priced. 
The Reference Price for a Market Maker Peg Order to buy (sell) is 
the then-current National Best Bid (National Best Offer) or if no 
such National Best Bid or National Best Offer, the most recent 
reported last-sale eligible trade from the responsible single plan 
processor for that day, or if none, the previous closing price of 
the security as adjusted to reflect any corporate actions (e.g., 
dividends or stock splits) in the security. See PSX Rule 3301A.
    \6\ An Intermarket Sweep or ISO Order, which is an Order that is 
immediately executable within PSX against Orders against which they 
are marketable, is not subject to LOP. See PSX Rule 3401(g).
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    LOP would be operational each trading day. LOP would not be 
operational during trading halts and pauses. Also, LOP would not apply 
in the event that there is no established LOP Reference Price.\7\ The 
LOP Reference Price shall be the current National Best Bid or Best 
Offer (NBBO), the bid for sell orders and the offer for buy orders.
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    \7\ For example, if there is a one-sided quote or if the LOP 
Reference Price is less than the greater of 10% or $0.50.
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    The Exchange proposes to not accept incoming Limit Orders that 
exceed the LOP Reference Threshold. Limit Orders will not be accepted 
if the price of the Limit Order is greater than the LOP Reference 
Threshold for a buy Limit Order. Limit Orders will not be accepted if 
the price of the Limit Order is less than the LOP Reference Threshold 
for a sell Limit Order. The LOP Reference Threshold for buy orders will 
be the LOP Reference Price (offer) plus the applicable percentage 
specified [sic] in the LOP Limit. The LOP Reference Threshold for sell 
orders will be the LOP Reference Price (bid) minus the applicable 
percentage specified [sic] in the LOP Limit. The LOP Limit shall be the 
greater of 10% of the LOP Reference Price or $0.50 for all securities 
across all trading sessions. The LOP Reference Price shall be the 
current National Best Bid or Best Offer (NBBO), the bid for sell orders 
and the offer for buy orders.
    The Exchange also notes that LOP will be applicable on all 
protocols.\8\ The LOP feature will be mandatory for all PSX members. 
The Exchange proposes to implement this rule within ninety (90) days of 
the approval of this proposed rule change. The Exchange will issue an 
Equities Trader Alert in advance to inform market participants of such 
implementation date.
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    \8\ PSX maintains several communications protocols for members 
to use in entering Orders and sending other messages to PSX, such 
as: OUCH, RASH, FLITE and FIX.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ 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 mitigating risks to market participants of human error in 
entering Limit Orders at clearly unintended prices. The proposals are 
appropriate and reasonable, because they offer protections for Limit 
Orders which should encourage price continuity and, in turn, protect 
investors and the public interest by reducing executions occurring at 
dislocated prices.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The proposed LOP feature would assist with the maintenance of fair 
and orderly markets by mitigating the risks associated with errors 
resulting in executions at prices that are away from the Best Bid or 
Offer and potentially erroneous. Further the proposal protects 
investors from potentially receiving executions away from the 
prevailing prices at any given time. The Exchange proposes LOP to avoid 
a series of improperly priced aggressive orders transacting in the 
Order Book. The LOP Limit is appropriate because it seeks to capture 
improperly priced Limit Orders and reject them to reduce the risk of, 
and to potentially prevent, the automatic execution of Orders at prices 
that may be considered clearly erroneous. The System will only execute 
Limit Orders priced within the LOP Limit. The proposed limit of greater 
than 10% or $0.50 is a reasonable measure to ensure prices remain 
within the reasonable limits. This protection will bolster the normal 
resilience and market behavior that persistently produces robust 
reference prices. This feature should create a level of protection that 
prevents the Limit Orders from entering the Order Book outside of an 
acceptable range for the Limit Order to execute.
    The LOP will reduce the negative impacts of sudden, unanticipated 
volatility, and serve to preserve an orderly market in a transparent 
and uniform manner, increase overall

[[Page 45339]]

market confidence, and promote fair and orderly markets and the 
protection of investors. This feature is not optional and is applicable 
to all members submitting Limit Orders.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The LOP feature will provide 
market participants with additional price protection from anomalous 
executions. This feature is not optional and is applicable to all 
members submitting Limit Orders. Thus, the Exchange does not believe 
the proposal creates any significant impact on competition. Offering 
this protection to the PSX will not impose any undue burden on intra-
market competition, rather, it would permit equities and options 
members to be protected in a similar manner from erroneous executions.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 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:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2016-58 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-2016-58. 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-2016-58 and should be 
submitted on or before August 3, 2016.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Brent J. Fields,
Secretary.
[FR Doc. 2016-16486 Filed 7-12-16; 8:45 am]
 BILLING CODE 8011-01-P