81 FR 541 - Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding Order Exposure

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 3 (January 6, 2016)

[Federal Register Volume 81, Number 3 (Wednesday, January 6, 2016)]
[Notices]
[Pages 541-544]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-33219]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76801; File No. SR-Phlx-2015-99]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Regarding 
Order Exposure

December 30, 2015.
    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 December 15, 2015, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, 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 Phlx Rule 1080, entitled ``Phlx XL 
and Phlx XL II,'' to account for potential internal conflicts with 
other Exchange Rules, which are exceptions to the order exposure rule 
regarding principle orders the Order Entry Firm represents as agent 
from being exposed.
    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.

[[Page 542]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Phlx Rule 1080(c)(ii)(C) to provide 
that other Exchange Rules are exceptions to rules requiring Order Entry 
Firms to expose orders and to name those rules. Today, Phlx Rule 
1080(c)(ii)(C)(1) provides that,

    Principal Transactions: Order Entry Firms may not execute as 
principal against orders on the limit order book they represent as 
agent unless: (a) Agency orders are first exposed on the limit order 
book for at least one (1) second, (b) the Order Entry Firm has been 
bidding or offering on the Exchange for at least one (1) second 
prior to receiving an agency order that is executable against such 
order, or (c) the Order Entry Firm proceeds in accordance with the 
crossing rules contained in Rule 1064.

Further, Phlx Rule 1080(c)(ii)(C)(2) and (3) provide,

    Solicitation Orders. Order Entry Firms must expose orders they 
represent as agent for at least one (1) 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.
    It shall be a violation of Rule 1080(c)(ii)(C) for any Exchange 
member or member organization to be a party to any arrangement 
designed to circumvent Rule 1080(c)(ii)(C) by providing an 
opportunity for a customer, member, member organization, or non-
member broker-dealer to execute immediately against agency orders 
delivered to the Exchange, whether such orders are delivered via 
AUTOM or represented in the trading crowd by a member or a member 
organization.

The Exchange notes that there are other exceptions to the general rule 
regarding the exposure of principal orders represented as agent by the 
Order Entry Firm. Also, other options exchanges have similar order 
exposure exceptions.\3\
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    \3\ See International Securities Exchange LLC (``ISE'') Rule 
717(d) and BOX Options Exchange LLC (``BOX'') Rule 7140.
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    The first proposed additional exception to the order exposure rule 
is Price Improvement XL or ``PIXL.'' \4\ PIXL is a component of the 
Exchange's fully automated options trading system, PHLX XL that allows 
a member or member organization to electronically submit for execution 
an order it represents as agent on behalf of a public customer, broker-
dealer, or any other entity (``PIXL Order'') against principal interest 
or against any other order it represents as agent (an ``Initiating 
Order'') provided it submits the PIXL Order for electronic execution 
into the PIXL Auction (``Auction''). This mechanism is an exception to 
the general rule in [sic], which requires Phlx members and member 
organizations to expose principal orders they represent as agent for at 
least one (1) second prior to receiving an agency order that is 
executable against such bid or offer. With PIXL, paired orders are 
submitted simultaneously and would not violate Phlx Rule 
1080(c)(ii)(C).
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    \4\ See Phlx Rule 1080(n). Complex Orders may also be placed 
into PIXL.
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    The second proposed additional exception to the order exposure rule 
is the Complex Order Live Auction or ``COLA.'' \5\ COLA is the 
automated Complex Order Live Auction process. A COLA may take place 
upon identification of the existence of a COLA-eligible order either: 
(1) Following a COOP, or (2) during normal trading if the Phlx XL 
system receives a Complex Order that improves the cPBBO. Phlx XL 
participants may bid and/or offer on either or both side(s) of the 
market during the COLA Timer by submitting one or more bids or offers 
that improve the cPBBO, known as a ``COLA Sweep.'' \6\ COLA does not 
abide by the one second order exposure requirement.
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    \5\ See Phlx Rule 1080, Commentary .02(c)(ii)(e) [sic].
    \6\ A single Phlx XL participant may submit multiple COLA Sweeps 
at different prices (but not multiple COLA Sweeps at the same price, 
except as provided in sub-paragraph (B) below) in increments of 
$0.01 in response to a COLA broadcast, regardless of the minimum 
trading increment applicable to the specific series. Phlx XL 
participants may change the size of a previously submitted COLA 
Sweep at the previously submitted COLA price during the COLA Timer. 
The system will use the Phlx XL participant's most recently 
submitted COLA Sweep at each price level as that participant's 
response at that price level, unless the COLA Sweep has a size of 
zero. A COLA Sweep with a size of zero will remove a Phlx XL 
participant's COLA Sweep from the COLA at that price level. COLA 
Sweeps will not be visible to any participant and will not be 
disseminated by the Exchange. See Phlx Rule 1080, Commentary 
.02(c)(ii)(e)(iv)(A)-(C) [sic].
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    The third proposed additional exception to the order exposure rule 
is the Qualified Contingent Cross or ``QCC'' mechanism.\7\ A QCC Order 
is comprised of an originating order to buy or sell at least 1,000 
contracts, or 10,000 contracts in the case of Mini Options, which is 
identified as being part of a qualified contingent trade that is 
coupled with a contra-side order or orders totaling an equal number of 
contracts.\8\ With QCC, coupled orders are submitted simultaneously and 
would not violate Phlx Rule 1080(c)(ii)(C).\9\ A QCC transaction 
consists of two or more component orders, executed as agent or 
principal, where: (a) At least one component is an NMS Stock, as 
defined in Rule 600 of Regulation NMS under the Exchange Act; (b) all 
components are effected with a product or price contingency that either 
has been agreed to by all the respective counterparties or arranged for 
by a broker-dealer as principal or agent; (c) the execution of one 
component is contingent upon the execution of all other components at 
or near the same time; (d) the specific relationship between the 
component orders (e.g., the spread between the prices of the component 
orders) is determined by the time the contingent order is placed; (e) 
the component orders bear a derivative relationship to one another, 
represent different classes of shares of the same issuer, or involve 
the securities of participants in mergers or with intentions to merge 
that have been announced or cancelled; and (f) the transaction is fully 
hedged (without regard to any prior existing position) as a result of 
other components of the contingent trade.\10\
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    \7\ See Phlx Rules 1080(o).
    \8\ See Phlx Rule 1080(o).
    \9\ Complex Orders may also be placed into PIXL. See Phlx Rule 
1080(n).
    \10\ See Phlx Rule 1080(o)(3).
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    The Exchange believes that amending Phlx Rule 1080(c)(ii)(C) to add 
rule text to include these additional exceptions to this general rule 
regarding order exposure will conform the rule text.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \11\ in general, and furthers the objectives of section 
6(b)(5) of the Act \12\ 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 explicitly delineating all exceptions to the general rule 
regarding the requirements to expose certain principal orders which the 
Order Entry firm represents as agent. Specifically, the Exchange's 
proposal amends the order exposure rule to list PIXL, COLA and QCC as 
exceptions to the wait time to expose such principal orders the Order 
Entry Firm represents as agent for at least one (1) second prior to 
receiving an agency order that is executable against such bid or offer.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange's proposal will make clear that PIXL is an exception 
to the

[[Page 543]]

general rule, which requires Phlx members and member organizations to 
expose principal orders they represent as agent for at least one (1) 
second prior to receiving an agency order that is executable against 
such bid or offer. PIXL permits Participants to enter paired orders 
without first exposing those orders for one second. The Exchange 
believes that providing an exception to the order exposure rule for 
orders entered into PIXL is consistent with the Act, because while 
PIXL's auction will last for one second, the orders may be entered as 
paired orders.\13\ A Phlx member or member organization, known as the 
Initiating Participant, must enter an order into the PIXL Mechanism as 
specified by Phlx Rule 1080(n).\14\ Complex Orders may also be entered 
into PIXL and such prices must be at the cPBBO or better.\15\ 
Initiating Participants entering orders into PIXL are required to 
guarantee an execution at the NBBO (cPBBO for Complex Orders) or at a 
better price, and are subject to market risk while their PIXL Order is 
exposed to other market participants in this competitive auction.
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    \13\ See Phlx Rule 1080(o).
    \14\ To initiate the Auction (except if it is a Complex Order), 
the Initiating Member must mark the PIXL Order for Auction 
processing, and specify either: (a) A single price at which it seeks 
to execute the PIXL Order (a ``stop price''); (b) that it is willing 
to automatically match as principal or as agent on behalf of an 
Initiating Order the price and size of all PAN responses, and 
trading interest (``auto-match'') in which case the PIXL Order will 
be stopped at the NBBO on the Initiating Order side; or (c) that it 
is willing to either: (i) Stop the entire order at a single stop 
price and auto-match PAN responses and trading interest at a price 
or prices that improve the stop price to a specified price (a ``Not 
Worse Than'' or ``NWT'' price); (ii) stop the entire order at a 
single stop price and auto-match all PAN responses and trading 
interest at or better than the stop price; or (iii) stop the entire 
order at the NBBO on the Initiating Order side, and auto-match PAN 
responses and trading interest at a price or prices that improve the 
stop price up to the NWT price. In all cases, if the PBBO on the 
same side of the market as the PIXL Order represents a limit order 
on the book, the stop price must be at least one minimum price 
improvement increment better than the booked limit order's limit 
price. Once the Initiating Member has submitted a PIXL Order for 
processing pursuant to this subparagraph, such PIXL Order may not be 
modified or cancelled. The stop price or NWT price may be improved 
to the benefit of the PIXL Order during the Auction, but may not be 
cancelled. See Phlx Rule 1080(n)(ii)(A)(1).
    \15\ To initiate the PIXL Complex Order Auction, the Initiating 
Member must mark the PIXL Order for Auction processing, and specify 
either: (a) A single price at which it seeks to execute the PIXL 
Order (a ``stop price''); or (b) that it is willing to either: (i) 
Stop the entire order at a single stop price and auto-match PAN 
responses and trading interest at a price or prices that improve the 
stop price to a specified price (a ``Not Worse Than'' or ``NWT'' 
price); or (ii) stop the entire order at a single stop price and 
auto-match all PAN responses and trading interest at or better than 
the stop price. Once the Initiating Member has submitted a PIXL 
Complex Order for processing pursuant to this subparagraph, such 
PIXL Order may not be modified or cancelled. Under any of the 
circumstances described in sub-paragraphs (a)-(b) in note 14, the 
stop price or NWT price may be improved to the benefit of the PIXL 
Order during the Auction, but may not be cancelled. See Phlx Rule 
1080(n)(ii)(A)(2).
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    The Exchange's proposal will make clear that COLA is an exception 
to the general order exposure rule. A ``COLA-eligible order'' means a 
Complex Order (a) identified by way of a COOP, or (b) that, upon 
receipt, improves the cPBBO respecting the specific Complex Order 
Strategy that is the subject of the Complex Order and is not for a 
market maker, as specified in Phlx Rule 1080.07 (b)(ii).\16\ COLA-
eligible orders are executed without consideration of any prices that 
might be available on other exchanges trading the same options 
contracts. The COLA will begin with a timing mechanism (a ``COLA 
Timer''), which is a counting period not to exceed five (5) seconds 
during which Phlx XL participants may submit bids or offers that 
improve the cPBBO. Phlx XL participants may bid and/or offer on either 
or both side(s) of the market during the COLA Timer by submitting one 
or more bids or offers that improve the cPBBO, known as a ``COLA 
Sweep.'' COLA Sweeps will not be visible to any participant and will 
not be disseminated by the Exchange. Upon the expiration of the COLA 
Timer, COLA Sweeps and/or any Complex Orders received during the COLA 
Timer that improve the cPBBO may be executed against the COLA-eligible 
order.\17\ The Exchange believes that providing an exception to the 
order exposure rule for orders entered into COLA is consistent with the 
Act, because while COLA auction may exceed one second, the COLA-
eligible order will receive the best price or prices available for the 
Complex Order Strategy represented by the COLA-eligible order, and are 
subject to market risk while their Complex Order is exposed to other 
market participants in this competitive auction.
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    \16\ If the Phlx XL system identifies the existence of a COLA-
eligible order following a COOP or by way of receipt during normal 
trading of a Complex Order that improves the cPBBO, such COLA-
eligible order will initiate a COLA, during which Phlx XL 
participants may bid and offer against the COLA-eligible order 
pursuant to this rule.
    \17\ See Phlx Rule 1080, Commentary .02(c)(ii)(e) [sic].
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    The Exchange's proposal will make clear that QCC is an exception to 
the general order exposure rule. QCC Orders are immediately executed 
upon entry into the System by an Order Entry Firm provided that (i) no 
Customer Orders are at the same price on the Exchange's limit order 
book and (ii) the price is at or between the NBBO. The Exchange 
believes that providing an exception to the order exposure rule for 
orders entered into QCC is consistent with the Act, because when 
entered into the System QCC Orders are coupled with a contra-side order 
or orders totaling an equal number of contracts. These orders must be 
executed at a price that is at or between the NBBO, and are subject to 
market risk while the QCC Order is exposed to other market participants 
in this competitive auction.
    The proposed amendments provide additional exceptions to the 
current order exposure rule and will serve to protect investors and the 
public interest by providing additional information in the Rules 
concerning exceptions.

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 proposed changes do not 
impose any burden on competition, rather, the amendment provides an 
exception to the order exposure rule for orders entered into PIXL, COLA 
and QCC for all Phlx members and member organizations. The Exchange 
believes that this exception will further inform Phlx members and 
member organizations of their obligations with respect to order 
exposure. Phlx members and member organizations entering orders into 
PILX [sic], COLA or QCC are subject to market risk while their order is 
exposed to other market participants and member organizations in these 
competitive auctions.

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to section 19(b)(3)(A)(iii) of the Act \18\ and

[[Page 544]]

subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \19\ 7 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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.

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-2015-99 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-2015-99. 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-2015-99 and should be 
submitted on or before January 27, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-33219 Filed 1-5-16; 8:45 am]
 BILLING CODE 8011-01-P