81 FR 78675 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Exchange Rule 1079 Concerning the Process of Initiating a FLEX Transaction and Determining the Best Bid or Offer

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 216 (November 8, 2016)

[Federal Register Volume 81, Number 216 (Tuesday, November 8, 2016)]
[Notices]
[Pages 78675-78677]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-26907]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79221; File No. SR-Phlx-2016-107]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Exchange 
Rule 1079 Concerning the Process of Initiating a FLEX Transaction and 
Determining the Best Bid or Offer

November 2, 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 October 19, 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, 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 Exchange Rule 1079, FLEX Index, 
Equity, and Currency Options, at Section (b), Procedure for Quoting and 
Trading FLEX Options.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/ 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 amend section (b), Procedure for Quoting 
and Trading FLEX Options, of Rule 1079. Specifically, the Exchange 
proposes to amend subsection (1), Requesting Quotations, by largely 
reversing the changes it made to that subsection in a 2013 proposed 
rule change (the ``2013 Amendments'').\3\ The changes proposed herein 
deal only with the process of initiating a FLEX transaction and 
determining the best bid or offer (``BBO''). No other aspects of Rule 
1079, as changed by the 2013 Amendments, are proposed to be amended.
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    \3\ See Securities Exchange Act Release No. 69586 (May 15, 
2013), 78 FR 29797 (May 21, 2013) (SR-Phlx-2013-50) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to FLEX Options).
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    FLEX option transactions on the Exchange are governed by Rule 1079. 
Under Rule 1079(b) a Requesting Member may obtain quotes and execute 
trades in certain non-listed FLEX options at the specialist post of the 
non-FLEX option on the Exchange. The Requesting Member is a Phlx 
member, qualified to trade FLEX options pursuant to paragraph (c) of 
Rule 1079, who initiates a FLEX Request For Quotes (``RFQ'') pursuant 
to Rule 1079(b).\4\ FLEX options are not continuously quoted and series 
are not pre-established. Moreover, the Exchange's electronic quoting 
and trading system is not available for FLEX options. The variable 
terms of FLEX options are established through the process described in 
Rule 1079.
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    \4\ All transactions must be in compliance with Section 11(a) of 
the Securities Exchange Act of 1934 and the rules promulgated 
thereunder, which may include yielding priority to customer orders.
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    Pursuant to the 2013 Amendments, the Exchange revised a number of 
its FLEX rules, which it stated were intended to be similar to those of 
NYSE MKT LLC (``Amex''). Rule 1079(b)(1) was revised to require the 
Requesting Member to submit to the FLEX Specialist an RFQ utilizing for 
that purpose the forms, formats and procedures established by the 
Exchange. The 2013 Amendments also amended Rule 1079(b)(1) to provide 
that, on receipt of an RFQ in proper form, the assigned FLEX Specialist 
shall cause the terms and specifications of the RFQ to be immediately 
announced at the post. Thus, the 2013 Amendments added new requirements 
mandating the participation of an assigned FLEX Specialist at the 
inception of every FLEX transaction.
    Prior to the 2013 Amendments, Rule 1079(b)(1) permitted a 
Requesting Member to initiate an RFQ without the participation of a 
FLEX Specialist, by first announcing all of the following contract 
terms to the trading crowd of the non-FLEX option and then submitting 
an RFQ ticket to that specialist post: (1) Underlying index, security 
or foreign currency; (2) type, size, and crossing intention; (3) in the 
case of FLEX index options and FLEX equity options, exercise style; (4) 
expiration date; (5) exercise price; and (6) respecting index options, 
the settlement value. Thereafter, on receipt of an RFQ in proper form, 
the assigned Specialist or Requesting Member was required to cause the 
terms of the RFQ to be disseminated as an administrative text message 
through the Options Price Reporting Authority (``OPRA''). 
Operationally, the Requesting Member provided this information to 
Exchange staff who entered it into Exchange systems.\5\
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    \5\ See Securities Exchange Act Release No. 39549 (January 14, 
1998), 63 FR 3601 (January 23, 1998) (Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval 
of Amendment Nos. 2, 4, and 5 to the Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc., Relating to the Listing of 
Flexible Exchange Traded Equity and Index Options) (SR-Phlx-96-38) 
(the ``1998 Approval Order'') at footnote 36. The 2013 Amendments 
also revised Rule 1079(b)(1) by eliminating the original requirement 
that the assigned Specialist or the Requesting Member cause the 
terms of the RFQ to be disseminated as an OPRA text message, and by 
substituting for that original requirement a statement, in passive 
voice that does not specify on whom the obligation is imposed, that 
the terms and specifications of the RFQ ``shall be disseminated as 
an administrative text message through OPRA.'' As a matter of 
practice today, the Requesting Member still provides this 
information to Exchange staff who enter it into Exchange systems.
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    Because most Exchange specialists no longer have a presence on the 
Exchange's trading floor, and are therefore unable to trade FLEX 
options, and because Exchange specialists (remote or otherwise) may 
have no interest in being an assigned FLEX Specialist in any event, the 
Exchange proposes to revert to Rule 1079(b)(1) largely as it read prior 
to the 2013 Amendments. That language did not require the participation 
of a FLEX Specialist to initiate a FLEX trade. As revised, the rule 
will once again permit FLEX transactions to be initiated without the 
participation of a specialist so long as all other requirements of Rule

[[Page 78676]]

1079 have been met, consistent with the intent of the original proposed 
rule change adopting the Rule 1079 provisions applicable to FLEX equity 
and index options.\6\
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    \6\ The 1998 Approval Order specifically anticipated that FLEX 
trading may occur without the participation of a Specialist, stating 
that ``the Exchange also notes that there may not be a Specialist in 
FLEX options'' and that ``[a]t least two Exchange members (ROTs and/
or a Specialist) shall be assigned to each FLEX option. If there is 
an assigned Specialist and an assigned ROT, the FLEX option will 
trade pursuant to the specialist system, just as non-FLEX options 
currently do on the Exchange. If, however, there is no assigned 
Specialist in a FLEX option, two assigned ROTs are required for that 
FLEX option to trade.'' If there were no assigned FLEX Specialist, 
the process for trading the FLEX option would unfold between and 
among the crowd participants, without involvement of an assigned 
FLEX Specialist, as described in Rule 1079. The Exchange notes that 
the 2013 Amendments also eliminated the rule previously found at 
Rule 1079(b)(5)(B) providing for the maintenance by a specialist of 
a FLEX book and governing trading with booked FLEX orders.
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    The Exchange did not intend for the 2013 Amendments to expand the 
role of a FLEX Specialist beyond the provisions of Rule 1079(b)(1) that 
the Exchange is now proposing to roll back to their wording prior to 
the 2013 Amendments. Because the Exchange did not intend for the 2013 
Amendments to expand the role of a FLEX Specialist in any case, the 
current proposed change to roll Rule 1079(b)(1) back to its wording 
prior to the 2013 Amendments will have no collateral consequences for 
the FLEX trading process under the rest of Rule 1079's provisions. In 
particular, the Exchange notes that the BBO (the best bid, offer or 
both, as applicable, entered in response to an RFQ) can be determined 
by the Requesting Member, without the assistance or intervention of a 
FLEX Specialist, consistent with the original 1998 Approval Order.\7\ 
Removing the requirement that a FLEX Specialist receive the RFQ and 
announce its terms and conditions to the crowd should have no effect on 
the remaining processes outlined in Rule 1079 for the trading in FLEX 
options.
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    \7\ Prior to the 2013 Amendments, former Rule 1079(b)(3) 
specifically provided that the Requesting Member was to determine 
the BBO if there were no assigned Specialist. The Exchange proposes 
to reinsert this language into Rule 1079(b)(3), for clarity.
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    In practice, initially due to oversight by Exchange staff, the 
Exchange has not required the participation of an assigned FLEX 
Specialist as provided for in the 2013 Amendments but has instead 
continued to permit FLEX trading to occur without an assigned FLEX 
Specialist, just as FLEX trading has been conducted since the original 
1998 Approval Order. Further, the negative practical effects of the 
superfluous FLEX Specialist participation requirement appear to have 
been inadequately considered by the Exchange when the requirement was 
initially adopted in the 2013 Amendments as a very small part of a more 
extensive set of amendments to Rule 1079 dealing with unrelated 
matters.\8\ As noted above, the Exchange advanced no policy reason for 
the requirement when it was adopted other than a general desire to 
track the language of another exchange's FLEX rule. It identified no 
problem that the Specialist participation requirement was intended to 
remedy. The Exchange now desires to eliminate the needless requirement, 
originally added in the 2013 Amendments for no substantive reason, and 
return Rule 1079(b)(1) to its previous language pursuant to which FLEX 
option transactions have been successfully executed since the 1998 
Approval Order.
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    \8\ For example, the Exchange stated in the 2013 Amendments that 
it proposed to adopt rules, similar to Amex, which require a 
Requesting Member to submit to the FLEX Specialist an RFQ and that 
on receipt of an RFQ in proper form, the assigned FLEX Specialist 
shall cause the terms and specifications to be immediately announced 
at the post. The proposed rule change thus assumed the existence of 
a FLEX Specialist even though the FLEX rules at the time provided 
for FLEX trading without any FLEX Specialist.
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    Finally, the Exchange proposes to amend the introductory language 
to Rule 1079, which provides that a Requesting Member shall obtain 
quotes and execute trades in certain non-listed FLEX options at the 
specialist post of the non-FLEX option on the Exchange. The Exchange 
proposes to delete the reference to the ``specialist'' post, which is a 
term no longer commonly used at the Exchange. Rather, the area where an 
option is traded is now simply referred to as a post.\9\
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    \9\ For the same reason, in the proposed amendments to Rule 
1079(b)(1) the Exchange is using the term ``post'' rather than the 
term ``specialist post'' that was used in the Rule 1079(b)(1) 
language in place prior to the 2013 Amendments.
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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, because the Commission has previously approved the proposed 
language in the 1998 Approval Order. The proposal eliminates a 
requirement that a FLEX Specialist participate in the initiation of 
every FLEX transaction which, given the general absence of specialists 
on the Exchange trading floor, may needlessly constrain FLEX trading. 
Importantly, as stated above, the Exchange's 2013 Amendments did not 
advance a particular policy or reason for amending the Rule 1079(b)(1) 
language or the language in Rule 1079(b)(3) permitting the Requesting 
Member to determine the BBO in the absence of an assigned Specialist, 
other than a general intent to track Amex rule language. There is 
consequently no policy reason not to return the rule language to the 
wording as it existed prior to the 2013 Amendments.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that amendments proposed herein will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act inasmuch as they simply 
reinstate previous Exchange rule language which had been approved by 
the Commission, and remove an outdated reference to the specialist 
post.

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 \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 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 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

[[Page 78677]]

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-2016-107 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2016-107. 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-2016-107 and 
should be submitted on or before November 29, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-26907 Filed 11-7-16; 8:45 am]
BILLING CODE 8011-01-P