82 FR 39925 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing of Proposed Rule Change Related to the Floor Requirements

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 161 (August 22, 2017)

[Federal Register Volume 82, Number 161 (Tuesday, August 22, 2017)]
[Notices]
[Pages 39925-39929]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-17685]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81409; File No. SR-Phlx-2017-67)]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change Related to the Floor Requirements

August 16, 2017.
    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 August 3, 2017, 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 Commentary .01 of Rule 1014, 
Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders, to change quarterly trading requirements applicable to 
Registered Options Traders (``ROTs''), as described below.\3\
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    \3\ A Registered Options Trader or ROT is a regular member 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).
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    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; deletions are bracketed.
* * * * *

[[Page 39926]]

Rule 1014 Obligations and Restrictions Applicable to Specialists and 
Registered Options Traders

    (a)-(g) No change.
Commentary
    .01 An ROT electing to engage in Exchange options transactions is 
designated as a specialist on the Exchange for all purposes under the 
Securities Exchange Act of 1934 and the rules and regulations 
thereunder with respect to options transactions initiated and effected 
by him on the floor in his capacity as an ROT. For purposes of this 
commentary, the term ``transactions initiated and effected on the 
floor'' shall not include transactions initiated by an ROT off the 
floor, but which are considered ``on-floor'' pursuant to Commentaries 
.07 and .08 of Rule 1014. Similarly, an RSQT electing to engage in 
Exchange options transactions is designated as a specialist on the 
Exchange for all purposes under the Securities Exchange Act of 1934 and 
the rules and regulations thereunder with respect to options 
transactions initiated and effected by him in his capacity as an ROT.
    [An ROT (other than an RSQT or a Remote Specialist)] A non-SQT ROT 
is required to trade either (a) 1,000 contracts and 300 transactions, 
or (b) 10,000 contracts and 100 transactions, on the Exchange each 
quarter. Transactions executed in the trading crowd where the contra-
side is an ROT are not included.
    In addition, in order for an ROT (other than an RSQT or a Remote 
Specialist) to receive specialist margin treatment for off-floor orders 
in any calendar quarter, the ROT must execute the greater of 1,000 
contracts or 80% of his total contracts that quarter in person (not 
through the use of orders, except that non-streaming ROTs can use 
orders entered in person) and 75% of his total contracts that quarter 
in assigned options. Transactions executed in the trading crowd where 
the contra-side is an ROT are not included.
    The off-floor orders for which an ROT receives specialist margin 
treatment shall be subject to the obligations of Rule 1014(a) and, in 
general, be effected for the purpose of hedging, reducing risk of, or 
rebalancing positions of the ROT. An ROT is responsible for evidencing 
compliance with these provisions. The Exchange may exempt one or more 
classes of options from this calculation.
    .02-.19 No change.
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to add flexibility to 
one of the Exchange's quarterly trading requirements to encourage 
liquidity-providing activity by market makers on the Exchange's trading 
floor. Phlx imposed this trading requirement initially to require 
market makers to ensure available liquidity on the trading floor. 
Liquidity provided by market makers is a key ingredient to ensuring a 
competitive trading floor. Market maker liquidity benefits all market 
participants by providing more trading opportunities. The Exchange's 
proposal is intended to ensure that market makers on the trading floor 
are ready and able to participate to provide a reasonable pool of 
liquidity on the floor trading. The Exchange also notes that other 
options exchanges with physical trading floors do not have a minimum 
trading requirement similar to Phlx.
    The general term ``market makers'' on the Exchange includes 
Specialists \4\ and ROTs. ROTs can be either Streaming Quote Traders 
\5\ (``SQTs''), Remote SQTs \6\ (``RSQTs'') or non-SQT ROTs.\7\ Today, 
quarterly trading requirements apply to two types of ROTs: SQTs and 
non-SQT ROTs. Specialists and RSQTs are subject to different 
requirements. By definition, non-SQT ROTs do not ``stream'' quotes, 
meaning send quotes electronically to the Exchange; instead, pursuant 
to Commentary .18 of Rule 1014, they submit limit orders electronically 
and respond to Floor Brokers verbally.
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    \4\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 501(a). An options specialist 
includes a Remote Specialist which is defined as an options 
specialist in one or more classes that does not have a physical 
presence on an Exchange floor and is approved by the Exchange 
pursuant to Rule 501.
    \5\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically in 
options to which such SQT is assigned. An SQT may only submit such 
quotations while such SQT is physically present on the floor of the 
Exchange. An SQT may only trade in a market making capacity in 
classes of options in which the SQT is assigned. See Rule 
1014(b)(ii)(A).
    \6\ An RSQT is an ROT that is a member affiliated with and RSQTO 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically in options to which such RSQT has been assigned. A 
qualified RSQT may function as a Remote Specialist upon Exchange 
approval. See Rule 1014(b)(ii)(B).
    \7\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT. 
See Rule 1014(b)(ii)(C).
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    Specifically, the Exchange is proposing to amend a quarterly 
trading requirement set forth in Commentary .01.\8\ Phlx Rule 1014 at 
Commentary .01 currently requires a ROT (other than an RSQT or Remote 
Specialist) to trade 1,000 contracts and 300 transactions on the 
Exchange each quarter (excluding transactions executed in the trading 
crowd where the contra-side is an ROT).
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    \8\ In addition to the trading requirement being amended herein, 
the ``in assigned'' quarterly trading requirement in Commentary .03 
requires that, except for unusual circumstances, at least 50% of the 
trading activity in any quarter (measured in terms of contract 
volume) of an ROT (other than an RSQT) shall ordinarily be in 
classes of options to which he is assigned. Temporarily undertaking 
the obligations of paragraph (c) at the request of a member of the 
Exchange in non-assigned classes of options is not deemed trading in 
non-assigned option contracts. Furthermore, Commentary .13 further 
provides that, within each quarter, an ROT must execute in person, 
and not through the use of orders, a specified number of contracts, 
such number to be determined from time to time by the Exchange. 
Options Floor Procedure Advice (``Advice'') B-3, Trading 
Requirements, establishes a quarterly requirement to trade the 
greater of 1,000 contracts or 50% of contract volume in person; 
pursuant to the Exchange's minor rule violation and enforcement 
plan, it establishes a fine schedule for violations thereof, as well 
as for violations of the quarterly trading requirement in assigned 
options contained in Commentary .03. Commentary .01 also requires 
that in order for an ROT (other than an RSQT or a Remote Specialist) 
to receive specialist margin treatment for off-floor orders in any 
calendar quarter, the ROT must execute the greater of 1,000 
contracts or 80% of his total contracts that quarter in person (not 
through the use of orders, except that non-streaming ROTs can use 
orders entered in person) and 75% of his total contracts that 
quarter in assigned options (excluding transactions executed in the 
trading crowd where the contra-side is an ROT). None of these 
trading requirements are changing.
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    This proposal seeks to amend this quarterly requirement of 
Commentary .01 in two ways: (1) By limiting the trading requirement to 
non-SQT ROTs; and (2) by adding a new test as an alternative. The 
Exchange proposes to amend Commentary .01 to require a non-SQT ROT 
(other than an RSQT or

[[Page 39927]]

a Remote Specialist) to trade either (a) 1,000 contracts and 300 
transactions (the ``1000/300 Alternative,'' which is the current 
requirement) or (b) 10,000 contracts and 100 transactions (the ``New 
Alternative''), on the Exchange each quarter.
    With respect to limiting the requirement to non-SQT ROTs, the 
Exchange notes that today, SQTs and RSQTs are obligated to continuous 
quoting requirements when trading electronically in their assigned 
options series.\9\ Non-SQT ROTs are not subject to similar continuous 
quoting requirements today on the trading floor. If a non-SQT ROT 
trades electronically, that market maker would be required to 
continuously quote in his or her assigned option pursuant to the 
requirement in Rule 1014(b)(ii)(D), whereas if that market maker was on 
the trading floor in the capacity of a non-SQT ROT, the market maker 
would be required to separately meet the requirements of Phlx Rule 1014 
at Commentary .01. With this proposal, the Exchange is proposing a 
separate requirement for market makers that conduct business on the 
trading floor as compared to market makers who transact business 
electronically on the Exchange.
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    \9\ See Rule 1014(b)(ii)(D).
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    With respect to adding the alternative, similar to the requirement 
today, transactions executed in the trading crowd where the contra-side 
is an ROT would not be included.\10\ Similar to the current 1000/300 
Alternative, the New Alternative is a pure trading requirement, not 
limited, like the other trading requirements, to assigned options \11\ 
and in person trading.\12\ Accordingly, the New Alternative requirement 
can be fulfilled with trades and contracts that are not in assigned 
options and not executed in person, although, of course, the existing 
trading requirements respecting ``in assigned'' options and ``in 
person'' trading must still be met. Also, limit orders can continue to 
be counted toward either minimum trading requirement. The Exchange 
recognizes that floor trading is a competitive space and that Phlx is 
the only floor trading venue requiring its market makers on the trading 
floor to transact a minimum amount of contracts. The Exchange is not 
seeking to burden these market participants by limiting the type of 
qualifying transactions to meet the requirement.
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    \10\ The Exchange already excludes from the contracts and 
transactions required by the current 1000/300 Alternative, in each 
quarter, any transactions executed in the trading crowd where the 
contra-side is an ROT in order to focus market making efforts on 
providing the sort of liquidity that will attract customers 
(including broker-dealers and professionals) to the Exchange, and is 
extending this exclusion to the New Alternative for the same reason. 
As with the 1000/300 Alternative currently in effect, ROTs will 
continue to be able to participate in crowd trades, and those crowd 
trades will count towards the new trading requirement, unless the 
contra-side is another ROT. ROT-to-ROT trades in the crowd are 
certainly permissible on the Exchange, but the Exchange seeks to 
better target liquidity and attract order flow by designing the 
trading requirement to exclude them.
    \11\ See Rule 1014.03.
    \12\ See Rule 1014.01.
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    By way of background, the Exchange adopted the 1000/300 
Alternative, the existing requirement, in 2011.\13\ At that time the 
Exchange believed this quarterly requirement would be a reasonable and 
fair measure to ensure ROTs were actively providing liquidity. Since 
that time the Exchange has observed that larger order sizes continue to 
seek liquidity on the trading floor, drawing regular responses from 
non-SQT ROTs whose business is centered around larger sized 
transactions, but not always resulting in transactions for these larger 
non-SQT ROT firms providing liquidity.
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    \13\ See Securities Exchange Act Release No. 65644 (October 27, 
2011), 76 FR 67786 (November 2, 2011) (SR-Phlx-2011-123).
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    The Exchange has observed that certain non-SQT ROTs, who trade 
larger sized orders and who only trade a handful of underlying stocks 
are making markets on a daily basis but are having less opportunity 
because larger orders are often placed into the Qualified Contingent 
Cross (QCC) mechanism.\14\ Consequently there are fewer opportunities 
for some non-SQT ROTs to make certain trades. The Exchange notes that 
ROTs may not enter responses to QCC Orders which are paired orders 
entered into the QCC Mechanism and are not exposed. While the 
introduction of QCC accounts for a portion of the types of qualifying 
orders that a non-SQT ROT can transact to fulfill the floor 
requirement, lower volumes on the trading floor has also contributed to 
the desire among market participants to fulfill the trading requirement 
in an alternative fashion.
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    \14\ See Securities Exchange Act Release No. 64249 (April 7, 
2011), 76 FR 20773 (April 13, 2011) (SR-Phlx-2011-47) (a rule change 
to establish a QCC Order to facilitate the execution of stock/option 
Qualified Contingent Trades (``QCTs'') that satisfy the requirements 
of the trade through exemption in connection with Rule 611(d) of the 
Regulation NMS).
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    The Exchange is now proposing to address this issue by modifying 
the 1000/300 Alternative trading requirement to include the New 
Alternative as an additional metric, one that could be satisfied by 
fewer transactions but more traded contracts, such that the overall 
trading requirement originally contemplated by the 1000/300 Alternative 
is not diluted. After discussing this issue with the larger non-SQT 
ROTs who are very active on a daily basis, the Exchange determined that 
100 transactions per quarter was a reasonable number to measure whether 
an non-SQT ROT is providing liquidity to the market. The Exchange 
concluded that a reduced number of 100 transactions per quarter would 
permit non-SQT ROTs to make their trading decisions without undue 
influence of quoting [sic] obligations alone, and instead choose 
whether to participate in trades based on factors independent of the 
actual quoting [sic] obligation.
    The Exchange believes that the value of a non-SQT ROT is not 
limited to only whether they actually execute transactions, but as 
important is that they are actively quoting markets and providing 
pricing information. Since 100 transactions is only 33% of the current 
requirement, the Exchange determined to increase the total executed 
contracts number by 900 percent to 10,000 contracts, to ensure that the 
Exchange did not diminish the trading requirement when viewed from an 
overall perspective. The Exchange believes this alternative requirement 
is a good measure that improves the analysis of whether the larger non-
SQT ROT's are participating in an expected manner, and providing 
liquidity to the market.
    The Exchange notes that in order to meet the floor trading 
requirements a non-SQT ROT may either continue to comply with the 
current requirement or may voluntarily comply with the New Alternative. 
The existing requirement is based on the ability to trade 1,000 
contracts and 300 transactions on the Exchange each quarter, more 
contracts but of a smaller size. The New Alternative permits compliance 
with the quoting [sic] rules by transacting fewer transactions (100 
transactions) but larger sized volume (10,000 contracts). The two 
options to comply with the floor trading rule do not vary in terms of 
benefits or obligations.
    The Exchange believes the combined test of ``10,000 contracts'' and 
``100 transactions'' would be a fair measure of liquidity as an 
alternative to complement the current requirement, and is a fair and 
balanced way to measure whether a non-SQT ROT is providing liquidity to 
the marketplace. This proposed new measure will be a fairer measure for 
market makers on the trading floor in that it considers another 
perspective of liquidity--specifically, the offering of deep liquid 
markets

[[Page 39928]]

which result in fewer executions, but of greater size.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\16\ 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 adopting a new alternative trading requirement which will 
narrow the requirement for ROTs, who have other quoting obligations, 
while also providing flexibility to non-SQT ROTs to encourage market 
making which should enhance liquidity on the Exchange. It would be 
unjust and inequitable to continue to impose the 1000/300 Alternative 
trading requirement without also offering non-SQT ROTs this New 
Alternative given the recent availability of QCC to handle large orders 
that previously may have been executed by certain non-SQT ROTs in 
satisfaction of the 1000/300 Alternative test along with lower volumes 
on the trading floor.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that removing the requirement that SQTs and 
RSQTs [sic] are required to meet the trading requirement is consistent 
with just and equitable principles of trade because these market 
participants are subject to continuous quoting requirements today.\17\ 
The Exchange intends to separate the two requirements. If a non-SQT ROT 
trades electronically, that market maker would be required to 
continuously quote in his or her assigned option pursuant to the 
requirement in Rule 1014(b)(ii)(D), whereas if that market maker was on 
the trading floor in the capacity of a non-SQT ROT, the market maker 
would be required to separately meet the requirements of Phlx Rule 1014 
at Commentary .01. Non-SQT ROTs are not subject to continuous quoting 
requirements today and therefore the Exchange proposes to separately 
applying a standard consistent with their business model and exclude 
other ROTs from this floor-based requirement.
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    \17\ See Rule 1014(b)(ii)(D).
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    The proposal will remove impediments to and perfect the mechanism 
of a free and open market and a national market system by providing a 
new alternative to an existing requirement that today non-SQT ROTs have 
difficulty meeting given the current trading environment, thus enabling 
them to continue making markets to the benefit of investors by 
requiring ample liquidity. Investors and the public interest are 
protected by the proposal in that it should help preserve the number of 
non-SQT ROTs making markets and providing liquidity to the benefit of 
users of the Exchange's market.
    It is important to note that a non-SQT ROT cannot control the size 
and frequency of crowd trades, even less so crowd trades where the 
contra-side is not an ROT. The Exchange represents that the only other 
way to participate in trades other than through the use of orders is by 
quoting; while SQTs quote electronically by ``streaming'' quotations 
into the Exchange, non-SQT ROTs may only quote verbally in response to 
floor brokers representing orders in the trading crowd. The Exchange 
believes that it has become difficult for such ROTs to comply with the 
trading requirements. The Exchange believes that this new trading 
requirement should increase the likelihood that an ROT is actively 
providing liquidity on Phlx. The Exchange believes that the proposed 
new trading requirement should enhance the market making functions for 
non-SQT ROTs and serve to maintain a fair and orderly market thereby 
promoting the protection of investors and the public interest.
    The Exchange notes that non-SQT ROTs may meet the proposed 
requirement by entering limits orders, but the Exchange notes that the 
Exchange is not seeking to burden these market participants by limiting 
the type of qualifying transactions to meet the requirement. The 
Exchange recognizes that floor trading is a competitive space and that 
Phlx is the only floor trading venue requiring its market makers on the 
trading floor to transact a minimum amount of contracts. The Exchange 
is not proposing to remove the ability to enter limit orders to meet 
the New Alternative because it seeks to encourage market makers to 
transact business on Phlx.

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. With respect to intra-market 
competition, limiting the trading requirement to non-SQT ROTS, the 
Exchange does not believe this imposes an undue burden on competition 
because SQTs and RSQTs are subject to continuous quoting requirements 
today,\18\ while non-SQT ROTs are not subject to continuous quoting 
obligations.
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    \18\ See Rule 1014(b)(ii)(D).
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    Further, with respect to inter-market competition, the Exchange 
also notes that other options exchanges with physical trading floors do 
not have a minimum trading requirement similar to Phlx. The New 
Alternative trading requirement would be available to non-SQT ROTs 
without distinction, as an alternative to the existing 1000/300 
Alternative trading requirement. The Exchange's proposal to permit non-
SQT ROTs to comply with the trading requirement in one of two ways 
provides these market participants a means to compete in a space which 
has witnessed lower trading volumes. Also, the Exchange does not seek 
to disadvantage these market participants who compete with other 
trading floors who do not have trading requirements, as noted above, 
and also who do not have the automated compliance checks.

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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (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-2017-67 on the subject line.

[[Page 39929]]

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-2017-67. 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-2017-67, and should be 
submitted on or before September 12, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-17685 Filed 8-21-17; 8:45 am]
BILLING CODE 8011-01-P