82 FR 6667 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend the Cabinet Trading Pilot Program

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 12 (January 19, 2017)

[Federal Register Volume 82, Number 12 (Thursday, January 19, 2017)]
[Notices]
[Pages 6667-6669]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-01153]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79782; File No. SR-Phlx-2017-01]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Extend the 
Cabinet Trading Pilot Program

January 12, 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 January 4, 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 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 extend the pilot program in Phlx Rule 
1059, Accommodation Transactions, to allow cabinet trading to take 
place below $1 per option contract under specified circumstances (the 
``pilot program'').
    The text of the proposed rule change is set forth below. Proposed 
new language is underlined; proposed deletions are in brackets.
* * * * *

NASDAQ PHLX Rules

* * * * *

Options Rules

* * * * *

Rule 1059. Accommodation Transactions

    (a)-(b) No change.

   Commentary:

    .01 No change.
    .02 Limit Orders Priced Below $1: Limit orders with a price of at 
least $0 but less than $1 per option contract may trade under the terms 
and conditions in Rule 1059 above in each series of option contracts 
open for trading on the Exchange, except that:
    (a)-(c) No change.
    (d) Unless otherwise extended, the effectiveness of the Commentary 
.02 terminates January 5, [2017] 2018, or, upon permanent approval of 
these procedures by the Securities and Exchange Commission, whichever 
occurs first.
* * * * *

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 extend the pilot program in Commentary .02 
of Exchange Rule 1059, Accommodation Transactions, which sets forth 
specific procedures for engaging in cabinet trades, to allow the 
Commission adequate time to consider permanently allowing transactions 
to take place on the Exchange in open outcry at a price of at least $0 
but less than $1 per option

[[Page 6668]]

contract.\3\ Prior to the pilot program, Rule 1059 required that all 
orders placed in the cabinet were assigned priority based upon the 
sequence in which such orders were received by the specialist. All 
closing bids and offers would be submitted to the specialist in 
writing, and the specialist effected all closing cabinet transactions 
by matching such orders placed with him. Bids or offers on orders to 
open for the accounts of customer, firm, specialists and Registered 
Options Traders (``ROTs'') could be made at $1 per option contract, but 
such orders could not be placed in and must yield to all orders in the 
cabinet. Specialists effected all cabinet transactions by matching 
closing purchase or sale orders which were placed in the cabinet or, 
provided there was no matching closing purchase or sale order in the 
cabinet, by matching a closing purchase or sale order in the cabinet 
with an opening purchase or sale order.\4\ All cabinet transactions 
were reported to the Exchange following the close of each business 
day.\5\ Any (i) member, (ii) member organization, or (iii) other person 
who was a non-member broker or dealer and who directly or indirectly 
controlled, was controlled by, or was under common control with, a 
member or member organization (any such other person being referred to 
as an affiliated person) could effect any transaction as principal in 
the over-the-counter market in any class of option contracts listed on 
the Exchange for a premium not in excess of $1.00 per contract.
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    \3\ Cabinet or accommodation trading of option contracts is 
intended to accommodate persons wishing to effect closing 
transactions in those series of options dealt in on the Exchange for 
which there is no auction market.
    \4\ Specialists and ROTs are not subject to the requirements of 
Rule 1014 in respect of orders placed pursuant to this Rule. Also, 
the provisions of Rule 1033(b) and (c), Rule 1034 and Rule 1038 do 
not apply to orders placed in the cabinet. Cabinet transactions are 
not reported on the ticker.
    \5\ See Exchange Rule 1059.
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    On December 30, 2010, the Exchange filed an immediately effective 
proposal that established the pilot program being extended by this 
filing. The pilot program allowed transactions to take place in open 
outcry at a price of at least $0 but less than $1 per option contract 
until June 1, 2011.\6\ These lower priced transactions are traded 
pursuant to the same procedures applicable to $1 cabinet trades, except 
that pursuant to the pilot program (i) bids and offers for opening 
transactions are only permitted to accommodate closing transactions in 
order to limit use of the procedure to liquidations of existing 
positions, and (ii) the procedures are also made available for trading 
in options participating in the Penny Pilot Program.\7\ On May 20, 
2011, the Exchange filed an immediately effective proposal that 
extended the pilot program until December 1, 2011 to consider whether 
to seek permanent approval of the temporary procedure.\8\ On November 
16, 2011, the Exchange filed an immediately effective proposal that 
extended the pilot program until June 1, 2012.\9\ On May 29, 2012, the 
Exchange filed an immediately effective proposal that extended the 
pilot program until December 1, 2012.\10\ On November 1, 2012, the 
Exchange filed an immediately effective proposal that extended the 
pilot program until June 1, 2013.\11\ On May 8, 2013, the Exchange 
filed an immediately effective proposal that extended the pilot program 
until January 5, 2014.\12\ On December 4, 2013, the Exchange filed an 
immediately effective proposal that extended the pilot program until 
January 5, 2015.\13\ On January 2, 2015, the Exchange filed an 
immediately effective proposal that extended the pilot program until 
January 5, 2016.\14\ On December 9, 2015, the Exchange filed an 
immediately effective proposal that extended the pilot program until 
January 5, 2017.\15\ The Exchange now proposes an extension of the 
pilot program to allow additional time to consider its effects while 
the pilot program continues uninterrupted.
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    \6\ Phlx Rule 1059, Commentary .02; See Securities Exchange Act 
Release No. 63626 (December 30, 2010), 76 FR 812 (January 6, 2011) 
(SR-Phlx-2010-185).
    \7\ Prior to the pilot, the $1 cabinet trading procedures were 
limited to options classes traded in $0.05 or $0.10 standard 
increments. The $1 cabinet trading procedures were not available in 
Penny Pilot Program classes because in those classes, an option 
series could trade in a standard increment as low as $0.01 per share 
(or $1.00 per option contract with a 100 share multiplier). The 
pilot allows trading below $0.01 per share (or $1.00 per option 
contract with a 100 share multiplier) in all classes, including 
those classes participating in the Penny Pilot Program.
    \8\ See Securities Exchange Act Release No. 64571 (May 31, 
2011), 76 FR 32385 (June 6, 2011) (SR-Phlx-2011-72).
    \9\ See Securities Exchange Act Release No. 65852 (November 30, 
2011), 76 FR 76212 (December 6, 2011) (SR-Phlx-2011-156).
    \10\ See Securities Exchange Act Release No. 67106 (June 4, 
2012), 77 FR 34108 (June 8, 2012) (SR-Phlx-2012-74).
    \11\ See Securities Exchange Act Release No. 68201 (November 9, 
2012), 77 FR 68871 (November 16, 2012) (SR-Phlx-2012-131).
    \12\ See Securities Exchange Act Release No. 69583 (May 15, 
2013), 78 FR 30380 (May 22, 2013) (SR-Phlx-2013-53).
    \13\ See Securities Exchange Act Release No. 71096 (December 17, 
2013), 78 FR 77538 (December 23, 2013) (SR-Phlx-2013-120).
    \14\ See Securities Exchange Act Release No. 74012 (January 7, 
2015), 80 FR 1688 (January 13, 2015) (SR-Phlx-2015-03).
    \15\ See Securities Exchange Act Release No. 76671 (December 16, 
2015), 80 FR 79642 (December 22, 2015) (SR-Phlx-2015-103).
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    The Exchange believes that allowing a price of at least $0 but less 
than $1 will continue to better accommodate the closing of options 
positions in series that are worthless or not actively traded, 
particularly due to recent market conditions which have resulted in a 
significant number of series being out-of-the-money. For example, a 
market participant might have a long position in a call series with a 
strike price of $100 and the underlying stock might now be trading at 
$30. In such an instance, there might not otherwise be a market for 
that person to close-out its position even at the $1 cabinet price 
(e.g., the series might be quoted no bid).
    The Exchange hereby seeks to extend the pilot period for such $1 
cabinet trading until January 5, 2018. The Exchange seeks this 
extension to allow the procedures to continue without interruption.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\16\ in general, and with 
Section 6(b)(5) of the Act,\17\ in particular, in that the proposal is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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. Specifically, 
the Exchange believes that allowing for liquidations at a price less 
than $1 per option contract pursuant to the pilot program will better 
facilitate the closing of options positions that are worthless or not 
actively trading, especially in Penny Pilot issues where cabinet trades 
are not otherwise permitted. The Exchange believes the extension is of 
sufficient length to allow the Commission to assess the impact of the 
Exchange's authority to allow transactions to take place in open outcry 
at a price of at least $0 but less than $1 per option in accordance 
with its attendant obligations and conditions.
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    \16\ 15 U.S.C. 78f.
    \17\ 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 the proposed rule change will 
result in

[[Page 6669]]

any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. The proposal does 
not raise any issues of intra-market competition because it applies to 
all options participants in the same manner.

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 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \19\ 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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    A proposed rule change filed under Rule 19b-4(f)(6) \20\ normally 
does not become operative for 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \21\ 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 requested a waiver 
of the 30-day operative delay so that the pilot program may continue 
without interruption. The Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because it will allow the pilot to continue 
uninterrupted, thereby avoiding any potential investor confusion that 
could result from a temporary interruption in the pilot and allowing 
members to continue to benefit from the program. Therefore, the 
Commission waives the 30-day operative delay and designates the 
proposed rule change operative upon filing.\22\
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    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6)(iii).
    \22\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 rule-co[email protected]. Please include 
File Number SR-Phlx-2017-01 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-2017-01. 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-2017-01 and should be 
submitted on or before February 9, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01153 Filed 1-18-17; 8:45 am]
 BILLING CODE 8011-01-P