83 FR 16907 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3, To Adopt Protections for Butterfly Spreads and Box Spreads

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 74 (April 17, 2018)

[Federal Register Volume 83, Number 74 (Tuesday, April 17, 2018)]
[Notices]
[Pages 16907-16908]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-07932]



[[Page 16907]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83033; File No. SR-Phlx-2018-14)


Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a 
Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3, To 
Adopt Protections for Butterfly Spreads and Box Spreads

April 11, 2018.

I. Introduction

    On February 9, 2018, Nasdaq PHLX LLC (``Phlx'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend Phlx Rule 1098, ``Complex Orders on the System,'' to adopt 
protections for Complex Orders that are box spreads or butterfly 
spreads.\3\ On February 21, 2018, the Exchange filed Amendment No. 1 to 
the proposed rule change, which superseded the original filing in its 
entirety. The proposed rule change, as modified by Amendment No. 1, was 
published for comment in the Federal Register on March 1, 2018.\4\ On 
April 9, 2018, the Exchange filed Amendment No. 2 to the proposal. On 
April 10, 2018, the Exchange filed Amendment No. 3 to the proposal, 
which superseded Amendment No. 2 in its entirety.\5\ The Commission 
received no comments regarding the proposed rule change. This order 
approves the proposed rule change, as modified by Amendment Nos. 1, 2, 
and 3.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ For purposes of the electronic trading of Complex Orders, a 
``Complex Order'' is an order involving the simultaneous purchase 
and/or sale of two or more different options series in the same 
underlying security, priced as a net debit or credit based on the 
relative prices of the individual components, for the same account, 
for the purpose of executing a particular investment strategy. See 
Phlx Rule 1098(a)(i).
    \4\ See Securities Exchange Act Release No. 82766 (February 23, 
2018), 83 FR 8914 (March 1, 2018) (``Notice'').
    \5\ In Amendment No. 3, the Phlx revised the proposal to (1) 
replace references in proposed Phlx Rule 1098(i)(i) to ``Complex 
Order'' with ``Butterfly Spread,'' and to ``Complex Market Order'' 
with ``Butterfly Spread entered as a Market Order;'' (2) revise 
proposed Phlx Rule 1098(i)(i)(a) to indicate that the Initial 
Maximum Value is the distance between the strike price of the leg 
with the mid-point and either of the outer leg strike prices; (3) 
replace references in proposed Phlx Rule 1098(j)(i) to ``Complex 
Order'' with ``Box Spread'' and to ``Complex Market Order'' with 
``Box Spread entered as a Market Order;'' (4) amend proposed Phlx 
Rules 1098(i)(i) and (j)(i) to refer to ``an order being 
auctioned,'' rather than an ``auction;'' and (5) delete the 
reference to ``spread'' in proposed Phlx Rule 1098(j)(i)(b). Because 
Amendment No. 3 makes only clarifying and technical changes, and 
does not present unique or novel regulatory issues, it is not 
subject to notice and comment.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 1, 2, and 3

    As described more fully in the Notice, the Exchange proposes to 
amend Phlx Rule 1098 to adopt protections that will prevent the 
execution of a butterfly spread \6\ or a box spread \7\ at a price 
outside of specified minimum and maximum values (the ``Butterfly Spread 
Protection'' and the ``Box Spread Protection,'' respectively).\8\ Under 
the Butterfly Spread Protection, a butterfly spread that is priced 
higher than the Maximum Value \9\ or lower than the Minimum Value \10\ 
will be cancelled. A butterfly spread entered as a market order will be 
accepted but will be restricted from trading at a price that is higher 
than the Maximum Value or lower than the Minimum Value. \11\ Similarly, 
under the Box Spread Protection, a box spread that is priced higher 
than the Maximum Value \12\ or lower than the Minimum Value \13\ will 
be cancelled. A box spread entered as a market order will be accepted 
but will be restricted from trading at a price that is higher than the 
Maximum Value or lower than the Minimum Value.\14\ The Butterfly Spread 
Protection and the Box Spread Protection apply to orders being 
auctioned and to auction responses, and they apply throughout the 
trading day, including during the pre-market, the opening process, and 
trading halts.\15\
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    \6\ A butterfly spread is a three legged Complex Order with the 
following: (1) Two legs to buy (sell) the same number of calls 
(puts); (2) one leg to sell (buy) twice the number of calls (puts) 
with a strike price at mid-point of the two legs to buy (sell); (3) 
all legs have the same expiration; and (4) each leg strike price is 
equidistant from the next sequential strike price. See proposed Phlx 
Rule 1098(i).
    \7\ A box spread is a four legged Complex Order with the 
following: (1) One pair of legs with the same strike price with one 
leg to buy a call (put) and one leg to sell a put (call); (2) a 
second pair of legs with a different strike price from the pair 
described in (1) with one leg to sell a call (put) and one leg to 
buy a put (call); (3) all legs have the same expiration; and (4) all 
legs have equal volume. See proposed Phlx Rule 1098(j).
    \8\ See Notice, 83 FR at 8915.
    \9\ For a butterfly spread, the Maximum Value is calculated by 
adding the Initial Maximum Value (the distance between strike price 
of the leg with the mid-point strike and either of the outer leg 
strike prices) and the Maximum Value Buffer. The Maximum Value 
Buffer is the lesser of a configurable absolute dollar value or 
percentage of the Initial Maximum Value set by the Exchange and 
announced via a notice to members. See proposed Phlx Rule 
1098(i)(i)(a).
    \10\ For a butterfly spread, the Minimum Value is calculated by 
subtracting the Minimum Value Buffer (a configurable absolute dollar 
value set by the Exchange and announced via a notice to members) 
from the Initial Minimum Value of zero. See proposed Phlx Rule 
1098(i)(i)(b). The Phlx notes that the Minimum Value could be less 
than zero. See Notice, 83 FR at 8915. The Phlx states that a market 
participant seeking to trade out of a position at intrinsic value 
might not find a contra-side willing to trade without a premium. The 
Phlx notes that an incremental allowance outside of the minimum/
maximum value would allow for a small premium to offset commissions 
associated with trading and could incentivize participants to take 
the other side of a spread trading at intrinsic value. The Phlx 
further notes that a participant might find it financially 
beneficial to pay a small premium to close out its position rather 
than carry the position to expiration and take delivery. See id.
    \11\ See proposed Phlx Rule 1098(i)(i).
    \12\ For a box spread, the Maximum Value is calculated by adding 
the Initial Maximum Value (the distance between the strike prices of 
each pair of leg strike prices) and the Maximum Value Buffer. The 
Maximum Value Buffer is the lesser of a configurable absolute dollar 
value or percentage of the Initial Maximum value set by the Exchange 
and announced via a notice to members. See proposed Phlx Rule 
1098(j)(i)(a).
    \13\ For a box spread, the Minimum Value is calculated by 
subtracting the Minimum Value Buffer (a configurable absolute dollar 
value set by the Exchange and announced via a notice to members) 
from the Initial Minimum Value of zero. See proposed Phlx Rule 
1098(j)(i)(b).
    \14\ See proposed Phlx Rule 1098(j)(i).
    \15\ See proposed Phlx Rules 1098(i)(i) and (ii), and 1098(j)(i) 
and (ii).
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    The Phlx states that the proposal is responsive to member input and 
will provide members with additional functionality that will assist 
them in managing risk.\16\ In addition, the Phlx states that the buffer 
allowance from the minimum and maximum values permitted for the 
execution of butterfly and box spreads will provide market participants 
with flexibility to manage their business.\17\ The Phlx notes that it 
currently offers similar order protection features for Complex Orders 
to avoid erroneous trades, including the Strategy Price Protection and 
the Acceptable Complex Execution (``ACE'') Parameter.\18\
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    \16\ See Notice, 83 FR at 8916.
    \17\ See id. at 8917.
    \18\ See id. at 8915. See also Phlx Rules 1098(g) (Strategy 
Price Protection) and 1098(h)(i) (ACE Parameter).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\19\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\20\ which 
requires, among other things, that the rules of a national securities 
exchange be

[[Page 16908]]

designed to prevent fraudulent and manipulative acts and practices, 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.
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    \19\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Butterfly Spread Protection and 
the Box Spread Protection will help market participants mitigate risk 
by preventing the execution of butterfly and box spreads at prices that 
are outside of specified minimum and maximum values. The Commission 
notes that the Phlx has indicated that the protections are responsive 
to input from Phlx members.\21\ In addition, the Commission notes that 
another options exchange has adopted similar price protections.\22\
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    \21\ See Notice, 83 FR at 8916.
    \22\ See CBOE Rule 6.53C, Interpretation and Policy .08(g).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-Phlx-2018-14), as modified 
by Amendment Nos. 1, 2, and 3, is approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-07932 Filed 4-16-18; 8:45 am]
 BILLING CODE 8011-01-P