83 FR 31201 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Firm Participation Guarantee for a Floor Broker

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 128 (July 3, 2018)

[Federal Register Volume 83, Number 128 (Tuesday, July 3, 2018)]
[Notices]
[Pages 31201-31203]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-14301]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83547; File No. SR-Phlx-2018-48]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the Firm 
Participation Guarantee for a Floor Broker

June 28, 2018.
    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 June 14, 2018, 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 amend Commentary .02 to Rule 1064.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.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.

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 Rule 1064 entitled ``Crossing, 
Facilitation and Solicited Orders.'' Specifically, the Exchange 
proposes to amend Commentary .02(ii) to Rule 1064 to amend the firm 
participation guarantee for a Floor Broker.
    Today, Phlx offers certain firm participation guarantees to a Floor 
Broker who holds an equity, index or U.S. dollar-settled foreign 
currency option order of the eligible order size or greater (``original 
order''), the Floor Broker is entitled to cross a certain percentage of 
the original order with other orders that he is holding or in the case 
of a public customer order, with a facilitation order of the 
originating firm (i.e., the firm from which the original customer order 
originated). Today, the Exchange may determine, on an option by option 
basis, the eligible size for an order that may be transacted pursuant 
to this Commentary, however, the eligible order size may not be less 
than 500 contracts. Orders for less than 500 contracts may be crossed 
pursuant to Rule 1064 but are not subject to Commentary .02, subsection 
(iii) to Rule 1064 pertaining to participation guarantees. Similar to 
Cboe Exchange, Inc. (``CBOE'') the Exchange proposes to lower the 
eligible minimum order size from 500 to not less than 50 contracts.\3\ 
The Commission noted in an approval of the reduction from 500 to 50 for 
CBOE that it had already approved the facilitation mechanism of ISE, 
which guarantees 40% of orders to facilitating firms for order sizes of 
50 or more contracts.\4\ In that approval order the Exchange approved 
the reduction in the size requirement, from 500 to 50 contracts, 
because the CBOE proposal raised no new regulatory issues.\5\ The 
Commission noted that it will benefit options market participants by 
allowing

[[Page 31202]]

for substantially consistent treatment of crossing mechanisms under the 
rules of the ISE and the CBOE, and will allow the CBOE to compete 
without disadvantage for facilitation orders.\6\
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    \3\ See CBOE Rule 6.74(d).
    \4\ See Securities Exchange Act Release No. 42835 (May 26, 
2000), 65 FR 35683 (June 5, 2000) (SR-CBOE-99-10) (Order Approving 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment Nos. 1, 2, and 3 to the Proposed 
Rule Change by the Chicago Board Options Exchange, Inc., Relating to 
Participation Rights for Firms Crossing Orders.)
    \5\ Id.
    \6\ Id.
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    The Exchange notes that, today, Rule 1064, Commentary .02 provides 
that if the same member organization is the originating firm and also 
the specialist for the particular class of options to which the order 
relates, then the specialist is not entitled to any Enhanced Specialist 
Participation with respect to the particular cross transaction. The 
Exchange notes that this limitation is not being amended with this 
proposal. The specialist would not be able to obtain an allocation in 
excess of the 40% allocation.
    The Exchange believes that this reduction from 500 to 50 contracts 
for the firm participation guarantee will continue to incentivize floor 
brokers to execute crossing orders on Phlx. The Exchange continues to 
reward the market participant that brought together market participants 
and executed orders on its trading floor. Further, the reduced contract 
size will benefit options market participants by allowing for 
substantially consistent treatment of crossing mechanisms with 
competing options venues. As noted in the CBOE proposal, today other 
competing mechanisms offer guarantees of 40% of orders to facilitating 
firms for order sizes of 50 or more contracts.\7\ The Exchange believes 
that the ability to obtain a 40% guarantee on smaller sized orders will 
incentivize market participants to competitively price trades in order 
to execute a greater number of smaller orders. The Exchange believes 
that the incentive encourages competition on Phlx and in turn benefits 
market participants in terms of competitive pricing for those orders.
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    \7\ See note 4 above.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\9\ in particular, in that it is designed to promote 
just and equitable principles of trade and to protect investors and the 
public interest by amending the eligible minimum order size within 
Commentary .02(ii) of Rule 1064, from 500 to not less than 50 
contracts, to promote competition.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange's proposal to lower the current eligible minimum order 
size in Commentary .02(ii) of Rule 1064 from 500 to not less than 50 
contracts is consistent with the Act as it should promote just and 
equitable principles of trade by allowing for substantially consistent 
treatment of crossing mechanisms with CBOE. Phlx market participants 
would be permitted to compete without disadvantage for facilitation 
orders with CBOE which today has the eligibility size proposed by 
Phlx.\10\
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    \10\ See note 4 above.
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    The Exchange believes that this reduction from 500 to 50 contracts 
for the firm participation guarantee will continue to incentivize floor 
brokers to execute crossing orders on Phlx. The Exchange continues to 
reward the market participant that brought together market participants 
and executed orders on its trading floor. Further, the reduced contract 
size will benefit options market participants by allowing for 
substantially consistent treatment of crossing mechanisms with 
competing options venues.

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 amendment to Commentary 
.02(ii) of Rule 1064 does not impose an undue burden on intra-market 
competition because the proposed rule change will apply uniformly to 
all market participants. The Exchange currently has a competitive 
market for orders of 500 contracts or more, notwithstanding the current 
40% firm participation guarantee for these orders, and therefore 
believes that extending this treatment to orders of 50 contracts or 
more (similar to other markets) will not have a significant impact on 
competition. The firm participation guarantee is designed as an 
incentive to market participants that bring order flow to the Phlx 
floor and is similar to allocation entitlements that exist on other 
floor based and electronic markets. The Commission has consistently 
found that rules entitling a market participant or participants up to 
40% of an order are not inconsistent with the statutory standards of 
competition and free and open markets, including in approving the 
Exchange's own firm participation guarantee.\11\ The Exchange believes 
that adopting a lower size threshold for this guarantee will benefit 
Phlx market participants by encouraging greater order flow and 
therefore increased opportunities for all market participants to trade, 
while ensuring that the trading crowd can still compete for a large 
portion of such orders. Furthermore, the proposal does not create an 
undue burden on inter-market competition because market participants 
would be permitted to compete without disadvantage for facilitation 
orders with CBOE. As noted in the CBOE proposal, today other competing 
mechanisms offer guarantees of 40% of orders to facilitating firms for 
order sizes of 50 or more contracts.\12\ The Exchange believes the 
guarantee may incentivize an increase in the flow of smaller orders to 
the trading floor because it will encourage market participants to 
offer competitive pricing in order to interact with that order flow.
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    \11\ See Securities Exchange Act Release No. 47819 (May 8, 
2003), 68 FR 25924 (May 14, 2003) (SR-Phlx-2002-17) (Approval 
Order).
    \12\ See note 4 above.
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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 \13\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 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) \15\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\16\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay so that the 
proposed rule changes may become operative immediately upon filing. The 
Exchange believes that waiver of the operative delay would allow the 
Exchange to more effectively compete

[[Page 31203]]

with CBOE by offering a firm participation allocation with the same 
eligibility size that CBOE currently offers. Additionally, the 
Commission notes that the proposed rule change is based on the current 
rules of CBOE \17\ and that it recently approved a similar rule change 
for the BOX Options Exchange LLC.\18\ As such, the Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Accordingly, the 
Commission waives the 30-day operative delay and designates the 
proposed rule change operative upon filing.\19\
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ See supra note 4.
    \18\ See Securities Exchange Act Release No. 82456 (January, 8, 
2008), 83 FR 1651 (January 12, 2018) (SR-BOX-2017-33) (Approval 
Order).
    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission 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 [email protected]. Please include 
File Number SR-Phlx-2018-48 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-2018-48. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2018-48 and should be submitted on 
or before July 24, 2018.

    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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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14301 Filed 7-2-18; 8:45 am]
BILLING CODE 8011-01-P