83 FR 8914 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, To Adopt New Order Type Protections, Butterfly and Box Spread Protections for Complex Order Strategy Trades

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 41 (March 1, 2018)

[Federal Register Volume 83, Number 41 (Thursday, March 1, 2018)]
[Notices]
[Pages 8914-8917]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-04126]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82766; File No. SR-Phlx-2018-14]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change, as Modified by Amendment No. 1, To Adopt New 
Order Type Protections, Butterfly and Box Spread Protections for 
Complex Order Strategy Trades

February 23, 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 February 9, 2018, Nasdaq PHLX LLC (``Phlx'' or the ``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

[[Page 8915]]

prepared by the Exchange. On February 21, 2018, the Exchange filed 
Amendment No. 1 to the proposal. Amendment No. 1 replaces and 
supersedes the original filing in its entirety. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified by Amendment No. 1, 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 adopt new order type protections, 
Butterfly and Box Spread protections, for Complex Order \3\ strategy 
trades. This rule change replaces and supersedes SR-Phlx-2018-14.
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    \3\ 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).
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    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to adopt Complex Order 
protections for butterfly and box spreads, which are Complex Order 
strategies. Today, Phlx members may submit butterfly and box spreads 
into the Phlx System. Phlx proposes to define a butterfly spread as a 
three legged Complex Order with certain characteristics.\4\ The 
Exchange is proposing to reject butterfly spreads which are outside of 
certain parameters to avoid potential executions at prices that exceed 
the minimum and maximum possible intrinsic value of the spread by a 
specified amount. Additionally, Phlx proposes to define a box spread as 
a four legged Complex Order with certain characteristics.\5\ The 
Exchange is proposing to reject box spreads which are outside of 
certain parameters to avoid potential executions at prices that exceed 
the minimum and maximum possible intrinsic value of the spread by a 
specified amount. Today, the Exchange offers similar order protection 
features for Complex Orders such as Strategy Price Protection \6\ and 
Acceptable Complex Execution \7\ to avoid erroneous trades. Each 
protection will be discussed in more detail below.
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    \4\ This strategy utilizes a combination of either all calls or 
all puts of the same expiration date in the same underlying to limit 
risk.
    \5\ This strategy utilizes a combination of put/call pairs of 
options with the same expiration date in the same underlying to 
limit risk.
    \6\ See Phlx Rule 1098(g).
    \7\ See Phlx Rule 1098(h)(i).
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Butterfly Spread Protection
    As noted above, the Exchange proposes to adopt a Butterfly Spread 
Protection. 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. With this protection, a Complex 
Order, including auction and auction responses, that is priced higher 
than the Maximum Value (defined below) or lower than the Minimum Value 
(defined below) will be cancelled. A Complex Market Order will be 
accepted, but will be restricted from trading at a price higher than 
the Maximum Value or lower than the Minimum Value.
    The Initial Maximum Value shall be the distance between the leg 
with the mid-point strike price and either of the outer leg strike 
prices. 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. The Exchange 
intends to set the Maximum Value Buffer at zero initially. The Maximum 
Value is calculated by adding the Initial Maximum Value and Maximum 
Value Buffer.
    The Initial Minimum Value shall be zero. The Minimum Value Buffer 
is a configurable absolute dollar value set by the Exchange and 
announced via a notice to members. The Exchange intends to set the 
Minimum Value Buffer at zero initially. The Exchange would monitor the 
zero value, including feedback from market participants, in determining 
whether the value is set at the appropriate level. The concern would 
set [sic] from market participants who are unable to close out 
positions. The Minimum Value is calculated by subtracting the Minimum 
Value Buffer from the Initial Minimum Value of zero. There are 
circumstances were [sic] the Minimum Value Buffer [sic] may be less 
than zero. For example, market participants who desire to trade out of 
positions at intrinsic value may not find a contra-side willing to 
trade without a premium. A small incremental allowance outside of the 
minimum/maximum value allows for a small premium to offset commissions 
associated with trading and may incentivize participants to take the 
other side of spreads trading at intrinsic value. For the participant 
looking to close out their position, it may be financially beneficial 
to pay a small premium and close out the position rather than carry 
such position to expiration and take delivery. The Butterfly Spread 
Protection would apply throughout the trading day, including pre-
market, during the Opening Process and during Halts. Below is an 
example of the application of this protection.
Example 1
    Assume the following Complex Order legs for a butterfly spread:

1. Buy 1 NDX 6960 Jan 26 Call (33.70 x 34.60)
2. Sell 2 NDX 6970 Jan 26 Calls (27.00 x 27.90)
3. Buy 1 NDX 6980 Jan 26 Call (28.40 x 29.50)
The derived net Phlx complex market (``cPBBO'') is 6.30 x 10.10
Assume both the Maximum Value Buffer and Minimum Value Buffer are 0
Minimum Value = 0
 Initial Minimum Value: 0.00
 Minimum Value Buffer: 0.00
 Minimum Value: 0.00 - 0.00 = 0.00
Maximum Value = 10
 Initial Maximum Value: 6970 (middle leg strike price) - 6960 
(outer leg strike price) = 10.00
 Maximum Value Buffer: 0.00
 Maximum Value: 10.00 (Initial Maximum Value) + 0.00 (Maximum 
Value Buffer) = 10.00

    An incoming order to buy the spread defined above for 10.10 will be 
cancelled because the purchase price of 10.10 is greater than the 
Maximum Value of 10.00.

[[Page 8916]]

Example 2
    Assume the following Complex Order legs for a butterfly spread:

1. Buy 1 NDX 6960 Jan 26 Call (33.70 x 34.60)
2. Sell 2 NDX 6970 Jan 26 Calls (27.00 x 27.90)
3. Buy 1 NDX 6980 Jan 26 Call (28.40 x 29.45)
The derived net Phlx complex market (``cPBBO'') is 6.30 x 10.05
Assume both the Maximum Value Buffer and Minimum Value Buffer are 0.05
Minimum Value = -0.05
 Initial Minimum Value: 0.00
 Minimum Value Buffer: 0.05
 Minimum Value: 0.00-0.05 = -0.05
Maximum Value = 10.05
 Initial Maximum Value: 6970 (middle leg strike price)-6960 
(outer leg strike price) = 10.00
 Maximum Value Buffer: 0.05
 Maximum Value: 10.00 (Initial Maximum Value) + 0.05 (Maximum 
Value Buffer) = 10.05

    An incoming order to buy the spread defined above for 10.05 will be 
accepted and executed against the simple market because the purchase 
price of 10.05 is equal to the Maximum Value 10.05.
Box Spread Protection
    As noted above, the Exchange proposes to adopt a Box Spread 
Protection. 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. 
With this protection, Complex Orders, including auction and auction 
responses that are priced higher than the Maximum Value or lower than 
the Minimum Value, will be cancelled. A Complex Market Order will be 
accepted but will be restricted from trading at a price higher than the 
Maximum Value or lower than the Minimum Value.
    The Initial Maximum Value shall be the distance between the strike 
prices of each pair of leg strike prices. 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. The Exchange intends to set the Maximum Value Buffer at zero 
initially. The Maximum Value is calculated by adding the Initial 
Maximum Value and Maximum Value Buffer.
    The Initial Minimum Value shall be zero. The Initial Minimum Value 
Buffer is a configurable absolute dollar value set by the Exchange and 
announced via a notice to members. The Exchange intends to set the 
Minimum Value Buffer at zero initially. The Minimum Value is calculated 
by subtracting the Minimum Value Buffer from the Initial Minimum Value 
of zero.
    The Box Spread Protection would apply throughout the trading day, 
including pre-market, during the Opening Process and during Halts. 
Below is an example of the application of this protection.
Example 1
    Assume the following Complex Order pairs for a box spread:

1. Pair A:
    a. Buy 1 NDX 6960 Jan 26 Call (30.80 x 34.05)
    b. Sell 1 NDX 6960 Jan 26 Put (33.50 x 36.00)
2. Pair B:
    a. Sell 1 NDX 6970 Jan 26 Call (27.50 x 29.00)
    b. Buy 1 NDX 6970 Jan 26 Put (36.40 x 37.05)
The derived net Phlx complex market (``cPBBO'') is 2.20 x 10.10
Assume both Maximum Value Buffer and Minimum Value Buffer are 0.00
Minimum Value = 0.00
 Initial Minimum Value: 0.00
 Minimum Value Buffer: 0.00
 Minimum Value: 0.00-0.00 = 0.00
Maximum Value = 10.00
 Initial Maximum Value: 6970 (Pair A strike price)-6960 (Pair B 
strike price) = 10.00
 Maximum Value Buffer: 0.00
 Maximum Value: 10.00 (Initial Maximum Value) + 0.00 (Maximum 
Value Buffer) = 10.00
    An incoming order to buy the spread defined above for 10.10 will be 
cancelled because the purchase price of 10.10 is greater than the 
Maximum Value of 10.00.
Example 2
    Assume the following Complex Order pairs for a box spread:

1. Pair A:
    a. Buy 1 NDX 6960 Jan 26 Call (30.80 x 34.05)
    b. Sell 1 NDX 6960 Jan 26 Put (33.50 x 36.50)
2. Pair B:
    a. Sell 1 NDX 6970 Jan 26 Call (27.50 x 30.75)
    b. Buy 1 NDX 6970 Jan 26 Put (36.40 x 37.05)
The derived net Phlx complex market (``cPBBO'') is -0.05 x 10.10
Assume both Maximum Value Buffer and Minimum Value Buffer are 0.05
Minimum Value = -0.05
 Initial Minimum Value: 0.00
 Minimum Value Buffer: 0.05
 Minimum Value: 0.00-0.05 = -0.05
Maximum Value = 10.05
 Initial Maximum Value: 6970 (Pair A strike price)-6960 (Pair B 
strike price) = 10.00
 Maximum Value Buffer: 0.05
 Maximum Value: 10.00 (Initial Maximum Value) + 0.05 (Maximum 
Value Buffer) = 10.05

    An incoming order to sell the spread defined above for -0.05 will 
be accepted and executed against the simple market because the purchase 
price of -0.05 is equal than the Minimum Value of -0.05.
Implementation
    The Exchange would implement these new protections no later than 
August 30, 2018. The Exchange would notify members of the exact 
implementation date by issuing a notice to members.
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, 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 offering protections for certain Complex Orders which restrict 
executions that exceed the intrinsic value of the spread by a specified 
(or configurable) amount. Further, the Exchange believes that its 
proposal will mitigate risks to market participants. Specifically, Phlx 
believes that the change, which is responsive to member input, will 
facilitate transactions in securities and perfect the mechanism of a 
free and open market by providing its members with additional 
functionality that will assist them with managing their risk by 
checking each Complex Order that is either a butterfly or box spread 
against certain parameters described within the filing before accepting 
the Complex Orders into the order book.
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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 believes that the parameters described herein, 
including parameters which will be configured by the Exchange, will 
protect members from executing orders too far outside the Minimum Value 
and Maximum Value which considers the intrinsic value of the strategy, 
thereby promoting fair and orderly markets and the protection of 
investors. The Exchange intends to offer

[[Page 8917]]

a buffer allowance from the minimum/maximum values permitted for the 
execution of these strategy orders to allow market participants 
flexibility to manage their business and accommodate executions outside 
of this range. The Exchange would monitor the zero value, including 
feedback from market participants, in determining whether the value is 
set at the appropriate level. The concern would set [sic] from market 
participants who are unable to close out positions. There are 
circumstances were [sic] the Minimum Value Buffer [sic] may be less 
than zero. For example, market participants who desire to trade out of 
positions at intrinsic value may not find a contra-side willing to 
trade without a premium. A small incremental allowance outside of the 
minimum/maximum value allows for a small premium to offset commissions 
associated with trading and may incentivize participants to take the 
other side of spreads trading at intrinsic value. For the participant 
looking to close out their position, it may be financially beneficial 
to pay a small premium and close out the position rather than carry 
such position to expiration and take delivery. The purpose of this rule 
change is not to impede current order handling but to ensure execution 
prices are within a reasonable range of minimum and maximum values. 
These parameters are consistent with order protection features for 
Strategy Price Protection in that Strategy Price Protection offers a 
buffer allowance from the permitted values.\10\
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    \10\ See Phlx Rule 1098(g).
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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 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, the proposal does 
not impose an intra-market burden on competition, because it will apply 
to all Complex Orders which are either butterfly or box spreads entered 
by any Phlx member. Further, the proposal will not impose an undue 
burden on inter-market competition, rather the proposal will assist the 
Exchange in remaining competitive in light of protections offered by 
other options exchanges.\11\ The Exchange competes with many other 
options exchanges which offer Complex Orders. In this highly 
competitive market, market participants can easily and readily direct 
order flow to competing venues.
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    \11\ See CBOE Rule 6.53C, Interpretations and Policies .08.
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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

    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-2018-14 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-2018-14. 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 such 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-2018-14, and should be submitted on 
or before March 22, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-04126 Filed 2-28-18; 8:45 am]
BILLING CODE 8011-01-P