[Federal Register Volume 77, Number 5 (Monday, January 9, 2012)]
[Notices]
[Pages 1095-1098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-101]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66087; File No. SR-Phlx-2011-182]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
the PHLX Market Exhaust Functionality

January 3, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 22, 2011, NASDAQ OMX 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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[[Page 1096]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 1082, Firm Quotations, 
by modifying Exchange Rule 1082(a)(ii)(B)(4), Market Exhaust, to 
reflect the Exchange's discontinuation of the Market Exhaust 
functionality (hereinafter, ``Market Exhaust''), a feature of the 
Exchange's PHLX XL[supreg] automated options trading system.\3\
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    \3\ This proposal refers to ``PHLX XL'' as the Exchange's 
automated options trading system. In May 2009 the Exchange enhanced 
the system and adopted corresponding rules referring to the system 
as ``Phlx XL II.'' See Securities Exchange Act Release No. 59995 
(May 28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). The 
Exchange intends to submit a separate technical proposed rule change 
that would change all references to the system from ``Phlx XL II'' 
to ``PHLX XL'' for branding purposes.
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    The Exchange also proposes to amend Exchange Rule 1080 by deleting 
a reference to ``Market Exhaust'' from Rule 1080(c).
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
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 the 
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 reflect in the 
Exchange rules the discontinuation of the PHLX XL Market Exhaust 
functionality.
    In June, 2009, the Exchange added several significant enhancements 
to its automated options trading platform (now known as PHLX XL), and 
adopted rules to reflect those enhancements.\4\ As part of the system 
enhancements, the Exchange proposed, among other things, Market 
Exhaust, which is defined below. Several elements of Market Exhaust 
have been part of a pilot (the ``pilot'') which was originally 
scheduled to expire November 30, 2009, and later extended through 
September 30, 2010.\5\ The Exchange subsequently modified the pilot to 
address the manner in which the PHLX XL system disseminates quotes 
during and after the Market Exhaust process.\6\ That modification was 
implemented on a pilot basis, scheduled to expire November 30, 2010,\7\ 
and the pilot was then extended through March 31, 2011.\8\ The pilot 
was then extended through July 31, 2011,\9\ November 30, 2011,\10\ and 
its current expiration date of February 29, 2012.\11\
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    \4\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
    \5\ See Securities Exchange Act Release No. 60951 (November 6, 
2009), 74 FR 59275 (November 17, 2009) (SR-Phlx-2009-95).
    \6\ See Securities Exchange Act Release No. 63024 (September 30, 
2010), 75 FR 61799 (October 6, 2010) (SR-Phlx-2010-134).
    \7\ Id.
    \8\ See Securities Exchange Act Release No. 63350 (November 19, 
2010), 75 FR 73150 (November 29, 2010) (SR-Phlx-2010-156).
    \9\ See Securities Exchange Act Release No. 64056 (March 8, 
2011), 76 FR 13678 (March 14, 2011) (SR-Phlx-2011-29).
    \10\ See Securities Exchange Act Release No. 64833 (July 7, 
2011), 76 FR 41317 (July 13, 2011) (SR-Phlx-2011-95).
    \11\ See Securities Exchange Act Release No. 65670 (November 2, 
2011), 76 FR 69308 (November 8, 2011) (SR-Phlx-2011-144).
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Market Exhaust Functionality
    The PHLX XL system initiates Market Exhaust when there are no PHLX 
XL participant quotations in the Exchange's disseminated market for a 
particular series and an initiating order in the series is 
received.\12\ The PHLX XL system initiates a ``Market Exhaust Auction'' 
for the initiating order, and then goes through a series of steps 
depending on the market conditions present for the affected series, 
including a broadcast to PHLX XL participants, execution of all or part 
of the initiating order, routing the initiating order (or remaining 
contracts following execution) to better priced away markets, and a 
``Provisional Auction,'' after which any unexecuted contracts from the 
initiating order will be subject to, and not executable outside of, an 
Auction Quote Range (``AQR''). During the Provisional Auction, any 
unexecuted contracts from the initiating order are displayed in the 
Exchange quote for the remaining size for a brief period not to exceed 
ten seconds and subsequently cancelled back to the entering participant 
if they remain unexecuted, unless the member that submitted the 
original order has instructed the Exchange in writing to re-enter the 
remaining size, in which case the remaining size will be automatically 
submitted as a new order.
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    \12\ See Exchange Rule 1082(a)(ii)(B)(4).
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Discontinuation of Market Exhaust
    The Exchange proposes to discontinue the application of Market 
Exhaust on PHLX XL. The Exchange has determined that Market Exhaust has 
only affected a small number of orders, given the specific set of 
circumstances that must occur in order for Market Exhaust to be 
initiated. Market Exhaust, which was originally intended to protect 
against erroneous executions when there are no participant quotes on 
the Exchange, may actually result in a customer missing the opportunity 
to access liquidity present on the order book and/or on other exchanges 
while their order is involved in the Market Exhaust process. Once 
Market Exhaust is discontinued on the Exchange, orders received when 
there are no PHLX XL participant quotations in the Exchange's 
disseminated market for the affected series will be handled in 
accordance with existing Exchange rules regarding electronic order 
entry, execution, routing, trade reporting, and firm quotations.\13\
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    \13\ See, e.g., Exchange Rules 1014, 1051, 1080, and 1082.
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    The Exchange proposes to amend Rule 1082(a)(ii)(B)(4) by adopting 
Rule 1082(a)(ii)(B)(4)(a), which would state that, if there are no 
offers both on the Exchange and on away markets in the affected series, 
market orders to buy in the affected series will be cancelled 
immediately, and an electronic report of such cancellation will be 
transmitted to the sender. The Exchange would cancel such a market 
order because in this rare circumstance there would be no disseminated 
market on the Exchange and no disseminated market on any away market 
against which such market order could be routed and executed, and there 
would be no price at which the Exchange could place such a market order 
on the Exchange's limit order book.
    Upon the discontinuation of Market Exhaust, orders that would have 
been handled under Market Exhaust will be handled according to Exchange 
rules that address specific market conditions. Proposed Rule 
1082(a)(ii)(B)(4)(b) would address the PHLX XL system's functionality 
in the circumstance where there are no offers on the Exchange and there 
are offers on away markets in the affected series. In such a 
circumstance,

[[Page 1097]]

market orders to buy will be handled pursuant to Exchange Rule 
1080(m).\14\
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    \14\ Rule 1080(m), Order Routing, describes the PHLX XL 
functionality by which eligible orders are routed to away markets 
for possible execution.
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    Proposed Rule 1082(a)(ii)(B)(4)(c) would address the PHLX XL 
system's functionality in the circumstance where there are no bids or a 
zero priced bid on the Exchange and there are no bids on away markets 
in the affected series. In such a circumstance, the Exchange will 
disseminate a bid price of zero, and market orders to sell will be 
handled pursuant to Exchange Rule 1080(i).\15\
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    \15\ Rule 1080(i) states that the system will convert market 
orders to sell a particular option series to limit orders to sell 
with a limit price of the minimum trading increment applicable to 
such series that are received when: (A) For options listed only on 
the Exchange: (1) The Exchange's disseminated bid price in such 
option series is zero; and (2) the Exchange's disseminated quotation 
in the series has a bid/ask differential less than or equal to 
$0.25; or (B) For options that are listed on multiple exchanges: (1) 
The disseminated NBBO includes a bid price of zero in the series; 
and (2) the Exchange's disseminated quotation in the series has a 
bid/ask differential less than or equal to $0.25. Such orders will 
be automatically placed on the limit order book in price-time 
priority.
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    Proposed Rule 1082(a)(ii)(B)(4)(d) would address the PHLX XL 
system's functionality in the circumstance where there are no bids or a 
zero priced bid on the Exchange and there are bids on away markets in 
the affected series. In such a circumstance, market orders to sell will 
be handled pursuant to Exchange Rule 1080(m).
    The Exchange believes that the proposed rule change benefits 
customers and the marketplace as a whole by simplifying the order 
handling process and enabling customers to immediately access posted 
liquidity on the Exchange and away markets even when there may not be 
PHLX participant quotes present.\16\
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    \16\ Additionally, the Exchange notes that the deletion of the 
rules concerning Market Exhaust effects consistency between the 
rules and the PHLX XL functionality in compliance with the Act.
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    The Exchange also proposes to amend Exchange Rule 1080 by deleting 
a reference to ``Market Exhaust'' from Rule 1080(c).
    The Exchange will complete the discontinuation of the Market 
Exhaust functionality on or before January 31, 2012.\17\
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    \17\ The Exchange will issue a circular to membership describing 
the discontinuation of Market Exhaust prior to the effectiveness of 
such discontinuation.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \18\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \19\ 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.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the proposed 
discontinuation of Market Exhaust protects investors and the public 
interest by ensuring that customers have the opportunity to access 
liquidity present on the order book and/or on other exchanges quickly, 
instead of foregoing such opportunity while their order is involved in 
the Market Exhaust process. In the rare set of circumstances that give 
rise to Market Exhaust, investors should continue to receive quality 
executions on PHLX and at away markets (following routing if 
appropriate).
    Moreover, the proposed discontinuation of Market Exhaust removes 
impediments and perfects the mechanism of a free and open market and a 
national market system by expediting the PHLX execution, routing and 
trade reporting process, all to the benefit of the markets as a whole.

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.

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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \20\ and Rule 19b-4(f)(6) \21\ 
thereunder.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 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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    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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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-2011-182 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2011-182. 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 on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing also will be available for inspection and copying at the 
principal offices of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying

[[Page 1098]]

information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Phlx-2011-182, and should be submitted on or before 
January 30, 2012.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-101 Filed 1-6-12; 8:45 am]
BILLING CODE 8011-01-P