[Federal Register Volume 78, Number 86 (Friday, May 3, 2013)]
[Notices]
[Pages 26096-26099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-10445]



[[Page 26096]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69471; File No. SR-Phlx-2013-09]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Approving Proposed Rule Change To Enhance the Functionality Offered on 
the Options Floor Broker Management System (``FBMS'') by, Among Other 
Things, Automating Functions Currently Performed by Floor Brokers

April 29, 2013.

I. Introduction

    On February 6, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``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 
enhance the functionality offered on the Options Floor Broker 
Management System (``FBMS'') by, among other things, automating 
functions currently performed by Floor Brokers manually. The proposed 
rule change was published for comment in the Federal Register on 
February 26, 2013.\3\ On April 12, 2013, the Exchange extended the time 
for Commission action to April 29, 2013. The Commission received no 
comment letters on the proposal. This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68960 (February 20, 
2013), 78 FR 13132.
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II. Description of the Proposal

    Exchange options Floor Brokers are registered with the Exchange for 
the purpose, while on the options floor, of accepting and executing 
options orders received from members and member organizations.\4\ 
Historically, Floor Brokers received orders at their booths on the 
trading floor and executed such orders manually and in person. The 
implementation of the Consolidated Options Audit Trail System 
(``COATS'') in 2000 required the capture of certain options order 
information, including the time of order receipt and execution, 
contemporaneously with receipt and execution.\5\ As a result of these 
changes, the Exchange introduced FBMS, a component of the Exchange's 
electronic trading system, Phlx XL. FBMS enables Floor Brokers and/or 
their employees to enter, route, and report transactions stemming from 
options orders received on the Exchange. FBMS also establishes an 
electronic audit trail for options orders represented by Floor Brokers 
on the Exchange. Floor Brokers can use FBMS to submit orders, including 
Complex Orders,\6\ to Phlx XL, rather than executing the orders in the 
trading crowd. Orders submitted through FBMS are processed like any 
other electronic order on the Exchange. Floor Brokers may use FBMS to 
submit orders for a variety of reasons, including that the order is far 
away from the market such that the Floor Broker would prefer to place 
it on the electronic book or that there is a contra-side order on the 
book with which the order can trade.
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    \4\ See Exchange Rule 1060. A floor broker who is the nominee of 
a member organization qualified to transact business with the public 
may accept orders from public customers of the member organization. 
See id.
    \5\ See In the Matter of Certain Activities of Options 
Exchanges, Administrative Proceeding File No. 3-10282, Securities 
Exchange Act Release No. 43268 (September 11, 2000) (Order 
Instituting Public Administrative Proceedings Pursuant to Section 
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and 
Imposing Remedial Sanctions) (``Options Settlement Order'').
    \6\ Complex Orders are defined in Phlx Rule 1080.08.
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    The Exchange proposes to make several changes to FBMS.

A. Order Execution in FBMS

    The Exchange proposes to enhance FBMS functionalities. Currently, 
FBMS is a system that is primarily used by Floor Brokers to enter 
orders and report executed transactions. The Exchange proposes to 
expand FBMS such that it would become an order execution system as 
well.
    As proposed, all options transactions on the Exchange would be 
executed: (1) automatically by Phlx XL; (2) by and among members in the 
trading crowd (as long as none of them is a Floor Broker); or (3) 
through the FBMS for trades involving at least one Floor Broker.\7\ The 
Exchange proposes three exceptions that would allow Floor Brokers to 
execute orders manually: (1) If the Exchange determines to permit 
manual executions in the event of a problem with Exchange systems; (2) 
Floor Brokers are handling accommodation transactions \8\ or FLEX 
trades; \9\ or (3) where an order has more than 15 legs.\10\ The 
Exchange also proposes to amend its rules to state that certain trades 
executed by Floor Brokers pursuant to Rule 1064--namely, crossing, 
facilitation, and solicited orders--must be executed through the 
FBMS.\11\
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    \7\ See proposed Phlx Rule 1000(f).
    \8\ As explained in Phlx Rule 1059, specialists--and not FBMS--
execute accommodation transactions made pursuant to cabinet trading.
    \9\ FLEX orders will continue to be executable by Floor Brokers 
in the trading crowd pursuant to Exchange Rules 1079 and 1079A, 
rather than through FBMS because FBMS will not be able to accept 
FLEX orders, which have varied and complicated terms. Similarly, 
accommodation transactions (also known as cabinet trades) will 
continue to be executable by Floor Brokers in the trading crowd 
pursuant to Exchange Rule 1059. According to the Exchange, neither 
FLEX nor accommodation transactions are executed through Exchange 
systems today.
    \10\ The Exchange proposes to limit the complexity of FBMS 
functionality and does not believe that many orders fall into this 
category or that Floor Brokers would be adversely affected.
    \11\ In addition to making these changes to Rule 1064, the 
Exchange also proposes to delete Advice B-11, which generally tracks 
the language of Rule 1064. In addition to generally repeating the 
substance of Rule 1064, the Exchange noted that Advice B-11 does not 
contain fine schedules adopted pursuant to the Exchange's minor rule 
enforcement and reporting plan, unlike other Advices.
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    In connection with the proposal to add order execution functions to 
FBMS, the Exchange is proposing to add new subsection (g) to Exchange 
Rule 1000. The proposed rule would require bids and offers to either be 
entered electronically or made by public outcry in the trading 
crowd.\12\ The Exchange also proposes to define public outcry. As 
proposed, a member shall be considered to be ``in'' on a bid or offer 
while the member remains at the post, unless the member distinctly and 
audibly states ``out.'' \13\ A member bidding and offering in immediate 
and rapid succession shall be deemed ``in'' until the member shall 
state ``out'' on either bid or offer.\14\ Once the crowd has provided a 
quote, it will remain in effect until: (A) A reasonable amount of time 
has passed; or (B) there is a significant change in the price of the 
underlying security; or (C) the market given in response to the request 
has been improved.\15\ With respect to orders involving a Floor Broker 
using FBMS to execute an order, a member must audibly say ``out'' 
before the Floor Broker submits the order into the FBMS for execution 
and, if the order is not executed, the member must audibly say ``out'' 
before each time the Floor Broker resubmits the order for 
execution.\16\
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    \12\ See proposed Exchange Rule 1000(g). The proposed rule would 
also require all bids and offers to be general and not be specified 
for acceptance by particular members. See id.
    \13\ See proposed Exchange Rule 1000(g).
    \14\ See id.
    \15\ See id. In the case of a dispute, the term ``significant 
change'' would be interpreted on a case-by-case basis by an Options 
Exchange Official based upon the extent of the recent trading in the 
option and, in the case of equity and index options, in the 
underlying security, and any other relevant factors.
    \16\ See id.
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    In connection with order execution, the Exchange also proposes to 
allow FBMS to execute two-sided orders entered by Floor Brokers, 
including multi-leg orders up to 15 legs, after the

[[Page 26097]]

Floor Broker has represented the orders in the trading crowd.\17\ When 
a Floor Broker submits an order for execution through FBMS, the order 
would be executed based on market conditions and in accordance with 
Exchange rules.\18\ FBMS execution functionality would assist the Floor 
Broker in clearing the Exchange book, consistent with Exchange priority 
rules.\19\ If the order cannot be executed, Phlx XL would attempt to 
execute the order a number of times for a period of no more than one 
second, which period shall be established by the Exchange and announced 
by Options Trader Alert, after which the order would be returned to the 
Floor Broker on the FBMS.\20\ The Floor Broker may resubmit the order 
for execution, as long as the quotes/orders that comprise the cross 
have not been withdrawn.\21\ Floor Brokers are responsible for handling 
all FBMS orders in accordance with Exchange priority and trade-through 
rules, including Exchange Rules 1014, 1033 and 1084.\22\
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    \17\ See proposed Exchange Rule 1063(e)(iv).
    \18\ See id.
    \19\ See id.
    \20\ See id.
    \21\ See id.
    \22\ See id.
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B. Complex Calculator Function in FBMS

    The Exchange proposes to provide Floor Brokers with an enhanced 
FBMS functionality called the complex calculator.\23\ FBMS would 
calculate and display a suggested price of each individual component of 
a multi-leg order, up to 15 legs, submitted on a net debit or credit 
basis.\24\ The Exchange stated that this functionality should 
substantially increase the speed with which Floor Brokers could 
ascertain the marketability of multi-leg orders at a specified net 
debit or credit price, and should result in more efficient executions 
in the trading crowd.
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    \23\ See proposed Exchange Rule 1063(e)(iii).
    \24\ See id. According to the Exchange, FBMS currently accepts 
up to 20 legs of a complex order. The Exchange believes that 
limiting the proposed complex calculator to 15 legs should be 
sufficient for Floor Brokers' current business needs.
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    Additionally, the Exchange proposes to change the manner in which 
Complex Orders are entered into FBMS. Currently, Floor Brokers may 
enter Complex Orders, as defined in Rule 1080.08, consisting of two 
option legs into FBMS for execution using the Complex Order 
functionality of Phlx XL, pursuant to Rule 180.08(b)(iii). The Exchange 
proposes to allow Complex Orders consisting of up to six legs (one of 
which may be stock) to be entered through FBMS.\25\ According to the 
Exchange, this functionality should assist Floor Brokers in pricing 
multi-leg orders for representation in the trading crowd, as well as 
with pricing multi-leg orders for submission for execution as a two-
sided order.
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    \25\ See proposed Exchange Rule.
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C. Multi-Leg Order Spread Type Priority

    The Exchange proposes to apply a new spread priority to certain 
multi-leg orders that are submitted to FBMS. This priority, which is 
the same as the priority set forth in Rule 1080.08(c)(iii) that applies 
to complex orders in Phlx XL, will apply to multi-leg orders that meet 
the definition of a Complex Order as set forth in Rule 1080.08. This 
priority will also apply to multi-leg orders that contain a conforming 
ratio that complies with the conforming ratio set forth in Rule 
1080.08(a)(ix).\26\
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    \26\ As set forth in Rule 1080.08(a)(ix), a conforming ratio 
``is where the ratio between the sizes of the options components of 
a Complex Order is equal to or greater than one-to-three (.333) and 
less than or equal to three-to-one (3.00).''
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    As set forth in proposed Rule 1033(i), Spread Type Orders \27\ 
consisting of a conforming ratio may be executed at a total credit or 
debit price with priority over individual bids or offers established in 
the marketplace (including customers) that are not better than the bids 
or offers comprising such total credit or debit, provided that at least 
one option leg is executed at a better price than the established bid 
or offer for that option contract and no option leg is executed at a 
price outside of the established bid or offer for that option contract. 
Because certain orders will continue to be executed on the floor and 
not through FBMS, the Exchange is retaining Rules 1033 (d), (e), (g), 
and (h), which effectively require one leg of a spread to be improved 
for every two legs of a multi-leg order.
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    \27\ A spread type order includes a spread, straddle and 
combination order and is an order to buy a stated number of option 
contracts and to sell a stated number of option contracts in a 
different series of the same option and may be bid for or offered on 
a total net debit or credit basis. See Exchange Rule 1066(f).
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D. Additional Changes

    The Exchange proposes to amend Exchange Rule 1014(g)(vi) and Option 
Floor Procedure Advice F-2, which pertain to how trades are allocated, 
matched and time stamped. Currently, trades executed electronically via 
Phlx XL are automatically trade reported without further action 
required by the executing parties. As proposed, trades executed 
electronically through FBMS are also automatically reported.
    The Exchange also proposes to amend Exchange Rule 1066, Certain 
Types of Orders Defined, and rename it ``Certain Types of Floor-Based 
(Non-Phlx XL) Orders Defined'' to make clear that the order types in 
the rule reflect what can be traded on the floor. The order types that 
are handled and executed automatically by Phlx XL appear in Exchange 
Rule 1080. The Exchange is also proposing introductory language 
specifically stating that these order types are eligible for entry by a 
Floor Broker for execution through FBMS and, with respect to 
transactions when there is no Floor Broker involved, for execution by 
members in the trading crowd. The Exchange also proposes to delete the 
following order types, because FBMS will not accept these order types: 
\28\ multi-part order, delta order, market-on-close order, and one-
cancels-the-other order.\29\ The Exchange stated that these order types 
are being deleted because they are not easily automated and are rarely 
used.
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    \28\ The Exchange is also proposing to delete Exchange Rule 
1033(i), Inter-Currency Spread Priority, because FBMS will not 
handle multi-leg orders involving two different underlying 
currencies.
    \29\ The Exchange is also deleting this order type in Exchange 
Rule 1063(b).
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    The Exchange proposes to rename ``Hedge Order'' in Exchange Rule 
1066(f) to ``Multi-leg Order,'' and make corresponding changes in 
Exchange Rules 1033(d), 1063(e) and Option Floor Procedure Advices C-2 
and F-14. A synthetic options order would be re-categorized as a type 
of multi-leg order in Exchange Rule 1066(f)(5), rather than a separate 
order type in Exchange Rule 1066(g). The definition and description of 
an Intermarket Sweep Order would be moved from Exchange Rule 1066(i) to 
Exchange Rule 1080.03 because such order is (and would continue to be) 
only available on Phlx XL. Exchange Rule 1066(f) would also be amended 
to add three new definitions--Spread Type Order; Complex Order (to help 
distinguish between the multi-leg orders that also meet the definition 
of Complex Order in Exchange Rule 1080.08 from those that do not); \30\ 
and DNA Order, which will now be submitted through FBMS. Exchange Rule 
1066 would contain all of the order types available for open outcry 
trading on the trading floor and through FBMS; Exchange Rule 1080 
continues to govern the order types available through PHLX XL.
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    \30\ A spread type order, which can only be entered through 
FBMS, can have up to 15 legs, while a Complex Order entered for 
handling through PHLX XL can have up to six legs, each including the 
underlying security.

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[[Page 26098]]

E. Implementation

    The Exchange proposes to implement the enhancements with a trial 
period of two to four weeks, to be determined by the Exchange, during 
which the new FBMS enhancements and related rules would operate along 
with the existing FBMS and rules. The Exchange seeks to begin 
implementation on June 1, 2013.\31\ During this period, Floor Brokers 
would still be able to execute orders verbally in the trading crowd and 
submit the execution reports through FBMS, like they do currently. 
Floor Brokers would also be able to use the new FBMS to execute trades.
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    \31\ Phlx confirmed that the implementation of FBMS will begin 
on June 1, 2013. See email from Edith Hallahan, Phlx, to Dhawal 
Sharma, Attorney Advisor, Division of Trading and Markets, 
Commission.
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III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and rules 
and regulations thereunder applicable to a national securities 
exchange.\32\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \33\ in that 
it is designed to promote just and equitable principles of trade, to 
remove impediments and to 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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    \32\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \33\ 15 U.S.C. 78f(b).
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    The Exchange proposes to amend its rules to, among other things, 
require Floor Brokers to execute orders via FBMS rather than manually 
on the trading floor, unless one of the enumerated exceptions 
applies.\34\ In part, the proposal would allow Floor Brokers to use 
FBMS to cross orders, including multi-leg orders with up to 15 legs. 
The Commission believes that such automation may benefit the Exchange, 
its members and users, and other market participants by, for example, 
producing more accurate and timely trade reporting. The Commission 
believes that this proposal should allow Floor Brokers to better manage 
orders and is reasonably designed to increase compliance with 
applicable Commission rules and regulations and with Exchange rules. 
For example, the FBMS would prohibit an execution of a two-sided order 
if that cross would trade through a better price on the book or on 
another market.\35\ Automating formerly manual trades should help 
ensure that trades do not violate the priority of orders on the book or 
trade through the NBBO.\36\
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    \34\ As part of these changes, the Exchange will delete Advice 
B-11, which generally tracks the language of Rule 1064, which the 
Exchange proposes to amend.
    \35\ The Exchange noted that Floor Brokers may choose not to 
execute the cross if orders exist on the book that would prevent the 
cross from executing. In this scenario, the FBMS would notify the 
Floor Brokers that such orders on the book exist, and the Floor 
Broker would have to exercise his discretion as to whether to 
proceed.
    \36\ Also of relevance is Rule 155, which requires that ``a 
Floor Broker handling an order is to use due diligence to execute 
the order at the best price or prices available to him in accordance 
with the Rules of the Exchange.'' The Commission notes that, with 
the changes made to the FBMS and to the manner in which Floor 
Brokers handle orders, Floor Brokers will still be obligated to 
adhere to the principles articulated in Rule 155.
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    Moreover, the Commission finds that the enhanced functionality of 
FBMS provided by the complex calculator, which would calculate and 
display a suggested price of each individual component of a multi-leg 
order, up to 15 legs, submitted on a net debit or credit basis, will 
aid Floor Brokers in calculating the prices of the components of a 
multi-leg order, which has the potential to increase the speed with 
which Floor Brokers can represent such orders. Taken together, the 
Commission believes that these changes will be beneficial to the market 
as a whole by contributing to the efficient functioning of the 
securities markets and the price discovery process and by contributing 
to the efficient functioning of the securities markets.
    The Commission also finds that the proposed Spread Type Order 
priority is consistent with the requirements of the Act. The FBMS would 
validate that a multi-leg order meets the definition of Complex Order 
(as defined in Exchange Rule 1080.08) and would apply the new spread 
priority provision. If a multi-leg order does not meet the definition 
of Complex Order because the multi-leg order has more than six legs, 
then the proposed spread priority provision would nevertheless apply if 
the multi-leg order has a conforming ratio (as defined in Exchange Rule 
1080.08(a)(ix)). The Commission believes that the proposed Spread Type 
Order priority could improve Floor Brokers' ability to execute multi-
leg orders, which could benefit investors and other market 
participants. The Commission notes that other options exchanges have 
similar complex order priority provisions for Complex Orders that do 
not limit the number of legs and that require only one leg to be 
improved.\37\
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    \37\ See, e.g., ISE Rule 722(b)(2).
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    Additionally, the Commission finds that the Exchange's proposal to 
amend Exchange Rule 1014(g)(vi) and Option Floor Procedure Advice F-2 
so that trades executed electronically through FBMS will be 
automatically reported (without further action required by executing 
parties) is consistent with the requirements of the Act. Currently, 
trades executed electronically via Phlx XL are automatically reported, 
and the proposed change would ensure automatic reporting for trades 
executed via FBMS. The Commission believes that this proposal will 
benefit investors and other market participants by providing quicker 
and more reliable confirmation of trade executions.
    The Commission also finds that the Exchange's proposed changes and 
deletions to Exchange Rules 1033, 1063, 1066, and 1080 are consistent 
with the Act. The Exchange is renaming Rule 1066 from ``Certain Types 
of Orders Defined'' to ``Certain Types of Floor-Based (Non-Phlx XL) 
Orders Defined,'' which the Commission believes will make clear to 
investors and other market participants that the order types in the 
rule reflect what can be traded on the floor. The Exchange is also 
amending Rule 1080, which lists the order types that are handled and 
executed automatically by Phlx XL, to provide introductory language 
that specifically states that the listed order types are eligible 
either for entry by a Floor Broker for execution through FBMS or for 
execution by members in the trading crowd where the transaction does 
not involve a Floor Broker. Additionally, the Exchange is deleting from 
Rule 1066 several order types (multi-part order, delta order, market-
on-close order, and one-cancels-the-other order \38\) that are not 
easily automated and rarely used. The Exchange is deleting from Rule 
1033(i) the ``Inter-Currency Spread Priority'' because FBMS will not 
handle multi-leg orders involving two different underlying currencies. 
The Exchange is also renaming ``Hedge Order'' in Rule 1066(f) to 
``Multi-leg Order,'' and making corresponding changes in Exchange Rules 
1033(d), 1063(e), and the Option Floor Procedure Advices C-2 and F-14. 
Additionally, a synthetic options order would be re-categorized as a 
type of multi-leg order in Exchange Rule 1066(f)(5), rather than a 
separate order type in Exchange Rule 1066(g). The definition and 
description of an Intermarket Sweep Order would be

[[Page 26099]]

moved from Exchange Rule 1066(i) to Exchange Rule 1080.03 because such 
order is (and would continue to be) only available on Phlx XL. Exchange 
Rule 1066(f) would also be amended to add three new definitions--Spread 
Type Order; Complex Order and DNA Order. The Commission believes that 
these changes are consistent with and necessary in light of the changes 
being made to FBMS, and are appropriate and beneficial to investors 
because they update the Exchange's Rules and provide the investing 
public with clearer information on order types available for execution 
on the Exchange.
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    \38\ The ``one-cancels-the-other order'' type is also being 
deleted from Exchange Rule 1063(b).
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    The Commission also finds that the addition of new subsection (g) 
to Exchange Rule 1000 is consistent with the Act. Exchange Rule 1000(g) 
would require bids and offers to either be entered electronically or 
made by public outcry in the trading crowd. As described above, public 
outcry is defined in Rule 1000(g). The Commission believes that the 
additional clarity provided by Rule 1000(g) on how bids and offers are 
made and maintained on the trading floor is appropriate because, in 
light of the elimination of most Floor Broker verbal executions, 
additional emphasis will be placed on how long a bid/offer is in 
effect.
    The Commission finds that it is consistent with the Act for the 
Exchange to begin implementation of the new FBMS enhancements and 
related rules on June 1, 2013, with a two to four week trial period. 
The Commission believes that this will provide Floor Brokers and other 
market participants with an appropriate amount of time to familiarize 
themselves with the changes, and, similarly, a trial period of two to 
four weeks will allow the Exchange and market participants to work 
together in making a transition from floor based executions to FBMS.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\39\ that the proposed rule change (SR-Phlx-2013-09) is approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10445 Filed 5-2-13; 8:45 am]
BILLING CODE 8011-01-P