[Federal Register Volume 78, Number 140 (Monday, July 22, 2013)]
[Notices]
[Pages 43950-43953]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-17468]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69989; File No. SR-Phlx-2013-74]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
the Extension of a Pilot Program Regarding Price Improvement XL

July 16, 2013.
    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 July 12, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') a 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 Exchange Rule 1080(n), Price 
Improvement XL (``PIXL\SM\'') to extend, through July 18, 2014, a pilot 
program (the ``pilot'') concerning (i) the early conclusion of the PIXL 
Auction (as described below), and (ii) permitting orders of fewer than 
50 contracts into the PIXL Auction. The current pilot is scheduled to 
expire July 18, 2013.\3\
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    \3\ The extension of the pilot relates to several subparagraphs 
of Rule 1080(n) in respect of PIXL and Complex Order PIXL, as 
discussed below.
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    Proposed new text is italicized. Deleted text is [bracketed].
* * * * *

NASDAQ OMX PHLX LLC Rules

Options Rules

* * * * *

Rule 1080. Phlx XL and Phlx XL II

    (a)-(m) No change.
    (n) Price Improvement XL (``PIXL'')
    A member may electronically submit for execution an order it 
represents as agent on behalf of a public customer, broker-dealer, or 
any other entity (``PIXL Order'') against principal interest or against 
any other order (except as provided in sub-paragraph (n)(i)(F) below) 
it represents as agent (an ``Initiating Order'') provided it submits 
the PIXL Order for electronic execution into the PIXL Auction 
(``Auction'') pursuant to this Rule. The contract size specified in 
Rule 1080(n) as applicable to PIXL Orders shall apply to Mini Options.
    (i) Auction Eligibility Requirements. All options traded on the 
Exchange are eligible for PIXL. A member (the ``Initiating Member'') 
may initiate an Auction provided all of the following are met:
    (A) if the PIXL Order (except if it is a Complex Order) is for the 
account of a public customer:
    (1) No change.
    (2) and is for a size of less than 50 contracts, the Initiating 
Member must stop the entire PIXL Order (except if it is a Complex 
Order) at a price that is the better of: (i) the Exchange's Best Bid or 
Offer (``PBBO'') price on the opposite side of the market from the PIXL 
Order improved by at least one minimum price improvement increment, or 
(ii) the PIXL Order's limit price (if the order is a limit order), 
provided in either case that such price is at or better than the NBBO, 
and at least one minimum price improvement increment better than any 
limit order on the book on the same side

[[Page 43951]]

of the market as the PIXL Order. This sub-paragraph (A)(2) shall be 
effective for a pilot period scheduled to expire July 18, 201[3]4.
    (B) If the PIXL Order (except if it is a Complex Order) is for the 
account of a broker dealer or any other person or entity that is not a 
public customer:
    (1) No change.
    (2) and is for a size of less than 50 contracts, the Initiating 
Member must stop the entire PIXL Order (except if it is a Complex 
Order) at a price that is the better of: (i) the PBBO price improved by 
at least one minimum price improvement increment on the same side of 
the market as the PIXL Order, or (ii) the PIXL Order's limit price (if 
the order is a limit order), provided in either case that such price is 
at or better than the NBBO and at least one minimum improvement 
increment better than the PBBO on the opposite side of the market from 
the PIXL Order. This sub-paragraph (B)(2) shall be effective for a 
pilot period scheduled to expire July 18, 201[3]4.
    (C) If the PIXL Order is a Complex Order and of a conforming ratio, 
as defined in Commentary.08(a)(i) and (a)(ix) to Rule 1080, the 
Initiating Member must stop the entire PIXL order at a price that is 
better than the best net price (debit or credit) (i) available on the 
Complex Order book regardless of the Complex Order book size; and (ii) 
achievable from the best Phlx bids and offers for the individual 
options (an ``improved net price''), provided in either case that such 
price is equal to or better than the PIXL Order's limit price. Complex 
Orders consisting of a ratio other than a conforming ratio will not be 
accepted. This sub-paragraph (C) shall apply to all Complex Orders 
submitted into PIXL. This sub-paragraph (C), where applied to Complex 
Orders where the smallest leg is less than 50 contracts in size, shall 
be effective for a pilot period scheduled to expire July 18, 201[3]4.
    (D)-(G) No change.
    (ii) Auction Process. Only one Auction may be conducted at a time 
in any given series or strategy. Once commenced, an Auction may not be 
cancelled and shall proceed as follows:
    (A) No change.
    (B) Conclusion of Auction. The PIXL Auction shall conclude at the 
earlier to occur of (1) through (4) below, with the PIXL Order 
executing pursuant to paragraph (C)(1) through (3) below.
    (1)-(4) No change.
    (5) Sub-paragraphs (B)(2), (B)(3) and (B)(4) above shall be 
effective for a pilot period scheduled to expire July 18, 201[3]4.
    (C) No change.
    (D) An unrelated market or marketable limit order (against the 
PBBO) on the opposite side of the market from the PIXL Order received 
during the Auction will not cause the Auction to end early and will 
execute against interest outside of the Auction. In the case of a 
Complex PIXL Auction, an unrelated market or marketable limit Complex 
Order on the opposite side of the market from the Complex PIXL Order as 
well as orders for the individual components of the Complex Order 
received during the Auction will not cause the Auction to end early and 
will execute against interest outside of the Auction. If contracts 
remain from such unrelated order at the time the Auction ends, they 
will be considered for participation in the order allocation process 
described in sub-paragraph (E) below. This sub-paragraph shall be 
effective for a pilot period scheduled to expire on July 18, 201[3]4.
    (E)-(J) No change.
    (iii)-(vi) No change.
    (vii) Initially, and for at least a Pilot Period expiring on July 
18, 201[3]4, there will be no minimum size requirement for orders to be 
eligible for the Auction. During this Pilot Period, the Exchange will 
submit certain data, periodically as required by the Commission, to 
provide supporting evidence that, among other things, there is 
meaningful competition for all size orders and that there is an active 
and liquid market functioning on the Exchange outside of the Auction 
mechanism. Any data which is submitted to the Commission will be 
provided on a confidential basis.
* * * * *
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.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 purpose of the proposed rule change is to extend the pilot 
through July 18, 2014.
Background
    The Exchange adopted PIXL in October 2010 as a price-improvement 
mechanism on the Exchange.\4\ PIXL is a component of the Exchange's 
fully automated options trading system, PHLX XL[supreg] that allows an 
Exchange member (an ``Initiating Member'') to electronically submit for 
execution an order it represents as agent on behalf of a public 
customer, broker dealer, or any other entity (``PIXL Order'') against 
principal interest or against any other order it represents as agent 
(an ``Initiating Order'') provided it submits the PIXL Order for 
electronic execution into the PIXL Auction (``Auction'') pursuant to 
the Rule.
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    \4\ See Securities Exchange Act Release Nos. 63027 (October 1, 
2010), 75 FR 62160 (October 7, 2010) (SR-Phlx-2010-108) (Order 
Granting Approval to a Proposed Rule Change Relating to a Proposed 
Price Improvement System, Price Improvement XL); 65043 (August 5, 
2011), 76 FR 49824 (August 11, 2011) (SR-Phlx-2011-104) (Order 
Extending Pilot for Price Improvement System, Price Improvement XL); 
67399 (July 11, 2012), 77 FR 42048 (July 17, 2012) (SR-Phlx-2012-94) 
(Order Extending Pilot for Price Improvement System, Price 
Improvement XL); and 69845 (June 25, 2013), 78 FR 39429 (July 1, 
2013) (SR-Phlx-2013-46) (Order Granting Approval To Proposed Rule 
Change, as Modified by Amendment No. 1, Regarding Complex Order 
PIXL).
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    An Initiating Member may initiate a PIXL Auction by submitting a 
PIXL Order, which is not a Complex Order, in one of three ways:
     First, the Initiating Member could submit a PIXL Order 
specifying a single price at which it seeks to execute the PIXL Order 
(a ``stop price'').
     Second, an Initiating Member could submit a PIXL Order 
specifying that it is willing to automatically match as principal or as 
agent on behalf of an Initiating Order the price and size of all 
trading interest and responses to the PIXL Auction Notification 
(``PAN,'' as described below) (``auto-match''), in which case the PIXL 
Order will be stopped at the National Best Bid/Offer (``NBBO'') on the 
Initiating Order side of the market (if 50 contracts or greater) or, if 
less than 50 contracts, the better of: (i) The PHLX Best Bid/Offer 
(``PBBO'') price on the opposite side of the market from the PIXL Order 
improved by at least one minimum price improvement increment, or (ii) 
the PIXL Order's limit price (if the order is a limit order),

[[Page 43952]]

provided in either case that such price is at or better than the NBBO 
and that such price is at least one increment better than the limit of 
an order on the book on the same side as the PIXL Order.
     Third, an Initiating Member could submit a PIXL Order 
specifying that it is willing to either: (i) Stop the entire order at a 
single stop price and auto-match PAN responses, as described below, 
together with trading interest, at a price or prices that improve the 
stop price to a specified price above or below which the Initiating 
Member will not trade (a ``Not Worse Than'' or ``NWT'' price); (ii) 
stop the entire order at a single stop price and auto-match all PAN 
responses and trading interest at or better than the stop price; or 
(iii) stop the entire order at the NBBO on the Initiating Order side 
(if 50 contracts or greater) or the better of: (A) The PBBO price on 
the opposite side of the market from the PIXL Order improved by one 
minimum price improvement increment, or (B) the PIXL Order's limit 
price (if the order is a limit order) on the Initiating Order side 
provided in either case that such price is at or better than the NBBO 
(if for less than 50 contracts), and auto-match PAN responses and 
trading interest are at a price or prices that improve the stop price 
up to the NWT price. In all cases, if the PBBO on the same side of the 
market as the PIXL Order represents a limit order on the book, the stop 
price must be at least one minimum price improvement increment better 
than the booked limit order's limit price.
    In addition, an Initiating Member may initiate a PIXL Auction by 
submitting a Complex Order which is of a conforming ratio, as defined 
in Commentary .08(a)(i) and (a)(ix) to Rule 1080. When submitting a 
Complex Order, the Initiating Member must stop the PIXL order at a 
price that is better than the best net price (debit or credit) (i) 
available on the Complex Order book regardless of the Complex Order 
book size; and (ii) achievable from the best PHLX bids and offers for 
the individual options (an ``improved net price''), provided in either 
case that such price is equal to or better than the PIXL Order's limit 
price.
    After the PIXL Order is entered, a PAN is broadcast and a one-
second blind Auction ensues. Anyone may respond to the PAN by sending 
orders or quotes. At the conclusion of the Auction, the PIXL Order will 
be allocated at the best price(s).
    Once the Initiating Member has submitted a PIXL Order for 
processing, such PIXL Order may not be modified or cancelled. Under any 
of the above circumstances, the Initiating Member's stop price or NWT 
price may be improved to the benefit of the PIXL Order during the 
Auction, but may not be cancelled.
    After a PIXL Order has been submitted, a member organization 
submitting the order has no ability to control the timing of the 
execution. The execution is carried out by the Exchange's PHLX 
XL[supreg] automated options trading system and pricing is determined 
solely by the other orders and quotes that are present in the Auction.
The Pilot
    Three components of the PIXL system were approved by the Commission 
on a pilot basis: (1) Paragraphs (n)(i)(A)(2),\5\ (n)(i)(B)(2), and 
(n)(i)(C) of Rule 1080, relating to auction eligibility requirements; 
(2) paragraphs (n)(ii)(B)(5) and (n)(ii)(D) of Rule 1080, relating to 
the early conclusion of the PIXL Auction; and (3) paragraph (n)(vii) of 
Rule 1080, stating that there shall be no minimum size requirement of 
orders entered into PIXL. The pilots were approved for a pilot period 
expiring on July 18, 2013.\6\ The Exchange notes that during the pilot 
period it has been required to submit, and has been submitting, certain 
data periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size orders and that there is an active and liquid market 
functioning on the Exchange outside of the Auction mechanism.\7\ The 
Exchange will continue to provide such data. The Exchange believes 
that, because the pilot has been operating for a relatively short 
amount of time, the proposed extension should afford the Commission 
additional time to evaluate the pilot.
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    \5\ On March 9, 2012, the Exchange filed a proposed rule change 
to clarify Exchange Rule 1080(n)(i)(A)(2). See Securities Exchange 
Act Release No. 66583 (March 13, 2012), 77 FR 16108 (March 19, 2012) 
(SR-Phlx-2012-032) (Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Amending Price Improvement System, Price 
Improvement XL). The amendment reflected the correct price--at or 
better than the NBBO--at which an Initiating Member must guarantee 
the execution of a PIXL Order that the Initiating Member submits 
into a PIXL Auction.
    \6\ See supra note 4.
    \7\ See Exchange Rule 1080(n)(vii).
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    The Exchange proposes to extend the pilot through July 18, 2014.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\8\ in general and with 
Section 6(b)(5) of the Act,\9\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purposes of the Act or the administration of 
the Exchange.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is also 
consistent with Section 6(b)(8) of the Act \10\ in that it does not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \10\ 15 U.S.C. 78f(b)(8).
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    Specifically, the Exchange believes that PIXL, including the rules 
to which the pilot applies, results in increased liquidity available at 
improved prices, with competitive final pricing out of the Initiating 
Member's complete control. The Exchange believes that PIXL promotes and 
fosters competition and affords the opportunity for price improvement 
to more options contracts. The extension proposal allows additional 
time for the Commission to evaluate the pilot.

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 proposal extends an 
existing pilot that applies to all Exchange members, and enables the 
Exchange to be competitive in respect of other option exchanges that 
have similar programs.

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

[[Page 43953]]

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)(ii) 
of the Act \11\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change along with a 
brief description and text of 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 
Commission deems this requirement to have been met.
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    A proposed rule change filed under Rule 19b-4(f)(6) \13\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \14\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requested 
that the Commission waive the 30-day operative delay. The Exchange 
noted that such waiver will permit the PIXL pilot to continue without 
interruption.
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the PIXL pilot to continue uninterrupted, thereby 
avoiding any potential investor confusion that could result from a 
temporary interruption in the pilot. Therefore, the Commission 
designates the proposed rule change to be operative on July 18, 
2013.\15\
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    \15\ For purposes only of waiving the 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 necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-2013-74 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-2013-74. 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 10:00 a.m. and 3:00 p.m., located at 
100 F Street NE., Washington, DC 20549. 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; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Phlx-2013-74 and should be submitted on or before August 12, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
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    \16\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-17468 Filed 7-19-13; 8:45 am]
BILLING CODE 8011-01-P