[Federal Register Volume 79, Number 95 (Friday, May 16, 2014)]
[Notices]
[Pages 28561-28564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-11295]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72152; File No. SR-Phlx-2014-32]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Regarding 
the Limitation on Entering Electronic Limit Orders From Off the Floor 
of the Exchange

May 12, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 2, 2014, 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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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Commission a proposal to amend Phlx 
Rule 1080 (Phlx XL and Phlx XL II) to change the limitation on Exchange 
members entering, or facilitating entry of, electronic limit orders in 
the same option series from off the floor of the Exchange, so that the 
limitation does not apply to off floor broker dealers or Professionals 
as defined in Rule 1000(b)(14).\3\
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    \3\ As discussed in the proposal, the limitation will continue 
to apply to Professional all-or-none orders.
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    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 amend Phlx Rule 
1080(j) to change the limitation on Exchange members entering, or 
facilitating entry of, electronic limit orders in the same option 
series from off the floor of the Exchange (known as ``limitation'' or 
``limitation on orders''), so that the limitation does not apply to off 
floor broker dealers or Professionals as defined in Rule 
1000(b)(14).\4\
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    \4\ Per Rule 1000(b)(14), the term ``Professional'' means any 
person or entity that (i) is not a broker or dealer in securities, 
and (ii) places more than 390 orders in listed options per day on 
average during a calendar month for its own beneficial account(s).
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    This proposal will align the Exchange with other options markets 
that do not limit the entry of off floor broker dealer and Professional 
limit orders, and effectively acting as market makers.\5\
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    \5\ See subsection (b) of International Securities Exchange 
(``ISE'') Rule 717 (Limitations on Orders). As discussed, while the 
language of the ISE Rule 717 and Exchange Rule 1080(j) is different, 
as a result of this filing the practical effect of the rules will be 
similar.
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    There are, along with specialists, several types of Registered 
Option Traders (``ROTs'') on the Exchange. These include market makers 
that are Streaming Quote Traders (``SQTs''),\6\ Directed Streaming 
Quote Traders (``DSQTs''), Remote Streaming Quote Traders (``RSQTs'') 
\7\ and Directed Remote Streaming Quote Traders (``DRSQTs'').\8\ 
Specialists may function

[[Page 28562]]

on the floor of the Exchange as well as off floor (``Remote 
Specialists'').\9\
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    \6\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically in 
eligible options to which such SQT is assigned. An SQT may only 
submit such quotations while such SQT is physically present on the 
floor of the Exchange. See Phlx Rule 1014(b)(ii)(A).
    \7\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically in eligible options to which such RSQT has been 
assigned. An RSQT may only submit such quotations electronically 
from off the floor of the Exchange. See Phlx Rule 1014(b)(ii)(B). As 
many as three RSQTs may be affiliated with an RSQT Organization.
    \8\ A DSQT is an SQT and a DRSQT is an RSQT that receives a 
Directed Order. Exchange Phlx Rule 1080(l)(i)(A) defines Directed 
Order as any customer order (other than a stop or stop-limit order 
as defined in Phlx Rule 1066) to buy or sell which has been directed 
to a particular specialist, RSQT, or SQT by an Order Flow Provider 
and delivered to the Exchange via its electronic quoting, execution 
and trading system.
    \9\ A Remote Specialist is an options specialist in one or more 
classes that does not have a physical presence on an Exchange floor 
and is approved by the Exchange pursuant to Phlx Rule 501. Phlx Rule 
1020.
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    Current Phlx Rule 1080 developed from a decades-old pilot program 
to operate the Exchange's Automated Options market (``AUTOM'') system 
to allow electronic delivery of options orders from member firms 
directly to the appropriate specialist on the Exchange options trading 
floor (with electronic confirmation of order executions).\10\ The AUTOM 
order delivery system grew over the years into the current fully 
automated Phlx options trading system XL II \11\ that is codified in 
Phlx Rule 1080. In addition to XL II, Phlx Rule 1080 deals with, among 
other things, eligibility and processing of electronic orders, how PIXL 
works, complex PIXL orders,\12\ qualified contingent cross orders,\13\ 
and acceptable trade range.\14\
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    \10\ See Securities Exchange Act Release No. 25540, 53 FR 11390 
(April 6, 1988) (SR-Phlx-88-10) (order granting approval of pilot 
program establishing AUTOM). See also Phlx Rule 1080(a) discussing 
AUTOM: (a) AUTOM is the Exchange's electronic order delivery and 
reporting system, which provides for the automatic entry and routing 
of Exchange-listed equity options, index options and U.S. dollar-
settled foreign currency options orders to the Exchange trading 
floor. Orders delivered through AUTOM may be executed manually, or 
certain orders are eligible for AUTOM's automatic execution feature, 
AUTO-X, in accordance with the provisions of this Rule. Equity 
option, index option and U.S. dollar-settled foreign currency option 
specialists are required by the Exchange to participate in AUTOM and 
its features and enhancements. Option orders entered by Exchange 
member organizations into AUTOM are routed to the appropriate 
specialist unit on the Exchange trading floor. AUTOM and AUTO-X were 
replaced by the Phlx XL System, such that references to both terms 
refer to Phlx XL.
    \11\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59) (order 
granting approval of the Exchange's new electronic trading system 
Phlx XL, now known as XL II). The electronic trading system has 
continued being enhanced. See, e.g., Securities Exchange Act Release 
Nos. 63027 (October 1, 2010), 75 FR 62160 (October 7, 2010) (SR-
Phlx-2010-108) (order granting approval of Price Improvement XL, 
PIXL); and 69845 (June 25, 2013), 78 FR 39429 (July 1, 2013) (SR-
Phlx-2013-46) (order granting approval of Complex Order PIXL).
    \12\ Phlx Rule 1080(n). This section allows six-legged complex 
orders into PIXL.
    \13\ Phlx Rule 1080(o).
    \14\ Phlx Rule 1080(p).
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    Subsection (j) of Phlx Rule 1080 sets forth the limitation on 
orders. Subsection (j) states that members \15\ shall not enter, or 
facilitate entry into AUTOM, as principal or agent, limit orders in the 
same options series from off the floor of the Exchange, for the account 
or accounts of the same or related beneficial owners, in such a manner 
that the off-floor member or the beneficial owner(s) effectively is 
operating as a market maker by holding itself out as willing to buy and 
sell such options contract on a regular or continuous basis.\16\ The 
current restriction on all limit orders is no longer needed or 
advisable.
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    \15\ Phlx Rule 900.2 indicates how potential members may seek 
admission to the Exchange.
    \16\ In determining whether an off-floor member or beneficial 
owner effectively is operating as a market maker, the Exchange will 
consider, among other things: The simultaneous or near-simultaneous 
entry of limit orders to buy and sell the same options contract; the 
multiple acquisition and liquidation of positions in the same 
options series during the same day; and the entry of multiple limit 
orders at different prices in the same options series. Phlx Rule 
1080(j).
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    The Exchange proposes to change the limitation in subsection (j) of 
Phlx Rule 1080 so that it is not applicable to off floor broker dealer 
limit orders or Professional limit orders (except Professional all-or-
none orders). Specifically, the Exchange proposes at the end of 
subsection (j) to state that the limitation set forth in this rule 
1080(j) does not apply to the accounts of off floor broker dealers or 
Professionals as the term is defined in Rule 1000(b)(14). 
Notwithstanding the foregoing, the limitation set forth in Rule 1080(j) 
will continue to apply to all-or-none orders submitted by Professionals 
to the Exchange.\17\ This is because Professionals are treated in the 
same manner as off-floor broker dealers for purposes of priority, but 
would have priority akin to customers in terms of all-or none order 
submitted to the Exchange.\18\ Moreover, non-Professional, non-broker-
dealer customer orders have priority over Professional orders.\19\ The 
proposed language change would make the Exchange limitation similar to 
that found on another options market, namely ISE.
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    \17\ Post filing, in addition to Professional all-or-none orders 
submitted to the Exchange, the limitation would continue to apply to 
non-Professional customer orders. The Exchange defines customer per 
Rule 1083(f) as an individual or organization that is not a broker 
dealer; non-Professional customer refers to an individual or 
organization that is neither a Professional nor a broker dealer.
    \18\ See, e.g., Rule 1014(g).
    \19\ Rule 1014(g)(vii).
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    Subsection (j) of Phlx Rule 1080, as amended, is substantially 
similar in its practical effect to ISE Rule 717, which disallows entry 
of Priority Customer \20\ limit orders in the same options series. In a 
similar manner, the Exchange proposal in subsection (j) disallows entry 
of limit orders in the same options series from off the floor of the 
Exchange, except for off floor broker dealers and Professionals. As 
such, the proposal is pro-competitive because it would allow entry of 
orders on the Exchange similar to those that are allowed on other 
markets. Changing the limitation to exclude off floor broker dealers 
and Professionals, being competitive in nature, is beneficial for 
market participants and investors.
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    \20\ Unlike ISE, the Exchange does not currently have a separate 
category called Priority Customer. However, as discussed, after this 
filing the practical effect of the ISE and Exchange rules will be 
similar. As proposed herein the limitation would not be applicable 
to broker dealer orders and Professional Orders, similarly to ISE. 
See Securities Exchange Act Release No. 63017 (September 29, 2010), 
75 FR 61795 (October 6, 2010) (SR-ISE-2010-95) (ISE does not believe 
necessary to impose ISE Rule 717 limitations on Priority Orders, 
which exclude broker dealers, and Voluntary Professionals because 
they are not subject to priority that is any better than market 
makers). In note 7 of its filing, ISE noted that the Commission has 
previously found that it is consistent with the Act for an options 
exchange not to prohibit a user of its market from effectively 
operating as a market maker by holding itself out as willing to buy 
and sell options contracts on a regular or continuous basis without 
registering as a market maker. See Securities Exchange Act Release 
No. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-
2007-004).
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    Moreover, the current limitation for all limit orders is no longer 
needed or desirable. The limitation was added more than a dozen years 
ago \21\ when Exchange options trading was rooted in the on-floor 
auction model with a traditional open outcry trading floor. When the 
limitation was added for all limit orders, electronic market makers 
such as Remote Specialists, SQTs, and RSQTs (together known as 
``electronic market makers'') did not exist; \22\ the options trading 
floor was principally populated by on-floor trading crowds. At the time 
of the limitation filing, when rules and processes for electronic 
market makers were not yet fully established, there was a concern that 
certain off-floor traders had the ability to engage in simultaneous or 
near-simultaneous entry of limit orders, thereby effectively 
functioning as market makers from off the floor of the Exchange.\23\ 
Over the last eight years, however, the traditional open outcry trading 
floor on the Exchange has evolved into a robust, predominantly

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electronic trading environment, with significantly fewer on-floor 
traders than off-floor traders and electronic market makers working 
through the Exchange's electronic trading system, XL II. As such, 
although the limitation was developed for a traditional trading floor 
that was only beginning to introduce electronic trading, the limitation 
on all limit orders from off the floor no longer makes sense in the 
current well-developed, predominantly electronic trading environment on 
the Exchange, where electronic market makers (and electronic market 
making including from off the floor) are no longer the exception but 
rather the norm.
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    \21\ See Securities Exchange Act Release No. 43939 (February 7, 
2001), 66 FR 10547 (February 15, 2001) (SR-Phlx-2001-05) (notice of 
filing and immediate effectiveness adopting Phlx Rule 1080(j)) (the 
``limitation filing'').
    \22\ Electronic market makers including RSQTs and Remote 
Specialists were introduced, and became prevalent, in the last eight 
years. See Securities Exchange Act Release Nos. 51126 (February 2, 
2005), 70 FR 6915 (February 9, 2005) (SR-Phlx-2004-90) (approval 
order relating to establishment of RSQTs); and 63717 (January 14, 
2011), 76 FR 4141 (January 24, 2011) (SR-Phlx-2010-145) (approval 
order relating to establishment of options Remote Specialists).
    \23\ See 66 FR 10547, 10548.
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    The Exchange is also proposing to change the word ``AUTOM'' to 
``Phlx XL'' to conform subsection (j) of Phlx Rule 1080 to the language 
of Rule 1080.\24\ Because AUTOM does not exist anymore, this change is 
done for purposes of clarity and to minimize potential confusion.
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    \24\ See supra note 10.
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    The Exchange notes that changing the limitation as proposed would 
ensure that the current limitation against all members and market 
participants entering limit orders into Phlx XL in the same options 
series from off the floor of the Exchange, does not apply to off floor 
broker dealers or Professionals. This makes sense in the current 
highly-developed electronic trading environment that operates alongside 
the traditional on-floor trading system.\25\ Off-floor electronic 
market makers, including those that are broker dealers or 
Professionals, are now a known and time-tested component of the 
Exchange that adds significant liquidity and depth to the benefit of 
market participants. The Exchange believes that changing the limitation 
should result in tighter bid ask spreads for all market participants 
wishing to access posted liquidity.
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    \25\ The Exchange notes that like other older options markets 
(e.g., Chicago Board Options Exchange), it continues to operate a 
hybrid trading system.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \26\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \27\ 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 changing the current order limitation so that the 
limitation no longer applies to off floor broker dealers or 
Professionals.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
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    First, although the limitation on orders was added more than a 
dozen years ago when Exchange options trading was rooted in the on-
floor auction model with a traditional open outcry trading floor, the 
Exchange trading system has developed into the robust, predominantly 
electronic trading system where most orders, whether limit or other 
orders, are entered from off the floor of the Exchange. The current 
expansive limitation is no longer needed, and is counter-productive in 
its current form. Second, because broker dealer and Professional 
orders, which tend to increase liquidity, are not subject to priority 
on the Exchange that is any better than other market makers, or, for 
that matter, non-Professional customers (except for Professional all-
or-none orders), the Exchange does not believe that it is necessary to 
impose the Rule 1080(j) restrictions on the entry of off floor broker 
dealer or Professional limit orders (except for Professional all-or-
none orders). In that non-Professional customer orders are provided 
with certain benefits such as priority on the Exchange, see Phlx Rule 
1014(g) and 1080(n)(ii)(E), the Exchange believes that the limitation 
applicable to non-Professional customers is counterbalanced by their 
priority and it is proper for the limitation to continue to apply. The 
Exchange believes that the removal of the limitation on off floor 
broker dealers and Professionals, while continuing to apply the 
limitation to all-or-none orders submitted by Professionals to the 
Exchange \28\ will permit entry of orders on both sides of the market 
more freely, resulting in more orders on the Exchange book and 
therefore increase liquidity on the Exchange market, all to the benefit 
of investors. And third, changing the limitation is competitive vis a 
vis other options exchanges that have a limitation that, as proposed 
herein, effectively does not apply to off floor broker dealers or 
Professionals. By promoting competition, the proposal may also lead to 
tighter, more efficient markets to the benefit of market participants 
including public investors that engage in trading and hedging on the 
Exchange.
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    \28\ See supra notes 18 and 19 and text regarding priority.
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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. To the contrary, the proposal 
further promotes competition on the Exchange which should lead to 
tighter, more efficient markets to the benefit of market participants 
including public investors that engage in trading and hedging on the 
Exchange, and thereby make the Exchange a desirable market vis a vis 
other options exchanges.

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)(ii) [sic] of the Act \29\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\30\
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    \29\ 15 U.S.C. 78s(b)(3)(a) [sic].
    \30\ 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: (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

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     Send an email to [email protected]. Please include 
File Number SR-Phlx-2014-32 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-2014-32. 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, 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 offices 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-2014-32, 
and should be submitted on or before June 6, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-11295 Filed 5-15-14; 8:45 am]
BILLING CODE 8011-01-P