[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45544-45546]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18387]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72713; File No. SR-Phlx-2014-49]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Disclose 
Publicly the Sources of Data Used for Exchange Functions

July 29, 2014.
    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 16, 2014, 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

    Phlx proposes a rule change to disclose publicly the sources of 
data, whether from the network processors or from direct data feeds, 
that Phlx utilizes when performing (1) order handling and execution; 
(2) order routing; and (3) related compliance processes.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Phlx 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 those 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 parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In her June 5, 2014 market structure speech, the Chair requested 
that all national securities exchanges review and disclose their 
policies and procedures governing the market data used when performing 
important exchange functions.\3\ In a letter dated June 20, 2014, the 
Director of the Division of Trading and Markets codified this request:
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    \3\ See Mary Jo White, Chair, Securities and Exchange 
Commission, Speech at the Sandler O'Neill & Partners L.P. Global 
Exchange and Brokerage Conference (June 5, 2014).
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    We believe there is a need for clarity regarding whether (1) the 
SIP data feeds, (2) proprietary data feeds, or (3) a combination 
thereof, are used by the exchanges for purposes of (1) order 
handling and execution (e.g., with pegged or midpoint orders), (2) 
order routing, and (3) regulatory compliance, as applicable. . . . 
Accordingly, we ask that proposed rule changes be filed that 
disclose the particular market data feeds that are used for each of 
these purposes. Consistent with your recent discussions with 
Commission staff, we ask that each SRO file these proposed rule 
changes with the Commission by July 15, 2014.\4\
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    \4\ See Letter from Steven Luparello, Director, SEC Division of 
Trading and Markets, to Robert Greifeld, Chief Executive Officer, 
NASDAQ OMX Group, Inc., dated June 20, 2014.

    Phlx fully supports the Commission's efforts to provide more 
clarity in this area. Through this proposed rule change, Phlx is 
publicly clarifying on a market-by-market basis the specific network 
processor and proprietary data feeds that Phlx utilizes for the 
handling, routing, and execution of orders, and for performing the 
regulatory compliance checks related to each of those functions. These 
complex practices are governed by a few, simple principles that are 
designed to ensure that Phlx has the most accurate view of the trading 
interest available across multiple markets, and to maximize the 
synchronization of the many exchange functions that depend upon the 
calculation of an accurate NBBO and top-of-book for each market. These 
principles are:
    1. Phlx uses a proprietary data feed from each exchange that 
provides a reliable proprietary data feed. Where no reliable 
proprietary data feed is available, Phlx uses the network processor 
feed;
    2. Where Phlx uses a proprietary data feed for an exchange quote, 
it also maintains access to the network processor feed as a back-up in 
the event a specific proprietary feed become unavailable or unusable 
for any reason;
    3. Phlx uses the same proprietary data feed when performing order 
handling, routing, and execution functions, and also when the execution 
and routing system performs internal compliance checks related to those 
functions; and
    4. Phlx acquires and processes all proprietary and network 
processor feeds via the same technological configuration (i.e., 
telecommunication circuitry, switches, and feed handlers) to the 
greatest extent possible.
    5. Phlx calculates the National Best Bid and Offer (``NBBO'') and 
top-of-book for each exchange at a single point within the Phlx system, 
and then distributes that data simultaneously to numerous applications 
performing order handling,\5\ routing, execution, and internal 
compliance functions throughout the Phlx system.
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    \5\ With respect to order handling, the NBBO and top-of-book 
calculation feeds applications governing the proper processing 
midpoint orders, pegged orders, price-to-comply orders, and retail 
orders.
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    As of the date of this filing, Phlx utilizes the following data 
feeds for the handling, execution and routing of orders, as well as for 
performing related compliance checks:

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          Market center             Primary source     Secondary source
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A--NYSE MKT (AMEX)..............  CQS/UQDF..........  n/a.

[[Page 45545]]

 
B--NASDAQ OMX BX................  BX ITCH 4.1.......  CQS/UQDF.
D--FINRA ADF....................  CQS/UQDF..........  n/a.
J--DirectEdge A.................  EdgeBook..........  CQS/UQDF.
K--DirectEdge X.................  EdgeBook..........  CQS/UQDF.
M--CSX..........................  CQS/UQDF..........  n/a.
N--NYSE.........................  NYSE OpenBook       CQS/UQDF.
                                   Ultra.
P--NYSE Arca....................  ArcaBook Binary     CQS/UQDF.
                                   uncompacted.
T/Q--NASDAQ.....................  ITCH 4.1..........  CQS/UQDF.
W--CBOE.........................  CQS/UQDF..........  n/a.
X--NASDAQ OMX PSX...............  PSX ITCH 4.1......  CQS/UQDF.
Y--BATS Y-Exchange..............  BATS PITCH........  CQS/UQDF.
Z--BATS Exchange................  BATS PITCH........  CQS/UQDF.
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    Phlx uses these feeds to calculate the NBBO via an application 
called the ``NMSFeed.'' The NMSFeed consumes the Phlx Protected Quote 
Service (``NPQS''), which provides an internal view of that exchange's 
own market data as ITCH, plus the proprietary and network processor 
market data feeds listed above. The NMSFeed calculates a Regulation 
NMS-Compliant ``Best Bid or Offer'' (``Compliant BBO''), and then 
delivers that information throughout the Phlx System, including to the 
``OUCH'' order entry ports,\6\ the routing system, and various 
compliance applications described below.
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    \6\ OUCH is a protocol that allows Phlx participants to enter, 
replace and cancel orders and receive executions. In addition to 
OUCH, Phlx offers the FLITE protocol as an option for participants. 
In this document, references to OUCH also include FLITE because they 
are interchangeable for these purposes.
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    Upon receipt of an update to a protected quote for a specific 
venue, the NMSFeed updates its quote for that venue, recalculates the 
consolidated BBO based upon the update, and recalculates the Compliant 
BBO after applying Phlx's own BBO. Any quote that crosses Phlx's BBO is 
ignored. Phlx odd lot orders at the same price are aggregated and 
considered in the NBBO calculation if the sum is greater than or equal 
to a round lot. Otherwise, they are not considered in the NBBO 
calculation. Out of the remaining quotes, the most aggressive remaining 
bid and offer (excluding Phlx\7\ and any destination which has been 
excluded from the NBBO in compliance with the self-help procedures 
under Regulation NMS) is selected and reported as the best quote. If 
away markets are crossing the market after applying Phlx's BBO, orders 
will be accepted as originally priced and have the potential to 
execute. Any order sent to Phlx that is not an Intermarket Sweep Order 
(``ISO'') will have the Compliant BBO check enforced by the system.\8\
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    \7\ Deletion of Phlx's quote at this stage of the process is 
necessary because otherwise the system would prevent valid 
executions on Phlx in the erroneous belief that such executions 
would be ``trade throughs'' in violation of Regulation NMS.
    \8\ In general, any order that is sent to Phlx with an ISO flag 
is not re-priced and will be processed at its original price. There 
are a limited number of circumstances in which an order marked as an 
ISO will be determined not to be executable at its original price 
and will be re-priced. These include re-pricing under the Plan to 
Address Extraordinary Market Volatility, re-pricing to comply with 
Regulation SHO, and the re-pricing of an order with a post-only 
condition if Phlx has an order at that price at the time the order 
is accepted.
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    The Phlx OMX Routing and Special Handling System (``RASH'') 
utilizes the Compliant BBO to determine if and when an order with 
special processing directives is marketable either against one or more 
orders in either the Core Matching System or a remote trading venue. 
RASH also receives market data feeds from certain venues not displaying 
protected quotes in the national market system for use in ``XQDRK'' 
[sic] and ``XCST'' routing strategies set forth in Phlx Rule 
3315(a)(1)(A)(xiii) [sic] and (xiv) [sic], respectively. RASH maintains 
a number of routing processes, or Routers, unique to each venue that 
the System accesses. These Routers maintain a limited set of details 
for orders that are configured as routable by the user, while also 
monitoring the current best bid and best offer prices on each exchange.
    The Phlx system includes internal compliance applications related 
to locked and crossed markets, trade throughs, limit-up/limit-down, and 
Regulation SHO compliance. Each of these applications utilizes the 
Compliant BBO to ensure compliance with applicable regulations. Phlx 
operates a separate real-time surveillance system that is external to 
the execution systems and that monitors the execution system's 
compliance with applicable rules and regulations. The real-time 
surveillance system utilizes a ``mirrored'' version of the internal 
NMSFeed in various realtime surveillance patterns, including (1) Lock/
Cross, which detects lock/cross events across all markets, regardless 
of whether or not Phlx is a participant in the event; (2) Trade 
Through, which detects potential trade through events for all three 
Phlx equity markets; and (3) RegSho, which detects potential RegSho 
violations, alerting when a trade executes at or below the NBB at the 
time of order entry while the stock is in a RegSho restricted state.
    In addition to the operational transparency provided above, Phlx is 
also proposing to add Rule 3304, which will provide for the public 
display of the proprietary and network processor feeds that Phlx 
utilizes in the order handling, routing, and execution processes 
described above, as well as in the compliance functions described 
above. Phlx will display this information on www.nasdaqtrader.com, 
which is heavily used by Phlx members and their customers.
2. Statutory Basis
    Phlx believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\9\ in general and with Sections 
6(b)(5) of the Act,\10\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, 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. The Exchange believes that 
this proposal is in keeping with those principles by enhancing 
transparency through the dissemination of the most accurate quotations 
data and by clarifying its contents.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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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 
result in

[[Page 45546]]

any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor 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 if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6) \12\ thereunder.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
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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    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 will institute proceedings to 
determine whether the proposed rule change 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-2014-49 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-2014-49. 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 the 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-2014-49 and should be 
submitted on or before August 26, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18387 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P