[Federal Register Volume 81, Number 137 (Monday, July 18, 2016)]
[Notices]
[Pages 46731-46734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16859]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78301; File No. SR-Phlx-2016-75]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Extend Pilot 
Program Through January 18, 2017

July 12, 2016.
    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, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
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 January 18, 2017, 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, 2016.\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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    The text of the proposed rule change is set forth below. Proposed 
new text is italicized. Deleted text is [bracketed].
* * * * *

NASDAQ 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) No change.
    (B) No change.
    (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, 
2016]January 18, 2017.

[[Page 46732]]

    (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, 2016]January 
18, 2017.
    (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, 
2016]January 18, 2017.
    (E)-(J) No change.
    (iii)-(vi) No change.
    (vii) Initially, and for at least a Pilot Period expiring on [July 
18, 2016] January 18, 2017, 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 raw data which is submitted to the Commission 
will be provided on a confidential basis.
* * * * *

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 January 18, 2017.
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) (Extending 
Pilot for Price Improvement System, Price Improvement XL); 67399 
(July 11, 2012), 77 FR 42048 (July 17, 2012) (SR-Phlx-2012-94) 
(Extending Pilot for Price Improvement System, Price Improvement 
XL); 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); 69989 
(July 16, 2013), 78 FR 43950 (July 22, 2013) (SR-Phlx-2013-74) 
(Extending Pilot for Price Improvement System, Price Improvement 
XL); 72619 (July 16, 2014), 79 FR 42613 (July 22, 2014) (Extending 
Pilot for Price Improvement System, Price Improvement XL); and 75470 
(July 16, 2015) 80 FR 43509 (July 22, 2015) (Amending Exchange Rule 
1080(n), Price Improvement XL (``PIXL\SM\'') to Extend, Until July 
18, 2016, a Pilot Program).
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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 better of the National Best Bid/Offer 
(``NBBO'') or the Reference BBO \5\ on the Initiating Order side.
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    \5\ The ``Reference BBO'' is defined as the ``internal market 
BBO''.
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     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 better of the NBBO or Reference BBO 
on the Initiating Order side, and auto-match PAN responses and trading 
interest at a price or prices that improve the stop price up to the NWT 
price. In all cases, if the PHLX Best Bid/Offer (``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 blind 
Auction ensues for a period of time as determined by the Exchange and 
announced on the Nasdaq Trader Web site. The Auction period will be no 
less than one hundred milliseconds and no more than one second. Anyone 
may respond to the PAN by sending orders or quotes. At the conclusion 
of the

[[Page 46733]]

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. Under no circumstances will the 
Initiating Member receive an allocation percentage, at the final price 
point, of more than 50% with one competing quote, order or PAN response 
or 40% with multiple competing quotes, orders or PAN responses, when 
competing quotes, orders or PAN responses have contracts available for 
execution.
    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 
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), (n)(i)(B), 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 pilot was extended until July 18, 2016.\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\ Further, the Exchange provided 
certain additional data requested by the Commission regarding trading 
in the PIXL Auction for the six (6) month period from January 1, 2015 
through June 30, 2015. The Exchange represented that it would make 
publicly available a summary of the data provided to the Commission. 
The Exchange continues to believe that there remains meaningful 
competition for all size orders and that there is an active and liquid 
market functioning on the Exchange outside of the PIXL Auction and that 
there is significant price improvement for orders entered into the PIXL 
Auction. The Exchange believes the additional data will substantiate 
the Exchange's belief and provide further evidence in support of 
permanent approval of the PIXL Pilot.
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    \6\ See supra note 4.
    \7\ See Exchange Rule 1080(n)(vii).
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    The Exchange proposes to extend the pilot through January 18, 2017. 
The Exchange believes that the proposed extension should afford the 
Commission additional time to evaluate the pilot.
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 existing 
pilots that apply 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 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) 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).
    \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 
Exchange has satisfied this requirement.
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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 the pilot is scheduled to expire July 18, 2016. According to 
the Exchange, a waiver of the operative delay will allow uninterrupted 
application of the PIXL pilot and thereby ensure fair competition with 
other exchanges that have similar programs.
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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

[[Page 46734]]

designates the proposed rule change to be operative on July 18, 
2016.\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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2016-75 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

    All submissions should refer to File Number SR-Phlx-2016-75. 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-2016-75 and should be 
submitted on or before August 8, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16859 Filed 7-15-16; 8:45 am]
 BILLING CODE 8011-01-P