[Federal Register Volume 82, Number 146 (Tuesday, August 1, 2017)]
[Notices]
[Pages 35858-35864]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16210]
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SECURITIES AND EXCHANGE COMMISSION
[Release No 34-81230; File No. SR-Phlx-2017-34]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
of Proposed Rule Change To Add Functionality to the Options Floor
Broker Management System
July 27, 2017.
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 18, 2017, 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, II, and
[[Page 35859]]
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 Substance
of the Proposed Rule Change
The Exchange proposes to add functionality to the Options Floor
Broker Management System (``FBMS''), the electronic system through
which Exchange Floor Brokers transmit orders to the Exchange's trading
system (``System''). The Exchange also proposes to amend Options Floor
Procedure Advice C-2.
The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqphlx.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
Overview of FBMS. As described in Exchange Rule 1063, the Floor
Broker Management System or FBMS is the electronic system that enables
Floor Brokers to submit option orders represented on the Exchange
trading floor (the ``Floor'') to the Exchange's Trading System for
execution and reporting to the consolidated tape. FBMS also facilitates
the creation of an electronic audit trail for such orders.
Specifically, when a Floor Broker agrees to the terms of a trade on
the Floor, then the Floor Broker memorializes the terms by entering the
information into the FBMS software application using either a handheld
tablet or a desktop computer. After the Floor Broker enters the trade
terms into FBMS, the Floor Broker directs FBMS to transmit the
information to the Exchange's automated Trading System.
Upon receipt, the Trading System immediately verifies whether the
terms of the trade comply with the Exchange's trade-through and
priority requirements. It does so by comparing the terms of the trade
to the market that prevailed at the time that the Trading System
received the trade from FBMS. If the Trading System determines, at the
time of receipt, that the trade violates either the trade-through rule
or applicable priority requirements, then the Trading System rejects
the trade. However, if the Trading System verifies that the trade
complies with the applicable rules, then the Trading System will
proceed to execute the trade and report the execution to the
consolidated tape for dissemination to the public.
FBMS provides numerous benefits to Floor Brokers, their Customers,
and the Exchange. Notably, it helps to ensure fair and orderly trading
by automating the enforcement of priority and trade-through rules for
on-Floor trades and rendering the enforcement of such rules consistent
for both on-Floor and off-Floor trading. FBMS also facilitates trading
surveillance by capturing a fulsome audit trail for all options orders
that Floor Brokers enter into it.
Notwithstanding the benefits of FMBS, the simplicity of its design
and the universality of its application also sometimes generate
unintended adverse consequences for Floor Brokers, their Customers, and
the Exchange. The circumstances in which these adverse consequences
arise are as follows.
Unlike routine trades, which Floor Brokers typically submit from
FBMS to the Trading System almost instantaneously after coming to an
agreement to their terms in open outcry on the Floor, certain Floor
trades involve Multi-leg Orders,\3\ which require Floor Brokers to
spend several seconds or more to fully calculate or reconcile their
terms before the Floor Brokers are ready and able to submit them to the
Trading System. For example, the Exchange estimates that the following
tasks associated with reconciling the terms of Multi-leg Orders would
require the following time periods to complete:
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\3\ See Rule 1066(f) (defining the term ``Multi-leg Orders'').
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The announced/negotiated price of a Multi-leg Order
differs from that which was entered on the order but is in the
allowable minimum price variation (``MPV'') (4 seconds);
The announced/negotiated volume of a Multi-leg Order
differs from that which was entered on the order (4 seconds);
The announced/negotiated volume and price of a Multi-leg
Order differs from that which was entered on the order, but the price
is in the allowable MPV (7 seconds);
The Multi-leg Order requires the use of the Complex
Calculator to change the volume and/or price for one leg (9 seconds);
and
The Multi-leg Order requires the use of the Complex
Calculator to enter all prices and volumes for: (i) 2 legs (14
seconds); 5 legs (27 seconds); 10 legs (51 seconds); and 15 legs (69
seconds).
While the near-instantaneous entry of information about routine
trades typically mitigates the risk that market conditions will shift
between the time when Floor Brokers agree upon the terms of such trades
on the Floor and the time when the Trading System receives the trades
for verification and execution, the same cannot be said for trades
involving Multi-leg Orders. A heightened risk exists that, during any
extended delay that occurs between the time when Floor Brokers come to
an agreement on the terms of a trade involving a Multi-leg Order and
the time when the Broker submits the trade to the Trading System,
market conditions will shift in a way that will render the trade
inconsistent with Exchange's priority and trade-through rules, such
that the Trading System will reject the trade.
Simple orders in certain options are also susceptible to this risk
when the markets for such options are volatile or prone to rapid
changes--even during a short time frame between the time of agreement
to the terms of a trade on the Floor and Trading System receipt. The
market for options on exchange traded funds (``ETFs'') in the Penny
Options Pilot is an example of a market that tends to shift rapidly.
When the aforementioned scenarios occur, they harm Floor Brokers,
their Customers, and the Exchange. In particular, a Customer
experiences harm when a trade that a Floor Broker agrees to on its
behalf cannot be executed on the terms agreed upon by the parties, if
at all. This harm is unfair in that it occurs, not because the
Customer's trade is invalid when agreed upon, but instead because the
Floor Broker finds it humanly impossible to reconcile the trade details
in FBMS and submit the trade to the Trading System quickly enough to
keep pace with the market--a market that is often dominated by
electronic trading algorithms that update quotations in nanoseconds
rather than seconds. Meanwhile, a Floor Broker suffers financially when
he or she is unable to execute a trade on behalf of his or her client.
Finally, the
[[Page 35860]]
Exchange suffers when, as a result of all of the foregoing, Floor
Brokers and their Customers forego trading on the Floor of the Exchange
and instead resort to other venues that afford no similar disadvantages
to those who engage in floor trades and are not held to the same
execution standards that FBMS enforces today. Indeed, the Exchange
observes that competing exchanges, like NYSE Amex, execute floor trades
based upon the time when their floor brokers reach agreement on the
trades in the trading crowd rather than the time when the trading
system receives the trades; the Exchange further observes that at such
competing exchanges, floor trades often execute at prices that differ
from those that prevail when the exchanges report the trades to the
consolidated tape.
The Exchange notes that the problem it is attempting to solve
through this proposal did not exist prior to the advent of FBMS, when
Floor Brokers stamped paper tickets with the times when they reached
agreement on their trades in the trading crowd, entered the trade terms
onto the tickets, and submitted the tickets to an Exchange Data Entry
Technician, who in turn forwarded the trade information to the Trading
System for execution as of the time of the date stamp on the ticket.
Moreover, the Exchange notes that even in the original version of FBMS,
Floor Brokers could self-stipulate the time when they executed a trade
and thereby avoid the risk that the market would move before they
finished entering the terms of that trade into FBMS and submitted it to
the System.
Overview of Snapshot. To mitigate the unintended and unfair
consequences of the current iteration of FBMS--while also preserving
its benefits--the Exchange proposes to amend Rules 1000 and 1063 to
permit the use of a new feature in FMBS called ``Snapshot.'' \4\
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\4\ The Exchange became capable of offering Snapshot upon
upgrading FBMS to version 3.0 in November 2016. The Exchange works
continually to enhance Exchange systems to improve trading on the
Exchange and in the national market system. The history of the
different versions of FBMS is described in great detail in a
previous filing. See Securities Exchange Release No. 78593 (August
16, 2016) (SR-Phlx-2016-82).
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Snapshot will in many respects serve as an electronic equivalent--
if not an enhanced version--of a paper ticket for Floor Brokers.\5\
Specifically, Snapshot will enable Floor Brokers who engage in certain
types of Floor trades to: (i) Provisionally execute \6\ the trades in
open outcry on the options Floor \7\; (ii) capture information about
the state of the market that exists at the time when they provisionally
execute such trades (i.e., take a ``snapshot'' of the market); (iii)
afford Floor Brokers a limited amount of additional time to submit
their provisionally executed trades through FBMS to the Trading System;
and (iv) provided that Floor Brokers enter the trade information into
FBMS and submit it to the Trading System in a timely fashion, have the
Trading System verify \8\ their trades for compliance with trade-
through and priority rules based upon the state of the market that
existed at the time when the trades were provisionally executed and
Snapshots were taken (rather than at the time when the Trading System
received the trades). Provided that the trades are indeed compliant,
then the Trading System will report them to the consolidated tape. (If
the trades are deemed to have been non-compliant with trade-through or
priority rules at the time when the Snapshots were taken, then they
will be rejected.) The time and market captured by the Snapshot will be
utilized for all purposes, including audit trail \9\ and surveillance
purposes.
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\5\ As described below, Snapshot would be superior to a paper
ticket in that it would provide for systematic enforcement of trade-
through and priority rules.
\6\ As set forth in proposed Rule 1063(e)(v)(A)(1), provisional
execution occurs when either: (i) The participants to a trade reach
a verbal agreement in the trading crowd as to the terms of the trade
or (ii) a Floor Broker crosses an order as set forth in Rule
1064(a). Execution is defined as ``provisional'' insofar as the
trade may be deemed invalid and then rejected when the Trading
System subsequently verifies it.
\7\ The use of Snapshot (for multi-leg orders and simple orders
on options in ETFs included in the Options Penny Pilot) would be an
exception to the general rule set forth in Rule 1000(f)(iii) that
Floor Brokers may not execute trades in open outcry on the options
trading Floor.
\8\ The Snapshot will contain all information necessary for the
Trading System to determine that a provisionally executed trade is
consistent with all applicable priority and trade-through rules
based on the time the trade is provisionally executed on the Floor.
Specifically, the Snapshot will include: (1) The away market best
bid and best offer; (2) the Exchange best bid and best offer; (3)
Customer orders at the top of the Exchange book; and (4) the best
bid and offer of all-or-none orders. The System needs each of these
data elements to complete important priority and trade-through
checks. The Snapshot must capture information regarding Customer
orders and all-or-none orders because those impact the determination
of priority and trade through differently than other orders on the
Exchange Book.
\9\ Every time a Floor Broker takes a Snapshot, a record of the
Snapshot will be created and retained for audit trail purposes
regardless of whether the Floor Broker acts upon the Snapshot by
submitting it to the Trading System. This record is in addition to
that which the Exchange presently creates upon initiation of an
order in FBMS. Moreover, when a Floor Broker submits a trade subject
to Snapshot to the Trading System and the trade is thereafter
reported to the consolidated tape, an additional execution record
will be created and retained for audit trail purposes that will
contain all of the same details as all other trade records. For
example, the Snapshot and the execution record created at the time
of reporting to the consolidated tape will contain the time when a
Snapshot was taken, the time of reporting to the consolidated tape,
and all relevant order and execution details (including the Exchange
best bid and offer and away best bid and offer). Lastly, the
Snapshot record will include Exchange all-or-none order details to
provide a fulsome capture of the Exchange best bid and offer at the
time of the Snapshot.
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The Exchange notes that Snapshot would not interact with the
Exchange's electronic order book. As set forth in proposed Rule
1063(e)(v)(C)(3), if an order exists on the book that has priority at
the time when a Floor Broker seeks to take a Snapshot, the System will
not prevent the Floor Broker from taking the Snapshot, but he will need
to clear the order on the book, re-announce and provisionally re-
execute the trade, and take a new Snapshot before he submits the
provisionally executed trade to the Trading System or else the Trading
System will reject the provisionally executed trade and will not report
that trade to the consolidated tape (as it would violate the priority
rules of the Exchange).
The following is an example of how Snapshot would operate in
practice and how it would impact a hypothetical trade. In this example,
a Floor Broker receives a Customer order to buy 100 SPY Jan 250 Calls
for $1.05. He enters the trading crowd, lawfully announces the order,
and requests bids and offers from the trading crowd. A Market Maker in
the trading crowd offers to sell 100 contracts at $1.04 while the
National Best Bid or Offer is $1.03 bid and $1.05 offer (no Customer
orders on the offer). At this point, the Floor Broker can agree to the
trade of the 100 SPY Jan 250 calls at a price of $1.04, a price which
is $0.01 better than the limit price of the Customer order.
Presently, and without the availability of Snapshot, if the market
changes to $1.05 bid and $1.07 offer while the Floor Broker is updating
his order in FBMS to reflect the provisional execution price of $1.04,
then the Floor Broker will be unable to complete his purchase of 100
contracts at $1.04 on behalf of the Customer and the Customer may end
up paying the new offer of $1.07 per contract. Moreover, if another
round of negotiation occurs in the crowd due to the inability of the
Floor Broker to execute the previously agreed-upon trade at the time of
agreement, then the same scenario noted above may occur again,
resulting in either an error for the Floor Broker or the Customer
paying a price higher than $1.07.
With Snapshot, by contrast, the Floor Broker could click the
Snapshot button in FBMS upon reaching an agreement
[[Page 35861]]
with a Market Maker in the crowd as to the terms of the trade, thereby
effecting a provisional execution of the trade based upon the available
market of a $1.03 bid and $1.05 offer. As discussed below, once the
Floor Broker clicks the Snapshot button, he will have up to 15 seconds
to enter into FBMS the final terms of his Customer's trade and then
submit the trade to the Trading System. The Trading System will then
verify that the trade complies with trade-through and priority rules
based upon the market that existed, $1.03 bid and $1.05 offer, when the
Snapshot was taken. Because in this example, the Trading System
determines that the trade is valid, it will report the trade to the
consolidated tape.
By affording the Floor Broker the extra time that he needs to enter
and submit this provisionally executed trade without having to bear the
interim risk of market conditions changing, Snapshot would help ensure
that the Floor Broker is able to execute the Customer order and do so
at a price that meets the Customer's expectations and needs while
continuing to adhere to trade-through and priority rules. In a larger
sense, Snapshot would also compensate for the inherent disparity that
exists between electronic options trading (involving the instantaneous
interactions of trading algorithms) and floor-based options trading
(involving the slower interactions of human beings). Lastly, it would
help ensure that the Exchange remains competitive with other floor
trading venues, like NYSE Amex, that already permit trading to occur in
a manner similar to Snapshot, as well as with venues, like the proposed
BOX Options Exchange trading floor, that are vague about whether they
would permit such trading practices.\10\
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\10\ See Ltr. from J. Conley, SVP and Corporate Secretary,
Nasdaq to B. Fields, Secretary, Securities and Exchange Commission,
dated March 27, 2017, at 3-4 (commenting on the failure of the BOX
Options Exchange, in its proposal to establish open outcry trading,
to explain how it would address a shift in the market that occurs
between the time when a trade is agreed upon in open outcry and when
it is entered into the BOX electronic order entry system for
verification and execution).
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Limitations on the Availability of Snapshot. Although the Exchange
believes that Snapshot will be a welcome and beneficial addition to its
Floor trading operations, the Exchange nevertheless recognizes the
prudence of imposing reasonable controls upon the use of Snapshot to
ensure that Floor Brokers do not misuse or abuse the functionality.
These controls, which are set forth in proposed Rule 1063(v)(A), are as
follows.
First, a Floor Broker may not use the Snapshot feature for all of
his options orders. Instead, a Floor Broker may trigger the Snapshot
feature only for his or her use with a trade involving a Multi-leg
Order (as defined in Rule 1066(f)) or a simple option order on an ETF
that is included in the Options Penny Pilot. The reason for this
limitation is to ensure that Floor Brokers use Snapshot only when the
complexity of an order or the fast-moving nature of the market for
certain options reasonably justifies the need for additional time to
calculate or enter trade information or the ability to preserve market
conditions that exist at the time of provisional execution. As
discussed above, options involving Multi-leg Orders often involve time-
consuming tasks prior to trade entry that justify use of Snapshot.
Likewise, the market for options orders on ETFs included in the Options
Penny Pilot is known to be especially fast-moving and volatile, which
again justifies the use of Snapshot.
A second limitation that the Exchange proposes is that a Floor
Broker may have only one Snapshot outstanding at any given time across
all options classes and series. In other words, when a Floor Broker
takes a Snapshot of a trade and while that Snapshot remains valid, the
Floor Broker may not simultaneously take a Snapshot of another trade.
The Exchange has built this limitation into FBMS such that FBMS will
enforce it automatically. This limitation will directly contribute to
preventing Floor Brokers from engaging in excessive use of and abuse of
Snapshot.
The Exchange notes that it proposes to amend Floor Advice C-2 to
render it a violation for a Floor Broker to trigger the Snapshot
feature for the purpose of obtaining favorable priority or trade-
through conditions or improperly avoiding unfavorable priority or
trade-through conditions. Conduct that violates this Advice would
include, for example, repeated instances in which Floor Brokers permit
valid Snapshots to expire without submitting the trades subject to the
Snapshots to the Trading System for verification and reporting to the
consolidated tape. Surveillance Staff will monitor and enforce proper
usage of the Snapshot feature on a post-trade basis.
Limitations on the Validity of a Snapshot. In addition to the
above, the Exchange proposes, in Rule 1063(v)(B), to limit the time
period during which a Snapshot will remain valid such that a trade may
execute based upon it. Specifically, the Exchange proposes to make each
Snapshot valid for only 15 seconds, meaning that a Floor Broker may
submit a trade from FBMS to the Trading System based upon a Snapshot at
any time within 15 seconds after the Floor Broker clicks the Snapshot
button and activates the feature.
The Exchange decided to impose this limitation after it concluded
that allowing Floor Brokers to rely upon a Snapshot for an extended
period of time would unduly impair the validity of the consolidated
tape. For example, the Exchange considered making a Snapshot valid for
up to the full 90 seconds available to report trades to the
consolidated tape. Although designating Snapshots as valid for up to 90
seconds would have provided Floor Brokers with ample time to enter and
submit even their most complex trades, the Exchange concluded that the
cost to market transparency of lengthy delays in executing and
reporting trades would outweigh this benefit. At the other end of the
spectrum, the Exchange also considered imposing a strict time
limitation on the validity of a Snapshot (as short as five seconds),
but it decided against doing so after concluding that such a limitation
would eliminate the utility of the Snapshot feature in most of the
scenarios in which it could be useful. Ultimately, the Exchange settled
on a 15 second limitation for the validity of a Snapshot as a
reasonable and prudent compromise between the needs of the Floor
Brokers for additional time to completely reconcile and record the
terms of their trades with the needs of market participants for fast,
accurate, and transparent reporting of trades.
If a Snapshot expires before a Floor Broker completes his or her
entry and submission of a trade, then FBMS will not permit the Floor
Broker to rely upon the expired Snapshot to submit the trade to the
Trading System. Instead, the Floor Broker has two options under the
Exchange's proposal.
First, assuming that the Floor Broker re-confirms the acceptability
of the terms of the trade with all participants, then the Floor Broker
may finish entering the trade details into FBMS without Snapshot and
submit it to the Trading System. The Trading System will then validate
and (assuming validity) execute the trade in the normal course using
the market conditions that prevail at the time when the Trading System
receives the trade.
Alternatively, the Floor Broker may, after re-confirming the terms
of the trade, take a new Snapshot of the market that records a new time
of provisional execution. The Floor Broker would then have no more than
15 seconds within which to submit the re-confirmed trade and, upon
timely submission, the Trading System would evaluate it based
[[Page 35862]]
upon the prevailing market conditions reflected in the new Snapshot.
Provided that the submitted trade adheres to the priority and trade-
through restrictions based upon the prevailing market condition
reflected in the new Snapshot, then the Trading System will report the
trade to the consolidated tape. Note that if the Floor Broker records
multiple Snapshots respecting the same order, the Trading System would
automatically use the most recent Snapshot for verification purposes.
Ability to Refresh a Snapshot Before it Expires. Lastly, the
proposal would permit a Floor Broker to replace a valid and existing
Snapshot, prior to its expiration, with a new one by re-clicking the
Snapshot button within 15 seconds of clicking it the first time. The
Exchange proposes to include this functionality in Snapshot to allow a
Floor Broker to address a scenario in which the market shifts between
the time of provisional execution and the time when the Floor Broker
takes a Snapshot, wherein the market captured in the Snapshot is such
that it would not permit a trade to occur in accordance with the
Exchange's rules. In this scenario, where the Trading System rejects or
the Floor Broker reasonably anticipates that the Trading System will
reject a provisional execution subject to a Snapshot, the proposal
provides that the Floor Broker must re-announce the trade in the crowd
before he refreshes the Snapshot.\11\
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\11\ An example of this would occur if the System rejects or the
Floor Broker realizes that the System will reject his or her
Snapshot because an order exists on the Exchange's limit order book
that has priority.
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This functionality in Snapshot would also allow a Floor Broker to
take a new Snapshot when he reasonably anticipates that he will be
unable to input the final terms of the trade within the 15 second
window. In this scenario, the proposal provides that the Floor Broker
need only re-confirm the terms of the trade with the existing
participants before he refreshes the Snapshot.
By way of example, a Floor Broker enters the trading crowd with a
Customer Multi-leg Order to Buy 100 IBM Jan 100 calls for $1.05 and
Sell 97 Jan 105 calls for $0.85. The market for the Jan 100 calls is
$1.00 bid and $1.15 offer while the market for the Jan 105 calls is
$0.70 bid and $1.00 offer. The trading crowd has no interest in
participating in this trade. This is a lawful trade and when the Floor
Broker announces the execution, he clicks the Snapshot button. When the
Snapshot appears, it reflects a rapid change in the market for the Jan
100 calls to $1.10 bid and $1.15 offer. When the Floor Broker sees the
Snapshot, he knows that it will be useless because the Trading System
will reject the trade since his price of $1.05 is outside of the
market. While the Snapshot remains valid, he sees the market for the
Jan 100 calls change back to $1.00 bid and $1.15 offer. He re-announces
the trade, receives no interest, and then clicks the Snapshot button
again to record the change in the market and receives a new 15 second
window in which to open the Complex Calculator, enter the terms of the
trade into the Complex Calculator, and submit the trade to the Trading
System for execution.
A second example where a Floor Broker may utilize the Snapshot
feature and find it necessary to re-click the Snapshot could occur when
the Floor Broker enters the trading crowd with a multi-Legged Customer
Order to buy 819 contracts of Leg 1, sell 912 contracts of Leg 2, and
buy 1011 contacts of Leg 3--all for a net price of $2.00. In the
trading crowd, the Floor Broker receives interest from several Market
Makers who provide $2.00 offers with a net offer size greater than his
order size (providing an over subscription of size). Because the Floor
Broker has sufficient interest to execute the trade at $2.00, he clicks
Snapshot, but he then finds himself unable, before the Snapshot
expires, to finalize the volumes that each Market Maker will agree to
trade (given that each Market Maker desired to trade more contracts
than the order size). Accordingly, the Floor Broker re-confirms the
terms of the trade and then refreshes the Snapshot.
The Exchange does not believe that Floor Brokers have an incentive
to abuse the Snapshot ``refresh'' functionality to take advantage of
favorable market moves. Nevertheless, in an abundance of caution, the
Exchange proposes to limit to three the number of Snapshots that Floor
Brokers may take with respect to any single order, regardless of
whether each such Snapshot persists for the full 15 seconds or for a
shorter period.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \12\ in general, and furthers the objectives of Section
6(b)(5) of the Act \13\ 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 to protect investors and the public interest.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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Snapshot promotes just and equitable principles of trade and serves
the interests of investors and the public by increasing the likelihood
that investors will be able to execute their orders and do so in line
with their expectations and needs. Similarly, Snapshot mitigates the
risk that the Trading System will unfairly reject a trade due to a
change in market conditions that occurs between the time when the
parties negotiate a lawful and valid trade on the Floor and the time
when the Trading System receives it.
Snapshot also renders the Exchange Floor more competitive with off-
floor electronic trading venues because it compensates for the
inefficiencies and delays inherent in a floor trading system that
depends upon the inputs and interactions of human beings; such
inefficiencies and delays do not exist in fully-electronic trading
environments, where computers and algorithms interact on a near
instantaneous basis. Additionally, Snapshot will render the Floor more
competitive with other floor-based trading venues at which the Exchange
observes trade executions occurring seconds or even minutes after
verifications occur, but on trading terms that existed as of the time
of verification.
The Exchange believes that it is consistent with the Act to
specifically exempt multi-leg orders and simple orders in options on
Options Penny Pilot ETFs from the general rule set forth Rule
1000(f)(iii) that Floor Brokers may not execute orders in the options
trading crowd. As noted previously, the complex calculations that are
often involved in multi-leg orders and the fast-moving nature of the
markets for options on Penny Pilot ETFs render these two categories of
options particularly appropriate for exceptional treatment using
Snapshot. Enabling Floor Brokers to provisionally execute these two
categories of options on the Options Floor (using Snapshot), rather
than execute them in the Trading System, will not adversely impact
investors or the quality of the market due to the controls that the
Exchange proposes on the circumstances in which Floor Brokers may use
Snapshot and on the manner in which they may use it. In fact, the
proposal will protect investors and the public interest by improving
Floor Brokers' ability to execute multi-leg orders and simple options
on Penny Options Pilot ETFs while continuing to ensure that all
priority and trade through rules are systematically enforced.
[[Page 35863]]
Moreover, this proposal is consistent with Rule 611 of Regulation
NMS,\14\ which requires the Exchange to establish policies and
procedures that are reasonably designed to prevent trade-throughs of
protected quotations. Presently, the Exchange verifies that a proposed
trade complies with the trade-through rule as of the time when the
Trading System receives the trade from FBMS; if the trade complies,
then the Trading System executes the trade and reports it to the
consolidated tape. However, the proposal would serve as an exception to
this practice. It would permit Floor Brokers, upon reaching a meeting
of the minds in the trading crowd regarding the terms of a trade, to
take a Snapshot that provisionally executes the trade on the Floor.
When the Floor Broker submits the trade to the Trading System using
Snapshot, the Trading System will verify that the provisionally
executed trade complied with the trade-through rule as of the time of
its execution--i.e., the time when the crowd agreed to the terms of the
trade and Snapshot was taken--rather than at the time when the Trading
System receives the trade. If the Trading System determines that the
provisionally executed trade complied with the trade-through rule, then
it will report the trade to the consolidated tape. If, however, the
Trading System determines that the provisionally executed trade was
non-compliant with the trade-through rule as of the time when the
Snapshot was taken, then it will reject the trade. In other words, even
though the proposal will change the time of execution of a trade for
purposes of verifying compliance with the trade-through rule, the
automated compliance verification process will otherwise be unchanged
and will still apply to systematically prevent trade-throughs for all
trades, including those utilizing Snapshot.\15\
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\14\ 12 CFR 242.611.
\15\ The Exchange notes that the SEC has published analogous
guidance indicating that a broker-dealer that individually
negotiates the terms of a block trade among multiple parties would
have policies and procedures reasonably designed to prevent a trade-
through even where the individually negotiated price is not at or
within the best protected quotations at the time when the
transaction terms are entered into the broker-dealer's automated
system if the broker-dealer takes steps to verify that the
transaction price of the trade was at or within the best protected
quotations at some point during a 20 second period up to and
including the time when the transaction terms are entered into the
broker-dealer's order entry system. See SEC, Responses to Frequently
Asked Questions Concerning Rule 611 and Rule 610 or Regulation NMS,
Question 3.23: Agency Block Transactions with Non-Trade-Through
Prices that are Individually Negotiated, at https://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
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Finally, the Exchange's proposal accomplishes the above in a manner
that: (1) Continues to provide automated and verifiable enforcement of
applicable trade-through and priority rules; (2) is documented in
writing and transparent, in contrast to the practices of other
exchanges; (3) provides for trade reporting to occur in a timely
fashion, even for the most complex trades, and within a 15 second time
frame that is far less than the maximum 90 second reporting period
allowable; and (4) imposes surveillance and responsible limitations
upon Snapshot that ensure appropriate usage and prevents violations and
abuse.
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.
In fact, the proposal is pro-competitive for several reasons. The
Exchange believes that the Snapshot feature will result in the
Exchange's Floor operating more efficiently, which will help it compete
with other floor-based exchanges.
Moreover, the proposal helps the Exchange compete by ensuring the
robustness of its regulatory program, ensuring Floor Brokers'
compliance with that program, and by enhancing Customer protections
through further utilization of electronic tools by members. The
Exchange considers all of these things to be differentiators in
attracting participants and order flow.
Lastly, the proposal does not impose a burden on intra-market
competition not necessary or appropriate in furtherance of the purposes
of the Act. Although the benefits of Snapshot will apply initially only
to Floor Brokers, the Exchange plans to extend its availability to
Registered Options Traders and Specialists once it receives authority
to allow them to utilize FBMS.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be 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-2017-34 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-2017-34. 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-2017-34 and should be
submitted on or before August 22, 2017.
[[Page 35864]]
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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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16210 Filed 7-31-17; 8:45 am]
BILLING CODE 8011-01-P