[Federal Register Volume 83, Number 191 (Tuesday, October 2, 2018)]
[Notices]
[Pages 49596-49599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21365]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84290; File No. SR-Phlx-2018-59]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change To Amend Rules 1000, 1064, and 1069 To Allow
for the Snapshot Functionality of the Floor Based Management System to
be Used for All Orders
September 26, 2018.
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 September 18, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``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 Substance
of the Proposed Rule Change
The Exchange proposes to amend Exchange Rules 1000, 1064, and 1069
to allow for the Snapshot functionality of the Floor Based Management
System (``FBMS'') to be used for all orders.
The text of the proposed rule change is available on the Exchange's
website 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
On October 30, 2017, the Commission approved the Exchange's
proposal to establish the ``Snapshot'' functionality within the Floor
Broker Management System (now known as the ``Floor Based Management
System'' or ``FBMS'').\3\ On July 17, 2018, the Commission approved
another Exchange proposal to expand the availability of Snapshot to
Registered Options Traders (``ROTs'') and Specialists.\4\
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\3\ Securities Exchange Act Release No. 34-81980 (Oct. 30,
2017), 82 FR 51313 (Nov. 3, 2017) (the ``Snapshot Approval Order'').
As described in Exchange Rule 1063, FBMS is the electronic system
that enables members to submit option orders represented or
negotiated 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.
\4\ Securities Exchange Act Release No. 34-83656 (July 17,
2018), 83 FR 34899 (July 23, 2018).
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As set forth in Rule 1069, Snapshot allows a Floor Broker, ROT, or
Specialist, at the time when they ``provisionally execute'' \5\ a trade
in the
[[Page 49597]]
trading crowd, to capture and record the market conditions that
prevailed at the time of the provisional execution.\6\ Once a member
triggers a Snapshot by pressing a button on FBMS, the member has up to
30 seconds to use the information captured by the Snapshot for purposes
of entering the terms of the provisionally-executed trade into FBMS and
submitting the trade to the Trading System. After 30 seconds, a
Snapshot expires and can no longer be used to capture the market that
existed at the time when it was taken. When a trade that is subject to
a valid Snapshot is submitted to the Trading System, the trade will
execute only to the extent that it is consistent with applicable
priority and trade-through rules based upon the prevailing market at
the time of the Snapshot. The Trading System will reject a trade
subject to a Snapshot if it would violate trade-through or priority
rules. Whenever a Snapshot becomes invalid due to expiration, rejection
by the Trading System, or cancellation in anticipation of expiration or
rejection, a member may take a new Snapshot that reflects the market
prevailing at the time the new Snapshot is taken, provided that the
member first re-announces the trade to the trading crowd and reaches a
new agreement as to the terms of the trade.
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\5\ A ``provisional execution'' occurs in the trading crowd 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 announces a cross in accordance with Phlx Rule 1064(a). See
Rule 1069(a)(i)(A).
\6\ Snapshot records the time when a member triggers the
functionality and the prevailing market conditions for an options
class or series, which includes all information required to
determine compliance with priority and trade through requirements,
including the Away Best Bid and Offer, the Exchange Best Bid and
Offer, customer orders at the top of the Exchange book, and the best
bid and offer of all-or-none orders. See Rule 1069(a). The market
conditions captured by Snapshot are derived from the same real-time
market information that exists in the Trading System.
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Snapshot exists to provide members with a means of mitigating risks
that are inherent in a Floor-based options trading environment. In
particular, Snapshot mitigates the risk that market conditions will
shift between the time when members provisionally execute trades on the
Floor in open outcry and the time when they enter such trades into FBMS
and submit them to the Trading System for execution. This risk exists
because, even with the advent of FBMS, which is the Exchange's
electronic Floor order entry system, a member still must manually enter
the terms of a trade into FBMS prior to submission to the Trading
System. This manual process can take several seconds or more to
complete, depending upon the complexity of the trade. The Exchange
notes that this manual process is not required when trading in an all-
electronic environment, such that Snapshot also serves the purpose of
rendering Floor trading venues more competitive with electronic venues.
When the Exchange developed Snapshot, it made certain design
choices, in coordination with the Commission, to mitigate the risk that
Snapshot could be subject to overuse or abuse. For example, the
Exchange limited the time period during which a Snapshot remains valid
to 30 seconds. Moreover, once a Snapshot expires, a member may take a
new Snapshot only after it re-announces the trade to the trading crowd
and reaches a new agreement regarding its terms. Additionally, a member
may have only one Snapshot outstanding across all option classes and
series at a time. The Exchange also prohibits members from triggering
Snapshot to obtain favorable priority or trade-through conditions or to
improperly avoid unfavorable priority or trade-through conditions, and
it surveils the market for proper use of Snapshot, both on a post-trade
and a real-time basis.\7\
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\7\ Conduct that would constitute a violation includes repeated
instances in which members permit valid Snapshots to expire without
submitting associated trades to the Trading System for verification
and reporting to the Consolidated Tape, as well as repeated
instances in which a member waits longer than is reasonably
necessary to submit a trade subject to a Snapshot to the Trading
System for execution.
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Finally, to mitigate the risk of Snapshot overuse, the Exchange
initially limited its applicability only to multi-leg orders and simple
orders involving options on exchange traded funds (``ETFs'') that are
included in the Options Penny Pilot. The Exchange limited Snapshot to
these two categories of orders because they presented the most
immediately compelling use cases for Snapshot.\8\
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\8\ Snapshot Approval Order, supra, at 51315 (These types of
orders were at ``heightened risk of failing to execute when market
conditions change between the time when Floor Brokers and
participants in the crowd agree upon the terms of the trade and the
time when the Trading System receives the trade for verification and
execution.'').
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Snapshot became available for use by Floor Brokers on December 4,
2017 and it recently became available to ROTs and Specialists. Since
the Exchange first introduced Snapshot, it has monitored when Snapshot
has been used and the frequency of such uses. Such monitoring reveals
that concerns regarding the prospective misuse and abuse of Snapshot
were greatly overstated. In fact, Snapshot was utilized only 24 times
(21 times in executed trades, 3 times in rejected trades) over the
course of eight months (December 2017-July 2018). In four of these
eight months, it was not used at all. In the other four months in which
Snapshot was used, it was used (successfully or otherwise) only once
more than 10 times in a month and otherwise, no more than six times in
a month.
To improve the competitive position of the Exchange Floor relative
to other venues, the Exchange now proposes to broaden the applicability
of Snapshot to all orders. The Exchange believes that this proposal
will make Snapshot simpler, more consistent, and useful in more
circumstances than it is now. Moreover, the Exchange believes that its
experience with Snapshot demonstrates that it can accommodate this
proposal while continuing to systematically enforce trade-through and
priority rules and without materially raising the risk that Snapshot
will be overused or abused. The existing design controls that mitigate
such risks will continue to apply, and if Surveillance--which will
continue monitor Snapshot usage closely--detects a significant uptick
in improper usage, then the Exchange will evaluate whether additional
controls are appropriate.
The Exchange expects to begin making Snapshot available for all
orders before the end of the fourth quarter of 2018. The Exchange will
notify members via an Options Trader Alert, to be posted on the
Exchange's website, at least seven calendar days prior to the date when
Snapshot will be available for expanded use.
Lastly, the Exchange proposes to remove from Rules 1000 and 1064
language that announced the initial launch of the Snapshot
functionality in Q4 2017. This language is no longer required as
Snapshot is operational.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \9\ in general, and furthers the objectives of Section
6(b)(5) of the Act \10\ 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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\9\ 15 U.S.C. 78f(b).
\10\ 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 reject
[[Page 49598]]
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. The proposal to
expand the applicability of Snapshot to all orders will broaden the
scope of such protections.
The expansion of Snapshot to all orders will also help Snapshot to
better achieve its intended purpose of rendering the Exchange Floor
more competitive with other 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 broaden
the applicability of Snapshot to all option orders traded on the
Exchange Floor. Although multi-leg orders and simple orders in options
on Options Penny Pilot ETFs were perhaps the most immediately
compelling use cases for Snapshot, they are by no means the only use
cases for the functionality. Indeed, all options orders that are
negotiated on the Exchange Floor are subject to the same risk of market
movement, to varying extents, from the time of their negotiation in
open outcry to the time of their submission to the Trading System. For
all of these orders, Snapshot will help to mitigate this risk. Enabling
members to provisionally execute all categories of options on the Floor
(using Snapshot when needed), 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 members may use Snapshot. In fact, the proposal
will protect investors and the public interest by improving members'
ability to execute orders negotiated on the Floor while continuing to
ensure that all priority and trade through rules are systematically
enforced.
Moreover, this proposal is consistent with Rule 611 of Regulation
NMS,\11\ 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 and priority rules 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 members, 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 member submits the trade to the Trading System using
Snapshot, the Trading System will verify that the provisionally
executed trade complied with the trade-through and priority rules 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
and priority rules, 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 and priority
rules 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 and priority rules, the automated compliance
verification process will otherwise be unchanged and will still apply
to systematically prevent any violation of the trade-through and
priority rules for all trades, including those utilizing Snapshot.
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\11\ 12 CFR 242.611 [sic].
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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; (3) provides for trade reporting to occur in a
timely fashion, even for the most complex trades, and within a 30
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 members' 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.
Finally, the proposal does not impose an unreasonable burden on
intramarket competition because the Exchange would make Snapshot
available for use for all orders by all members that trade on the
Options Floor.
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-2018-59 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-2018-59. 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 website (http://www.sec.gov/
[[Page 49599]]
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 website
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. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2018-59 and should be
submitted on or before October 23, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
Eduardo A. Aleman,
Assistant Secretary.
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\12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-21365 Filed 10-1-18; 8:45 am]
BILLING CODE 8011-01-P