[Federal Register Volume 83, Number 193 (Thursday, October 4, 2018)]
[Notices]
[Pages 50131-50132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21586]



[[Page 50131]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84311; File No. SR-Phlx-2018-55]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a 
Proposed Rule Change Relating to Anticipatory Hedging

September 28, 2018.

I. Introduction

    On August 3, 2018, Nasdaq PHLX LLC (``Exchange'' or ``Phlx'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change amending 
Phlx's Rule 1064(d), relating to anticipatory hedging of crossing, 
facilitation, and solicited orders. The proposed rule change was 
published for comment in the Federal Register on August 16, 2018.\3\ 
The Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83826 (Aug. 10, 
2018), 83 FR 40797 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange has proposed to amend Phlx Rule 1064(d), governing 
anticipatory hedging relating to crossing, facilitation, and 
solicitation orders. Specifically, the Exchange has proposed to lower 
the eligibility size for the ``tied hedge'' exception to the 
anticipatory hedging prohibition from 500 contracts to 50 contracts per 
order \4\ for options on the Nasdaq 100 Index, including options with 
nonstandard expiration dates (``NDX'' and ``NDXP'').\5\ The tied hedge 
exception eligibility size for all other options orders will remain at 
500 contracts per order.\6\
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    \4\ See Proposed Phlx Rule 1064(d)(iii)(A).
    \5\ NDX represents A.M.-settled options on the Nasdaq 
100[supreg] Index. NDXP represent P.M.-settled options on the Nasdaq 
100[supreg] Index.
    \6\ See Proposed Phlx Rule 1064(d)(iii)(A).
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    Phlx Rule 1064(d) governing anticipatory hedging prohibits member 
organizations and associated persons of members and member 
organizations who have knowledge of the material terms and conditions 
of a solicited, facilitated, or crossed order that is to be imminently 
executed from entering, based on such knowledge, an order to buy or 
sell the underlying security, an option for the same underlying 
security, or any related instrument \7\ until certain conditions set 
forth in the rule are met.\8\ Specifically, the order may only be 
entered when (i) the terms and conditions of the order and any changes 
in the terms of the order that the member, member organization, or 
associated person has knowledge of are disclosed to the trading crowd, 
or (ii) the trade can no longer reasonably be considered imminent in 
view of the passage of time since the order was received.
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    \7\ See Phlx Rule 1064(d)(ii), which states that an order to buy 
or sell a ``related instrument'' means, in reference to an index 
option, an order to buy or sell securities comprising 10% or more of 
the component securities in the index or an order to buy or sell a 
futures contract on an economically equivalent index.
    \8\ See Phlx Rule 1064(d).
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    Phlx Rule 1064(d)(iii) sets forth an exception to this rule, known 
as the ``tied hedge'' exception. Under such exception, a member or 
member organization is not prohibited from buying or selling a stock, 
security futures, or future position following the receipt of an option 
order, including a complex order, but prior to announcing such order to 
the trading crowd, provided that the option order is in a class 
designated as eligible for ``tied hedge'' transactions,\9\ as 
determined by the Exchange, and is within the designated tied hedge 
eligibility size parameters, also determined by the Exchange and which 
may not be smaller than 500 contracts per order.\10\
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    \9\ See Phlx Rule 1064(d)(iii)(C)-(H).
    \10\ See Phlx Rule 1064(d)(iii)(A). The rule also provides that 
there shall be no aggregation of multiple orders to satisfy the size 
parameters.
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    The Exchange now proposes to lower the minimum tied hedge 
eligibility size threshold for NDX and NDXP, from 500 contracts to 50 
contracts. The Exchange asserts that this smaller eligibility size for 
NDX and NDXP is appropriate because the index value for NDX and NDXP is 
high as compared to other securities instruments and would reduce the 
minimum notional value required for a trade to be eligible for the tied 
hedge exception.
    The Exchange also proposes to amend Phlx Rule 1066 to delete the 
term ``Phlx XL'' and replace it with the term ``System.'' \11\ It also 
proposes to amend an incorrect cross-reference to the tied hedge 
exception, Commentary .04 to Phlx Rule 1064, and replace it with the 
correct cross-reference, Rule 1064(d)(iii).\12\
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    \11\ See Proposed Phlx Rule 1066. See also Phlx Rule 1000(b)(45) 
(defining ``System'').
    \12\ See Proposed Phlx Rule 1066(f)(4).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act \13\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\14\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\15\ which 
requires that the rules of an exchange be 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.
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    \13\ 15 U.S.C. 78f.
    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    When adopting the tied-hedge exception, Phlx described the 
provision as a limited exception that remained in keeping with the 
original design of the anticipatory hedging prohibition,\16\ while 
responding to increased trading in the over-the-counter market and 
changes in the marketplace that favored volatility trading 
strategies.\17\ The Exchange explained that the primary purpose of the 
500 contracts minimum eligibility size provision of the tied hedge 
exception was to limit the use of the tied hedge procedures to larger 
orders that might benefit from the member's or member organization's 
ability to execute a facilitating hedge.\18\
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    \16\ The Exchange stated that when it originally adopted the 
anticipatory hedging prohibition, it believed the prohibition was 
necessary to prevent members and associated persons from using 
undisclosed, non-public information about imminent solicited options 
transactions to trade in advance of persons represented in the 
options crowd. See Notice, supra note 3, at 40798. See also 
Securities Exchange Act Release No. 44740 (August 23, 2001), 66 FR 
45721 (August 29, 2001) (SR-Phlx-2001-61).
    \17\ See Securities Exchange Act Release No. 61066 (November 25, 
2009), 74 FR 63162 (December 2, 2009) (SR-Phlx-2009-98).
    \18\ Id.

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[[Page 50132]]

    As noted above, the Exchange asserts that a lower tied hedge 
minimum eligibility size is appropriate for options on the Nasdaq 100 
Index because the index value for NDX and NDXP is high compared to the 
index values of other security instruments, adding that a size of 50 
contracts for NDX is still considered a large size order given NDX's 
higher notional value.\19\ To illustrate the high notional value of 
options on the Nasdaq 100 Index, Phlx stated that based on the index 
value, the multiplier, and the premium value, the current 500 minimum 
contract size parameter would require an NDX options transaction with a 
premium of approximately $6.5 million in order to qualify for the 
rule's tied hedge exception.\20\
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    \19\ See Notice, supra note 3, at 40798-99.
    \20\ See Notice, supra note 3, at 40798.
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    The Commission believes that the reduced tied hedge eligibility 
size requirement of 50 contracts for options on the Nasdaq 100 Index is 
in line with the original intent of the provision, as it will continue 
to be limited to larger orders, given the relatively higher index value 
and notional value of NDX and NDXP.\21\ While the reduction in the 
minimum size requirement may allow more transactions to qualify for the 
tied hedge exception, the Commission believes that the proposed change 
is narrow in scope as it relates only to options in NDX and NDXP and 
will continue to provide only a limited exception for larger orders 
meeting the conditions of the rule.\22\
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    \21\ See Notice, supra note 3, at 40798-99. The Commission also 
notes that the Exchange represented that it conducts surveillance in 
connection with anticipatory hedging. Specifically, the Exchange 
represented that it conducts on-floor surveillance to ensure both 
the stock and option components of the trade were exposed in open 
outcry and that the trading crowd had a reasonable opportunity to 
participate in the transaction. The Exchange asserted that it also 
conducts post-trade surveillance. The Exchange also noted that prior 
to entering tied hedge orders on behalf of customers, the member or 
member organization must deliver to the customer a written 
notification informing the customer that his order may be executed 
using the Exchange's tied hedge procedures. See Phlx Rule 
1064(d)(iii)(G).
    \22\ The Commission notes that the Exchange represented that 
tied hedge transactions do not occur with great frequency on the 
Exchange's trading floor. Id.
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    The Commission also finds that the non-substantive changes to Phlx 
Rule 1066 are designed to protect investors and the public interest by 
adding clarity and transparency to the rules.
    For the reasons noted above, the Commission finds that the proposed 
rule change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-Phlx-2018-55) be, and hereby 
is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21586 Filed 10-3-18; 8:45 am]
 BILLING CODE 8011-01-P