[Federal Register Volume 83, Number 238 (Wednesday, December 12, 2018)]
[Notices]
[Pages 63937-63939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26824]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84727; File No. SR-Phlx-2018-77]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to Bid/Ask 
Differentials

December 6, 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 November 28, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 Phlx Rule 1017, entitled ``Openings 
in Options,'' Phlx Rule 1014, entitled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders,'' and Rule 
1000, entitled ``Applicability, Definitions an References.''
    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
    Phlx proposes several amendments in this rule change. First, the 
Exchange proposes to amend Phlx Rule 1017, entitled ``Openings in 
Options'' and Phlx Rule 1014, entitled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders'' to correct 
inconsistencies between the Exchange's rule text and the operation of 
the System. Second, the Exchange proposes to add definitions to Phlx 
Rule 1000 to define ``in-the-money'' and ``out-of-the-money'' option 
series. Third, the Exchange proposes to amend Rule 1014 to correct an 
error regarding rounding. Each amendment will be described in more 
detail below.
Rule 1017
    Today, Phlx Rule 1017(a)(ix) defines a Valid Width Quotes as a two-
sided electronic quotation submitted by a Phlx Electronic Market Maker 
(which includes a Specialist \3\ and a Registered Options Trader \4\ or 
``ROT'') that consists of a bid/ask differential that is compliant with 
Rule 1014(c)(i)(A)(1)(a).\5\ Specifically, for the Opening Process, 
Phlx Rule 1014(c)(i)(A)(1)(a) states that, for in-the-money series, the 
bid/ask differentials may be as wide as the spread between the national 
best bid and offer in the underlying security, or its decimal 
equivalent rounded up to the nearest minimum increment. In practice, 
however, the Exchange's System permits a Valid Width Quote in the 
Opening Process to be as wide as the quotation for the underlying 
security on the primary (listing) market.\6\
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    \3\ A Specialist is an Exchange member who is registered as an 
options Specialist. See Phlx Rule 1020(a).
    \4\ Rule 1014(b) defines a ROT as ``a regular member or a 
foreign currency options participant of the Exchange located on the 
trading floor who has received permission from the Exchange to trade 
in options for his own account.'' For purposes of Rule 1014, the 
term ``ROT'' shall include a Streaming Quote Trader and a Remote 
Streaming Quote Trader, as defined in Rule 1014.
    \5\ Phlx Rule 1014(c)(i)(A)(1)(a) provides, ``[o]ptions on 
equities and index options bidding and/or offering so as to create 
differences of no more than $.25 between the bid and the offer for 
each option contract for which the prevailing bid is less than $2; 
no more than $.40 where the prevailing bid is $2 or more but less 
than $5; no more than $.50 where the prevailing bid is $5 or more 
but less than $10; no more than $.80 where the prevailing bid is $10 
or more but less than $20; and no more than $1 where the prevailing 
bid is $20 or more, provided that, in the case of equity options, 
the bid/ask differentials stated above shall not apply to in-the-
money series where the market for the underlying security is wider 
than the differentials set forth above. For such series, the bid/ask 
differentials may be as wide as the spread between the national best 
bid and offer in the underlying security, or its decimal equivalent 
rounded up to the nearest minimum increment. The Exchange may 
establish differences other than the above for one or more series or 
classes of options.''
    \6\ The primary market has always been utilized on Phlx since 
the migration to Phlx XLII.
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Proposal
    The Exchange proposes to codify its current practice and correctly 
reflect in its Rules that the Valid Width Quote in the Opening Process 
apply a primary market analysis, not a national best bid or offer 
(``NBBO'') analysis.\7\ Specifically, this proposal would conform the 
current rule text to the current System by amending the definition of a 
Valid Width Quote in Rule 1017, ``Opening in Options,'' so that, in the 
case of in-the-money option series \8\ where the market for the 
underlying security is wider than the differentials set forth above, 
the bid/ask differential set forth in Phlx Rule 1017(a)(ix) may be as 
wide as the quotation for the underlying security on the primary \9\ 
(listing) market, or its decimal equivalent rounded down to the nearest 
minimum increment.
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    \7\ The Exchange notes that today Phlx utilizes the primary 
market in calculating the bid/ask differential during the Opening 
Process. This rule change would amend the rule to reflect Phlx's 
current practice.
    \8\ An at-the-money option series would also qualify. An out-of-
the-money series would not qualify.
    \9\ The term ``primary market'' means, in the case of securities 
listed on The Nasdaq Stock Market, the market that is identified as 
the listing market pursuant to Section X(d) of the approved national 
market system plan governing the trading of Nasdaq-listed 
securities, and, in the case of securities listed on another 
national securities exchange, the market that is identified as the 
listing market pursuant to Section XI of the Consolidated Tape 
Association Plan. See Phlx Rule 1000(b)(31).
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    The Exchange believes that utilizing the primary market in the 
Opening Process is reasonable given the close connection between the 
primary market and the Opening Process. For example, Phlx Rule 
1017(d)(ii) provides, ``For all options, the underlying security, 
including indexes, must be open on the primary market for a certain 
time period as determined by the Exchange for the Opening Process to 
commence. The time period shall be no less than 100 milliseconds and no 
more than 5 seconds.''
    Today, in order to open, the Exchange requires either: (i) The 
Specialist's Valid

[[Page 63938]]

Width Quote; (ii) the Valid Width Quotes of at least two Phlx 
Electronic Market Makers other than the Specialist; or (iii) if neither 
the Specialist's Valid Width Quote nor the Valid Width Quotes of two 
Phlx Electronic Market Makers have been submitted within such 
timeframe, one Phlx Electronic Market Maker has submitted a Valid Width 
Quote. The Exchange notes that it requires Specialists to submit Valid 
Width Quotes during the Opening Process to guarantee liquidity, unlike 
other markets which may not require market makers to quote during the 
opening.\10\ Further, amending the rule text to conform to its current 
practice will avoid confusion and continue to permit Phlx to remain one 
of the strongest openings in the industry.
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    \10\ The Nasdaq Options Market (``NOM'') permits a bid/ask 
differential for options on equities and on index options to be 
quoted with a difference not to exceed $5 between the bid and offer 
regardless of the price of the bid, including before and during the 
opening. See NOM Rules at Chapter VII, Section 6(d)(ii).
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Rule 1000
    Phlx rules currently do not define an ``in-the-money'' or ``out-of-
the-money'' option series. As part of this rule change, the Exchange 
proposes to define these above-referenced terms within Phlx Rule 
1000(b) to bring greater transparency to its rules with respect to Phlx 
Electronic Market Maker quoting. The Exchange proposes to define the 
term ``in-the-money'' at Rule 1000(b)(51) as the following: For call 
options, all strike prices at or below the offer in the underlying 
security on the primary listing market; for put options, all strike 
prices at or above the bid in the underlying security on the primary 
listing market. The Exchange proposes to define the term ``out-of-the-
money'' option at Rule 1000(b)(52), which is currently reserved, to 
mean the following: For call options, all strike prices above the offer 
in the underlying security on the primary listing market; for put 
options, all strike prices below the bid in the underlying security on 
the primary listing market.\11\ Each of these definitions would apply 
for purposes of Phlx Electronic Market Maker quoting obligations in 
Rules 1014 and 1017. The Exchange notes that it specifically proposes 
to reference the rules related to Phlx Electronic Market Maker quoting 
obligations to avoid any confusion with the manner in which ``in-the-
money'' and ``out-of-the-money'' options series are defined for 
purposes of other options rules.
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    \11\ The Exchange notes that it does not utilize a last sale 
calculation. The Exchange believes that the quotation for the 
underlying security on the primary market provides an accurate 
reflection of the market. A last sale calculation may not be an 
accurate reflection of the market because the last sale may not be 
representative of the primary market in all cases, particularly if a 
halt were to occur.
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Rule 1014
    The Exchange proposes to codify current rounding practice by 
amending Rule 1014(c)(i)(A)(1)(a). Today, Rule 1014(c)(i)(A)(1)(a) 
provides that rounding is up when referring to decimal equivalent. 
Today, the decimal equivalent is rounded down not up. The Exchange 
proposes to conform its rule text to the current practice. The Exchange 
believes that the manner in which the Exchange rounds is immaterial, 
however the Exchange believes that it is important to disclose its 
method of rounding and uniformly apply such rounding. The Exchange 
proposes this amendment to make clear the manner in which it rounds the 
decimal equivalent. Today the Exchange uniformly applies this rounding 
to all market maker participants and will continue to apply it in a 
uniform manner.
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, in general to protect investors and the public 
interest. The Exchange notes that today Phlx utilizes the primary 
market in calculating the bid/ask differential during the Opening 
Process, although the current rule does not reflect this practice. This 
rule change would amend the rule to reflect Phlx's current practice.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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Rule 1017
    The Exchange's proposal to amend the Opening Process to conform to 
current practice is consistent with the Act because while the Exchange 
believes that relying on the primary market or the NBBO accurately 
reflect the current trading environment and take into consideration 
market conditions, the Exchange's current Opening Process is designed 
to utilize the primary standard during the Opening Process.\14\
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    \14\ Phlx Rule 1017(d)(ii) provides, ``For all options, the 
underlying security, including indexes, must be open on the primary 
market for a certain time period as determined by the Exchange for 
the Opening Process to commence. The time period shall be no less 
than 100 milliseconds and no more than 5 seconds.''
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Rule 1000
    The Exchange's proposal to define the terms ``in-the-money'' and 
``out-of-the-money'' for purposes of Phlx Electronic Market Maker 
quoting obligations in Rules 1014 and 1017 is consistent with the Act 
and protects investors and the public interest by bringing greater 
transparency to the Rulebook. Each of these defined terms would apply 
for purposes of Phlx Electronic Market Maker quoting obligations in 
Rules 1014 and 1017. The Exchange notes that it specifically proposes 
to reference the rules related to Phlx Electronic Market Maker quoting 
obligations to avoid any confusion with the manner in which ``in-the-
money'' and ``out-of-the-money'' options series are defined for 
purposes of other options rules.
Rule 1014
    The Exchange's proposal to amend Rule 1014(c)(i)(A)(1)(a) to codify 
the Exchange's current practice of rounding down when referring to 
decimal equivalent is consistent with the protection of investor and 
the public interest because the Exchange is adding transparency to its 
current rule by disclosing its method of rounding.

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.
Rule 1017
    The Exchange's proposal to codify its current practice of utilizing 
the primary market in the Opening Process does not unduly burden 
competition because the current practice maintains a close connection 
between the primary market and the Opening Process. The primary market 
reflects the current trading environment. The Exchange notes that the 
proposal does not create an undue burden on intra-market competition 
because Phlx Electronic Market Makers are the only market participants 
subject to quoting requirements and these participants have valuable 
information with respect to the underlying instrument under the current 
process to make informed decisions and take calculated risks in the 
marketplace when providing liquidity. Phlx Electronic Market Makers 
remain responsible for maintaining fair and orderly markets.

[[Page 63939]]

Rule 1000
    The Exchange's proposal to define the terms ``in-the-money'' or 
``out-of-the-money'' for purposes of Phlx Electronic Market Maker 
quoting obligations in Rules 1014 and 1017 does not unduly burden 
competition, rather it adds greater transparency to the Rulebook and 
makes clear the applicability of the definitions to avoid confusion 
with respect to the remainder of the options rules.
Rule 1014
    The Exchange's proposal to codify its current practice of rounding 
down when referring to decimal equivalent within Rule 
1014(c)(i)(A)(1)(a) does not impose an unduly burden competition 
because the Exchange continues to uniformly apply its rounding 
methodology with respect to its market making participants.

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)(iii) of the Act \15\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and the 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) \17\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \18\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Exchange states that 
immediately codifying its current practice within its rules to 
accurately reflect the operation of the Exchange's System will avoid 
confusion. The Commission believes that waiver of the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. Accordingly, the Commission hereby waives the operative delay 
and designates the proposed rule change as operative upon filing.\19\
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    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6)(iii).
    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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-2018-77 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-2018-77. 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/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-2018-77 and should be submitted on 
or before January 2, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26824 Filed 12-11-18; 8:45 am]
 BILLING CODE 8011-01-P