[Federal Register Volume 84, Number 49 (Wednesday, March 13, 2019)]
[Notices]
[Pages 9192-9195]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04559]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85262; File No. SR-Phlx-2019-03]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Option
Floor Procedure Advice A-9 and Phlx Rules 1000 and 1066 and To Adopt a
New Phlx Rule 1078
March 7, 2019.
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 February 26, 2019, 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 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 Option Floor Procedure Advice
(``OFPA'') A-9, titled ``All-or-None Options Orders,'' amend Phlx Rule
1066, titled ``Certain Types of Floor-Based (Non-System) Orders
Defined,'' and adopt a new Phlx Rule 1078, titled ``All-or-None
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
The Exchange proposes to: (i) Amend OFPA A-9, titled ``All-or-None
Options Orders''; (ii) amend Phlx Rule 1066, titled ``Certain Types of
Floor-Based (Non-System) Orders Defined''; (iii) adopt new Phlx Rule
1078, titled ``All-or-None Orders;'' and (iv) amend Phlx Rule
1000(b)(14) which described a professional order. Each change will be
discussed in detail below.
Description of an All-or None Order
Today, Phlx Rule 1066, ``Certain Types of Floor-Based (Non-System)
Orders Defined,'' at paragraph (c)(4) describes an All-or-None Order as
a market or limit order which is to be executed in its entirety or not
at all. OFPA A-9, describes an all-or-none option order as a limit
order which is to be executed in its entirety, or not at all. The
Exchange proposes to amend Rule 1066(c)(4) and OFPA A-9 to reference
new Phlx Rule 1078 for the description of an All-or-None Order, thereby
creating a single description of an All-or-None Order for purposes of
the Phlx Rulebook to avoid confusion.
The Exchange proposes to state within new Rule 1078 that, ``An All-
or-None Order is a limit order or market order that is to be executed
in its entirety or not at all.'' This is the case today, an All-or-None
Order may be either a limit order or market order, as provided for in
Rule 1066(c)(4), although the current description within OFPA A-9
simply states limit order. The Exchange has noted in other rule changes
that an All-or-None Order may be a limit or market order.\3\ The
Exchange further proposes to state within new Rule 1078 that ``All-or-
None Orders are non-displayed and non-routable.'' \4\ Also, the
Exchange proposes to state that ``All-or-None Orders are executed in
price-time priority among all public customer \5\ Orders if the size
contingency can be met.'' Finally, the Exchange proposes to memorialize
that, ``The Acceptable Trade Range protection in Rule 1099(a) is not
applied to All-or-None Orders.'' The Exchange previously noted this
limitation in a rule change.\6\ The Exchange does not offer the
Acceptable Trade Range protection to All-or-None Orders because it is
difficult to apply this feature to an all-or-none because of the
contingency associated with this order type. The Exchange believes that
noting this limitation within new Rule 1078 will add greater
transparency to the order type.
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\3\ See Securities Exchange Act Release No. 83141 (May 1, 2018),
83 FR 20123, 20124 at footnote 7 (May 7, 2018) (SR-Phlx-2018-32).
\4\ See Securities Exchange Act Release No. 83141 (May 1, 2018),
83 FR 20123, at 20124 (May 7, 2018) (SR-Phlx-2018-32). In this
filing the Exchange also noted that an All-or-None Order is a non-
displayed order type.
\5\ For purposes of this rule change, the term ``public
customer'' shall mean a person or entity that is not a broker or
dealer in securities and is not a professional as defined within
Phlx Rule 1000(b)(14).
\6\ See Securities Exchange Act Release No. 69848 (June 25,
2018), 78 FR 39346, 39348 at footnote 4 (July 1, 2013) (SR-Phlx-
2013-69).
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Today, All-or-None Orders are available to public customers \7\ and
professionals.\8\ The Exchange initially offered All-or-None Orders to
professionals in 2010 at the time of the adoption of the new term
``professional.'' \9\ The Exchange
[[Page 9193]]
proposes to amend its current practice and offer All-or-None Orders to
public customers only.
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\7\ See Phlx Rule 1098(b)(v), which states, ``All-or-none
orders--to be executed in its entirety or not at all. These orders
can only be submitted for non-broker-dealer customers.'' See
Securities Exchange Act Release No. 76742 (December 22, 2015), 80 FR
81393 (December 29, 2015) (SR-Phlx-2015-49). Within this rule change
footnote 101 provides, among other information, that these orders
can only be submitted for non-broker-dealer customers. See also
Securities Exchange Act Release No. 74746 (April 16, 2015), 80 FR
22569 (April 22, 2015) (SR-Phlx-2014-66) (Notice of Filing of
Amendment No. 2 and Designation of Longer Period for Commission
Action on Proceedings To Determine Whether To Approve or Disapprove
Proposed Rule Change, as Modified by Amendment No. 2, To Adopt New
Exchange Rule 1081, Solicitation Mechanism, To Introduce a New
Electronic Solicitation Mechanism). Footnote 39 to this rule change
provides, ``All-or-none orders can only be submitted for non-broker
dealer customers.''
\8\ The term ``professional'' means any person or entity that
(i) is not a broker or dealer in securities, and (ii) places more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). See Rule
1000(b)(14).
\9\ See Securities Exchange Act Release No. 61802 (March 30,
2010), 75 FR 17193 (April 5, 2010) (SR-Phlx-2010-05) (Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
the Proposed Rule Change, as Modified by Amendment No. 2 Thereto,
Relating to Professional Orders) (``Professional Filing'').
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The Exchange believes that permitting only public customers to
utilize All-or-None Orders on the Order Book is consistent with the Act
because unlike other market participants, public customers do not have
access to the same technology as Registered Options Traders,\10\
Specialists,\11\ professionals, firms and broker-dealers. Unlike other
market participants, public customers do not have the tools to monitor
trading activity throughout the trading day and react to changes in
market pricing. Permitting public customers to enter All-or-None Orders
with specific size limitations that rest on the Order Book would
continue to allow public customers the opportunity to obtain fills for
their orders when the market moves even if the All-Or-None Order was
not immediately executable upon entry.
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\10\ Registered Options Traders (``ROTs'') includes Streaming
Quote Traders (``SQTs'') and Remote Streaming Quote Traders
(``RSQTs''). A ROT is a regular member or a foreign currency options
participant of the Exchange who has received permission from the
Exchange to trade in options for his own account. An SQT is an ROT
who has received permission from the Exchange to generate and submit
option quotations electronically in options to which such SQT is
assigned. An SQT may only submit such quotations while such SQT is
physically present on the floor of the Exchange. An SQT may only
trade in a market making capacity in classes of options in which the
SQT is assigned. An RSQT is an ROT that is a member affiliated with
an RSQT with no physical trading floor presence who has received
permission from the Exchange to generate and submit option
quotations electronically in options to which such RSQT has been
assigned. A qualified RSQT may function as a Remote Specialist upon
Exchange approval. A floor market maker is known as a non-SQT ROT in
Rule 1014(b)(ii)(C). A non-SQT ROT is an ROT who is neither an SQT
nor an RSQT.
\11\ A Specialist is an Exchange member who is registered as an
options specialist. See Phlx Rule 1020(a).
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Rule 1000(b)(14)
At the time the Exchange adopted the term ``professional,'' the
Exchange noted within Rule 1000(b)(14) the manner in which professional
orders would be treated. Specifically, Phlx Rule 1014(b)(14) provides,
``. . . . . [sic] A professional will be treated in the same manner as
an off-floor broker-dealer for purposes of Rules 1014(g) \12\ (except
with respect to All-or-None Orders, which will be treated like customer
orders, except that orders submitted pursuant to Rule 1087 \13\ for the
beneficial account(s) of professionals with an all-or-none designation
will be treated in the same manner as off-floor broker-dealer
orders),1033(e),\14\ 1064, Commentary .02 \15\ (except professional
orders will be considered customer orders subject to facilitation),
1087 and 1098,\16\ as well as OFPA B-6 \17\ and F-5.'' \18\ Further,
the Professional Filing stated,
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\12\ Rule 1014(g) concerns the allocation of interest on Phlx.
\13\ Rule 1087 concerns the Price Improvement XL auction.
\14\ Rule 1033(e) concerns Synthetic Option Orders.
\15\ Rule 1064 at Commentary .02 concerns the floor Firm
Participation Guarantee.
\16\ Rule 1098 concerns Complex Orders.
\17\ OFPA B-6 is titled ``Priority of Options Orders for Equity
Options, Index Options and U.S. Dollar-Settled Foreign Currency
Options by Account Type (Equity Option, Index Options and U.S.
dollar-settled foreign currency option only).''
\18\ OFPA F-5 is titled ``Changes or Corrections to Material
Terms of a Matched Trade.''
`. . . In this regard, the Commission does not believe that the Act
requires that the orders of a public customer or any other market
participant be granted priority. Historically, in developing their
trading and business models, exchanges have adopted rules, with
Commission approval, that grant priority to certain participants
over others, in order to attract order flow or to create more
competitive markets. However, the Act does not entitle any
participant to priority as a right. The requirement of section
6(b)(8) of the Act that the rules of an exchange not impose an
unnecessary or inappropriate burden upon competition does not
necessarily mandate that a Professional (as defined in the Phlx
proposal) be granted priority at a time that a broker-dealer is not
granted the same right. The Phlx proposal simply restores the
treatment of persons who would be deemed Professionals to a base
line where no special priority benefits are granted. Thus, the
Commission believes that it is consistent with the Act for Phlx to
amend its rules so that Professional orders, like the orders of
broker-dealers, are not granted special priority.' [footnotes
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omitted]
Unlike public customers, professionals conduct business in the same
manner as an off-floor broker-dealer and therefore have the ability to
react to market conditions swiftly when entering orders. The Exchange
proposes to amend Rule 1000(b)(14) to remove the following text, ``. .
. (except with respect to All-or-None Orders, which will be treated
like customer orders, except that orders submitted pursuant to Rule
1087 for the beneficial account(s) of professionals with an all-or-none
designation will be treated in the same manner as off-floor broker-
dealer orders).''
Rule 1066
The Exchange's proposal to amend Phlx Rule 1066 by deleting the
current description and instead indicating, ``An All-or-None Order is
described in Rule 1078,'' will bring greater consistency to the usage
of the term all-or-none throughout Phlx's Rules.
OFPA A-9
The Exchange's proposal to amend OPFA A-9 to indicate that this
rule applies to an All-or-None Order submitted on the trading floor
will bring greater transparency to this rule. The Exchange's proposal
to remove the description of an All-or-None Order from this rule and
instead refer to the description in proposed new Rule 1078 will bring
greater consistency to the usage of the term All-or-None Order
throughout Phlx's Rules. The Exchange proposes to remove the sentence
that provides, ``Unlike a fill-or-kill order, an All-or-None Order is
not cancelled if it is not executed as soon as it is represented in the
trading crowd'' because All-or-None Orders are not technically
cancelled in the trading crowd, they are simply not consummated or
withdrawn. The Exchange proposes to add the word ``trading'' before the
word ``crowd'' for clarity. The Exchange proposes to remove the last
paragraph of OFPA A-9 because priority for All-or-None Orders is
described in proposed new Rule 1078 and that rule is proposed to be
referenced within OFPA A-9.
Implementation
The Exchange would implement the changes proposed herein prior to
May 31, 2019. The Exchange would issue an Options Trader Alert
announcing the exact date of implementation in advance.\19\
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\19\ See Options Trader Alert 2018-47.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\20\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\21\ 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, by more specifically defining an All-or-None Order within the
Exchange's Rules and conforming the term throughout the Phlx rules to
bring greater transparency to this order type. The Exchange
specifically proposes to make clear within new Rule 1078 that All-or-
None Orders are non-displayed and non-routable.\22\ In addition,
indicating that
[[Page 9194]]
All-or-None Orders are executed in price-time priority among all public
customer orders if the size contingency can be met will bring greater
clarity to the Exchange's Rules. Finally, memorializing that the
Acceptable Trade Range protection in Rule 1099(a) is not applied to
All-or-None Orders will make clear that this limitation exists. Today,
the Exchange does not offer the Acceptable Trade Range protection to
All-or-None Orders because it is difficult to apply this feature to an
All-or-None Order because of the contingency associated with this order
type.\23\ The Exchange believes that noting this limitation within new
Rule 1078 will add greater transparency to the order type.
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ See Securities Exchange Act Release No. 83141 (May 1,
2018), 83 FR 20123, at 20124 (May 7, 2018) (SR-Phlx-2018-32). In
this filing the Exchange also noted that an All-or-None Order is a
non-displayed order type.
\23\ See Securities Exchange Act Release No. 69848 (June 25,
2018), 78 FR 39346, 39348 at footnote 4 (July 1, 2013) (SR-Phlx-
2013-69).
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The Exchange's proposal to amend the All-or-None Order type so that
it would only be available to public customers, and not be available
professionals,\24\ is consistent with the Act. Today, public customers
are afforded certain priorities within the Exchange's Rules that are
not offered to other market participants, including professionals.
Today, for example, public customers are offered priority with respect
to the execution of Qualified Contingent Cross Orders. Specifically,
Phlx Rule 1080(o) provides that a Phlx Order Entry Firm effectuating a
trade in the System pursuant to the Regulation NMS QCT Trade Exemption
to Rule 611(a) can cross the options leg of the trade on Phlx as a QCC
Order immediately upon entry and without order exposure if no public
customer orders \25\ exist on the Exchange's order book at the same
price.\26\ In addition, with respect to the Exchange's allocation rule,
public customer [sic] have a different priority as compared to
professionals, as well as all other market participants. Orders are
allocated such that the highest bid and lowest offer shall have
priority, except that public customer orders have priority over non-
public customer, including non-All-or-None professional orders at the
same price, provided the public customer order is executable.\27\
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\24\ Today the All-or-None Order type is available to public
customers and professionals.
\25\ Phlx will reject a QCC Order that attempts to execute when
any Customer orders are resting on the Exchange limit order book at
the same price.
\26\ See Phlx Rule 1080(o).
\27\ If there are two or more public customer orders for the
same options series at the same price, priority shall be afforded to
such public customer orders in the sequence in which an order is
received by the System.
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Phlx notes that public customer orders are a source of liquidity in
the market, and exchanges have sought to attract such orders by
providing public customers certain guarantees that their orders would
be executed even in the face of competition from broker-dealers.
Further, providing marketplace advantages to public customer orders
attracts main street retail investor order flow to the Exchange by
leveling the playing field for retail investors over market
professionals and providing competitive pricing.
Today, the Exchange offers the All-or-None Order type to public
customers to permit the entry of smaller-sized contingency orders.
Professionals, while offered All-or-None Orders, rarely submit such
orders. The Exchange believes that offering All-or-None Orders solely
to public customers is appropriate. Unlike ROTs, Specialists,
professionals, firms and broker-dealers, public customers do not have
access to information and technology that enables them to trade listed
options in the same manner as a broker or dealer in securities.
Professionals, for example, have the same technological and
informational advantages as broker-dealers trading for their own
accounts, which enables professional account holders to compete
effectively with broker-dealer orders and market maker quotes for
execution opportunities. ROTs, Specialists, firms and broker-dealers
also have tools and infrastructure which monitor the marketplace in
real-time. These non-public customer market participants have the
ability to react to changes in the market and effectuate trades in a
way that public customers may not have with respect entering
specialized orders that have a size contingency in order to effectuate
a hedge.
The Exchange believes that it is consistent with fair competition
to offer the All-or-None Order type solely to public customers in order
to permit these main street retail investors to have advantages over
broker-dealers trading on the Phlx. Further, broker dealers cannot use
the All-or-None Order type today. Professionals are treated in the same
manner as a broker dealer for purposes of Exchange rules. The Exchange
believes that Professionals would be aligned with broker dealers with
respect to not being offered the All-or-None Order type.
Rule 1000(b)(14)
The Exchange's proposal to amend Rule 1000(b)(14) by removing text
related to All-or-None Orders executed by professionals that interact
on the Order Book would align this rule with this proposal.
Rule 1066
The Exchange's proposal to amend Rule 1066 by deleting the current
description and instead indicating, ``An All-or-None Order is described
in Rule 1078'' will bring greater consistency to the usage of the term
all-or-none throughout Phlx's Rules.
OFPA A-9
The Exchange's proposal to amend OPFA A-9 to indicate that this
rule applies to an All-or-None Order submitted on the trading floor
will bring greater transparency to this rule. The Exchange's proposal
to remove the description from this rule and instead refer to the
description in Rule 1078 will bring greater consistency to the usage of
the term all-or-none throughout Phlx's Rules. Finally removing language
that is not relevant to the trading floor will bring clarity to the
rule as modified.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange notes that
adopting a new Rule 1078 and memorializing the All-or-None Order type
with greater detail will bring greater transparency to the order type
to the benefit of all market participants.
Not offering the All-or-None Order type to professionals does not
create an undue burden on competition because unlike professionals,
public customers do not have access to information and technology that
enables them to trade listed options in the same manner as a broker or
dealer in securities. Professionals on the other hand have the same
technological and informational advantages as broker-dealers trading
for their own accounts, which enables professional account holders to
compete effectively with broker-dealer orders and market maker quotes
for execution opportunities. ROTs, Specialists, firms and broker-
dealers all have tools and infrastructure which monitor the marketplace
in real-time. These non-public customer market participants have the
ability to react to changes in the market and effectuate trades in a
way that public customers may not have with respect entering
specialized orders that have a size contingency in order to effectuate
a hedge.
[[Page 9195]]
The Exchange believes that it is consistent with fair competition
to offer the All-or-None Order type solely to public customers in order
to permit these main street retail investors to have advantages over
broker-dealers trading on the Phlx. Also, the Exchange notes that it is
rare for Professionals to utilize the All-or-None Order type. Broker
dealers cannot use the All-or-None Order type today. Professionals are
treated in the same manner as a broker dealer for purposes of Exchange
rules. The Exchange believes that Professionals would be aligned with
broker dealers with respect to not being offered the All-or-None Order
type.
Further, as compared to all other market participants, public
customer orders are a source of liquidity in the market. Providing
marketplace advantages to public customer orders attracts retail
investor order flow to the Exchange by leveling the playing field for
main street retail investors over market professionals and providing
competitive pricing.
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 \28\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\29\
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\28\ 15 U.S.C. 78s(b)(3)(A)(iii).
\29\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file a 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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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-Phlx-2019-03 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-2019-03. 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 a.m. and 3 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-2019-03 and should be submitted on or before April 3, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-04559 Filed 3-12-19; 8:45 am]
BILLING CODE 8011-01-P