[Federal Register Volume 90, Number 243 (Monday, December 22, 2025)]
[Notices]
[Pages 59892-59894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-23522]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104427; File No. SR-PHLX-2025-72]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt PHLX
Options 9, Section 25 To Codify an Options Unbundling Rule
December 17, 2025.
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 December 11, 2025, Nasdaq PHLX LLC (``PHLX'' or ``Exchange'') filed
with the Securities
[[Page 59893]]
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 adopt PHLX Options 9, Section 25 to codify
the Exchange's longstanding guidance that the unbundling of orders for
any purpose other than best execution is considered conduct
inconsistent with just and equitable principles of trade, and to remove
extraneous and nonsensical rule text from PHLX Options 3, Section 7.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/phlx/rulefilings,
and at the principal office of the Exchange.
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 amend PHLX Options 9 by adding a new
Section 25 to codify its longstanding guidance that it shall be
considered conduct inconsistent with just and equitable principles of
trade for any member, member organization, or person associated with or
employed by a member or member organization (collectively, ``member''
or ``members'') to split an order into multiple smaller orders for any
purpose other than seeking the best execution of the entire order.
Members of the Exchange are not allowed to engage in conduct
inconsistent with just and equitable principles of trade.\3\
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\3\ See PHLX General 9, Section 1(c)(1) (``A member, member
organization, or person associated with or employed by a member or
member organization shall not engage in conduct inconsistent with
just and equitable principles of trade.'').
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``Unbundling,'' also known as ``trade shredding,'' is the practice
of breaking up an order into multiple smaller orders for some purpose
other than the best execution of the order. The practice of unbundling
has in the past been used for purposes such as improperly maximizing
commissions and fees charged to customers, distorting trade data, or
circumventing rules pertaining to maximum order size.\4\ For example,
the unbundling of a large order into several smaller orders could be
done for the purpose of achieving the Lead Market Maker (LMM)
allocation preference for orders of 5 contracts or fewer.\5\
Alternatively, unbundling an order into separate orders could be done
for the purpose of gaining a higher allocation percentage in a price-
improvement auction than the member submitting the orders into a price-
improvement auction otherwise would have received.\6\
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\4\ See, e.g., Securities Exchange Act Release No. 62667 (Aug.
9, 2010), 75 FR 50013 (Aug. 16, 2010) (File No. SR-NYSEAmex-2010-77)
(Self-Regulatory Organizations; NYSE Amex, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending Rule
995NY).
\5\ See PHLX Options 3, Section 10(a)(1)(C).
\6\ See PHLX Options 3, Section 13(e) (Stating, in part, that
``[i]t will also be deemed conduct inconsistent with just and
equitable principles of trade and a violation of General 9, Section
1(c) to engage in a pattern of conduct where the Initiating Member
breaks up a PIXL Order into separate orders for the purpose of
gaining a higher allocation percentage than the Initiating Member
would have otherwise received in accordance with the allocation
procedures contained in subparagraph (b)(5) above.'').
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The Exchange believes that the unbundling of orders generally
serves no purpose to the customer that entered the order and may cause
unnecessary delays in the execution of that order. This belief has been
reflected in the Exchange's longstanding regulatory guidance to its
members.\7\ It is also reflected in PHLX General 9, Section 1(c)(3),
concerning the unbundling of equity securities orders.\8\
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\7\ See Options Regulatory Alert #2025-34 (Aug. 29, 2025),
available at https://www.nasdaqtrader.com/MicroNews.aspx?id=ORA2025-34; Options Regulatory Alert #2016-6 (Feb. 17, 2016), available at
https://www.nasdaqtrader.com/MicroNews.aspx?id=ORA2016-6; and
Options Regulatory Alert #2016-4 (Jan. 22, 2016), available at
https://www.nasdaqtrader.com/MicroNews.aspx?id=ORA2016-4.
\8\ That rule states that ``it is conduct inconsistent with just
and equitable principles of trade for any member, member
organization, or person associated with or employed by a member or
member organization to engage in conduct that has the intent or
effect of unbundling equity securities orders for execution for the
primary purpose of maximizing a monetary or in-kind amount received
by the member, member organization, or person associated with or
employed by a member or member organization as a result of the
execution of such equity securities orders. For purposes of this
section, `monetary or in-kind amounts' shall be defined to include
commissions, gratuities, payments for or rebate of fees resulting
from the entry of such equity securities orders, or any similar
payments of value to the member, member organization, or person
associated with or employed by a member or member organization.''
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The impermissibility of unbundling is a well-established principle
across the U.S. securities markets. Other options exchanges have anti-
unbundling rules or rule interpretations that are similar to the rule
being adopted by the Exchange.\9\ Additionally, other exchanges have
also issued regulatory guidance to their members warning them against
the practice of unbundling.\10\ Finally, the Financial Industry
Regulatory Authority (``FINRA'') also has its own anti-unbundling rule,
FINRA Rule 5290, which specifies, in part, that ``[n]o member . . .
shall engage in conduct that has the intent or effect of splitting any
order into multiple smaller orders for execution or any execution into
multiple smaller executions for transaction reporting for the primary
purpose of maximizing a monetary or in-kind amount to be received by
the member . . . as a result of the execution of such orders or the
transaction reporting of such executions.''
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\9\ See, e.g., NYSE American Rule 995NY(d) (``It shall be
considered conduct inconsistent with just and equitable principles
of trade for an ATP Holder to split an order into multiple smaller
orders for any purpose other than seeking the best execution of the
entire order.''), NYSE Arca Rule 11.2(g) (``An ETP Holder may not
split any order into multiple orders for any purpose other than
seeking the best execution of the entire order.''), and MIAX Chapter
III, Rule 301, Interpretation .03 (``It shall be considered conduct
inconsistent with just and equitable principles of trade and a
violation of Rule 301 for a Member to split an order into multiple
smaller orders for any purpose other than seeking the best execution
of the entire order.'').
\10\ See, e.g., Cboe Regulatory Circular RG-15-011 (Sept. 23,
2015) (``Please note that unbundling of orders greater than 5
contracts into 1 to 5 lot increments for the purpose of achieving
small order preference in favor of any [Designated Primary Market-
Maker] or [Lead Market-Maker] may be a violation of CBOE Rule 4.1,
Just and Equitable Principles of Trade''), available at https://cdn.cboe.com/resources/regulation/circulars/regulatory/RG15-130.pdf.
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Additionally, the Exchange proposes to remove from PHLX Option 3,
Section 7 the following sentence: ``Orders may not be unbundled, nor
may a firm solicit a customer to unbundle an order for this purpose.''
\11\ This sentence appears
[[Page 59894]]
extraneous, as it does not seem to belong with the preceding sentence
(``The Exchange may determine to make certain order types and time-in-
force, respectively, on a class or System basis.''). The sentence is
also nonsensical, as it is not at all clear what it refers to by ``for
this purpose.'' The Exchange suspects that this rule text may be a
vestigial remain of some older Exchange rule that has since been
modified so much as to make this sentence nonsensical.
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\11\ This sentence was placed in its current location in 2024 as
part of a larger reorganization of the Exchange's rulebook. The
sentence used to be located in Option 3, Section 7(f) as a
standalone provision. The Exchange now believes that, even in its
former location, this rule text was extraneous and nonsensical and
should have been removed instead of relocated in that prior filing.
See Securities Exchange Act No. 101989 (Dec. 19, 2024), 89 FR 106888
(Dec. 30, 2024) (File No. SR-PHLX-2024-71) (Self-Regulatory
Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend Various PHLX Rules in
Connection With a Technology Migration).
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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, by deterring and helping to prevent the distortive practice
of unbundling.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the unbundling of orders generally
serves no purpose to the customer that entered the order and may cause
unnecessary delays in the execution of that order. Codifying its
longstanding guidance in its rulebook that unbundling is conduct
inconsistent with just and equitable principles of trade is thus
designed to promote just and equitable principles of trade.
Additionally, by defining unbundling as the practice of splitting an
order into multiple smaller orders for any purpose other than seeking
the best execution of the entire order, the proposal is designed to
promote best execution and thus protect investors and the public
interest.
Additionally, the Exchange reiterates that the proposed rule is
substantively identical to NYSE American Rule 995NY(d) and it is
consistent with the rules and regulatory guidance of other exchanges,
as well as FINRA Rule 5290.
Finally, the Exchange believes that it is consistent with the Act
to remove the extraneous and nonsensical rule text in PHLX Options 3,
Section 7, as this likely vestigial rule text currently serves no
purpose and can be confusing to market participants. Removing this rule
text is designed to remove impediments to and perfect the mechanism of
a free and open market and a national market system by making PHLX
Options 3, Section 7 more internally coherent and clearer to market
participants.
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 terms of intra-market
competition, the Exchange notes that the proposed rule will apply
equally to all members of the Exchange. Additionally, in terms of
intermarket competition, the Exchange notes that the proposed rule is
consistent with the rules of other exchanges, as well as the rules of
FINRA. Finally, removing the extraneous and nonsensical rule text in
PHLX Options 3, Section 7 will not impose any burden on competition, as
it will serve to clarify that rule for all market 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 \14\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
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\14\ 15 U.S.C. 78s(b)(3)(A)(iii).
\15\ 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 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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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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-PHLX-2025-72 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-2025-72. 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 (https://www.sec.gov/rules/sro.shtml). Copies of the filing will be available for inspection and
copying at the principal office of the Exchange. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-PHLX-2025-72 and should be submitted on
or before January 12, 2026.
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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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-23522 Filed 12-19-25; 8:45 am]
BILLING CODE 8011-01-P