[Federal Register Volume 77, Number 72 (Friday, April 13, 2012)]
[Notices]
[Pages 22365-22367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8877]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66767; File No. SR-Phlx-2012-40]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Relating to Quarterly Trading 
Requirements Applicable to Registered Options Traders

April 6, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on March 26, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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 Exchange Rules 1014, Obligations and 
Restrictions Applicable to Specialists and Registered Options Traders, 
and 1093, Phlx XL Risk Monitor Mechanism, and Options Floor Procedure 
Advice B-3, Trading Requirements, to change trading requirements 
applicable to certain Registered Options Traders trading 
electronically, as described below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room, and on the Commission's Web site at http://www.sec.gov.

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 parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to eliminate unnecessary 
and outdated potential burdens on certain Exchange market makers 
arising from their use of electronic orders to trade on the Exchange. 
The general term ``market makers'' on the Exchange includes specialists 
and registered options traders (``ROTs'').\3\ ROTs can be either 
Streaming Quote Traders (``SQTs'') \4\, Remote Streaming Quote Traders 
(``RSQTs'') \5\ or non-Streaming Quote Trader ROTs (``non-SQT ROTs'') 
which by definition are neither SQTs nor RSQTs. The Exchange is 
proposing to amend Rule 1014, Commentary .13 to permit non-SQT ROTs to 
meet an in-person trading requirement set forth in that section using 
electronic orders. The Exchange also proposes to amend Rule 
1014(b)(ii)(E) to eliminate a trading requirement applicable to a non-
SQT ROT who transacts more than 20% of his/her contract volume in an 
option electronically versus in open outcry during any calendar 
quarter. A conforming change is proposed to Section (a) of Rule 1093, 
Phlx XL Risk Monitor Mechanism. Finally, changes are proposed to 
Options Floor Procedure Advice B-3 and to Rule 1014(b)(ii)(E)(1) to 
conform to a recent amendment by the Exchange of Rule 1014, Commentary 
.01, as explained below.
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    \3\ An ROT is defined in Exchange Rule 1014(b) as a regular 
member of the Exchange located on the trading floor who has received 
permission from the Exchange to trade in options for his own 
account. See Exchange Rule 1014 (b)(i) and (ii).
    \4\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as an ROT 
who has received permission from the Exchange to generate and submit 
option quotations electronically in options to which such SQT is 
assigned.
    \5\ An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an 
ROT that is a member or member organization 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. An RSQT may only submit such 
quotations electronically from off the floor of the Exchange.
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    Recent Rule 1014, Commentary .01 Amendment
    The Exchange has recently amended Commentary .01 of Rule 1014. \6\ 
Prior to the amendment Commentary .01 required that in order for an ROT 
(other than an RSQT or a Remote Specialist) to receive specialist 
margin treatment for off-floor orders in any calendar quarter, the ROT 
was required among other things to execute the greater of 1,000 
contracts or 80% of his total contracts that quarter in person and not 
through the use of orders (the ``80% in-person test'').
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    \6\ See Securities Exchange Act Release No. 65644 (October 27, 
2011), 76 FR 67786 (November 2, 2011) (approving SR-Phlx-2011-123).
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    The only way to participate in trades other than through the use of 
orders is by quoting. As the Exchange explained in the proposed rule 
change, non-SQT ROTs do not ``stream'' quotes, meaning send quotes 
electronically to the Exchange. Instead, pursuant to Commentary .18 of 
Rule 1014, they submit limit orders electronically and respond to floor 
brokers verbally. While SQTs quote electronically by ``streaming'' 
quotations into the Exchange, non-SQT ROTs quote verbally in response 
to floor brokers representing orders in the trading crowd verbally.
    The Exchange explained in the filing that the limitation on the use 
of orders to satisfy the 80% in-person test with respect to non-SQT 
ROTs was obsolete as, over time, following the movement toward a more 
electronic trading platform in options, it had become difficult for 
such ROTs to comply with the trading requirement without using orders. 
The Exchange explained that in order to comply with their quarterly 
trading requirements, non-SQT ROTs have to proactively enter orders 
that provide or take liquidity. While some time ago, ROTs were able to 
place their liquidity on the book by verbally

[[Page 22366]]

informing the specialist the proposed rule change explained that this 
is no longer the case. The Exchange observed that non-SQT ROTs could 
only meet the 80% in person test by participating in crowd trades which 
they cannot control in terms of frequency. The 80% in-person test was 
therefore amended to permit non-SQT ROTs to count orders entered in 
person to meet the test.
    The 50% in-person test.
    Exchange Rule 1014 Commentary .13 contains a separate in-person 
requirement. It provides that within each quarter an ROT must execute 
in person, and not through the use of orders, a specified number of 
contracts, such number to be determined from time to time by the 
Exchange. Pursuant to Commentary .13, Options Floor Procedure Advice B-
3 currently requires an ROT (other than an RSQT or a Remote Specialist) 
to trade in person, and not through the use of orders, the greater of 
1000 contracts or 50% of his contract volume on the Exchange each 
quarter (the ``50% in person test'').\7\
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    \7\ The 50% in-person test is separate and distinct from the 80% 
in-person test and applies whether or not the ROT seeks to receive 
specialist margin treatment for off-floor orders.
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    For the same reasons discussed above in connection with the recent 
modification of the 80% in-person test, the Exchange proposes to amend 
Rule 1013 Commentary .13 and the 50% in-person test of Options Floor 
Procedure Advice B-3 to permit non-SQT ROTs to use orders entered in 
person to meet the test.
    The ``20%'' Test
    Currently, Rule 1014(b)(ii)(E)(2) provides that if a non-SQT ROT 
transacts more than 20% of his/her contract volume in an option 
electronically (i.e., by way of placing limit orders on the limit order 
book that are executed electronically and allocated automatically in 
accordance with Rule 1014(g)(vii)) versus in open outcry during any 
calendar quarter (the ``20% test''), commencing the next calendar 
quarter such non-SQT ROT will be subject to certain quoting obligations 
for as long as the non-SQT ROT trades the option. Among other things, 
the non-SQT ROT would be required to submit two-sided electronic 
quotations, or stream quotes, in a designated percentage of series 
within options in which he is assigned, in accordance with a schedule 
set forth in Rule 1014(b)(ii)(E)(2)(b).
    Streaming quotes would be burdensome to non-SQT ROTS who are 
generally not equipped to undertake this new form of trading. Requiring 
a non-SQT ROT to begin streaming would result in a significant increase 
of fixed costs to the non-SQT ROT. The Exchange believes this will 
likely result in these ROTs leaving the trading floor. While meeting 
the 20% test has become more difficult due to the erosion of open 
outcry trading, the Exchange still believes price improvement, quality 
of execution, and especially price discovery will suffer if these non-
SQT ROT's are forced out of open outcry market making.
    The Exchange therefore proposes to eliminate the 20% test and its 
associated requirements as a vestige of the early days of electronic 
trading.\8\ The Exchange believes the provision no longer makes sense 
in the current environment where electronic trading predominates. For 
the same reasons the Exchange deleted the restriction on non SQT ROTs' 
use of orders from the 80% in-person test and the 50% in-person test, 
it is proposing to eliminate the requirements of Rule 1014(b)(ii)(E)(2) 
that currently apply if a non-SQT ROT transacts more than 20% of his/
her contract volume in an option electronically during any calendar 
quarter.\9\ The proposed amendment is particularly critical given the 
recent adoption by the Exchange in Rule 1014, Commentary .01, of a 
general trading requirement that an ROT (other than an RSQT or a Remote 
Specialist) is required to trade 1,000 contracts and 300 transactions 
on the Exchange each quarter, not including transactions executed in 
the trading crowd where the contra-side is an ROT.\10\ The non-SQT ROT 
cannot control the size and frequency of crowd trades, even less so 
crowd trades where the contra-side is not an ROT. As a practical 
matter, the non-SQT ROT may have no other option but to use electronic 
orders to meet the new general trading requirement, thus triggering the 
20% test which will prohibit any further trading of the option unless 
he begins streaming quotes in the option in accordance with Rule 
1014(b)(ii)(E)(2).
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    \8\ In addition to deleting Rule 1014(b)(ii)(E)(2), the Exchange 
proposes to delete introductory language from the beginning of Rule 
1014(b)(ii)(E) that would no longer be necessary. The substantive 
provisions of Rule 1014(e)(1) governing non-SQT ROT obligations, as 
proposed to be renumbered and amended, would continue to apply.
    \9\ In addition to removing the electronic quoting obligation of 
Rule 1014(b)(ii)(E)(2)(b), the amendment would also remove a 
reference to the quote spread requirements of Rule 1014(c)(i) found 
in Rule 1014(b)(ii)(E)(2)(a). The removal of Rule 
1014(b)(ii)(E)(2)(a) does not change non-SQT ROTs' quote spread 
parameter requirements, as Rule 1014(c)(i) will continue to apply to 
them. See also Rule 1014(b)(ii)(E)(1)(b), which is proposed to be 
renumbered as Rule 1014(b)(ii)(E)(2), which will continue to require 
non-SQT ROTs to comply with the quote spread parameter requirements 
of Rule 1014(c)(i).
    \10\ See Securities Exchange Act Release No. 65644 (October 27, 
2011), 76 FR 67786 (November 2, 2011) (approving SR- Phlx-2011-123).
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    Finally, a reference to non-SQT ROTs is proposed to be deleted from 
Section (a) of Rule 1093, Phlx XL Risk Monitor Mechanism, which 
currently refers to non-SQT ROTs who are required to submit continuous 
two-sided electronic quotations pursuant to Rule 1014(b)(ii)(E) which 
is proposed to be deleted as discussed above. This is simply a 
conforming change to the proposed deletion of Rule 1014(b)(ii)(E).
    Conforming Change--Deletion of Rule 1014(b)(ii)(E)(1)(c)
    The Exchange also proposes to delete Rule 1014(b)(ii)(E)(1)(c) 
which provides that any volume transacted electronically will not count 
towards a non-SQT ROT's 80% in-person test contained in Commentary .01 
to Rule 1014. As discussed above, the Exchange recently amended 
Commentary .01 to eliminate this restriction. The Exchange is deleting 
Rule 1014(b)(ii)(E)(1)(c) simply as a conforming change.
    Conforming Change--Options Floor Procedures Advice B-3
    Options Floor Procedure Advice B-3, Section (b), also requires an 
ROT (other than an RSQT or a Remote Specialist) in order to receive 
Specialist margin treatment for off-floor orders to meet the 80% in-
person test (not through the use of orders). The Exchange proposes to 
amend Options Floor Procedure Advice B-3 to conform it to the recently 
revised language of Rule 1014 Commentary .01 such that non-streaming 
ROTs can use orders entered in person to meet the 80% in-person test. 
This change is simply a conforming change to the earlier amendment.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ 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 eliminating a restriction on non-SQT ROTs' use of orders 
to meet an in-person trading requirement, by eliminating burdensome 
requirements triggered by non-SQT ROTs' use of orders to transact more 
than 20% of their contract volume in an option, and

[[Page 22367]]

by making clarifying and conforming changes to previously amended text.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    It would be unjust and inequitable to continue to impose in-person 
trading requirements on non-SQT ROTs without counting orders entered 
electronically given that their ability to trade other than by the use 
of orders has substantially diminished over the years. Making the 
changes proposed herein will remove impediments to and perfect the 
mechanism of a free and open market and a national market system by 
eliminating an in-person trading requirement that non-SQT ROTs will 
have difficulty meeting given the current electronic trading 
environment, thus enabling them to continue making markets by open 
outcry, to the extent they are able, to the benefit of investors. 
Investors and the public interest are protected by including as market 
makers those individuals who, while unable or unwilling to invest 
resources necessary for streaming, are able to provide liquidity in the 
open outcry trading that does remain on the floor of the Exchange. The 
changes that conform rule text to an earlier Exchange amendment benefit 
investors and the public interest by providing clarity and eliminating 
potential confusion.

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.

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 up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the 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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#ed9f988188c08e8280808883999ead9e888ec38a829b"><span class="__cf_email__" data-cfemail="d1a3a4bdb4fcb2bebcbcb4bfa5a291a2b4b2ffb6bea7">[email protected]</span></a>. Please include 
File Number SR-Phlx-2012-40 on the subject line.
Paper Comments
    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2012-40. 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 Web site (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 Web site 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 will also be available for 
inspection and copying at the Exchange's principal office. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make publicly available. All 
submissions should refer to File Number SR-Phlx-2012-40 and should be 
submitted on or before May 4, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8877 Filed 4-12-12; 8:45 am]
BILLING CODE 8011-01-P


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