[Federal Register Volume 89, Number 215 (Wednesday, November 6, 2024)]
[Notices]
[Pages 88092-88094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25728]



[[Page 88092]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101488; File No. SR-Phlx-2024-54]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change To Amend Options 3, Section 13 Related to XND

October 31, 2024.
    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 October 18, 2024, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
a 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 Options 3, Section 13, Price 
Improvement XL (``PIXL'').
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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 amend Options 3, Section 13, Price 
Improvement XL (``PIXL'') to permit orders for the accounts of 
appointed Market Makers to be solicited for PIXL Auctions for XND 
options only. XND options are options based on 1/100 the value of the 
Nasdaq-100 (``XND'' or ``XND options''). Today, Cboe Exchange, Inc. 
(``Cboe'') permits orders for the accounts of Market-Makers with an 
appointment in SPX to be solicited for the Initiating Order submitted 
for execution against an Agency Order in SPX options into an AIM 
Auction pursuant to Rule 5.37.\3\
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    \3\ See Securities Exchange Act Release No. 91116 (February 11, 
2021), 86 FR 10154 (February 18, 2021) (SR-Cboe-2020-050) Order 
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 
and 2, To Amend Rules 5.37 and 5.73 Related to the Solicitation of 
Market Makers for SPX Initiating Orders in the Automated Improvement 
Mechanism and FLEX Automated Improvement Mechanism.
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    The Exchange proposes to amend Options 3, Section 13(a)(8) to 
permit orders for the accounts of Market Makers with an appointment in 
XND to be solicited for the Initiating Order \4\ submitted for 
execution against a PIXL Order in XND options into a PIXL Auction 
pursuant to Options 3, Section 13. Today, Options 3, Section 13(a)(8) 
provides that, ``[a]n Initiating Order may not be a solicited order for 
the account of any Exchange Lead Market Maker, SQT, RSQT or non-
streaming Market Maker assigned in the affected series.'' No similar 
restriction applies to crossing transactions in open outcry trading, 
where XND options also trade. As further discussed below, brokers 
seeking liquidity to execute against Public Customer orders on the 
trading floor regularly solicit appointed XND Market Makers for this 
liquidity, as they are generally the primary source of pricing and 
liquidity for those options.
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    \4\ The ``Initiating Order'' is an order comprised of principal 
interest or a solicited order(s) submitted to trade against the 
order the submitting agency order on behalf of a Public Customer, 
broker-dealer, or any other entity or ``PIXL Order.'' See Phlx 
Options 3, Section 13.
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    The Exchange believes not permitting Market Makers appointed in XND 
to participate as contras in the PIXL Auction in XND makes it difficult 
for brokers to find sufficient liquidity to fill their customer orders. 
For example, if a Public Customer order is not fully executable against 
electronic bids and offers, a floor broker can attempt to execute the 
order, or remainder thereof, on the trading floor, where the liquidity 
to trade with this remainder is generally provided by Market Makers in 
the open outcry trading crowd. Additionally, brokers may solicit 
liquidity from upstairs Market Maker firms.
    The Exchange believes brokers will have difficulty finding 
sufficient liquidity to initiate PIXL Auctions from only market 
participants that are not Market-Makers appointed in XND, thereby 
denying smaller, retail-sized XND options price improvement benefits. 
The Exchange believes it is appropriate to permit orders for the 
account of appointed XND Market Makers, similar to Cboe's SPX, to be 
submitted as the contra order, as the Exchange believes the liquidity 
provided by XND Market Makers will need to be available for brokers to 
initiate PIXL Auctions in XND and create potential price improvement 
opportunities for those retail-sized orders. If XND Market Makers 
cannot be solicited for XND PIXL Auctions, the Exchange believes 
brokers may not be able to initiate as many XND PIXL Auctions for their 
retail orders, which may reduce the price improvement opportunities 
available for those orders. The Exchange notes that today, there are 
three electronic Market Maker firms with XND appointments.
    In multi-list classes, many Market Makers serve as both appointed 
Market Makers on the Exchange and as away market makers that are 
registered on other options exchanges. These firms, as a result, can 
use their accounts for their away market maker activities for being 
solicited with respect to PIXL Auctions. In general, solicited orders 
submitted as the Initiating Order for PIXL Auctions are almost always 
comprised of orders for the accounts of away market makers. However, 
XND is an exclusively listed class on the Exchange, so a firm cannot 
serve as an XND away market maker. Permitting orders for the account of 
an appointed XND Market Makers, similar to Cboe's SPX, to be submitted 
as the contra order will allow brokers to more efficiently locate 
liquidity to initiate PIXL Auctions to fill their Public Customer 
orders, particularly during times of volatility, which may create 
additional execution and price improvement opportunities for Public 
Customers at all times. The Exchange believes the proposed rule change 
will, therefore, provide retail-sized orders with similar price 
improvement opportunities with PIXL as is the case with the trading 
floor. Permitting XND Market Makers to serve as contra parties to 
crossing transactions submitted into a PIXL Auction will also further 
align PIXL Auctions with XND crossing executions that occur on the 
trading floor. XND Market Makers frequently serve as contra parties to 
crossing transactions on the trading floor.
Implementation
    The Exchange proposes to implement this rule change on or before Q2 
of 2025.

[[Page 88093]]

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\5\ in general, and furthers the objectives of Section 
6(b)(5) of the Act.\6\ Specifically, the Exchange believes the proposed 
rule change is consistent with the Section 6(b)(5) \7\ requirements 
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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    \5\ 15 U.S.C. 78f(b)
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes the proposed rule change will 
benefit investors. The proposed rule change will permit the primary XND 
liquidity providers on the Exchange to provide the liquidity necessary 
for brokers to initiate XND PIXL Auctions for their Public Customer 
orders. If brokers can solicit the primary liquidity providers in XND 
for PIXL Auctions the Exchange believes brokers will be able to more 
efficiently locate liquidity to fill their Public Customer orders, 
particularly during times of volatility. The Exchange believes the 
proposed rule change will, therefore, provide retail-sized orders with 
similar price improvement opportunities as on the trading floor. As a 
result, the Exchange believes the proposed rule change will permit 
sufficient liquidity to be available for PIXL Auctions, which may 
create additional execution and price improvement opportunities for 
Public Customers, including retail customers.
    The Exchange also believes the proposed rule change will promote 
just and equitable principles of trade and remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system because it will align the XND PIXL Auction process with the open 
outcry crossing process, and thus align the execution and price 
improvement opportunities available in both auctions by permitting the 
same participants to be solicited as contras in both types of auctions 
in XND. Currently, XND Market Makers may be solicited with respect to 
crossing transactions on the trading floor. However, pursuant to 
Options 3, Section 13 governing PIXL, XND Market Makers would not be 
able to be solicited to initiate PIXL Auctions. The Exchange believes 
there is no reason to restrict XND Market Makers' ability to provide 
liquidity into XND PIXL Auctions when they are able to similarly 
provide, and do provide, that liquidity for open outcry XND crossing 
transactions. Today, Cboe permits orders for the accounts of Market-
Makers with an appointment in SPX to be solicited for the Initiating 
Order submitted for execution against an Agency Order in SPX options 
into an AIM Auction pursuant to Cboe Rule 5.37.
    The Exchange believes the proposed rule change will promote 
competition in XND PIXL Auctions, including competition to initiate XND 
PIXL Auctions, which will remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors. As noted above, there are three 
electronic Market Maker firms with XND appointments. The Exchange 
believes the availability of this liquidity available to PIXL Orders 
will positively affect the experience for PIXL Orders and overall 
quality of the auctions. Furthermore, the Exchange believes increasing 
the number of market participants available to be solicited may 
increase competition to provide Initiating Orders, which may lead to a 
PIXL Auction being initiated at a better price. More market 
participants competing to provide Initiating Orders may lead to 
solicited parties providing more aggressive initial prices. The 
Exchange believes the ability of all market participants, including 
appointed Market Makers that did not submit an Initiating Order, to 
submit responses to a PIXL Auction will continue to provide competition 
for executions against Agency Orders. The Exchange does not believe the 
proposed rule change will adversely impact the quoting behavior of XND 
Market Makers.
    The Exchange believes any risk that appointed Market Makers may 
misuse the nonpublic information of an upcoming XND PIXL Auction is de 
minimis. Currently, that same risk is present for non-appointed Market 
Makers, but the Exchange has not observed any trends of solicited 
market participants separately submitting unrelated orders as a result 
of knowledge of impending PIXL Auctions in other classes. Phlx Options 
3, Section 13(d) prohibits a pattern or practice of submitting multiple 
orders in response to a PAN at a particular price point that exceeds, 
in the aggregate, the size of the PIXL Order, will be deemed conduct 
inconsistent with just and equitable principles of trade and a 
violation of General 9, Section 1(c). Further, Phlx General 9, Section 
21 requires members to establish, maintain, and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
material, nonpublic information by members and their associated 
persons.
    Finally, the Exchange believes the proposed rule change is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers because it will permit orders for accounts of 
appointed XND Market Makers to be solicited in the same manner as 
orders for the accounts of all other market participants in XND PIXL 
Auctions. Currently, all market participants other than appointed XND 
Market Makers would be able to be solicited as the contra and submit 
responses in PIXL Auctions, while appointed XND Market Makers would be 
restricted to only submitting responses. The Exchange believes that 
this proposal may increase execution and price improvement 
opportunities for Public Customers' XND orders, where the ability for 
away market makers to provide liquidity is limited.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    The Exchange does not believe the proposed rule change will impose 
any burden on intra-market competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because it will 
provide XND Market Makers with the same execution opportunities in PIXL 
Auctions that would be available to all other market participants. 
Additionally, the proposed rule change will align open outcry and 
electronic crossing auctions for XND and the execution and price 
improvement opportunities available in both auctions by permitting the 
same participants to be solicited as contras in both types of auctions 
across XND. As a result, the Exchange believes it is appropriate for 
the electronic crossing mechanism to more closely replicate the open 
outcry crossing process in XND in order to minimize any impact on the 
market for those options. Unlike in multi-list classes, Market Maker 
firms cannot serve as XND market makers at other options exchanges. The 
Exchange further believes the restriction of this change to XND will 
preserve certain aspects of market structure that are important to 
maintain Market Maker

[[Page 88094]]

incentives to provide electronic liquidity in XND options.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because it 
relates to orders in an exclusively listed class submitted into a PIXL 
Auction on the Exchange. Additionally, the Exchange notes that Cboe 
permits orders for the accounts of Market-Makers with an appointment in 
SPX to be solicited for the Initiating Order submitted for execution 
against an Agency Order in SPX options into an AIM Auction pursuant to 
Cboe Rule 5.37. The Exchange believes the proposed rule change may 
improve price competition for smaller-sized orders within PIXL Auctions 
for XND options, because the primary liquidity providers will be 
available for the solicitation necessary to initiate those auctions.

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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) by order approve 
or disapprove such 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 (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#b8cacdd4dd95dbd7d5d5ddd6cccbf8cbdddb96dfd7ce"><span class="__cf_email__" data-cfemail="3a484f565f17595557575f544e497a495f59145d554c">[email protected]</span></a>. Please include 
file number SR-Phlx-2024-54 on the subject line.

Paper Comments

    <bullet> 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-2024-54. 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 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. 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-2024-54 and should be 
submitted on or before November 27, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-25728 Filed 11-5-24; 8:45 am]
BILLING CODE 8011-01-P


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