62160 Federal Register / Vol. 75, No. 194 / Thursday, October 7, 2010 / Notices 

6 15 U.S.C. 78s(b)(1). [sic] 

7 15 U.S.C. 78f(b). 

8 15 U.S.C. 78f(b)(5). 

9 15 U.S.C. 78s(b)(3)(A). 

10 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– 

4(f)(6)(iii) requires a self-regulatory organization to 

provide the Commission with written notice of its 

intent to file the proposed rule change, along with 

a brief description and 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. C2 

has satisfied this requirement. 

11 17 CFR 240.19b–4(f)(6)(iii). 

12For 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). 

13 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

2. Statutory Basis 

The Exchange believes the proposed 

rule change is consistent with the 

Securities Exchange Act of 1934 (the 

‘‘Act’’) 6 and the rules and regulations 

thereunder and, in particular, the 

requirements of Section 6(b) of the Act.7

Specifically, the Exchange believes the 

proposed rule change is consistent with 

the Section 6(b)(5) 8 requirements that 

the rules of an exchange be designed to 

promote just and equitable principles of 

trade, to prevent fraudulent and 

manipulative acts, to remove 

impediments to and to perfect the 

mechanism for a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. Updating the C2 rules to 

keep them in line with those of CBOE 

provides for consistency in rules. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

C2 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 

The Exchange neither solicited nor 

received comments on the proposal. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Because the foregoing proposed rule 

change: (1) Does not significantly affect 

the protection of investors or the public 

interest; (2) does not impose any 

significant burden on competition; and 

(3) by its terms does not become 

operative for 30 days after the date of 

this filing, or such shorter time as the 

Commission may designate if consistent 

with the protection of investors and the 

public interest, the proposed rule 

change has become effective pursuant to 

Section 19(b)(3)(A) of the Act 9 and Rule 

19b–4(f)(6) thereunder.10

A proposed rule change filed under 

Rule 19b–4(f)(6) normally does not 

become operative for 30 days after the 

date of filing. However, Rule 19b– 

4(f)(6)(iii) permits the Commission to 

designate a shorter time if such action 

is consistent with the protection of 

investors and the public interest. The 

Exchange requests that the Commission 

waive the 30-day operative delay, as 

specified in Rule 19b–4(f)(6)(iii),11

which would make the rule change 

effective and operative upon filing. The 

Commission believes that waiving the 

30-day operative delay is consistent 

with the protection of investors and the 

public interest.12 The Commission notes 

the proposal is substantively identical to 

SRO rules that were approved by the 

Commission, and does not raise any 

new regulatory issues. For these 

reasons, the Commission designates the 

proposed rule change as operative upon 

filing. 

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. 

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 e-mail to 

rule-comments@sec.gov. Please include 

File Number SR–C2–2010–004 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities Exchange Commission, 100 F 

Street, NE., Washington, DC 20549– 

1090. 

All submissions should refer to File 

Number SR–C2–2010–004. This file 

number should be included on the 

subject line if e-mail 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 also 

will be available for inspection and 

copying at the principal office of the 

Exchange. 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 

available publicly. All submissions 

should refer to File Number SR–C2– 

2010–004 and should be submitted on 

or before October 28, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–25247 Filed 10–6–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63027; File No. SR–Phlx– 

2010–108] 

Self-Regulatory Organizations; 

NASDAQ OMX PHLX LLC; Order 

Granting Approval to a Proposed Rule 

Change Relating to a Proposed Price 

Improvement System, Price 

Improvement XL 

October 1, 2010. 

I. Introduction 

On July 30, 2010, NASDAQ OMX 

PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed 

with the Securities and Exchange 

Commission (the ‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a 

proposed rule change to establish Price 

Improvement XL (‘‘PIXL’’). The 

proposed rule change was published for 


jdjones on DSK8KYBLC1PROD with NOTICES
Federal Register / Vol. 75, No. 194 / Thursday, October 7, 2010 / Notices 62161 

3See Securities Exchange Act Release No. 62678 

(August 10, 2010), 75 FR 50021 (‘‘Notice’’). 

4For a more detailed discussion of the purpose 

of the proposal and examples, see Notice. 

5 In approving this proposal, the Commission has 

considered the proposed rule change’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

6 15 U.S.C. 78f. 

7 15 U.S.C. 78f(b)(5). 

8 In addition, the Notice contains an example that 

illustrates the application of these specific 

provisions. See Notice, supra note 3, at 75 FR 

50022. 

9The Boston Options Exchange (‘‘BOX’’), a trading 

facility of NASDAQ OMX BX, Inc., operates an 

auction known as the PIP, see Securities Exchange 

Act Release No. 49068 (January 13, 2004), 69 FR 

2775 (January 20, 2004) (Order approving SR–BSE– 

2002–15 to establish trading rules for the BOX 

facility (‘‘PIP Order’’)), the International Securities 

Exchange, LLC. (‘‘ISE’’) operates an auction known 

as the PIM, see Securities Exchange Act Release No. 

50819 (December 8, 2004), 69 FR 75093 (December 

15, 2004) (Order approving SR–ISE–2003–06 to 

adopt rules for the PIM (‘‘PIM Order’’)), and the 

Chicago Board Stock Exchange, Incorporated 

(‘‘CBOE’’) operates an auction known as the AIM, 

see Securities Exchange Act Release No. 53222 

(February 3, 2006), 71 FR 7089 (February 10, 2006) 

(Order approving SR–CBOE 2005–60 to adopt rules 

for the AIM (‘‘AIM Order’’)). The PIP and PIM also 

require a member to enter an order into the auction 

at a price that is at least equal to the NBBO. See 

BOX Rules, Chapter V, Section 18(e) and ISE Rule 

723(b)(1). The CBOE requires an agency order that 

is for 50 contracts or more to be entered into the 

AIM at a price that is the better of the NBBO or the 

agency order’s limit price, and an agency order that 

is less than 50 contracts at a price that is the better 

of the NBBO price improved by one minimum price 

improvement increment or the agency order’s limit 

price. See CBOE Rule 6.74A(a). 

comment in the Federal Register on 

August 16, 2010.3 The Commission 

received no comment letters on the 

proposal. This order approves the 

proposed rule change. 

II. Description of the Proposal 

In its filing, Phlx proposes to establish 

a price-improvement mechanism in 

which a member (an ‘‘Initiating 

Member’’) may electronically submit for 

execution an order it represents as agent 

on behalf of a public customer, brokerdealer, or any other entity (this initial 

order is referred to as the ‘‘PIXL Order’’) 

against principal interest or against any 

other order it represents as agent (this 

matching order is referred to as the 

‘‘Initiating Order’’) provided it submits 

the PIXL Order for electronic execution 

into the PIXL Auction (‘‘Auction’’) 

pursuant to the proposed Rule.4 In 

addition, Phlx proposes to provide for 

the automatic execution, under certain 

conditions, of a crossing transaction 

where there is a public customer order 

in the same options series on each side. 

III. Discussion and Commission 

Findings 

After careful review of the proposal, 

the Commission finds that the proposed 

rule change to establish rules for the 

implementation of the PIXL auction is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to a national 

securities exchange 5 and, in particular, 

the requirements of Section 6 of the 

Act.6 Specifically, as discussed further 

below, the Commission finds that the 

proposal is consistent with Section 

6(b)(5) of the Act,7 which requires, in 

part, 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, and 

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. 

Section 6(b)(5) of the Act also requires 

that the rules of an exchange not be 

designed to permit unfair 

discrimination among customers, 

issuers, brokers, or dealers. The 

Commission believes that approving the 

Exchange’s proposal to establish PIXL 

should increase competition among 

those options exchanges that offer 

similar functionality. For the reasons 

discussed below, the Commission finds 

that the Exchange’s proposal is 

consistent with the Act. 

A. Auction Eligibility 

Proposed Rule 1080(n)(i) describes 

the circumstances under which an 

Initiating Member may initiate a PIXL 

Auction. Notably, the proposal draws a 

distinction between orders for less than 

50 contracts and those for 50 contracts 

or more, and affords slightly different 

treatment based on that distinction. The 

specific treatment of public customer 

and non-public customer orders for 

above and below 50 contracts is 

described directly below.8

For public customer orders, if the 

PIXL Order is for 50 contracts or more, 

the Initiating Member must stop the 

entire PIXL Order at a price that is equal 

to or better than the National Best Bid/ 

Offer (‘‘NBBO’’) on the opposite side of 

the market from the PIXL Order, 

provided that such price must be at least 

one minimum price improvement 

increment (as determined by the 

Exchange but not smaller than one cent) 

better than any limit order on the limit 

order book on the same side of the 

market as the PIXL Order. If the PIXL 

Order is for a size of less than 50 

contracts, the Initiating Member must 

stop the entire PIXL Order at a price that 

is the better of: (i) The PBBO price on 

the opposite side of the market from the 

PIXL Order improved by at least one 

minimum price improvement 

increment, or (ii) the PIXL Order’s limit 

price (if the order is a limit order), 

provided in either case that such price 

is better than the NBBO, and at least one 

minimum price improvement increment 

better than any limit order on the book 

on the same side of the market as the 

PIXL Order. 

For non-public customer orders (i.e., 

where the order is for the account of a 

broker-dealer or any other person or 

entity that is not a public customer), if 

the order is for 50 contracts or more, the 

Initiating Member must stop the entire 

PIXL Order at a price that is the better 

of: (i) The PBBO price improved by at 

least one minimum price improvement 

increment on the same side of the 

market as the PIXL Order, or (ii) the 

PIXL Order’s limit price (if the order is 

a limit order), provided in either case 

that such price is at or better than the 

NBBO. If the PIXL Order is for less than 

50 contracts, the Initiating Member must 

stop the entire PIXL Order at a price that 

is the better of: (i) The PBBO price 

improved by at least one minimum 

price improvement increment on the 

same side of the market as the PIXL 

Order, or (ii) the PIXL Order’s limit 

price (if the order is a limit order), 

provided in either case that such price 

is at or better than the NBBO and at least 

one minimum improvement increment 

better than the PBBO on the opposite 

side of the market from the PIXL Order. 

The Commission finds that the 

Exchange’s proposed rule with respect 

to auction eligibility requirements for 

PIXL is consistent with the Act. The 

Commission notes that the PIXL Order 

will be guaranteed an execution price of 

at least the NBBO in all cases and will 

be given an opportunity for execution at 

a price better than the NBBO.9 Further, 

for public customer orders of less than 

50 contracts, the Commission notes that 

minimum stop price must be one 

minimum increment better than the 

NBBO. In addition, the proposal seeks 

to protect the priority of resting limit 

orders on the Exchange book. The 

Commission notes that proposed Rule 

1080(n)(i)(A)(2) and (n)(i)(B)(2), 

concerning orders that are submitted 

with a size of less than 50 contracts, will 

be effective on a pilot basis expiring 

August 31, 2011. The Exchange has 

agreed to provide the Commission with 

detailed information each month during 

the pilot period to assist the 

Commission, as well as the Exchange, in 


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10 ‘‘Trading interest’’ refers to unrelated orders 

received during the Auction, booked orders, and 

quotes that are considered for execution and 

allocation against the PIXL Order following the 

Auction. 

11See BOX Rules, Ch. V, Section 18(e), CBOE 

Rule 6.74A(b)(1)(A), and ISE Rule 716(d)(iii). 

12See BOX Rules, Ch. V, Section 18(e) and ISE 

Rule 716(d)(iii). 

13For a description of TOPO Plus Orders, see 

Securities Exchange Act Release No. 60877 (October 

26, 2009), 74 FR 56255 (October 30, 2009) (SR– 

Phlx–2009–92). See also Securities Exchange Act 

Release No. 62194 (May 28, 2010), 75 FR 31830 

(June 4, 2010) (SR–Phlx–2010–48) (Order approving 

market data fees for TOPO Plus Orders) (‘‘TOPO 

Plus Approval Order’’). Members who are 

‘‘Professional Subscribers’’ to the TOPO Plus Orders 

data feed are subject to lower fees than the ‘‘External 

Distributors’’ from whom they receive TOPO Plus 

Orders. 

14See TOPO Plus Approval Order, supra note 13 

(approving market data fees for TOPO Plus Orders 

as consistent with Sections 6(b)(4) and 6(b)(5) of the 

Act). 

15The PIP, AIM, and PIM also are one-second 

auctions. See BOX Rules, Chapter V, Section 

18(e)(i), CBOE Rule 6.74A(b)(1)(C), and ISE Rule 

723(c)(1). 

16CBOE’s AIM also provides that responses to the 

auction will not be visible to other participants and 

will not be disseminated to OPRA. See CBOE Rule 

6.74A(b)(1)(F). 

17See also CBOE Rule 6.74A(b)(1)(I). 

ascertaining the level of price 

improvement attained for smaller-sized 

orders during the pilot period. 

B. Initiating the Auction 

An Initiating Member may initiate a 

PIXL Auction by submitting a PIXL 

Order in one of three ways: (1) Single 

stop price, (2) auto-match price, or (3) 

not-worse-than price. 

Under the first option, the Initiating 

Member could submit a PIXL Order 

specifying a single ‘‘stop’’ price at which 

it seeks to execute the PIXL Order. 

Under the second option, an Initiating 

Member could submit a PIXL Order 

specifying that it is willing to 

automatically match (‘‘auto-match’’) as 

principal or as agent on behalf of an 

Initiating Order the price and size of all 

trading interest 10 and responses to the 

PIXL Auction Notification (‘‘PAN,’’ as 

described below), in which case the 

PIXL Order would be stopped at the 

NBBO on the Initiating Order side of the 

market (if 50 contracts or greater) or, if 

less than 50 contracts, the better of: (i) 

The PBBO price on the opposite side of 

the market from the PIXL Order 

improved by at least one minimum 

price improvement increment, or (ii) the 

PIXL Order’s limit price (if the order is 

a limit order), provided in either case 

that such price is at or better than the 

NBBO and at least one increment better 

than the limit of an order on the book 

on the same side as the PIXL Order. 

Under the third and final option, an 

Initiating Member could submit a PIXL 

Order specifying that it is willing to 

either: (i) Stop the entire order at a 

single stop price and auto-match PAN 

responses, as described below, together 

with trading interest, at a price or prices 

that improve the stop price to a 

specified price above or below which 

the Initiating Member will not trade (a 

‘‘Not Worse Than’’ or ‘‘NWT’’ price); (ii) 

stop the entire order at a single stop 

price and auto-match all PAN responses 

and trading interest at or better than the 

stop price; or (iii) stop the entire order 

at the NBBO on the Initiating Order side 

(if 50 contracts or greater) or the better 

of: (A) The PBBO price on the opposite 

side of the market from the PIXL Order 

improved by one minimum price 

improvement increment, or (B) the PIXL 

Order’s limit price (if the order is a limit 

order) on the Initiating Order side (if for 

less than 50 contracts), and auto-match 

PAN responses and trading interest at a 

price or prices that improve the stop 

price up to the NWT price. In all cases, 

if the PBBO on the same side of the 

market as the PIXL Order represents a 

limit order on the book, the stop price 

must be at least one minimum price 

improvement increment better than the 

booked limit order’s limit price. 

Once the Initiating Member has 

submitted a PIXL Order for processing, 

the PIXL Order may not be cancelled. 

The Initiating Member may improve the 

stop price or NWT price of its Initiating 

Order, however such price may be 

improved only to the benefit of the PIXL 

Order during the Auction, and the order 

may not be cancelled. 

The Commission notes that the 

proposed PIXL procedures regarding the 

submission of a PIXL Order using the 

auto-match and NWT prices are similar 

to the rules of the CBOE, BOX, and 

ISE.11 One notable difference is that the 

BOX and ISE Rules prohibit a member 

from cancelling or modifying the automatch price during the price 

improvement auction 12 whereas the 

Phlx proposal would allow a member to 

modify the stop or NWT price, but such 

price may only be improved to the 

benefit of the PIXL Order during the 

Auction and the order may not be 

cancelled after it is entered. The 

Commission notes that when the 

Initiating Member selects the automatch or NTW price prior to the start of 

the auction, competitive final pricing 

would be out of the Initiating Member’s 

control. The Commission believes that 

permitting the Initiating Member to 

improve the NWT price during the PIXL 

Auction could allow members to 

quickly react to an improving market 

and thereby provide additional 

opportunity for the member to offer 

price improvement to the PIXL Order. 

In addition, the Exchange has 

undertaken to provide the Commission 

with the following data on a monthly 

basis, which the Commission and the 

Exchange can use to evaluate the 

proposed auto-match functionality: the 

percentage of all Phlx trades effected 

through the PIXL Auction in which the 

Initiating Member has chosen the automatch feature, and the average amount 

of price improvement provided to the 

PIXL Order when the Initiating Member 

has chosen the auto-match feature 

versus the average amount of price 

improvement provided to the PIXL 

Order when the Initiating Member has 

chosen a stop price submission. 

C. PIXL Auction Notification (‘‘PAN’’) 

When the Exchange receives a PIXL 

Order for Auction processing, a PAN 

detailing the side, size, and the stop 

price of the PIXL Order will be sent over 

the Exchange’s TOPO Plus Orders data 

feed.13 An updated PAN message will 

be sent over the Exchange’s TOPO Plus 

Orders data feed when the Initiating 

Member improves the stop price of the 

PIXL Order. The updated PAN will 

include the side, size, and improved 

stop price of the PIXL Order. Messages 

concerning updates to the stop price by 

the Initiating Member would be used by 

PAN respondents to improve a 

previously-submitted price when they 

are alerted that a stop price has been 

improved. Any person or entity may 

submit PAN responses, provided such 

response is properly marked specifying 

price, size, and side of the market. The 

Commission believes that access to the 

PIXL auction for those who may wish to 

compete for a PIXL Order should be 

sufficient to provide opportunities for a 

meaningful, competitive auction.14

D. PIXL Auction 

A PIXL Auction would last for one 

second,15 unless it is concluded early as 

the result of any of the circumstances 

described below. PAN responses will 

not be visible to Auction participants, 

and will not be disseminated to the 

Options Price Reporting Authority 

(‘‘OPRA’’).16 A PAN response must be 

equal to or better than the NBBO at the 

time of receipt of the PAN response. A 

PAN response with a price that is 

outside the NBBO would be rejected. 

PAN responses may be modified or 

cancelled during the Auction.17 PAN 

responses on the same side of the 

market as the PIXL Order are considered 


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18The Exchange stated in its proposal that any 

PAN response on the same side of the market as the 

PIXL Order would be the result of an error, and 

therefore Phlx would reject such response. 

19A pattern or practice of submitting multiple 

orders in response to a PAN at a particular price 

point that exceed, 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 Phlx Rule 707. See Phlx Rule 

1080(n)(iv). 

20The Exchange’s surveillance plan and 

procedures are subject to inspection by the 

Commission, to ensure that the Exchange 

adequately monitors its market and its members, 

and enforces its rules and the federal securities 

laws, including the anti-fraud provisions. 

21Proposed Rules 1080(n)(ii)(F) through (H) 

address the handling of the PIXL Order and other 

orders, quotes and PAN responses when certain 

conditions are present. Specifically, if there are 

PAN responses that cross the then-existing NBBO 

(provided such NBBO is not crossed) at the time of 

the conclusion of the Auction, such PAN responses 

will be executed, if possible, at their limit price(s). 

If the final PIXL Auction price is the same as an 

order on the limit order book on the same side of 

the market as the PIXL Order, the PIXL Order may 

only be executed at a price that is at least one 

minimum price improvement increment better than 

the resting order’s limit price or, if such resting 

order’s limit price crosses the stop price, then the 

entire PIXL Order will trade at the stop price with 

all better priced interest being considered for 

execution at the stop price. 

22However, if only one specialist, SQT or RSQT 

matches the stop price, then the Initiating Member 

may be allocated up to 50% of the contracts 

executed at such price. This allocation is consistent 

with CBOE Rule 6.74A(b)(3)(F). 

23Under the proposed Rule, the specialist would 

not be entitled to receive orders for 5 contracts or 

fewer. 

invalid and will be rejected.18 Multiple 

PAN responses from the same member 

may be submitted during the Auction. 

Multiple orders at a particular price 

level submitted by a member in 

response to a PAN may not exceed, in 

the aggregate, the size of the PIXL 

Order.19

E. Conclusion of the PIXL Auction 

An Auction could conclude early any 

time: (i) The PBBO crosses the PIXL 

Order stop price on the same side of the 

market as the PIXL Order (since further 

price improvement will be unlikely and 

any responses offering improvement are 

likely to be cancelled), or (ii) there is a 

trading halt on the Exchange in the 

affected series. The proposed rules 

concerning the early conclusion of an 

Auction will be effective for a pilot 

period scheduled to expire August 31, 

2011. The Exchange has undertaken to 

provide the Commission with detailed 

information each month during the pilot 

period to assist the Commission, as well 

as the Exchange, in ascertaining the 

effect of early Auction conclusions 

during the pilot period. 

If the Auction concludes before the 

expiration of one second as the result of 

the PBBO crossing the stop price, the 

entire PIXL Order will be executed at 

the best response price(s) or, if the stop 

price is the best price in the Auction, at 

the stop price, unless the best response 

price is equal to the price of a limit 

order resting on the Phlx book on the 

same side of the market as the PIXL 

Order, in which case the PIXL Order 

will be executed against that response, 

but at a price that is at least one 

minimum price improvement increment 

better than the price of such limit order 

at the time of the conclusion of the 

Auction. The Commission notes that 

Phlx Rule 1080(n)(v) states that a 

pattern or practice of submitting 

unrelated orders or quotes that cross the 

stop price, causing a PIXL Auction to 

conclude before the end of the PIXL 

Auction period will be deemed conduct 

inconsistent with just and equitable 

principles of trade and a violation of 

Phlx Rule 707. 

If the Auction concludes early as the 

result of a trading halt on the Exchange 

in the affected series, the entire PIXL 

Order would execute against the 

Initiating Order at the stop price, since 

the Initiating Member had guaranteed 

that an execution would occur at the 

stop price (or better) prior to the 

initiation of the trading halt. 

An unrelated market or marketable 

limit order on the opposite side of the 

market from the PIXL Order received 

during the Auction will not cause the 

Auction to end early. Such order would 

execute against interest outside of the 

Auction. If contracts remain from such 

unrelated order at the time the Auction 

ends, however, they would participate 

in the PIXL order allocation process. 

This provision would be effective for a 

pilot period scheduled to expire on 

August 31, 2011. The Commission 

believes that allowing the PIXL auction 

to continue for the full auction period 

despite receipt of unrelated orders 

outside the Auction would allow the 

auction to run its full course and, in so 

doing, will provide a full opportunity 

for price improvement to the PIXL 

Order. Further, the unrelated order 

would be available to participate in the 

PIXL order allocation. 

The Commission believes that 

approval of these provisions on a pilot 

basis is appropriate and will afford both 

the Exchange and the Commission an 

opportunity to analyze the impact of 

early terminations and unrelated orders 

on the PIXL process, as well as the 

Exchange’s surveillance procedures 

with respect to PIXL.20 In particular, the 

Exchange has agreed to provide the 

Commission with data on a monthly 

basis to assist the Commission, and the 

Exchange, in evaluating the operation of 

the PIXL Auction and the provisions for 

early termination of an Auction. In 

addition, the Exchange has agreed to 

provide information on (1) the number 

of times an unrelated market or 

marketable limit order (against the 

PBBO) on the opposite side of the PIXL 

Order is received during the Auction 

Period and (2) the price(s) at which an 

unrelated market or marketable limit 

order (against the PBBO) on the 

opposite side of the PIXL Order that is 

received during the Auction Period is 

executed, compared to the execution 

price of the PIXL Order. The 

Commission expects to be able to use 

this information to consider the impact 

of the proposed rule on the PIXL Order 

as well as the unrelated order. 

F. Order Allocation 

At the conclusion of the Auction, the 

PIXL Order would be allocated at the 

best price(s), which may include nonAuction quotes and orders that may be 

present at each price level. Public 

customer orders would have priority at 

each price level, after which contracts 

would be allocated among all Exchange 

quotes, orders, and PAN responses.21

Any unexecuted PAN responses would 

be cancelled. 

1. Single Price Submission Option 

Under the single stop price option, 

allocations would be made first at prices 

that improve the stop price, and then at 

the stop price with up to 40% of the 

remaining contracts after public 

customer interest is satisfied being 

allocated to the Initiating Member at the 

stop price.22 Remaining contracts would 

be allocated among remaining quotes, 

orders, and PAN responses at the stop 

price, and then to the Initiating 

Member.23

2. Auto-Match Option 

Under the auto-match option, the 

Initiating Member would be allocated an 

equal number of contracts as the 

aggregate size of all other quotes, orders, 

and PAN responses at each price point 

until a price point is reached where the 

balance of the order can be fully 

executed, except that the Initiating 

Member would receive up to 40% of the 

contracts remaining at the final price 

point (including situations where the 

final price point is the stop price). 

3. Stop and NWT Option 

Under the NWT option, after public 

customer interest is satisfied, contracts 

would be allocated first to quotes, 

orders, and PAN responses at prices 


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24See PIP Order, supra note 9, at 2789–2790 and 

PIM Order, supra note 9, at 75097–75098. 

25See Securities Exchange Act Release No. 61802 

(March 30, 2010), 75 FR 17193 (April 5, 2010)(SR– 

Phlx–2010–05) (adopting the term ‘‘professional’’ as 

a 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)). 

26According to the Exchange, PIXL Orders are 

inherently all-or-none orders because the Initiating 

Member guarantees that the PIXL Order will be 

filled in its entirety. 

27See ISE Rule 723(d)(1). 28See CBOE Rule 6.74A.09. 

better than the NWT price (if any), 

beginning with the best price. Next, 

contracts would be allocated among 

quotes, orders, and PAN responses at 

prices equal to the Initiating Member’s 

NWT price and better than the Initiating 

Member’s stop price, beginning with the 

NWT price. The Initiating Member 

would receive an equal number of 

contracts as the aggregate size of all 

other quotes, orders, and PAN responses 

at each price point, except that the 

Initiating Member would be entitled to 

receive up to 40% of the contracts 

remaining at the final price point 

(including situations where the final 

price point is the stop price). 

The Commission believes that the 

proposed PIXL rules should promote 

price competition within a PIXL auction 

by providing Phlx members with a 

reasonable opportunity to compete for a 

significant percentage of the PIXL order 

and, therefore, should protect investors 

and the public interest. The 

Commission continues to believe that a 

40% allocation is consistent with the 

statutory standards for competition and 

free and open markets.24

G. Professionals 

Phlx Rule 1000(b)(14) defines the 

term ‘‘professional’’ and provides that 

professional orders will be treated in the 

same manner as orders for an off-floor 

broker-dealer for the purposes of certain 

rules.25 The definition provides an 

exception for professional all-or-none 

orders, which are treated like customer 

orders. Phlx proposes to amend this 

definition to provide that professional 

orders will be treated in the same 

manner as orders for an off-floor brokerdealers for the purposes of PIXL and to 

also provide that PIXL orders for the 

beneficial accounts of professionals 

with an all-or-none designation 26 will 

be treated in the same manner as offfloor broker-dealer orders (i.e., not 

treated like customer orders). The 

Commission notes that this is consistent 

with the ISE’s PIM, where ISE Priority 

Customer interest is executed in full 

before Professional Orders and market 

maker quotes.27

H. Crossing Public Customer Orders on 

PIXL 

Proposed Rule 1080(n)(v) addresses 

the situation where an Initiating 

Member holds public customer orders 

on both sides of the market in the same 

option series. Instead of initiating a 

PIXL Auction, an Initiating Member 

would be able to enter a PIXL Order for 

the account of a public customer paired 

with an order for the account of another 

public customer and such paired orders 

would be automatically executed 

without the need to commence a PIXL 

Auction. The execution price would be 

required to be expressed in the 

minimum quoting increment applicable 

to the series (e.g., a penny where the 

series trades in penny increments). An 

execution may not trade through the 

NBBO or at the same price as any 

resting customer order. The Commission 

believes that these specifications are 

designed to protect resting limit orders 

on the book, and would ensure that this 

mechanism could not be used to trade 

in increments that would not otherwise 

be available for trading outside the PIXL 

context. 

Phlx Rule 1080(c)(ii)(C) prevents an 

Order Entry Firm from executing agency 

orders to increase its economic gain 

from trading against the order without 

first giving other trading interests on the 

Exchange an opportunity to either trade 

with the agency order or to trade at the 

execution price when the member was 

already bidding or offering on the book. 

However, the Exchange recognizes that 

it may be possible for a firm to establish 

a relationship with a customer or other 

person to deny agency orders the 

opportunity to interact on the Exchange 

and to realize similar economic benefits 

as it would achieve by executing agency 

orders as principal. The proposed rule 

would provide that it would be a 

violation of Rule 1080(c)(ii)(C) for a firm 

to circumvent Rule 1080(c)(ii)(C) by 

providing an opportunity for (i) a 

customer affiliated with the firm, or (ii) 

a customer with whom the firm has an 

arrangement that allows the firm to 

realize similar economic benefits from 

the transaction as the firm would 

achieve by executing agency orders as 

principal, to regularly execute against 

agency orders handled by the firm 

immediately upon their entry as PIXL 

customer-to-customer immediate 

crosses. These provisions are 

substantially similar to those of CBOE.28

I. No Minimum Size Requirement for 

PIXL 

Like the BOX’s PIP auction, the ISE’s 

PIM auction, and the CBOE’s AIM 

auction, the PIXL auction would be 

available for orders of fewer than 50 

contracts. Under the Exchange’s 

proposal, there would be no minimum 

size requirement for orders entered into 

the PIXL for a pilot period expiring on 

August 31, 2011. 

The Commission believes that the 

Exchange’s proposal should provide 

small customer orders with the 

opportunity for price improvement in a 

manner that is consistent with the Act. 

The Commission will evaluate the PIXL 

auction during the Pilot Period to 

determine whether it would be 

beneficial to customers and to the 

options market as a whole to approve 

any proposal requesting permanent 

approval to permit orders of fewer than 

50 contracts to be submitted to the PIXL 

auction. In addition, the Commission 

will examine the data submitted by the 

Exchange with respect to situations in 

which the PIXL auction is terminated 

prematurely by an unrelated order. To 

aid the Commission in its evaluation, 

the Exchange represents that it will 

provide the following information each 

month: 

Regarding the early conclusion of an 

Auction due to the PBBO crossing the 

PIXL Order stop price on the same side 

of the market as the PIXL order, or due 

to a trading halt, the Exchange has 

undertaken to provide the following 

information on a monthly basis during 

the pilot period: 

(1) The number of times that the 

PBBO crossed the PIXL Order stop price 

on the same side of the market as the 

PIXL Order and prematurely ended the 

PIXL Auction, and at what time the 

PIXL Auction ended; 

(2) The number of times that a trading 

halt prematurely ended the PIXL 

auction and at what time the trading 

halt ended the PIXL Auction; 

(3) Of the Auctions terminated early 

due to the PBBO crossing the PIXL order 

stop price, the number that resulted in 

price improvement over the PIXL Order 

stop price, and the average amount of 

price improvement provided to the PIXL 

Order; 

(4) In the Auctions terminated early 

due to the PBBO crossing the PIXL order 

stop price, the percentage of contracts 

that received price improvement over 

the PIXL order stop price; 

(5) Of the Auctions terminated early 

due to a trading halt, the number that 

resulted in price improvement over the 

PIXL Order stop price, and the average 

amount of price improvement provided 

to the PIXL Order; 


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29 15 U.S.C. 78k(a)(1). 

30 17 CFR 240.11a2–2(T). 

(6) In the auctions terminated early 

due to a trading halt, the percentage of 

contracts that received price 

improvement over the PIXL order stop 

price; and 

(7) The average amount of price 

improvement provided to the PIXL 

Order when the PIXL Auction is not 

terminated early (i.e., runs the full one 

second). 

(8) The number of times an unrelated 

market or marketable limit order 

(against the PBBO) on the opposite side 

of the PIXL Order is received during the 

Auction Period; and 

(9) The price(s) at which an unrelated 

market or marketable limit order 

(against the PBBO) on the opposite side 

of the PIXL Order that is received 

during the Auction Period is executed, 

compared to the execution price of the 

PIXL Order. 

Regarding PIXL Orders of fewer than 

50 contracts, the Exchange has 

undertaken to provide the following 

information on a monthly basis during 

the pilot period: 

(1) The number of orders of fewer 

than 50 contracts entered into the PIXL 

Auction; 

(2) The percentage of all orders of 

fewer than 50 contracts sent to Phlx that 

are entered into the PIXL Auction; 

(3) The percentage of all Phlx trades 

represented by orders of fewer than 50 

contracts; 

(4) The percentage of all Phlx trades 

effected through the PIXL Auction 

represented by orders of fewer than 50 

contracts; 

(5) The percentage of all contracts 

traded on Phlx represented by orders of 

fewer than 50 contracts; 

(6) The percentage of all contracts 

effected through the PIXL Auction 

represented by orders of fewer than 50 

contracts; 

(7) The spread in the option, at the 

time an order of fewer than 50 contracts 

is submitted to the PIXL Auction; 

(8) The number of orders of 50 

contracts or greater entered into the 

PIXL Auction; 

(9) The percentage of all orders of 50 

contracts or greater sent to Phlx that are 

entered into the PIXL Auction; 

(10) The spread in the option, at the 

time an order of 50 contracts or greater 

is submitted to the PIXL Auction; 

(11) Of PIXL trades where the PIXL 

Order is for the account of a public 

customer, and is for a size of fewer than 

50 contracts, the percentage done at the 

NBBO plus $.01, plus $.02, plus $.03, 

etc.; 

(12) Of PIXL trades where the PIXL 

Order is for the account of a public 

customer, and is for a size of 50 

contracts or greater, the percentage done 

at the NBBO plus $.01, plus $.02, plus 

$.03, etc.; and 

(13) Of PIXL trades where the PIXL 

Order is for the account of a broker 

dealer or any other person or entity that 

is not a public customer, and is for a 

size of fewer than 50 contracts, the 

percentage done at the NBBO plus $.01, 

plus $.02, plus $.03, etc. 

(14) Of PIXL trades where the PIXL 

Order is for the account of a broker 

dealer or any other person or entity that 

is not a public customer, and is for a 

size of 50 contracts or greater, the 

percentage done at the NBBO plus $.01, 

plus $.02, plus $.03, etc.; and 

(15) The number of orders submitted 

by Initiating Members when the spread 

was $.05, $.10, $.15, etc. For each 

spread, specify the percentage of 

contracts in orders of fewer than 50 

contracts submitted to the PIXL Auction 

that were traded by: (a) The Initiating 

Member that submitted the order to the 

PIXL; (b) Phlx Market Makers assigned 

to the class; (c) other Phlx members; (d) 

Public Customer Orders; and (e) 

unrelated orders (orders in standard 

increments entered during the PIXL 

Auction). For each spread, also specify 

the percentage of contracts in orders of 

50 contracts or greater submitted to the 

PIXL Auction that were traded by: (a) 

the Initiating Member that submitted the 

order to the PIXL Auction; (b) Phlx 

market makers assigned to the class; (c) 

other Phlx members; (d) Public 

Customer Orders; and (e) unrelated 

orders (orders in standard increments 

entered during the PIXL Auction). 

Regarding PIXL auto-match, the 

Exchange has undertaken to provide the 

following information on a monthly 

basis during the pilot period: 

(1) The percentage of all Phlx trades 

effected through the PIXL Auction in 

which the Initiating Member has chosen 

the auto-match feature, and the average 

amount of price improvement provided 

to the PIXL Order when the Initiating 

Member has chosen the auto-match 

feature vs. the average amount of price 

improvement provided to the PIXL 

Order when the Initiating Member has 

chosen a stop price submission. 

Regarding competition, the Exchange 

has undertaken to provide the following 

information on a monthly basis during 

the pilot period: 

(1) For the first Wednesday of each 

month: (a) The total number of PIXL 

auctions on that date; (b) the number of 

PIXL auctions where the order 

submitted to the PIXL was fewer than 50 

contracts; (c) the number of PIXL 

auctions where the order submitted to 

the PIXL was 50 contracts or greater; (d) 

the number of PIXL auctions (for orders 

of fewer than 50 contracts) with 0 

participants (excluding the initiating 

participant), 1 participant (excluding 

the initiating participant), 2 participants 

(excluding the initiating participant), 3 

participants (excluding the initiating 

participant), 4 participants (excluding 

the initiating participant), etc., and (e) 

the number of PIXL auctions (for orders 

of 50 contracts or greater) with 0 

participants (excluding the initiating 

participant), 1 participant (excluding 

the initiating participant), 2 participants 

(excluding the initiating participant), 3 

participants (excluding the initiating 

participant), 4 participants (excluding 

the initiating participant), etc.; and 

(2) For the third Wednesday of each 

month: (a) The total number of PIXL 

auctions on that date; (b) the number of 

PIXL auctions where the order 

submitted to the PIXL was fewer than 50 

contracts; (c) the number of PIXL 

auctions where the order submitted to 

the PIXL was 50 contracts or greater; (d) 

the number of PIXL auctions (for orders 

of fewer than 50 contracts) with 0 

participants (excluding the initiating 

participant), 1 participant (excluding 

the initiating participant), 2 participants 

(excluding the initiating participant), 3 

participants (excluding the initiating 

participant), 4 participants (excluding 

the initiating participant), etc., and (e) 

the number of PIXL auctions (for orders 

of 50 contracts or greater) with 0 

participants (excluding the initiating 

participant), 1 participant (excluding 

the initiating participant), 2 participants 

(excluding the initiating participant), 3 

participants (excluding the initiating 

participant), 4 participants (excluding 

the initiating participant), etc. 

J. Section 11(a) of the Act 

Section 11(a)(1) of the Act 29 prohibits 

a member of a national securities 

exchange from effecting transactions on 

that exchange for its own account, the 

account of an associated person, or an 

account over which it or its associated 

person exercises discretion (collectively, 

‘‘covered accounts’’) unless an exception 

applies. Rule 11a2–2(T) under the Act,30

known as the ‘‘effect versus execute’’ 

rule, provides exchange members with 

an exemption from the Section 11(a)(1) 

prohibition. Rule 11a2–2(T) permits an 

exchange member, subject to certain 

conditions, to effect transactions for 

covered accounts by arranging for an 

unaffiliated member to execute 

transactions on the exchange. To 

comply with Rule 11a2–2(T)’s 

conditions, a member: (i) Must transmit 

the order from off the exchange floor; 

(ii) may not participate in the execution 


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31The member may, however, participate in 

clearing and settling the transaction. 

32See Letter from Richard S. Rudolph, Associate 

General Counsel, Phlx, to Elizabeth M. Murphy, 

Secretary, Commission, dated October 1, 2010 

(‘‘Phlx 11(a) Letter’’). 

33See, e.g., Securities Exchange Act Release Nos. 

61419 (January 26, 2010), 75 FR 5157 (February 1, 

2010) (SR–BATS–2009–031) (approving BATS 

options trading); 59154 (December 23, 2008), 73 FR 

80468 (December 31, 2008) (SR–BSE–2008–48) 

(approving equity securities listing and trading on 

BSE); 57478 (March 12, 2008), 73 FR 14521 (March 

18, 2008) (SR–NASDAQ–2007–004 and SR– 

NASDAQ–2007–080) (approving NOM options 

trading); 53128 (January 13, 2006), 71 FR 3550 

(January 23, 2006) (File No. 10–131) (approving The 

Nasdaq Stock Market LLC); 44983 (October 25, 

2001), 66 FR 55225 (November 1, 2001) (SR–PCX– 

00–25) (approving Archipelago Exchange); 29237 

(May 24, 1991), 56 FR 24853 (May 31, 1991) (SR– 

NYSE–90–52 and SR–NYSE–90–53) (approving 

NYSE’s Off-Hours Trading Facility); and 15533 

(January 29, 1979), 44 FR 6084 (January 31, 1979) 

(‘‘1979 Release’’). 

34An SQT is an Exchange Registered Options 

Trader (‘‘ROT’’) who has received permission from 

the Exchange to generate and submit option 

quotations electronically through AUTOM in 

eligible 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. See Exchange Rule 1014(b)(ii)(A). 

35See Phlx 11(a) Letter, supra note 32, at note 21 

and accompanying text. Also, the Exchange 

represented that SQTs and RSQTs are market 

makers on the Exchange. See Phlx 11(a) Letter, 

supra note 32. 

36See 15 U.S.C. Section 78k(a)(1)(A); 17 CFR 

240.11a2–2(T)(a)(1). According to the Exchange, 

there are no other on-floor members, other than 

Exchange specialists and SQTs, who have the 

ability to submit orders into the Auction. 

37See Phlx 11(a) Letter, supra note 32, at note 18 

and accompanying text. An RSQT is an ROT that 

is a member or member organization with no 

physical trading floor presence and who has 

received permission from the Exchange to generate 

and submit option quotations electronically through 

AUTOM in eligible options to which such RSQT 

has been assigned. An RSQT may only submit such 

quotations electronically from off the floor of the 

Exchange. See Exchange Rule 1014(b)(ii)(B). 

The Commission notes that, while RSQTs may 

only submit orders into the Auction from off the 

Exchange floor, RSQTs also would be subject to the 

‘‘market maker’’ exception to Section 11(a) of the 

Act and Rule 11a2–2(T)(a)(1) thereunder. 

38The Exchange represented that because FBMS 

does not have the coding required to enter orders 

into the Auction, and, as a result, it is impossible 

for such Floor Brokers to submit orders into the 

Auction. See Phlx 11(a) Letter, supra note 32, at 

note 20 and accompanying text. 

39See Phlx 11(a) Letter, supra note 32. 

40See id. A member may cancel or modify the 

order, or modify the instruction for executing the 

order, but only from off the floor. The Commission 

has stated that the non-participation requirement is 

satisfied under such circumstances, so long as such 

modifications or cancellations are also transmitted 

from off the floor. See Securities Exchange Act 

Release No. 14713 (April 27, 1978), 43 FR 18557 

(May 1, 1978) (‘‘1978 Release’’) (stating that the 

‘‘non-participation requirement does not prevent 

initiating members from canceling or modifying 

orders (or the instructions pursuant to which the 

initiating member wishes orders to be executed) 

after the orders have been transmitted to the 

executing member, provided that any such 

instructions are also transmitted from off the floor’’). 

41 In considering the operation of automated 

execution systems operated by an exchange, the 

Commission noted that, while there is not an 

independent executing exchange member, the 

execution of an order is automatic once it has been 

transmitted into the system. Because the design of 

these systems ensures that members do not possess 

any special or unique trading advantages in 

handling their orders after transmitting them to the 

exchange, the Commission has stated that 

executions obtained through these systems satisfy 

the independent execution requirement of Rule 

11a2–2(T). See 1979 Release, supra note 33. 

42See Phlx 11(a) Letter, supra note 32. 

43See 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, 

Rule 11a2–2(T)(d) requires a member or associated 

person authorized by written contract to retain 

compensation, in connection with effecting 

transactions for covered accounts over which such 

member or associated persons thereof exercises 

investment discretion, to furnish at least annually 

to the person authorized to transact business for the 

account a statement setting forth the total amount 

of compensation retained by the member in 

connection with effecting transactions for the 

account during the period covered by the statement. 

See 17 CFR 240.11a2–2(T)(d). See also 1978 

Release, supra note 40 (stating ‘‘[t]he contractual 

and disclosure requirements are designed to assure 

that accounts electing to permit transaction-related 

compensation do so only after deciding that such 

arrangements are suitable to their interests’’). 

of the transaction once it has been 

transmitted to the member performing 

the execution; 31 (iii) may not be 

affiliated with the executing member; 

and (iv) with respect to an account over 

which the member has investment 

discretion, neither the member nor its 

associated person may retain any 

compensation in connection with 

effecting the transaction except as 

provided in the Rule. 

In a letter to the Commission, the 

Exchange requests that the Commission 

concur with Phlx’s conclusion that 

members who enter orders into the 

Auction satisfy the requirements of Rule 

11a2–2(T).32 For the reasons set forth 

below, the Commission believes that 

Exchange members entering orders into 

the Auction would satisfy the 

conditions of the Rule. 

The Rule’s first condition is that 

orders for covered accounts be 

transmitted from off the exchange floor. 

In the context of automated trading 

systems, the Commission has found that 

the off-floor transmission requirement is 

met if a covered account order is 

transmitted from a remote location 

directly to an exchange’s floor by 

electronic means.33 Phlx has 

represented that only specialists and onfloor Streaming Quote Traders 

(‘‘SQTs’’) 34 have the ability to submit 

orders into the Auction from on the 

floor of the Exchange.35 These members, 

however, would be subject to the 

‘‘market maker’’ exception to Section 

11(a) of the Act and Rule 11a2– 

2(T)(a)(1) thereunder.36 Remote 

Streaming Quote Traders (‘‘RSQTs’’) may 

only submit orders into the Auction 

from off the floor of the Exchange.37

Phlx has also represented that, while 

Floor Brokers have the ability to submit 

orders they represent as agent to the 

electronic limit order book through the 

Exchange’s Options Floor Broker 

Management System (‘‘FBMS’’), there is 

no mechanism by which such Floor 

Brokers can directly submit orders to 

the Auction or send orders to off-floor 

broker-dealers through FBMS for 

indirect submission into the Auction.38

Because no Exchange members, other 

than specialists and SQTs, may submit 

orders into the Auction from on the 

floor of the Exchange, the Commission 

believes that PIXL satisfies the off-floor 

transmission requirement. 

Second, the Rule requires that the 

member not participate in the execution 

of its order. Phlx has represented that at 

no time following the submission of an 

order is a member organization able to 

acquire control or influence over the 

result or timing of an order’s 

execution.39 According to the Exchange, 

the execution of a member’s order is 

determined by what other orders are 

present in the Auction and the priority 

of those orders.40 Accordingly, the 

Commission believes that a member 

does not participate in the execution of 

an order submitted to the Auction. 

Third, Rule 11a2–2(T) requires that 

the order be executed by an exchange 

member who is unaffiliated with the 

member initiating the order. The 

Commission has stated that this 

requirement is satisfied when 

automated systems, such as PIXL, are 

used, as long as the design of these 

systems ensures that members do not 

possess any special or unique trading 

advantages in handling their orders after 

transmitting them to the exchange.41

Phlx has represented that the design of 

the Auction ensures that no member 

organization has any special or unique 

trading advantage in the handling of its 

orders after transmitting its orders to the 

Auction.42 Based on the Exchange’s 

representation, the Commission believes 

that PIXL satisfies this requirement. 

Fourth, in the case of a transaction 

effected for an account with respect to 

which the initiating member or an 

associated person thereof exercises 

investment discretion, neither the 

initiating member nor any associated 

person thereof may retain any 

compensation in connection with 

effecting the transaction, unless the 

person authorized to transact business 

for the account has expressly provided 

otherwise by written contract referring 

to Section 11(a) of the Act and Rule 

11a2–2(T) thereunder.43 Phlx represents 

that member organizations relying on 

Rule 11a2–2(T) for transactions effected 


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44See Phlx 11(a) Letter, supra note 32. 

45 15 U.S.C. 78f(b)(5). In connection with the 

issuance of this approval order, neither the 

Commission nor its staff is granting any exemptive 

or no-action relief from the requirements of Rule 

10b–0 under the Act. 17 CFR 240.10b–10. 

Accordingly, a broker-dealer executing a customer 

order through the PIXL auction will need to comply 

with all applicable requirements of that Rule. 

46 15 U.S.C. 78s(b)(2). 

47 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release Nos. 

55871(June 6, 2007), 72 FR 32372 (June 12, 2007) 

(SR–CBOE–2006–84); 56275 (August 17, 2007), 72 

FR 47097 (August 22, 2007). 

4See Securities Exchange Act Release No. 56380 

(September 10, 2007), 72 FR 52948 (September 17, 

2007) (SR–CBOE–2007–105) (immediately effective 

filing pertaining to contract multiplier for Credit 

Default Options). 

5The Exchange may vary the particular contract 

multiplier on a class-by-class basis within a range 

of 1 to 1,000. See 29.1(a). 6See Rule 29.1(a)(i). 7The Exchange notes that with a fixed exercise 

settlement value of $100, any quote above $100 

(e.g., $150) would not make economic sense since 

it would represent a premium cost ($150 × 1,000 = 

$150,000) that exceeds than [sic] the exercise 

settlement amount of the contract ($100 × 1,000 = 

$100,000). 

through PIXL must comply with this 

condition of the Rule.44

IV. Conclusion 

For the foregoing reasons, the 

Commission finds that the proposed 

rule change, as amended, is consistent 

with the Act and the rules and 

regulations thereunder applicable to a 

national securities exchange, and, in 

particular, with Section 6(b)(5) of the 

Act.45

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,46 that the 

proposed rule change (SR–Phlx–2010– 

108) is approved, except that (1) 

paragraphs (n)(i)(A)(2), (n)(i)(B)(2), 

(n)(ii)(B)(4), and (n)(ii)(D) of Phlx Rule 

1080 are approved on a pilot basis until 

August 31, 2011; and (2) there shall be 

no minimum size requirement for orders 

entered into the PIXL for a pilot period 

expiring on August 31, 2011. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.47

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–25252 Filed 10–6–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63026; File No. SR–CBOE– 

2010–046] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing of a 

Proposed Rule Change To Amend 

Certain Rules Pertaining to Credit 

Options 

October 1, 2010. 

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 

September 20, 2010, the Chicago Board 

Options Exchange, Incorporated 

(‘‘CBOE’’ or the ‘‘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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

CBOE proposes to amend certain rules 

pertaining to Credit Options. The text of 

the rule proposal is available on the 

Exchange’s Web site (http:// 

www.cboe.org/legal), at the Exchange’s 

principal office, 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 

self-regulatory organization 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 those 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 Exchange received approval to 

list and trade Credit Default Options 

and Credit Default Basket Options 

(collectively ‘‘Credit Options’’) in 2007, 

and is planning to re-launch these 

products.3 In connection with the 

Exchange’s planned re-launching of 

Credit Options, the Exchange will be 

introducing contracts that have a payout 

that is less than $100,000.4 In addition, 

the Exchange would like to: (1) Change 

the quoting convention for Credit 

Default Options, (2) change the 

minimum price variation for Credit 

Option, and (3) designate a single 

applicable Credit Event for Credit 

Options. 

Quoting Convention and Minimum 

Price Variation Changes 

When CBOE launched Credit Default 

Options, the Exchange designated the 

cash settlement amount to be $100,000, 

which was equal to an exercise 

settlement value of $100 multiplied by 

a contract multiplier of 1,000 (which 

was specified by the Exchange at 

listing).5 Because the exercise 

settlement value is currently fixed by 

rule at $100,6 bids and offers for 

contracts are expressed in amounts 

ranging from $0 (no bid) to $100. The 

range of bids and offers is not hard 

coded into CBOE’s rules and is a 

function of pricing options that have a 

fixed payout.7 To arrive at the total 

amount a bid or offer represents per 

contract, the bid or offer is multiplied 

by the contract multiplier. For example, 

if a Credit Default Option has a cash 

settlement amount of $100,000 ($100 × 

1,000), bids of $0.05, $45.15 and $67.50 

equate to premium amounts of $50, 

$45,150 and $67,500, respectively. 

CBOE proposes to change the quoting 

conventions for Credit Default Options 

by permitting the exercise settlement 

value to be an amount determined by 

the Exchange on a class-by-class basis 

and that would be equal to $1 or $100, 

or a value between those values. By 

permitting the Exchange to vary the 

exercise settlement value, the range of 

bids and offers would vary in tandem. 

For example, if the Exchange sets the 

exercise settlement value at $10, bids 

and offers for that contract would range 

from $0 (no bid) to $10, and the total 

premium amount would be determined 

by multiplying the bid or offer by the 

contract multiplier. 

In addition, by permitting the 

Exchange to set the exercise settlement 

value on a class-by-class basis, the 

Exchange would be able to list a 

contract having a cash settlement 

amount that could be arrived at in 

different ways. For example, for a Credit 

Default Option with a cash settlement 

amount of $1,000, the Exchange could: 

(1) Set the exercise settlement value at 

$1 with a contract multiplier of $1,000, 

(2) set the exercise settlement value at 

$10 with a contract multiplier of 100, (3) 

set the exercise settlement value at $100 

with a contract multiplier of 10, or (4) 

set the exercise settlement value at 

$1,000 with a contract multiplier of 1. 

The Exchange notes that it will not list 

more than one Credit Default Option 

contract with a cash settlement amount 


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