Document ID: SEC-2018-0147-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2018-01-26T05:00Z

[Federal Register Volume 83, Number 18 (Friday, January 26, 2018)]
[Notices]
[Pages 3839-3841]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01365]

[[Page 3839]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82550; File No. SR-Phlx-2018-03]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Add a New Rule 
3215 and Commentary Thereto To Codify PSX Participant Risk Settings in 
PSX and To Authorize the Exchange To Share Those Settings With the 
Clearing Member That Clears Transactions on Behalf of the PSX 
Participant

January 19, 2018.
    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 January 16, 2018, Nasdaq PHLX LLC (``Phlx'' or ``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.
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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 add a new Rule 3215 and commentary thereto 
to codify PSX Participant risk settings in PSX and to authorize the 
Exchange to share those settings with the clearing member that clears 
transactions on behalf of the PSX Participant.
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; deleted text is in brackets.
* * * * *

Nasdaq PHLX Rules

Rules of the Exchange

* * * * *

Nasdaq PSX

* * * * *

[Rule 3215. Reserved.]

Rule 3215. Exchange Sharing of PSX Participant Risk Settings

    The Exchange may share any PSX Participant risk settings in the 
trading system specified in the commentary below with the clearing 
member that clears transactions on behalf of the PSX Participant. For 
purposes of this Rule, the term ``PSX Participant'' has the meaning set 
forth in Rule 3301(c).

Commentary

    The Exchange offers certain risk settings applicable to a PSX 
Participant's activities on the Exchange. The risk settings currently 
offered by the Exchange are:
    (a) Share Size Control--When enabled by a PSX Participant, this 
optional control will allow a PSX Participant to limit the number of 
shares that the PSX Participant may associate with an order placed on 
the Exchange;
    (b) ISO Control--When enabled by a PSX Participant, this optional 
control will prevent a PSX Participant from entering an ISO order onto 
the Exchange;
    (c) Cancel-on-Disconnect Control--When enabled by a PSX 
Participant, this optional control will allow a PSX Participant, when 
it experiences a disruption in its connection to the Exchange, to 
immediately cancel all pending Exchange orders except for Good-Till-
Canceled orders (RASH & FIX only);
    (d) The Phlx Kill Switch--This control is described in Rule 3316;
    (e) Limit Order Protection--This control is described in Rule 
3307(f);
    (f) Price Collar Check--This control will automatically restrict a 
routed order from executing at a price that differs from the NBBO (at 
the time of order entry) by more than five percent or $0.25, whichever 
difference is greater. The system will proceed to route an order unless 
and until it crosses the greater of these two price collars, and if it 
does so, then the system will block further routings of the order that 
fall outside of the collars. For example, if the NBBO is $99 x $100 at 
the time of entry of a buy order, then the system will route the order 
at prices at or below $105, but will stop doing so if the offer price 
rises above $105 (five percent of the NBO);
    (g) Maximum Order Volume Check--This control will automatically 
reject an order for routing away that exceeds a maximum volume of 
shares. As applied to equity orders, the default maximum order volume 
is set at 25,000 shares, but the PSX Participant may request that the 
Exchange set a higher default based on historic volume;
    (h) Cumulative Order Volume Check--This control will automatically 
block an attempt by a PSX Participant using a particular MPID to route 
orders away to buy or sell equity securities that, cumulatively, exceed 
9.5 million shares during a five second time period; and
    (i) Duplication Control--This control will automatically reject an 
order that a PSX Participant submits to the Exchange to the extent that 
it is duplicative of another order that the PSX Participant submitted 
to the Exchange during the prior five seconds.
* * * * *

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 adopt the proposed commentary to Rule 
3215, which codifies a comprehensive list of PSX Participant risk 
settings in the Exchange's trading system. The Exchange also proposes 
to adopt new Rule 3215 to authorize the Exchange to share these risk 
settings with the clearing member that clears transactions on behalf of 
the PSX Participant. For purposes of Rule 3215, the term ``PSX 
Participant'' has the meaning set forth in Rule 3301(c).\3\
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    \3\ Rule 3301(c) defines a ``PSX Participant'' as an entity that 
fulfills the obligations contained in Rule 3211 regarding 
participation in the System, and includes Equities ECNs, PSX Market 
Makers, and Order Entry Firms.
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    PSX Participants are required to be members of the Exchange. Rule 
3218 states that ``all transactions through the facilities of PSX shall 
be cleared and settled through a registered clearing agency using a 
continuous net settlement system.'' It further provides that this 
requirement may be satisfied by ``direct participation, use of direct 
clearing services, by entry into a correspondent clearing arrangement 
with another member organization that clears trades through such a 
clearing agency. . ..'' Further, pursuant to Rule 3227, every clearing 
member acting on a PSX Participant's behalf that constitutes a side of 
a system trade is responsible for honoring such trades of that PSX 
Participant.
    All PSX Participants that are not clearing members require a 
clearing

[[Page 3840]]

member's consent to clear transactions on their behalf in order to 
conduct business on the Exchange. Each PSX Participant that transacts 
through a clearing member on the Exchange must have an arrangement 
between the PSX Participant and the clearing member. The Exchange is 
provided notice of which clearing members have relationships with which 
PSX Participants. The clearing member that guarantees the PSX 
Participant's transactions on the Exchange has a financial interest in 
understanding the risk tolerance of the PSX Participant. The proposal 
would provide the Exchange with authority to directly provide clearing 
members with information that may otherwise be available to such 
clearing members by virtue of their relationship with the respective 
PSX Participants.
    The proposed commentary to Rule 3215 would codify a list of risk 
settings that are currently offered by the Exchange and would be 
covered by proposed Rule 3215. This list is comprehensive with respect 
to the risk settings that the Exchange presently offers. Certain of 
these risk settings are mandatory for PSX Participants, meaning that 
the Exchange either imposes specific risk tolerances that are uniform 
for all PSX Participants or it sets default risk tolerances, but it 
affords flexibility to PSX Participants to select their own risk 
tolerance levels. In certain instances, the Exchange does not require 
PSX Participants to utilize risk settings, but instead makes them 
available for use at the option of PSX Participants. The risk settings 
set forth in the proposed commentary to Rule 3215 comprise the 
following:
     Share Size Control--When enabled by a PSX Participant, 
this optional control will allow a PSX Participant to limit the number 
of shares that the PSX Participant may associate with an order placed 
on the Exchange;
     ISO Control--When enabled by a PSX Participant, this 
optional control will prevent a PSX Participant from entering an ISO 
order onto the Exchange;
     Cancel-on-Disconnect Control--When enabled by a PSX 
Participant, this optional control will allow a PSX Participant, when 
it experiences a disruption in its connection to the Exchange, to 
immediately cancel all pending Exchange orders except for Good-Till-
Canceled orders (RASH & FIX only);
     The Phlx Kill Switch--This control is described in Rule 
3316;
     Limit Order Protection--This control is described in Rule 
3307(f);
     Price Collar Check--This control will automatically 
restrict a routed order from executing at a price that differs from the 
NBBO (at the time of order entry) by more than five percent or $0.25, 
whichever difference is greater. The system will proceed to route an 
order unless and until it crosses the greater of these two price 
collars, and if it does so, then the system will block further routings 
of the order that fall outside of the collars. For example, if the NBBO 
is $99 x $100 at the time of entry of a buy order, then the system will 
route the order at prices at or below $105, but will stop doing so if 
the offer price rises above $105 (five percent of the NBO).
     Maximum Order Volume Check--This control will 
automatically reject an order for routing away that exceeds a maximum 
volume of shares. As applied to equity orders, the default maximum 
order volume is set at 25,000 shares, but the PSX Participant may 
request that the Exchange set a higher default based on historic 
volume.
     Cumulative Order Volume Check--This control will 
automatically block an attempt by a PSX Participant using a particular 
MPID to route orders away to buy or sell equity securities that, 
cumulatively, exceed 9.5 million shares during a five second time 
period; and
     Duplication Control--This control will automatically 
reject an order that a PSX Participant submits to the Exchange to the 
extent that it is duplicative of another order that the PSX Participant 
submitted to the Exchange during the prior five seconds.
    As set forth above, the proposal to authorize the Exchange to share 
any of the PSX Participant's risk settings with the clearing member 
that clears transactions on behalf of the PSX Participant would be 
limited to the risk settings specified in the proposed commentary. The 
Exchange notes that use by a PSX Participant of the risk settings 
offered by the Exchange is optional for share size, ISO, kill switch, 
and cancel-on disconnect controls, and is required in other 
instances.\4\ By using the optional risk settings, following this 
proposed Rule change a PSX Participant therefore also opts-in to the 
Exchange sharing its risk settings with its clearing member. The 
Exchange notes that any PSX Participant that does not wish to share its 
mandatory risk settings with its clearing member could avoid sharing 
such settings by becoming a clearing member.
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    \4\ As noted above, for the Maximum Order Volume Check, the 
Exchange sets a default order volume but PSX Participants have 
flexibility to adjust this level.
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    To the extent that a clearing member might reasonably require a PSX 
Participant to provide access to its risk settings as a prerequisite to 
continuing to clear trades on the PSX Participant's behalf, the 
Exchange's proposal to share those risk settings directly reduces the 
administrative burden on PSX Participants and ensures that clearing 
members are receiving information that is up-to-date and conforms to 
the settings active in the Exchange's trading system. Further, the 
Exchange believes that the proposal will help such clearing members to 
better monitor and manage the potential risks that they assume when 
clearing for PSX Participants of the Exchange.
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\ in particular, in that it is designed 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).
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    The proposed rule change will allow the Exchange to directly 
provide a PSX Participant's risk settings to the clearing member that 
clears trades on behalf of the PSX Participant. A clearing member 
guarantees transactions executed on PSX for members with whom it has 
entered into a clearing arrangement, and therefore bears the risk 
associated with those transactions. The Exchange believes that it is 
appropriate for the clearing member to have knowledge of what risk 
settings the PSX Participant may utilize within the Exchange's trading 
system. The proposal will permit clearing members who have a financial 
interest in the risk settings of PSX Participants with whom the PSX 
Participants have entered into clearing arrangements to better monitor 
and manage the potential risks assumed by clearing members, thereby 
providing clearing members with greater control and flexibility over 
setting their own risk tolerance and exposure and aiding clearing 
members in complying with the Act. To the extent a clearing member 
might reasonably require a PSX

[[Page 3841]]

Participant to provide access to its risk settings as a prerequisite to 
continuing to clear trades on the PSX Participant's behalf, the 
Exchange's proposal to share those risk settings directly reduces the 
administrative burden on PSX Participants and ensures that clearing 
members are receiving information that is up-to-date and conforms to 
the settings active in the Exchange's trading system. Moreover, the 
proposal will foster cooperation and coordination with persons engaged 
in facilitating transactions in securities and more generally, will 
protect investors and the public interest, by reducing administrative 
burden on both clearing members and other PSX Participants and by 
allowing clearing members to better monitor their risk exposure.
    The Exchange further believes that codifying the risk settings 
described above in the proposed commentary is consistent with the Act. 
These settings assist PSX Participants in managing and controlling the 
risks associated with their access to and activity on the Exchange, 
both for the benefit of PSX Participants and investors. The Exchange's 
risk settings, moreover, are consistent with risk settings employed by 
other exchanges, such as Cboe BYX. Although the Exchange presently 
offers these risk settings, codifying them will provide additional 
transparency to PSX Participants regarding the risk settings offered by 
the Exchange. It will also foster cooperation and coordination with 
persons engaged in facilitating transactions in securities and more 
generally, will protect investors and the public interest, by providing 
additional transparency regarding risk settings offered by the 
Exchange.

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, as amended. The proposed 
rule change is not designed to address any competitive issues and does 
not pose an undue burden on non-clearing members because, unlike 
clearing members, non-clearing members do not guarantee the execution 
of a Participant's transactions on the Exchange. Moreover, the proposal 
to share risk settings with clearing members will not burden 
competition among clearing members because it will apply to all 
clearing members equally and regardless of size. The Exchange notes 
that this proposal will not affect competition among PSX Participants 
because the proposal provides for sharing of all of PSX Participants' 
risk settings set forth in the commentary to Rule 3215. Any PSX 
Participant that does not wish to share its risk settings with its 
clearing member could avoid sharing such settings by becoming a 
clearing member. Lastly, the proposal to codify the Exchange's risk 
settings will not burden competition among PSX Participants because the 
risk settings are already available to or required of PSX Participants 
and will continue to be available or required of all PSX Participants 
going forward.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \7\ and Rule 19b-
4(f)(6) thereunder.\8\
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
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. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2018-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2018-03. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2018-03 and should be submitted on 
or before February 16, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01365 Filed 1-25-18; 8:45 am]
 BILLING CODE 8011-01-P