Document ID: SEC-2016-1821-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-10-12T04:00Z

[Federal Register Volume 81, Number 197 (Wednesday, October 12, 2016)]
[Notices]
[Pages 70447-70449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24572]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79047; File No. SR-Phlx-2016-96]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Options 
Floor Procedure Advice F-1, Entitled ``Use of Identification Letters 
and Numbers.''

October 5, 2016.
    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 23, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III, below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Options Floor Procedure Advice F-1, 
entitled ``Use of Identification Letters and Numbers.''
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/, 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 Floor Procedure Advice 
(``OFPA'') F-1, entitled ``Use of Identification Letters and Numbers'' 
to eliminate the current fine schedule. Pursuant to this OFPA F-1, 
today, all Specialists, ROTs, and Floor Brokers must use the complete 
alpha/numeric identification assigned by the Exchange. Specifically, 
all Floor Brokers or their employees must indicate their complete 
alpha/numeric identifiers on the Options Floor Broker Management System 
(``FBMS'') for each order they receive and represent in the trading 
crowd. The FMBS system is automated and requires this field to be 
completed before the transaction may be submitted. These numbers are 
important because they represent the parties to the particular 
transaction for purposes of audit trail, clearance and settlement of 
that transaction. This information is submitted to The Options Clearing 
Corporation at the end of the day to complete the back-office portion 
of the transaction. The information is available to and reviewed by 
both parties to the transaction. The Exchange currently has a fine 
schedule for violations of OFPA F-1 as follows:

                              Fine Schedule
           [Implemented on a two-year running calendar basis]
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------------------------------------------------------------------------
1st Occurrence.........................  $250.00.
2nd Occurrence.........................  $500.00.
3rd Occurrence.........................  $1,000.00.
4th Occurrence and Thereafter..........  Sanction is discretionary with
                                          Business Conduct Committee.
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    The Exchange notes that the violations of this rule today consist 
of inadvertent failures to include the requisite alpha/numeric 
identification.\3\ These errors are corrected post-trade, by end of day 
by the party in error. The Floor Brokers receive inter-day reports 
which allow them to review this information and determine if any errors 
occurred. Also, the contra-party to the transaction may alert the Floor 
Broker that an error occurred. The Exchange notes that where errors 
have been identified through surveillance, it has not witnessed any 
manipulative conduct, rather the error was an inadvertent data entry 
error, which was subsequently corrected.
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    \3\ For example in 2016, the Exchange statistically had .00004% 
of violations of this minor rule. In 2015, the Exchange 
statistically had .00003% of violations of this minor rule.
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    By way of background, the Exchange notes that when the floor 
operated with more manual procedures and inter-day reports were not 
available, these types of error occurred with more frequency. The 
Exchange at that time employed a greater number of staff employees on 
the Exchange floor when the population on the floor was also at greater 
numbers. The amount of time that staff was devoted to assisting with 
these types of errors placed an administrative burden on the Exchange 
and presented an administrative cost to the Exchange to employ staff to 
assist with clerical errors. The fine at that time was justified to 
prevent a greater number of violations and also to support the amount 
of regulatory resources that were required to surveil for such 
violations and assist in the correction of errors.
    Today, the automated processes and inter-day reports alleviate many 
of the issues that previously existed, including the burden on staff to 
correct errors. The Exchange does not believe that a single error 
necessitates the imposition of a $250.00 fine, for example, where a 
data entry error occurred and was corrected by the firm.
    The Exchange proposes to eliminate the current fine schedule and 
instead

[[Page 70448]]

review for patterns and practices of manipulative conduct. The Exchange 
will continue to review, as it does today, for instances where a party 
to a trade did not enter the complete or an accurate identifier. Also, 
the Exchange would continue to bring violations of this rule before the 
Business Conduct Committee and suggest appropriate fines given the 
facts and circumstances surrounding current and previous violations of 
the minor rule. Today, the Exchange has the ability to bring any 
violations before the Business Conduct Committee.\4\ The disciplinary 
rules provide for a process by which the Exchange will discipline 
members for violations of its rules and the process for hearings.\5\ 
The Exchange's focus is to prevent abusive or manipulative patterns and 
practices of violations of OFPA F-1 and also prevent repeated abuse of 
this rule. The Exchange intends to continue to surveil and discipline 
its members for violations of this rule.
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    \4\ Any member, member organization, or any partner, officer, 
director or person employed by or associated with any member or 
member organization (the Respondent) who is alleged to have violated 
or aided and abetted a violation of the Securities Exchange Act of 
1934 (Exchange Act), the rules and regulations thereunder, the by-
laws and Rules of the Exchange or any interpretation thereof, and 
the Rules, Regulations, resolutions and stated policies of the Board 
of Directors or any Committee of the Exchange, shall be subject to 
the disciplinary jurisdiction of the Exchange, and after notice and 
opportunity for a hearing may be appropriately disciplined by 
expulsion, suspension, fine, censure, limitation or termination as 
to activities, functions, operations, or association with a member 
or member organization, or any other fitting sanction in accordance 
with the provisions of these disciplinary Rules. See Phlx Rule 
960.1(a). Further, whenever the staff of the Exchange has a 
reasonable basis to believe that a violation within the disciplinary 
jurisdiction of the Exchange has occurred, a written report shall be 
submitted to the Business Conduct Committee specifying the 
violations which are believed to have occurred and those facts which 
gave rise to these violations. See Phlx Rule 960.2(d).
    \5\ See Phlx Rules 960-970.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \6\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \7\ in particular, in that it is designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest, 
by continuing to enforce violations of rules governing the marking of 
orders.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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    Proper identification of orders protects investors and the public 
interest. In cases where human error occurred and a member failed to 
include the requisite alpha/numeric identification or submitted an 
incorrect alpha/numeric identification, such information may be 
corrected post-trade. The Exchange will continue to enforce the proper 
identification on each trade. Regulatory staff will monitor violations 
of such rule and bring cases before the Business Conduct Committee 
where a pattern or practice of violation of such rule exists and 
suggest appropriate fines given the facts and circumstances surrounding 
current and previous violations of the minor rule. Today, the Exchange 
has the ability to bring any violations before the Business Conduct 
Committee.\8\
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    \8\ See note 4 above.
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    The Exchange is concerned with the entry of accurate trading 
information which identifies counter-parties to each trade. The trading 
system requires such information for each transaction. The automated 
process combined with the surveillance of such information, as well as 
counter-party transparency to the information, ensure that the audit 
trail is accurate and complete. The Exchange understands that human 
error may occur from time to time and that members have the ability to 
and do correct such information prior to the end of the day. Given all 
of these circumstances, the proposal is consistent with the Act because 
it will continue to ensure that the information is maintained 
accurately and also discipline members that fail to consistently abide 
by this rule.
    The Exchange believes it is consistent with the Act and protects 
investors and the general public to amend the rule to bring 
disciplinary actions where a pattern or practice of violating OFPA F-1 
exists versus multiple fines for each individual violation. The 
Exchange notes that it has not observed a large number of these 
violations. Where a number of violations have occurred or where there 
has been manipulative activity in the entry of such trade information, 
these actions will be brought by the Regulatory group to the Business 
Conduct Committee for further action. The Exchange will enumerate the 
facts and circumstances surrounding the violations and present an 
appropriate sanction in light of the circumstances to the Business 
Conduct Committee.
    This filing is non-controversial because the Exchange will continue 
to regulate members for violations of Rule OFPA F-1, albeit in a 
slightly different matter. The result may be the imposition of the same 
fines by the Business Conduct Committee.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that no 
undue burden on competition arises with this rule change as the rule 
will be uniformly applied to all members. The Exchange will continue to 
monitor the activity of all members, and where a number of violations 
has occurred or where there has been manipulative activity in the entry 
of such trade information, these actions will be brought by the 
Regulatory group to the Business Conduct Committee for further action.

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \9\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (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,

[[Page 70449]]

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 rule-comments@sec.gov. Please include 
File Number SR-Phlx-2016-96 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2016-96. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 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; 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-Phlx-2016-96 and should be 
submitted on or before November 2, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-24572 Filed 10-11-16; 8:45 am]
 BILLING CODE 8011-01-P