Document ID: SEC-2018-1139-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2018-07-23T04:00Z

[Federal Register Volume 83, Number 141 (Monday, July 23, 2018)]
[Notices]
[Pages 34899-34901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15647]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83656; File No. SR-Phlx-2018-40]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Amendment No. 1, and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Extend the 
Applicability of the Floor Broker Management System and the Snapshot 
Functionality to Registered Options Traders and Specialists

July 17, 2018.

I. Introduction

    On May 24, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 extend the 
applicability of the Floor Broker Management System and the Snapshot 
functionality to Registered Options Traders (``ROTS'') \3\ and 
Specialists.\4\ The proposed rule change was published for comment in 
the Federal Register on June 4, 2018.\5\ On June 4, 2018, the Exchange 
filed Amendment No. 1 to the proposed rule change.\6\ The Commission 
received no comment letters on the proposed rule change. This order 
provides notice of filing of Amendment No. 1 and approves the proposal, 
as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Phlx Rule 1014(b) (defining a ROT).
    \4\ See Phlx Rule 1020 (describing the functions of a 
Specialist).
    \5\ See Securities Exchange Act Release No. 83339 (May 29, 
2018), 83 FR 25725 (``Notice'').
    \6\ In Amendment No. 1 the Exchange: (1) Re-numbered proposed 
Phlx Rule 1081 as proposed Phlx Rule 1085 and (2) changed the 
proposed cross-references in proposed Commentary .06 to Phlx Rule 
1080 and in Options Floor Procedure Advices and Order & Decorum 
Regulations (``Floor Advice'') A-9 from Phlx Rule 1081 to Phlx Rule 
1085. Amendment No. 1 is available at https://www.sec.gov/comments/sr-phlx-2018-40/phlx201840-3767632-162689.pdf).
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II. Description of the Proposal

    Currently, ROTs and Specialists executing orders in the trading 
crowd are required to record such orders and related execution details 
on paper trading tickets.\7\ ROTS and Specialists must then provide 
those matched trade tickets to an Exchange Data Entry Technician 
(``DET''), who manually enters the information written on the trade 
tickets into the Exchange's electronic trading system.\8\ In contrast, 
unless one of five exceptions applies, Floor Brokers are required to 
enter orders originating in the trading crowd using the Exchange's 
electronic order entry system--the ``Floor Broker Management System'' 
\9\--and are not permitted to execute orders in the trading crowd. The 
Exchange proposes to change the order entry process for ROTS and 
Specialist by requiring them to utilize the same electronic order entry 
system that is currently used by Floor Brokers. To accomplish this 
transition, the Exchange proposes to change the name of its electronic 
order entry system from the ``Floor Broker Management System'' to the 
``Floor Based Management System'' (``FBMS'') to reflect its expanded 
applicability to all members that operate on the Exchange's trading 
floor--namely, Floor Brokers, ROT, and Specialists.\10\ In addition, 
the Exchange proposes to apply the same general obligations it 
currently imposes upon Floor Brokers regarding orders on the trading 
floor to ROTS and Specialists.\11\ The Exchange also proposes to extend 
FBMS' Snapshot functionality to ROTs and Specialists.\12\ To effectuate 
these changes, the Exchange proposes several amendments and additions 
to its Rules and Floor Advices.\13\
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    \7\ See Notice, supra note 5, at 25726.
    \8\ See id.
    \9\ Phlx Rule 1000(f)(iii).
    \10\ See Notice, supra note 5, at 25726.
    \11\ See id. at 25725.
    \12\ See id. at 25726.
    \13\ A more detailed description of the proposal appears in the 
Notice and in Amendment No. 1.
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    Specifically, the Exchange proposes to amend Phlx Rule 1000(f) to 
require ROTs and Specialists to execute orders utilizing FBMS and to 
prohibit ROTs and Specialists from executing orders in the Exchange's 
options trading crowd, unless one of five exceptions applies.\14\ These 
exceptions are listed in Phlx Rule 1000(f)(iii)(A)-(E) and would permit 
a Floor Broker, ROT or Specialist to execute an order in the trading 
crowd if: (1) There is a problem with the Exchange's systems; (2) the 
member is executing an order pursuant to Phlx Rule 1059 
(``Accommodation Transactions'') or Phlx Rule 1079 (``FLEX Index, 
Equity, and Currency Options''); (3) the transaction involves a multi-
leg order with more than 15 legs; (4) the transaction involves certain 
split-price orders that, due to FBMS system limitations, require manual 
calculation; or (5) the member elects to use of the Snapshot 
functionality to provisionally execute certain designated categories of 
trades, as described below.\15\
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    \14\ See Notice, supra note 5, at 25726.
    \15\ See id.
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    With respect to Snapshot, the Exchange proposes to allow ROTs and 
Specialists, like Floor Brokers, to use Snapshot to provisionally 
execute, in the options trading crowd, multi-leg orders and simple 
orders in options on exchange-traded funds (``ETFs'') that are included 
in the Options Penny Pilot, subject to the procedures for and the 
limitations to the use of Snapshot.\16\ The Exchange represents that it 
does not anticipate that the use of Snapshot by ROTs or Specialists 
will pose any increased or unique risks relative to its current use by 
Floor Brokers.\17\ Therefore, the Exchange proposes to utilize the same 
methods it currently uses to surveil Floor Brokers' use of Snapshot to 
also monitor ROTs' and Specialists' uses of the Snapshot 
functionality.\18\
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    \16\ See id. These procedures and limitations regarding the use 
of Snapshot are currently set forth in Phlx Rule 1063(e)(v), but the 
Exchange proposes to move them to a new Phlx Rule 1069, where they 
will apply broadly to ``members'' rather than only to Floor Brokers.
    \17\ See id.
    \18\ See id. at 25726-27.
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    To implement the renaming of FBMS and the extension of FBMS 
(including its Snapshot functionality) to ROTs and Specialists, the 
Exchange also proposes to make changes to its Rules and Floor Advices, 
as well as to update multiple cross-references within its Rules and 
Floor Advices, so that its current requirements regarding the use of 
FBMS will apply to ROTS and Specialists.\19\
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    \19\ See id. at 25726-28; Amendment No. 1, supra note 6. The 
Exchange is proposing minor alterations to its Rules that presently 
govern the use of FBMS by Floor Brokers to, among other things, 
account for the fact that ROTS and Specialists negotiate orders on 
the floor for their own account and do not represent orders on 
behalf of others. See Notice, supra note 5, at 25728. In addition, 
the Exchange is proposing several changes to remove obsolete 
language from its Rules and make conforming changes to its Rules.

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[[Page 34900]]

    The Exchange represents that it will not require ROTs or 
Specialists to use FBMS until one month after the date on which the 
Commission approves the Exchange's proposal.\20\ The Exchange will 
notify Members via an Options Trader Alert, to be posted on the 
Exchange's website, at least seven calendar days prior to the date when 
FBMS will be available for use by ROTs and Specialists.\21\ The alert 
will also contain the mandatory start date.\22\
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    \20\ See Notice, supra note 5, at 25728. See also Amendment No. 
1, supra note 6.
    \21\ See id.
    \22\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\23\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\24\ which requires, among other things, 
that the rules of a national securities exchange be 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 and, in general, to protect investors and the public 
interest, and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \24\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Exchange's rules currently require 
Floor Brokers to execute transactions through FBMS and prohibit Floor 
Brokers from executing orders in the trading crowd unless an exception 
applies.\25\ The Commission also notes that use of the Snapshot 
functionality is one of the current exceptions set forth in Phlx Rule 
1000(f), which allows Floor Brokers to provisionally execute, in the 
options trading crowd (as opposed to through FBMS), multi-leg orders 
and simple orders in options on ETFs that are included in the Options 
Penny Pilot.\26\
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    \25\ See Phlx Rule 1000(f).
    \26\ See Phlx Rule 1000(f)(iii)(E).
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    According to the Exchange, the manual order entry process that ROTs 
and Specialists currently use has become outmoded in comparison to its 
electronic order entry process.\27\ Specifically, the Exchange 
represents that because the manual process is less efficient, manual 
trades are often reported with a ``Late'' or ``Out of Sequence'' trade 
condition.\28\ The Exchange further represents that, compared to FBMS, 
the current manual process is more prone to human error and it does not 
establish an immediate audit trail for orders.\29\ The Exchange notes 
that its proposed extension of FBMS to ROTs and Specialists is intended 
to address these inefficiencies, mitigate risks, and improve the 
Exchange's compliance record by establishing an immediately available 
audit trail.\30\ Moreover, the Exchange believes that requiring all 
members to use the same electronic order entry system (and to do so 
subject to the same general conditions, requirements, and exceptions) 
will help ensure fair and equal treatment for all members that operate 
on the trading floor.\31\ Further, the Exchange represents that it does 
not anticipate any unique risks associated with ROTs and Specialists 
use of FBMS and therefore believes that the current exceptions and 
conditions set forth in Phlx Rule 1000(f) should apply without 
modification to ROTs and Specialists.
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    \27\ See Notice, supra note 5, at 25726.
    \28\ See id.
    \29\ See id.
    \30\ See id. at 25726 and 25728.
    \31\ See id. at 25728.
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    For example, according to the Exchange, FBMS' Snapshot 
functionality was designed to mitigate the risk that, when engaging in 
floor-based trading, the market for multi-leg orders and simple orders 
in options on ETFs that are included in the Options Penny Pilot may 
move faster than a Floor Broker would be able to manually enter and 
submit a paper trade ticket on a trade consummated in the trading 
crowd.\32\ According to the Exchange, ROTs and Specialists are subject 
to this same risk and the Exchange does not perceive any unique risks 
or concerns associated with the use of Snapshot by ROTs and Specialists 
that would necessitate changes to, or restrictions on, market makers' 
use of the Snapshot functionality.\33\ Therefore, the Exchange believes 
the Snapshot functionality is appropriate for use by ROTs and 
Specialists, notwithstanding the fact that ROTS and Specialists trade 
on a proprietary basis, rather than an agency basis like Floor 
Brokers.\34\ The Exchange represents that it will monitor ROTs' and 
Specialists' use of the Snapshot feature using the same methods that it 
currently uses to surveil Floor Brokers' use of Snapshot.\35\
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    \32\ See id. at 25726.
    \33\ See id. at 25726 and 25729.
    \34\ See id. at 25726.
    \35\ See id. at 25726-27.
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    The Commission notes that proposed Phlx Rule 1069(a)(i)(B) will 
prohibit all members from triggering the Snapshot feature for the 
purpose of obtaining favorable, or avoiding unfavorable, priority or 
trade-through conditions. In addition, the Exchange represents that its 
surveillance staff will monitor ROTs and Specialists to determine 
whether they exhibit patterns of using Snapshot excessively, including 
in circumstances where the nature of the orders or movements in the 
markets for such orders do not reasonably warrant the use of Snapshot 
or the full extent of its use.\36\ The Exchange will compare the times 
of provisional executions in the crowd that Snapshot captures with the 
records of such times that Options Exchange Officials capture to ensure 
accuracy.\37\ The Exchange will also surveil for patterns of orders 
subject to Snapshots that ROTs and Specialists abandon without 
submitting them to the Trading System for final execution.\38\ The 
Commission notes that these measures were designed to ensure that 
Snapshot operates, and is used by Floor Brokers, in a manner that is 
consistent with the Act and Phlx's Rules and notes that these measuer 
should similarly ensure that ROTs and Specialists electing to use the 
Snapshot functionality will do so in a manner that is consistent with 
the Act and Phlx's Rules.\39\
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    \36\ See id. at 25727 n.7.
    \37\ See id.
    \38\ See id.
    \39\ See Securities Exchange Act Release No. 81980 (October 30, 
2017), 82 FR 51313 (November 3, 2017) (SR-Phlx-2017-34) (approving 
the Snapshot functionality as an exception to Phlx Rule 1000(f)).
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    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act and the rules and regulations thereunder applicable 
to national securities exchanges.

IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 to 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

[[Page 34901]]

     Send an email to [email protected]. Please include 
File No. SR-Phlx-2018-40 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 No. SR-Phlx-2018-40. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet 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 such filing will also 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 No. SR-Phlx-2018-40 and should be submitted on or 
before August 13, 2018.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the amended proposal in the 
Federal Register. As described above, in Amendment No. 1, the Exchange 
(a) re-numbered proposed Phlx Rule 1081 as proposed Phlx Rule 1085 and 
(b) changed the proposed cross-references in proposed Commentary .06 to 
Phlx Rule 1080 and in Floor Advice A-9 from Phlx Rule 1081 to Phlx Rule 
1085.\40\ The Commission believes that Amendment No. 1 simply modified 
certain proposed rule numbering and cross-referencing and does not 
raise novel regulatory issues. Accordingly, the Commission finds good 
cause, pursuant to Section 19(b)(2) of the Act,\41\ to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \40\ See Amendment No. 1, supra note 6.
    \41\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\42\ that the proposed rule change (SR-Phlx-2018-40), as modified 
by Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
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    \42\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15647 Filed 7-20-18; 8:45 am]
 BILLING CODE 8011-01-P