Document ID: SEC-2011-1360-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-09-09T04:00Z

[Federal Register Volume 76, Number 175 (Friday, September 9, 2011)]
[Notices]
[Pages 55996-55998]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23102]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65257; File No. SR-Phlx-2011-123]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Relating to the Quarterly Trading 
Requirements Applicable to Registered Options Traders

September 2, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on August 24, 2011, NASDAQ OMX 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, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Commentary .01 of Rule 1014, 
Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders, to change the quarterly trading requirements 
applicable to Registered Options Traders, as described below.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
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 purpose of the proposed rule change is to strengthen the 
Exchange's quarterly trading requirement to encourage liquidity-
providing activity by market makers on the Exchange. The general term 
``market makers'' on the Exchange includes specialists and ROTs. ROTs 
can be either Streaming Quote Traders (``SQTs''), Remote SQTs 
(``RSQTs'') or non-SQT ROTs. The quarterly trading requirements apply 
to two types of ROTs: SQTs and non-SQT ROTs. Specialists and RSQTs are 
subject to different requirements. By definition, non-SQT ROTs do not 
``stream'' quotes, meaning send quotes electronically to the Exchange; 
instead, pursuant to Commentary .18 of Rule 1014, they submit limit 
orders electronically and respond to Floor Brokers verbally.
    Currently, Rule 1014 contains two quarterly trading requirements--
in person and in assigned. First,

[[Page 55997]]

Commentary .01 requires that in order for an ROT (other than an RSQT or 
a Remote Specialist) to receive specialist margin treatment for off-
floor orders in any calendar quarter, the ROT must execute the greater 
of 1,000 contracts or 80% of his total contracts that quarter in person 
(not through the use of orders) and 75% of his total contracts that 
quarter in assigned options.
    Second, the ``in assigned'' quarterly trading requirement in 
Commentary .03 requires that, except for unusual circumstances, at 
least 50% of the trading activity in any quarter (measured in terms of 
contract volume) of an ROT (other than an RSQT) shall ordinarily be in 
classes of options to which he is assigned. Temporarily undertaking the 
obligations of paragraph (c) at the request of a member of the Exchange 
in non assigned classes of options shall not be deemed trading in non 
assigned option contracts.
    Furthermore, Commentary .13 further provides that, within each 
quarter, an ROT must execute in person, and not through the use of 
orders, a specified number of contracts, such number to be determined 
from time to time by the Exchange. Options Floor Procedure Advice 
(``Advice'') B-3, Trading Requirements, establishes a quarterly 
requirement to trade the greater of 1,000 contracts or 50% of contract 
volume in person; pursuant to the Exchange's minor rule violation and 
enforcement plan, it establishes a fine schedule for violations 
thereof, as well as for violations of the quarterly trading requirement 
in assigned options contained in Commentary .03. These are not 
changing.
    The Exchange proposes to amend Commentary .01 to adopt a new 
quarterly requirement such that an ROT (other than an RSQT or a Remote 
Specialist) is required to trade 1,000 contracts and 300 transactions 
on the Exchange each quarter. Transactions executed in the trading 
crowd where the contra-side is an ROT are not included. This 
requirement is a pure trading requirement, not limited, like the 
existing trading requirements, to assigned options \5\ and in person 
trading.\6\ Accordingly, the new trading requirement can be fulfilled 
with trades and contracts that are not in assigned options and not 
executed in person, although, of course, the existing trading 
requirements respecting ``in assigned'' options and in person trading 
must still be met. The new trading requirement is comprised of both a 
1,000 contract requirement similar to the existing trading requirement 
in Commentary .01, as well as a 300 transaction requirement. Both 
requirements must be met each quarter. The Exchange believes that a 
requirement to execute 300 transactions per quarter is more likely to 
result in regular market-making activity, rather than just fulfilling a 
contract-based requirement, which can be achieved in one or two trades. 
For instance, during the course of 62 trading days in the first quarter 
of 2011, an ROT would have been required to, if the proposed new 
trading requirement were in effect, execute around five transactions 
per day in order to comply with the proposed 300 transaction 
requirement in that quarter. Accordingly, the Exchange believes that 
this new trading requirement should increase the likelihood that an ROT 
is actively providing liquidity in a given quarter.
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    \5\ See Rule 1014.03.
    \6\ See Rule 1014.01.
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    The Exchange proposes to exclude from the contracts and 
transactions required by the new trading requirement, in each quarter, 
any transactions executed in the trading crowd where the contra-side is 
an ROT in order to focus market making efforts on providing the sort of 
liquidity that will attract customers (including broker-dealers and 
professionals) to the Exchange. Specifically, the Exchange believes 
that this new requirement will encourage the regular posting of 
liquidity. Of course, ROTs will continue to be able to participate in 
crowd trades as well, and those crowd trades will count towards the new 
trading requirement, unless the contra-side is another ROT. ROT-to-ROT 
trades in the crowd are certainly permissible on the Exchange, but the 
Exchange seeks to better target liquidity and attract order flow by 
casting the new trading requirement in these terms. For example, ROTs 
participating in ``strategy'' trades \7\ could continue to participate 
in these, of course, but they would not, if involving an ROT as the 
contra-side and occurring on the trading floor, count toward the new 
trading requirement. The new trading requirement would include 
electronic transactions where the contra-side is another ROT, because 
ROTs cannot predict whether their electronic orders will trade against 
other ROTs, such that they would be unable to determine in advance 
whether the quarterly requirement would be met.
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    \7\ For example, these include transactions done to achieve a 
dividend arbitrage involving the purchase, sale and exercise of in-
the-money options of the same class, executed immediately prior to 
the date on which the underlying stock goes ex-dividend. See 
Securities Exchange Act Release No. 63957 (February 24, 2011, 76 FR 
11551 (March 2, 2011) (SR-Phlx-2011-20).
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    The Exchange is also proposing to amend the in person trading 
requirement in Commentary .01 in two ways. First, the Exchange proposes 
to exclude transactions executed in the trading crowd where the contra-
side is an ROT from the existing in person trading requirement for the 
same reasons as discussed above. The Exchange believes that having 
another trading requirement (this ``in person'' requirement, in 
addition to the new trading requirement discussed above) that focuses 
on activity other than in crowd ROT-to-ROT transactions should 
encourage the providing of liquidity. By excluding ROT-to-ROT crowd 
trades, including those involving dividend, merger and short interest 
strategies, the Exchange believes that ROTs will be encouraged to 
better focus their market making, similar to the new trading 
requirement.
    Secondly, the current in person trading requirement in Commentary 
.01 uses the term ``not through the use of orders'' when describing the 
in person trading requirement. At this time, the Exchange proposes to 
permit non-SQT ROTs to use orders entered in person to meet the in 
person trading requirement. The only other way to participate in trades 
other than through the use of orders is by quoting; while SQTs quote 
electronically by ``streaming'' quotations into the Exchange, non-SQT 
ROTs quote verbally in response to floor brokers representing orders in 
the trading crowd verbally. The limitation on the use of orders with 
respect to non-SQT ROTs is obsolete, as, over time, following the 
movement toward a more electronic trading platform in options, it has 
become difficult for such ROTs to comply with the trading requirement 
without using orders. In order to comply with their quarterly trading 
requirements, non-SQT ROTs have to proactively enter orders that 
provide or take liquidity. Some time ago, ROTs were able to place their 
liquidity on the book by verbally informing the specialist; this is no 
longer the case, so non-SQT ROTs can only meet the in person 
requirement by participating in crowd trades, which they cannot 
control, in terms of frequency.
    Under this proposal, SQTs would continue to be subject to an in 
person trading requirement that cannot be met using orders. The 
Exchange believes that this is reasonable and appropriate because SQTs, 
by definition, stream (or electronically submit) quotations to the 
Exchange to provide liquidity and comply with their market making 
obligations. The Exchange does not

[[Page 55998]]

believe that loosening the ``in person'' trading requirement to permit 
the use of orders by SQTs is necessary.
    The Exchange believes that the proposed new trading requirement 
coupled with the proposed changes to the existing ``in person'' trading 
requirement should encourage a more regular presence and thus result in 
more active market making. Similarly, excluding transactions where the 
contra-side is another ROT should encourage more regular and active 
market making. For example, a non-SQT ROT would not be able to include 
transactions involving dividend, merger and short interest strategies 
where the contra-side is another ROT, which is often the case; 
accordingly, these large transactions would not alleviate the ROT's in 
person quarterly trading requirement and would encourage active market 
making to reach that number.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \9\ 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 (i) Adopting a new trading requirement, which should, in turn, 
strengthen the quarterly trading requirements for ROTs, and (ii) 
updating the in person trading requirement to permit non-SQT ROTs to 
use in person orders due to changes in electronic trading over time.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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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.

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

    No written comments were either solicited or received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     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-Phlx-2011-123 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2011-123. 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-Phlx-2011-123 and should be 
submitted on or before September 30, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23102 Filed 9-8-11; 8:45 am]
BILLING CODE 8011-01-P