Document ID: SEC-2016-1470-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX LLC
Posted Date: 2016-08-22T04:00Z

[Federal Register Volume 81, Number 162 (Monday, August 22, 2016)]
[Notices]
[Pages 56724-56728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19899]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78593; File No. SR-Phlx-2016-82]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Adopt a New Exception in Exchange Rule 
1000(f) for Sub-MPV Split-Priced Orders

August 16, 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 August 3, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt a new exception in Rule 1000(f) 
permitting Floor Brokers to execute certain split price orders in the 
trading crowd rather than electronically through the Options Floor 
Broker Management System, as described in detail below.
    The text of the proposed rule change is set forth below. Proposed 
new language is underlined.
* * * * *

NASDAQ PHLX Rules

* * * * *

Options Rules

* * * * *

Rule 1000. Applicability, Definitions and References

    (a)-(e) No change.
    (f) All Exchange options transactions shall be executed in one of 
the following ways[, once the Exchange's new Options Floor Broker 
Management System functionality has been operating for a certain period 
to be established by the Exchange]:
    (i) Automatically by the Exchange Trading System pursuant to Rule 
1080 and other applicable options rules;
    (ii) by and among members in the Exchange's options trading crowd 
none of whom is a Floor Broker; or
    (iii) through the Options Floor Broker Management System for trades 
involving at least one Floor Broker. Although Floor Brokers may 
represent orders in the trading crowd, Floor Brokers are not permitted 
to execute orders in the Exchange's options trading crowd, except as 
follows:
    (A) The Exchange may determine to permit executions otherwise than 
in accordance with subparagraphs (i)--(iii) above respecting an option 
or all options in the event of a problem with Exchange systems.
    (B) In addition, Floor Brokers can execute orders in the options 
trading crowd pursuant to Rule 1059, Accommodation Transactions 
(cabinet trades), and Rule 1079, FLEX Equity, Index and Currency 
Options.
    (C) Multi-leg orders with more than 15 legs can be executed in the 
trading crowd.
    (D) The following split price orders that, due to FBMS system 
limitations, require manual calculation:
    (I) simple orders not expressed in the applicable minimum increment 
(``sub-MPV'') and that cannot be evenly split into two whole numbers to 
create a price at the midpoint of the minimum increment; and
    (II) complex and multi-leg orders with at least one option leg with 
an odd-numbered volume that must trade at a sub-MPV price or one leg 
that qualifies under (I) above.
    Surveillance staff must approve all executions submitted under this 
Rule 1000(f)(iii) to validate that each abides by applicable priority 
and trade through rules, and that rounding of prices is used only where 
necessary to execute the trade at the MPV, and only to the benefit of a 
customer order or, where multiple customers' orders are involved, for 
the customer order that is earliest in time.
    (g) No change.
* * * * *

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.

[[Page 56725]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposal is to provide an exception to the 
mandatory use of the Floor Broker Management System (``FBMS'') pursuant 
to Rule 1000(f) to permit Floor Brokers to execute certain split price 
orders in the trading crowd rather than electronically and to 
facilitate these transactions. Through the use of a surveillance 
process to verify that the conditions of the exception are met, the 
Exchange will ensure that the proposed exception is used only rarely.
Development of FBMS System
    Until April 1, 2016, the Exchange operated two Options Floor Broker 
Management Systems concurrently on the options trading floor: the 
original Floor Broker Management System operating since 2005 (``FBMS 
1''); \3\ and the enhanced Floor Broker Management System (``FBMS 2''). 
After March 31, 2016, FBMS 1 was retired and Floor Brokers were 
required to use FBMS 2.
---------------------------------------------------------------------------

    \3\ Under FBMS 1, orders were executed in the trading crowd by 
the Floor Broker and that execution was recorded in FBMS 1, which 
enabled the Exchange to electronically process the order in terms of 
trade reporting and clearing. If a trade that occurred in the 
trading crowd fails to give priority to an order on the book, for 
example, such violation is addressed by the Exchange's surveillance 
and enforcement programs after the fact.
---------------------------------------------------------------------------

    FBMS 2 was launched in March 2014 in order to prevent certain types 
of violations and enhance order handling protections. Currently, with 
FBMS 2, all options transactions on the Exchange involving at least one 
Floor Broker are required to be executed by FBMS 2 as opposed to being 
executed by the Floor Broker in the trading crowd.\4\ All orders must 
continue to be represented in the trading crowd, but the negotiation 
and agreement that occurs in the trading crowd does not result in a 
final trade, but rather a ``meeting of the minds'' that is then 
submitted through FBMS 2 for execution in the matching engine.
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 69471 (April 29, 2013), 
78 FR 26096 (May 3, 2013) (SR-Phlx-2013-09).
---------------------------------------------------------------------------

    The Exchange received approval to implement FBMS 2 as of June 1, 
2013,\5\ and delayed its implementation until July 2013,\6\ until 
September 2013,\7\ until December 2013,\8\ and until March 2014.\9\ 
Implementation began on March 7, 2014, with FBMS 2 operating 
concurrently with FBMS 1. FBMS 2 has been made available to all Floor 
Brokers in all options and, on March 31, 2016, FBMS 1 was retired.\10\ 
As a result, FBMS 2 is the only system currently in use.
---------------------------------------------------------------------------

    \5\ Id.
    \6\ Securities Exchange Act Release No. 69811 (June 20, 2013), 
78 FR 38422 (June 26, 2013) (SR-Phlx-2013-67).
    \7\ Securities Exchange Act Release No. 70141 (August 8, 2013), 
78 FR 49565 (August 14, 2013) (SR-Phlx-2013-83).
    \8\ Securities Exchange Act Release No. 70629 (October 8, 2013), 
78 FR 62852 (October 22, 2013) (SR-Phlx-2013-100).
    \9\ Securities Exchange Act Release No. 71212 (December 31, 
2013), 79 FR 888 (January 7, 2014) (SR-Phlx-2013-129).
    \10\ See Securities Exchange Act Release Nos. 72135 (May 9, 
2014), 79 FR 27966 (May 15, 2014) (SR-Phlx-2014-33). Accordingly, 
the Exchange proposes to delete language from the first sentence of 
Rule 1000(f) that refers to the continued operation of FBMS 1. 
Nevertheless, the Exchange delayed the retirement of FBMS 1 until 
September 1, 2014, November 3, 2014, November 3, 2015, and, most 
recently, until April 1, 2016. See also Securities Exchange Act 
Release Nos. 72135 (May 9, 2014), 79 FR 27966 (May 15, 2014) (SR-
Phlx-2014-33); 73246 (September 29, 2014), 79 FR 59874 (October 3, 
2014) (SR-Phlx-2014-59); 73586 (November 13, 2014), 79 FR 68931 
(November 19, 2014) (SR-Phlx-2014-71); and 67187 (October 19, 2015), 
80 FR 64462 (October 23, 2015) (SR-Phlx-2015-80).
---------------------------------------------------------------------------

    The Exchange has contracted with a third-party to build an 
alternative system (``FBMS 3'') to replace FBMS 2. The Exchange had 
intended to implement FBMS 3 by November 3, 2015, and then by March 
2016, but, based on recent estimates from the third-party entity, it 
will be ready by November 30, 2016.\11\ Despite the delays in launching 
FBMS 3, the new system is still needed to reduce the occurrence of 
latencies and abnormalities that have occurred with FBMS 2 that has 
affected multiple firms multiple times per week. The Exchange is 
committed to distributing a next-generation product in the form of FBMS 
3.
---------------------------------------------------------------------------

    \11\ Before FBMS 3 becomes available, the Exchange will provide 
notice in the form of an options circular to the Floor Broker 
community establishing a schedule for training and a reasonable 
implementation period. The Exchange does not expect that this will 
be a long or difficult transition from FBMS 2 to FBMS 3 because the 
functionality is the same and the interface to the Floor Broker is 
as well; the principal differences lie in the background, involving 
the architecture that is the backbone of the system.
---------------------------------------------------------------------------

    Beginning last year, the Exchange explained the state of FBMS 3 to 
Commission staff in the spirit of sharing the context around the delay 
and the Exchange's then-current thoughts about deployment going 
forward. The Commission's notice of filing and immediate effectiveness 
of the proposed rule change extending the operation of FBMS 1 until 
March 31, 2016 stated that until FBMS 3 becomes available, the Exchange 
would continue to operate FBMS 1 and FBMS 2 concurrently and that all 
Floor Brokers may use either FBMS. Although that was the Exchange's 
intent at the time, the Exchange did not intend to tie the retirement 
of FBMS 1 to the deployment of FBMS 3; the availability of FBMS 1 until 
FBMS 3 became available was a likely assumption, but not the only 
possible outcome.
    Despite the possibility that FBMS 2 may experience some latency or 
potential glitches, the Exchange determined in its regulatory 
discretion to retire FBMS 1 and not seek an extension of the rule 
permitting the concurrent operation of FBMS 1 and FBMS 2, a 
determination the Exchange announced on March 14, 2016.\12\ 
Specifically, the Exchange believed that the regulatory and other 
benefits of exclusively using FBMS 2 across the trading floor should no 
longer be delayed. The electronic protections associated with the 
Commission's Market Access Rule \13\ requirements are available on FBMS 
2 (but not FBMS 1) such that the Exchange concluded this was a key 
reason to require the use of FBMS 2. The Floor Brokers themselves 
benefit from using FBMS 2 because they avoid certain violations, 
process complicated multi-leg orders more quickly and manage their 
orders, overall, better. The FBMS 3 delay and the importance of the 
Exchange's compliance record changed the situation such that the 
Exchange determined to let the permission to operate FBMS 1 expire.\14\ 
FBMS 1 has not operated since March 31, 2016.
---------------------------------------------------------------------------

    \12\ http://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2016-8.
    \13\ 17 CFR 240.15c3-5.
    \14\ See note 10 above.
---------------------------------------------------------------------------

Proposal
    The Exchange proposes to adopt a new exception to the mandatory use 
of FBMS to execute trades for the processing of split-price orders. 
Currently, Rule 1000(f) provides that all Exchange options transactions 
shall be executed in one of the following ways:
    (i) Automatically by the Exchange Trading System pursuant to Rule 
1080 and other applicable options rules;
    (ii) by and among members in the Exchange's options trading crowd 
none of whom is a Floor Broker; or
    (iii) through the Options Floor Broker Management System for trades 
involving at least one Floor Broker. Although Floor Brokers may 
represent orders in the trading crowd, Floor Brokers are not permitted 
to execute orders in the Exchange's options trading crowd.

[[Page 56726]]

    There are currently three exceptions to Rule 1000(f)(iii) that 
permit executions otherwise than in accordance with subparagraphs (i)-
(iii) above. The first, under subparagraph (A), applies to executions 
respecting an option or all options in the event of a problem with 
Exchange systems. In addition, under subparagraph (B), Floor Brokers 
can execute orders in the options trading crowd pursuant to Rule 1059, 
Accommodation Transactions (cabinet trades), and Rule 1079, FLEX 
Equity, Index and Currency Options. Finally, under subparagraph (C), 
Multi-leg orders with more than 15 legs can be executed in the trading 
crowd. These three exceptions in (A)-(C) have been narrowly crafted to 
address specific situations, such as the complexity of a trade 
involving more than 15 legs. Each time a Floor Broker invokes an 
exception to Rule 1000(f), the Floor Broker is required by Rule 
1063(e)(ii) to record the information required by Rule 1063(e)(i) on 
paper trade tickets, and may not represent an order for execution that 
has not been time stamped with the time of entry on the trading floor; 
such trade tickets must be time stamped upon the execution of such an 
order.
    Creation of Split-Price Orders. The Exchange first recognized the 
complexity of the split-price order in 2005 when it filed to create an 
exception from existing priority rules for split-price orders under 
Rule 1014(g)(i)(B).\15\ The purpose behind the split-price priority 
exception was ``to bring about the execution of large orders, which by 
virtue of their size and the need to execute them at multiple prices 
may be difficult to execute without a limited exception to the priority 
rules.'' The proposed exception allows a member effecting a trade that 
betters the market to have priority on the balance of that trade at the 
next pricing increment, even if there are orders in the book at the 
same price. Floor Brokers that avail themselves of the split-price 
priority rule are obligated to ensure compliance with Section 11(a) of 
the Act.\16\
---------------------------------------------------------------------------

    \15\ Securities Exchange Act Release No. 51820 (June 10, 2005), 
70 FR 35759 (June 21, 2005) (SR-Phlx-2005-028) (pilot approval). See 
also Securities Exchange Act Release No. 55993 (June 29, 2007), 72 
FR 37301 (July 9, 2007) (SR-Phlx-2007-044) (permanent approval).
    \16\ Id.
---------------------------------------------------------------------------

    Today, split-price orders are processed via either FBMS 2 or paper 
ticket. If the split-price order is evenly split and requires simple 
calculations to determine the number of contracts at two price points, 
the order is handled through FBMS 2. If the split-price order 
computation is more complicated, involving non-even integers and sub 
MPV price points, the surveillance staff declare an FBMS 2 system 
malfunction--in accordance with PHLX Rules 1000(f)(iii)(A) and 
1063(e)(ii)--and allow the floor broker to utilize a paper ticket and 
oral execution of the split-price order in the trading crowd. The 
Exchange believes that the treatment of split-price orders under Rule 
1000(f) should be made clearer.
    Therefore, the Exchange proposes to add an additional exception to 
Rule 1000(f)(iii), also narrowly crafted to reflect the complexities of 
executing split-price orders. Specifically, pursuant to proposed Rule 
1000(f)(iii)(D), the following split price orders that require, due to 
a system limitation, a manual calculation to determine specific volumes 
at different prices can be executed in the trading crowd: (I) Simple 
orders with a price not expressed in the applicable minimum increment 
(``sub-MPV'') \17\ and that cannot be evenly split into two whole 
numbers to create a price at the midpoint of the minimum increment; and 
(II) complex and multi-leg orders with at least one option leg with an 
odd-numbered volume that must trade at a sub-MPV price or one leg that 
qualifies under (I) above, thereby requiring the Floor Broker to 
determine the specific volumes to trade at each price. Surveillance 
staff must approve any such executions in open outcry to validate that 
such execution abides by applicable priority and trade through rules.
---------------------------------------------------------------------------

    \17\ See Nasdaq Rule 1034.
---------------------------------------------------------------------------

    The proposed exception is similar to the existing exceptions in 
that it permits additional time when there is a system problem or when 
needed for the entry and completion of complicated trades. Here, the 
additional time provided by the proposed exception is needed when a 
split-price trade calculation is complicated or requires contracts be 
rounded in favor of the customer due to the fact that it requires 
manual intervention. If, at the end of the manual calculation, the 
Floor Broker is able to input the determined split prices into FBMS 2 
he may do so; otherwise he may use paper tickets. The use of a paper 
ticket will be necessary where, for example, the NBBO has moved and the 
trade no longer complies with the applicable trade through 
restrictions. Even if the Floor Broker is unable to use FBMS 2 to 
complete the entry of the split-price trade, the Floor Broker must 
still enter the order information into FBMS 2 for audit trail purposes.
    The Surveillance staff will oversee Floor Brokers' use of the 
proposed exception as it does today under the current exceptions. 
Currently, when a Floor Broker states that there is a problem with the 
FBMS system, the Floor Broker will continue to input the order into 
FBMS (to the extend order entry functionality is accessible) and 
continue to announce the order in the trading crowd. Surveillance 
staff, knowing that the Floor Broker stated that he is experiencing a 
system problem or limitation will attempt to confirm the system problem 
with Exchange Operations staff. If Surveillance staff is able to 
confirm that FBMS has a performance problem, Surveillance staff will 
approve the use of a paper trade ticket and oral consummation of a 
transaction in the trading crowd that is contingent on Surveillance 
staff's additional confirmation that the trade complies with the time 
and price priority rules of the Exchange--a ``pending trade.''
    If the pending trade complies with the time and price priority 
rules of the Exchange, the trade is approved and determined to have 
occurred at the time it would have occurred in the trading crowd but 
for the system problem or limitation. If the pending trade does not 
comply with the time and price priority rules of the Exchange, the 
Surveillance staff will inform the applicable trading crowd 
participants that the pending trade does not comply with Exchange rules 
and not permit the trade to occur. This manual process performed by the 
Surveillance staff parallels the electronic process performed within 
the Exchange matching engine when FBMS is able to process a trade. The 
delay attributable to this manual surveillance process does not change 
the time of trade execution, which is set at the time the trade would 
have occurred in the trading crowd.
    With respect to simple orders, if a Floor Broker attempts to 
execute a customer order to sell 357 contracts in symbol XYZ (with a 
Minimum Price Variation increment of $0.05) at a price of $0.11 by way 
of split price execution, the floor broker must perform a manual 
calculation. As a result of FBMS 2 being unable to calculate the number 
of contracts to split to determine a net price of at least $0.11, the 
floor broker will manually enter 285 contracts @ $0.10 and 72 contracts 
@ $0.15 to arrive at an execution price as close as possible to an 
$0.11 ($0.110084 in this case) aggregate price for the 357 contracts 
ensuring that, when applicable, the customer side of the trade benefits 
from the difference between the $0.11 limit and the actual

[[Page 56727]]

average price. This example would qualify for the proposed exception 
because it is a sub-MPV price (not in $0.05 increments) and cannot be 
evenly split to obtain the desired aggregate price.\18\
---------------------------------------------------------------------------

    \18\ The exemption would not apply where an order for 500 
contracts could be traded at a split price of .125 by splitting it 
into two lots of 250 contracts at .10 and 250 contracts at .15.
---------------------------------------------------------------------------

    With respect to complex and multi-leg orders, consider the 
following example: A Floor Broker receives a two legged call spread in 
XYZ (with a Minimum Price Variation increment of $0.05) to sell 456 
contracts of leg A @ $1.23 and buy 229 contracts of leg B @ $0.50. 
Because a Floor Broker is restricted to trading in not less than the 
permitted MPV increments, the Floor Broker will need to manually 
calculate to trade 274 contracts of leg A @ $1.25 and 182 contracts of 
leg A @ $1.20. This equals a net price on leg A of $1.23004. This is 
the closest achievable net price that is at least equal to the limit 
price of the Floor Broker's client without breaking the limit price. 
This would qualify because the Floor Broker will need to determine at 
which of the price points the additional contract will trade, given 
that the odd number of contracts cannot be split evenly across two 
price points.
    Another example involving a simple order is if a Floor Broker has a 
customer order to buy 479 GOOG May 440 calls for $3.67: GOOG has a 
Minimum Price Variation of $0.10 in trades over $3.00 so the Floor 
Broker will need to determine the calculation that will amount to a 
price closest to $3.67; namely, 70% of 479 equals 335.3 but 335.3 is a 
non-round number and the customer buying the volume entered at the 
lower price gets a price that is rounded up while the volume at the 
higher price is rounded down so as to offer an advantage to the 
customer.\19\ The result is 335 at $3.70 and 144 at $3.60. Since the 
customer is buying, the volume at the lower price of 3.60 gets rounded 
up to offer the advantage of rounding to the customer. This transaction 
would qualify for the exception because the simple order is for a sub-
MPV price and cannot be evenly split.
---------------------------------------------------------------------------

    \19\ Under Proposed Rule 1000(f)(iii)(D), Exchange surveillance 
staff would be required to validate the use of price rounding to 
ensure that it is necessary and to the benefit of the customer.
---------------------------------------------------------------------------

    Under this proposal, Surveillance staff must validate that split-
price executions abide by all applicable priority and trade through 
rules using the time of execution recorded by the Floor Broker (and 
separately confirmed by Surveillance staff) on the paper order ticket. 
Referring back to a prior example involving a simple customer order to 
execute 357 contracts in symbol XYZ (with a Minimum Price Variation 
increment of $0.05) at $0.11 (285 contracts @ $0.10/72 contracts @ 
$0.15), if FBMS 2 is unable to determine the correct number of 
contracts to split to derive the net price of $0.11, the Floor Broker, 
upon confirmation and approval of the Surveillance staff, can verbally 
execute the order and Surveillance staff would capture the verbal 
execution time of the pending transaction and determine if the Floor 
Broker established priority over the bids and/or offers based on the 
documented verbal execution time. If the market was $0.05 bid and $0.15 
offer, Surveillance staff would approve this transaction because the 
Floor Broker established priority over the $0.15 offers by trading more 
contracts at the better price of $0.10. However, if the market was 
$0.10 bid and $0.20 offer, On-Floor Surveillance staff would not 
approve this transaction because the Floor Broker did not establish 
priority over the $0.10 bids by trading the greater number of contracts 
at the inferior price. Finally, if the market was $0.10 bid and $0.15 
offer (with no public customer orders on either side of the market), 
On-Floor Surveillance staff would approve this transaction because the 
Floor Broker would have priority over the non-customer book (bids/
offers) given that customer orders always have priority pursuant to 
Rule 1014(g)(i)(A).
    In conclusion, the Exchange believes that certain split-price 
orders warrant an exception from the requirement that the order be 
executed by FBMS. First, the exception is needed because FBMS is not 
currently programmed to perform the calculations associated with split 
prices not at the minimum price variation. Accordingly, the Floor 
Broker must do so manually, which can be time consuming; by the time 
the calculation is made, the market may have changed such that FBMS 
would return the order to the Floor Broker unexecuted. Second, 
heightened surveillance will be imposed. Under the proposal, the 
execution would occur on the trading floor in open outcry as a pending 
transaction. The transaction is completed only upon validation from 
Surveillance staff, based on the market prices at the time of 
execution. The proposal clarifies the need for a manual handling of the 
execution for these complicated split price trades, rather than leaving 
ambiguous the question of whether a split-price trade amounts to an 
FBMS system problem. This proposal does not change what is considered 
by the Exchange as a FBMS system problem, but rather clearly sets forth 
a defined system limitation for a split-price order with specific 
characteristics.
2. Statutory Basis
    The Exchange believes that the proposed exception is consistent 
with Section 6(b) of the Act,\20\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\21\ in particular, in that it 
is designed to promote just and equitable principles of trade and to 
protect investors and the public interest by permitting split-price 
trades, which are complicated, to be executed in the trading crowd, 
which should, in turn, result in a greater likelihood that such orders 
are properly executed. FBMS 2 cannot calculate these particular prices, 
as described in the examples above.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed exception is consistent 
with the Act because it is narrowly tailored to permit a small number 
of beneficial trades. As stated earlier, the Commission has recognized 
the importance of split-price trades because they permit the execution 
of large blocks, even permitting a limited exception to priority rules. 
Although FBMS was designed to enhance compliance to the greatest extent 
possible, FBMS does not have the capability to calculate and process 
certain split-price trades. If an exception was denied, Floor Brokers' 
ability to execute these large, split-price trades that benefit the 
market would be substantially impaired.
    Additionally, Exchange surveillance is well-designed to protect 
customer when the exception is used. As set forth above, every split-
price trade that invokes the proposed exception will require approval 
by Exchange surveillance staff in order to validate compliance with 
applicable priority and trade through rules. Additionally, all relevant 
trade data will be recorded on both paper tickets and in the FBMS 
system in order to ensure a proper audit trail for T+1 surveillance. 
Finally, to the extent the exception permits rounding of prices, 
rounding is required to occur in the customer's favor, a result that is 
itself consistent with the Act.
    The proposal is not unfairly discriminatory because it applies to 
all Floor Brokers the same way. Nor is it unfairly discriminatory with 
respect to market participants other than Floor Brokers because only 
Floor Brokers use FBMS 2.

[[Page 56728]]

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 the 
proposal should allow it to compete with other floor-based exchanges 
and help the Exchange's Floor Brokers compete with floor brokers on 
other options exchanges by accommodating another type of complicated 
order. Through the use of a surveillance process to verify that the 
conditions of the exception are met, the Exchange will ensure that the 
exception is used only rarely.

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 email to rule-comments@sec.gov. Please include 
File No. SR-Phlx-2016-82 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 No. SR-Phlx-2016-82. 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 such 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 No. SR-Phlx-2016-82, and should be 
submitted on or before September 12, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19899 Filed 8-19-16; 8:45 am]
 BILLING CODE 8011-01-P