Document ID: SEC-2012-0951-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-06-14T04:00Z

[Federal Register Volume 77, Number 115 (Thursday, June 14, 2012)]
[Notices]
[Pages 35725-35727]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14534]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67169; File No. SR-Phlx-2012-40]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to Quarterly Trading Requirements Applicable to Registered 
Options Traders

June 8, 2012.

I. Introduction

    On March 26, 2012, NASDAQ OMX PHLX LLC (``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 change trading 
requirements applicable to certain Registered Options Traders trading 
electronically. The proposed rule change was published for comment in 
the Federal Register on April 13, 2012.\3\ The Commission received no 
comments on the proposal. On June 6, the Exchange filed Amendment No. 1 
to the proposal.\4\ This order approves the proposal, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66767 (April 6, 
2012), 77 FR 22365. The Exchange subsequently extended the date for 
Commission action to June 4, 2012, and then to June 8, 2012.
    \4\ The amendment is technical in nature, and is thus not 
subject to notice and comment.
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II. Description

    The Exchange proposed to amend the trading requirements imposed on 
certain Exchange market makers \5\ arising from their use of electronic 
orders to trade on the Exchange.
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    \5\ The general term ``market makers'' on the Exchange includes 
specialists and registered options traders (``ROTs''). An ROT is a 
regular member of the Exchange located on the trading floor who has 
received permission from the Exchange to trade in options for his 
own account. See Exchange Rule 1014 (b)(i) and (ii). ROTs can be 
Streaming Quote Traders (``SQTs''), Remote Streaming Quote Traders 
(``RSQTs''), or non-Streaming Quote Trader ROTs (``non-SQT ROTs'') 
which by definition are neither SQTs nor RSQTs. An ROT is a regular 
member of the Exchange located on the trading floor who has received 
permission from the Exchange to trade in options for his own 
account. See Exchange Rule 1014 (b)(i) and (ii). An SQT is defined 
as an ROT who has received permission from the Exchange to generate 
and submit option quotations electronically in options to which such 
SQT is assigned. See Exchange Rule 1014 (b)(ii)(A).
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    First, the Exchange proposed to amend Exchange Rule 1014, 
Commentary .13, which provides that within each quarter an ROT must 
execute in person, and not through the use of orders, a specified 
number of contracts, with such number to be determined from time to 
time by the Exchange. Pursuant to Commentary .13, Options Floor 
Procedure Advice B-3 requires that an ROT (other than an RSQT or a 
Remote Specialist) trade in person, and not through the use of orders, 
the greater of 1000 contracts or 50% of its contract volume on the 
Exchange each quarter. The Exchange proposed to amend both Commentary 
.13 and Options Floor Procedure Advice B-3 to permit non-SQT ROTs to 
meet the in-person trading requirements set forth in those sections 
using orders entered in person, for the same reasons that the Exchange 
recently modified the 80% in-person test set forth in Commentary .01 to 
Rule 1014.\6\
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    \6\ Prior to being amended, Commentary .01 required 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 was required, among other things, to 
execute the greater of 1,000 contracts or 80% of his total contracts 
that quarter in person and not through the use of orders (the ``80% 
in-person test''). The only way to participate in trades other than 
through the use of orders is by quoting. In amending this provision, 
the Exchange explained that the limitation on the use of orders to 
satisfy the 80% in-person test with respect to non-SQT ROTs was 
obsolete as, given the movement toward more electronic trading in 
options, it had become difficult for such ROTs to comply with the 
trading requirement without using orders. The Exchange observed that 
non-SQT ROTs could only meet the 80% in person test by participating 
in crowd trades which they cannot control in terms of frequency, and 
proposed that the 80% in-person test be amended to permit non-SQT 
ROTs to count orders entered in person to meet the requirement. See 
Securities Exchange Act Release No. 65644 (October 27, 2011), 76 FR 
67786 (November 2, 2011) (SR-Phlx-2011-123).
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    The Exchange also proposed to amend Exchange Rule 1014(b)(ii)(E) to 
eliminate the requirement that non-SQT ROTs who transact more than 20% 
of their contract volume in an option electronically during any 
calendar quarter submit two-sided electronic quotations (also known as 
``streaming quotes'') in a designated percentage of series within 
options in which such non-SQT ROT is assigned (the ``20% test''). The 
Exchange stated that streaming quotes is burdensome to non-SQT ROTs, 
who are generally not equipped to undertake this form of trading, and 
could result in a significant

[[Page 35726]]

increase in fixed costs to these non-SQT ROTs. The Exchange stated that 
continuing to require non-SQT ROTs that execute more than 20% of their 
contract volume electronically to stream quotes would likely result in 
those ROTs leaving the trading floor in that option. The Exchange 
stated that price improvement, quality of execution, and especially 
price discovery would suffer if these non-SQT ROTs were forced out of 
open outcry market making. The Exchange therefore proposed to eliminate 
the 20% test and its associated requirements as a vestige of the early 
days of electronic trading.\7\ Instead, all non-SQT ROTs, regardless of 
their volume of electronic transactions, would be subject to the 
continuous open outcry quoting obligation that is currently only 
applicable to those non-SQT ROTs that trade less than 20% of their 
contract volume electronically. The Exchange represented that this 
proposal would affect a relatively small number of non-SQT ROTs. The 
Exchange also represented that this change would not detract from the 
current electronic trading environment.
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    \7\ In addition to deleting Exchange Rule 1014(b)(ii)(E)(2), the 
Exchange proposed to delete introductory language from the beginning 
of Exchange Rule 1014(b)(ii)(E) that would no longer be necessary. 
The substantive provisions of Exchange Rule 1014(b)(ii)(E)(1) 
governing non-SQT ROT obligations, as proposed to be renumbered and 
amended, would continue to apply.
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    The Exchange also proposed conforming changes to Exchange Rule 
1014(b)(ii)(E)(1) to conform that provision to the recent amendment by 
the Exchange of Rule 1014, Commentary .01. Specifically, the Exchange 
proposed to delete Exchange Rule 1014(b)(ii)(E)(1)(c), which provides 
that any volume transacted electronically will not count towards a non-
SQT ROT's 80% in-person test contained in Commentary .01 to Rule 1014. 
As described above, recently amended Commentary .01 eliminated this 
restriction and the Exchange stated that Exchange Rule 
1014(b)(ii)(E)(1)(c) was no longer necessary.
    Finally, the Exchange proposed to eliminate a reference from Rule 
1093(a), the Phlx XL Risk Monitor Mechanism, which refers to non-SQT 
ROTs that are required to stream two-sided quotes electronically 
pursuant to Rule 1014(b)(ii)(E). As described above, the Exchange 
proposes to remove the requirement from Rule 1014(b)(ii)(E) that non-
SQT ROTs stream quotes electronically, and is making this conforming 
change to Rule 1093(a).

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange \8\ 
and, in particular, the requirements of Section 6(b)(5) of the Act.\9\ 
Specifically, the Commission finds that the proposed rule change 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.
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    \8\ 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).
    \9\ 15 U.S.C. 78f(b)(5).
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    The proposal eliminates the potentially burdensome requirements 
that are triggered when a non-SQT ROT executes more than 20% of its 
volume electronically, eliminates restrictions on non-SQT ROTs' use of 
orders to meet various in-person trading requirements, and makes 
clarifying and conforming changes to previously amended rule text.
    With respect to the elimination of the requirement that non-SQT 
ROTs stream quotes electronically if they transact more than 20% of 
their contract volume electronically, the Commission notes that the 
Exchange recently amended its rules to require ROTs (other than RSQTs 
and Remote Specialists) to execute a minimum of 1,000 contracts and 300 
transactions on the Exchange each quarter.\10\ Given that a non-SQT ROT 
cannot control the size or frequency of crowd trades, the non-SQT ROT 
may have to use more electronic orders to meet this transaction 
requirement, making it more likely that such non-SQT ROT would trigger 
the 20% threshold for streaming quotes electronically. To the extent 
that a non-SQT ROT that meets this threshold may be unable or unwilling 
to invest the resources necessary for streaming quotes, and may exit 
open-outcry market making in that option rather than stream quotes, 
this may impact price improvement, quality of execution, and price 
discovery on the Exchange. The Commission believes it is reasonable to 
revise the quoting requirements for non-SQT ROTs accordingly to enable 
such non-SQT ROTs to continue making markets in open outcry, to the 
benefit of investors. In making this finding, the Commission notes that 
this proposal would affect a relatively small number of non-SQT ROTs, 
and that this change should not detract from the current electronic 
trading environment. Moreover, to the extent that this rule change 
imposes a continuous open outcry quoting obligation on all non-SQT 
ROTs, regardless of electronic transaction volume, the Commission notes 
that this proposal may potentially contribute to a more robust trading 
crowd in a given option.\11\
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    \10\ See Securities Exchange Act Release No. 65644 (October 27, 
2011), 76 FR 67786 (November 2, 2011) (SR-Phlx-2011-123). 
Transactions executed in the trading crowd where the contra-side is 
an ROT, however, do not count towards this requirement. See Rule 
1014, Commentary .01.
    \11\ Currently, non-SQT ROTs that are under the 20% threshold 
quote in open outcry, while non-SQT ROTs that exceed the 20% 
threshold stream quotes electronically (or exit open-outcry market 
making in that option). This proposed change would impose the 
continuous open outcry obligation on all non-SQT ROTs.
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    Given that the Exchange is eliminating the continuous electronic 
quoting obligations for non-SQT ROTs, the Commission finds that it is 
consistent with the Act for the Exchange to eliminate a corresponding 
reference to this requirement in Rule 1093(a).
    The Commission finds that the changes to Rule 1014, Commentary .13, 
and to the Options Floor Procedure Advice B-3 to permit non-SQT ROTs to 
use orders to meet in-person trading requirements are also consistent 
with the Act. Those changes are consistent with the recent changes to 
Commentary .01 to Rule 1014, which were approved by the Commission, to 
permit the use of orders entered in person to count towards the 80% in-
person requirement of that Commentary.\12\ As the Exchange noted in 
that rule change, non-SQT ROTs could have difficulty meeting the non-
SQT ROT in-person trading requirements without counting orders entered 
electronically, given that non-SQT ROTs' ability to trade other than by 
the use of orders has substantially diminished over the years with the 
increasing prominence of electronic trading. The Commission finds that 
rationale equally applicable here. Similarly, the deletion of Rule 
1014(b)(ii)(E)(1)(c) is also consistent with those changes to 
Commentary .01 to Rule 1014.
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    \12\ See Securities Exchange Act Release No. 65644 (October 27, 
2011), 76 FR 67786 (November 2, 2011) (SR-Phlx-2011-123).
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    For the foregoing reasons, the Commission believes that the 
proposed rule change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the

[[Page 35727]]

proposed rule change (SR-Phlx-2012-40), as modified by Amendment No.1, 
be, and it hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-14534 Filed 6-13-12; 8:45 am]
BILLING CODE 8011-01-P