Document ID: SEC-2016-0386-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2016-03-03T05:00Z

[Federal Register Volume 81, Number 42 (Thursday, March 3, 2016)]
[Notices]
[Pages 11307-11309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04636]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77245; File No. SR-Phlx-2016-23]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a 
Kill Switch

February 26, 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 February 16, 2016, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to relocate language in current Rule 1035, 
entitled ``Acceptable of Bid or Offer'' [sic] to Phlx Rule 1019 and 
adopt an optional Kill Switch protection. The Kill Switch will allow 
Phlx members to remove quotes and cancel open orders and prevent new 
order submission.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.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 adopt a new risk protection, a Kill 
Switch, applicable to all Phlx members and member organizations 
(hereinafter ``member(s)''). The Kill Switch will allow Phlx members to 
remove quotes and cancel open orders and prevent new order submission. 
This feature provides firms with a powerful risk management tool for 
immediate control of their quote and order activity.
    The Exchange proposes to relocate current Rule 1035, entitled 
``Acceptable of Bid or Offer'' [sic] to currently reserved Rule 1019, 
title revised Rule 1019 ``Acceptance of Bid or Offer,'' and add a new 
section (b) to Rule 1019. The Phlx Options Kill Switch will be an 
optional tool that enables Phlx members to initiate a message(s) \3\ to 
the Phlx XL system (``System'') to: (i) Promptly remove quotes; and/or 
(ii) promptly cancel orders. Phlx members may submit a request to the 
System to remove/cancel quotes and/or orders based on certain 
identifiers on either a user or group level. Phlx members may elect to 
remove quotes and cancel orders by Exchange account, port, and/or badge 
or mnemonic (``Identifier'') or by a group (one or more Identifier 
combinations),\4\ which are provided by such Phlx member to the 
Exchange. Phlx members may not remove quotes/orders by symbol. The 
System will send an automated message to the Phlx member when a Kill 
Switch request has

[[Page 11308]]

been processed by the Exchange's System.
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    \3\ Phlx members will be able to utilize an interface to send a 
message to the Exchange to initiate the Kill Switch or they may 
contact the Exchange directly.
    \4\ The type of group permissible would be within a broker-
dealer. For example, this could be including but not limited to all 
market maker accounts or all order entry ports.
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    If the Phlx member selects quotes to be cancelled utilizing the 
Kill Switch, the Phlx member must send a message to the Exchange to 
request the removal of all quotes requested for the specified 
Identifier(s).\5\ The Phlx member will be unable to enter any 
additional quotes for the affected Identifier(s) until re-entry has 
been enabled pursuant to proposed section (b)(iii).\6\
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    \5\ See note 3.
    \6\ PIXL Orders will not be cancelled. PIXL\SM\ is the 
Exchange's price improvement mechanism known as Price Improvement XL 
or PIXL. See Rule 1080(n). Of note, sweeps will be cancelled. A 
sweep is a one-sided electronic quote submitted over the Specialized 
Quote Feed, which is the market making quoting interface.
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    If the Phlx member selects orders to be cancelled utilizing the 
Kill Switch, the Phlx member must send a message to the Exchange to 
request the cancellation of all orders requested for the certain 
specified Identifier(s).\7\ The Phlx member will be unable to enter 
additional orders for the affected Identifier(s) until re-entry has 
been enabled pursuant to section (b)(iii).
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    \7\ See note 3.
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    Proposed section (b)(iii) stipulates that after quotes and/or 
orders are removed/cancelled by the Phlx member utilizing the Kill 
Switch, the Phlx member will be unable to enter additional quotes and/
or orders for the affected Identifier(s) until the Phlx member has made 
a request to the Exchange and Exchange staff has set a re-entry 
indicator to enable re-entry.\8\ Once enabled for re-entry, the System 
will send a Re-entry Notification Message to the Phlx member. The 
applicable Clearing member for that Phlx member also will be notified 
of the re-entry into the System after quotes and/or orders are removed/
cancelled as a result of the Kill Switch, provided the Clearing member 
has requested to receive such notification.
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    \8\ The Phlx member must directly and verbally contact the 
Exchange to request the re-set.
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    The Exchange offers many risk mitigation and management tools today 
including, but not limited to, certain rapid fire risk controls,\9\ 
Rule 15c3-5 risk controls,\10\ Order Price Protections,\11\ and cancel 
on disconnect and purge functionality for Specialized Quote Feed (SQF). 
The Kill Switch offers members a means to control their exposure, 
through an interface which is not dependent on the integrity of the 
member's own systems, should the member experience a failure.
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    \9\ See Phlx Rule 1095.
    \10\ See Sec.  240.15c3-5.
    \11\ See Phlx Rule 1084.
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    The Exchange proposes to implement this rule within ninety (90) 
days of the implementation date. The Exchange will issue an Options 
Trader Alert in advance to inform market participants of such date.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ 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 enhancing the risk protections available to Exchange 
members. The proposal promotes policy goals of the Commission which has 
encouraged execution venues, exchange and non-exchange alike, to 
enhance risk protection tools and other mechanisms to decrease risk and 
increase stability.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The individual firm benefits of enhanced risk protections flow 
downstream to counter-parties both at the Exchange and at other options 
exchanges, thereby increasing systemic protections as well. 
Additionally, because the Exchange offers this risk tool to all Phlx 
members, the Exchange believes this will allow Phlx members to enter 
quotes and orders without fear of inadvertent exposure to excessive 
risk, which in turn will benefit investors through increased liquidity 
for the execution of their orders, thereby protecting investors and the 
public interest.
    This optional risk tool as noted above will be offered to all Phlx 
members. The Exchange further represents that its proposal will operate 
consistently with the firm quote obligations of a broker-dealer 
pursuant to Rule 602 of Regulation NMS and that the functionality is 
not mandatory. Specifically, any interest that is executable against a 
Phlx member's quotes and orders that are received \14\ by the Exchange 
prior to the time the Kill Switch is processed by the System will 
automatically execute at the price up to the Phlx member's size. The 
Kill Switch message will be accepted by the System in the order of 
receipt in the queue and will be processed in that order so that 
interest that is already accepted into the System will be processed 
prior to the Kill Switch message.
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    \14\ The time of receipt for an order or quote is the time such 
message is processed by the Exchange Order Book.
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    A Market Makers' obligation to provide continuous two-sided quotes 
on a daily basis is not diminished by the removal of such quotes and/or 
orders by utilizing the Kill Switch. Market Makers will be required to 
provide continuous two-sided quotes on a daily basis. Market Makers 
that utilize the Kill Switch will not be relieved of the obligation to 
provide continuous two-sided quotes on a daily basis, nor will it 
prohibit the Exchange from taking disciplinary action against a Market 
Maker for failing to meet the continuous quoting obligation each 
trading day.
    With respect to providing information regarding the removal of 
quotes and/or cancellation of orders as a result of the Kill Switch to 
the Clearing Member, each Member that transacts through a Clearing 
Member on the Exchange executes a Letter of Guarantee wherein the 
Clearing Member accepts financial responsibility for all Exchange 
transactions made by the Phlx member on whose behalf the Clearing 
Member submits the Letter of Guarantee. The Exchange believes that 
because Clearing Members guarantee all transactions on behalf of a 
member, and therefore bear the risk associated with those transactions, 
it is appropriate for Clearing members to have knowledge of the 
utilization by the member of the Kill Switch, should the Clearing 
member request such notification.

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 proposal does not impose an 
undue burden on intra-market competition because all Phlx members may 
avail themselves of the Kill Switch. The Kill Switch functionality is 
optional. The proposed rule change is meant to protect Phlx members in 
the event the Phlx member is suffering from a systems issue or from the 
occurrence of unusual or unexpected market activity that would require 
them to withdraw from the market in order to protect investors. The 
ability to control risk at either the user or group level will permit 
the Phlx member to protect itself from inadvertent exposure to 
excessive risk at each level. Reducing such risk will enable Phlx 
members to enter quotes and orders without fear of inadvertent exposure 
to excessive risk, which in turn will benefit investors through 
increased liquidity for the execution of their orders. Such increased 
liquidity

[[Page 11309]]

benefits investors because they receive better prices and because it 
lowers volatility in the options market. For these reasons, the 
Exchange does not believe this proposal imposes an undue burden on 
inter-market competition because other exchanges offer the same 
functionality.

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 \15\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \16\ 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, 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-2016-23 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 Number SR-Phlx-2016-23. 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 Number SR-Phlx-2016-23, and should be 
submitted on or before March 24, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04636 Filed 3-2-16; 8:45 am]
BILLING CODE 8011-01-P