Document ID: SEC-2013-0394-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-02-26T05:00Z

[Federal Register Volume 78, Number 38 (Tuesday, February 26, 2013)]
[Notices]
[Pages 13132-13138]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04359]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68960; File No. SR-Phlx-2013-09]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Enhance the Functionality Offered on 
Its Options Floor Broker Management System (``FBMS'') by, Among Other 
Things, Automating Functions Currently Performed by Floor Brokers

February 20, 2013.
    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 February 6, 2013, 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 is filing with the Commission a proposed rule change 
to enhance the functionality offered on its Options Floor Broker 
Management System (``FBMS'') in a number of ways, described in detail 
below. As a result of these enhancements, Floor Brokers will no longer 
execute most trades on the Exchange's options trading floor, resulting 
in changes to a number of rules.

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 proposal is to enhance the Exchange's options 
regulatory program by expanding the tools available to Floor Brokers in 
order to reduce the potential for violations of various Exchange rules 
by Floor Brokers. Specifically, under the proposal, most Floor Broker 
transactions will be executed through FBMS rather than verbally by 
Floor Brokers in the trading crowd, which should result in fewer 
priority rule and trade-through rule violations, because FBMS will 
check the Exchange's market and/or the National Best Bid/Offer 
(``NBBO'') to help prevent violations, as described further below.
    Today, Floor Brokers use FBMS for a number of reasons. 
Historically, Floor Brokers were not connected to the order entry 
portals like order flow providers are, because their business was 
focused on receiving orders at the Floor Broker booths on the trading 
floor and executing such orders in person, manually. As options trading 
has

[[Page 13133]]

become more electronic, this has continued to change over time, such 
that the Exchange began to provide technology to Floor Brokers, as did 
other options exchanges.\3\ The main driving force behind the creation 
of FBMS was the Consolidated Options Audit Trail System (``COATS''), 
mandated in 2000.\4\ The COATS requirements created the need for tools 
to assist Floor Brokers \5\ in complying with the requirement to 
capture certain options order information, including the time of order 
receipt and execution, contemporaneously with receipt and execution.
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    \3\ See e.g., Securities Exchange Act Release Nos. 41524 (June 
14, 1999) (SR-Phlx-99-11); 50070 (July 23, 2004) (SR-Phlx-2004-46); 
50996 (January 7, 2005) (SR-CBOE-2004-77); and 64057 (March 8, 2011) 
(SR-CBOE-2011-019) at note 4.
    \4\ See subparagraph IV.B.e(v) of the Order Instituting Public 
Administrative Proceedings Pursuant to Section 19(h)(1) of the 
Securities Exchange Act of 1934, Making Findings and Imposing 
Remedial Sanctions. See Securities Exchange Act Release No. 43268 
(September 11, 2000) (Requiring options exchanges to design and 
implement COATS to ``incorporate into the audit trail all non-
electronic orders such that the audit trail provides an accurate, 
time-sequenced record of electronic and other orders, quotations and 
transactions on such respondent exchange, beginning with the receipt 
of an order by such respondent exchange and further documenting the 
life of the order through the process of execution, partial 
execution, or cancellation of that order* * *'' (``Phase V'')).
    \5\ COATS is not just applicable to Floor Brokers but was 
particularly challenging for them because of the number of orders 
they executed manually.
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    In addition, today, Floor Brokers can use FBMS to submit orders, 
including Complex Orders, to Phlx XL, the Exchange's trading system 
rather than executing the order in the trading crowd. Those orders are 
processed just like any other electronic order on the Exchange, subject 
to the rules governing Phlx XL, such as Rule 1080. Floor Brokers may do 
so for a variety of reasons, including that the order is far away from 
the market such that the Floor Broker would prefer to place it on the 
electronic book or that there is a contra-side order on the book with 
which the order can trade.
    At this time, the Exchange proposes to expand upon FBMS 
functionality with several enhancements.
Complex Calculator
    The Exchange proposes to provide Floor Brokers with a feature 
called a complex calculator. Floor Brokers entering multi-leg option 
orders up to 15 legs on a net debit or net credit basis via FBMS would 
receive suggested prices for each component of the multi-leg order that 
would achieve the desired net debit or net credit price. Such prices 
would then be displayed on FBMS. The Floor Broker would not be required 
to submit the multi-leg order at the suggested prices; the new FBMS 
functionality is intended to function as a tool to assist Floor Brokers 
in calculating the component prices and expedite the process of 
handling multi-leg orders in the trading crowd.\6\ Accordingly, the 
Floor Broker can override the prices and attempt to achieve the net 
price using different prices. The net debit/credit price can also be 
expressed as an overall cash value. For example, a multi-leg order to 
purchase 100 of option A and sell 100 of option B could be entered with 
a net debit price of $5,000. If the option legs were trading $0.90-
$1.10 and $0.45--$0.55, respectively, the complex calculator could 
generate suggested prices of $1.00 and $0.50 [(($1.00 - $0.50)*100 
times)*100 options premium multiplier = $5,000], which would satisfy 
the $5,000 net debit.
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    \6\ The complex calculator functionality will not execute 
orders.
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    When a Floor Broker enters a trading crowd with a multi-leg order, 
often he or she will simply request a market for that order and 
announce a net debit or credit price, rather than separate prices for 
each component. For example, a Floor Broker representing a two-legged 
spread order to buy 10 XYZ Mar 50 calls and sell 10 XYZ Jun 60 calls 
may announce the price as a net debit of, for example, $1.00. This 
means that the purchase price for 10 XYZ Mar 50 calls is $1.00 greater 
than the selling price of 10 XYZ Jun 60 calls.\7\ Conversely, a net 
credit price of $1.00 would indicate that the purchase price of 10 XYZ 
Mar 50 calls is $1.00 less than the selling price of 10 XYZ Jun 60 
calls.\8\
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    \7\ The Floor Broker might pay, for example, $5.00 to purchase 
10 XYZ Mar 50 calls, and would receive $4.00 for the sale of 10 XYZ 
Jun 60 calls. This leaves the Floor Broker with a net debit of 
$1.00.
    \8\ In this example, the Floor Broker might pay $4.00 to 
purchase 10 XYZ Mar 50 calls, and would receive $5.00 for the sale 
of 10 XYZ Jun 60calls. This leaves the Floor Broker with a net 
credit of $1.00.
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    Currently, when a Floor Broker receives a single order that has 
multiple components with instructions to execute such order on a net 
debit or credit basis, the Floor Broker must first consider prices on 
various different markets, all as close to contemporaneously as 
possible. He must calculate the bid and ask of the total net debit and 
credit. If the Floor Broker is able to achieve the specified net debit 
or credit based upon the then-current market conditions, the Floor 
Broker will enter the trading crowd (after entering all of the required 
electronic audit trail information onto the FBMS in accordance with 
Exchange rules \9\) and request a market. The members of the trading 
crowd would then make their own calculations and respond with a net 
debit or credit price.\10\ Next, the Floor Broker must ascertain the 
current market price of each component of the order to determine 
whether or not the order can be executed at the specified net debit or 
credit price. Taking all of this into account, he must then execute the 
trade verbally in open outcry at the net debit or credit price. 
Following the verbal execution, he must consider whether the markets 
for the legs of the order are still the same as they were when he 
traded the order in open outcry. Often, those markets have changed in 
the small amount of time, perhaps one second, it took to announce and 
execute the trade in open outcry. If so, when the Floor Broker submits 
the trade for trade reporting, the trade report is marked as late or 
out of sequence to indicate that the trade report is at a price outside 
of the current market, even though the trade occurred within the market 
at the time.
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    \9\ See Rules 1063(e) and (f).
    \10\ The trading crowd will continue to have a reasonable time 
period to respond, but, over time, that time period has become 
shorter, as trading becomes more electronic, and the Exchange 
expects that to be the case following these changes as well. The 
Exchange will continue to provide guidance to trading crowds 
regarding what is a reasonable time period to respond, depending on 
a number of factors, including market conditions and the type of 
order.
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    This process can be time-consuming, especially when the order 
consists of a large number of components. It sometimes results in 
missed opportunities to trade at the market prices that would support 
the specified net debit or credit. Overall, the Floor Broker has 
significant manual order handling and post-trade responsibilities 
today.
    The new functionality proposed herein is intended to expedite this 
process by providing a calculation tool in the FBMS. The tool is 
intended to significantly reduce and potentially eliminate out of 
sequence or late trade reporting that often results due to the current 
protracted open outcry trade execution process. Specifically, once the 
Floor Broker has submitted the required electronic audit trail 
information into FBMS, FBMS will enable the Floor Broker to ``query'' 
the prices of each component of such an order such that the specified 
net debit or credit can be achieved. The System will then calculate the 
prices of each component and display those suggested prices. Initially, 
multi-leg orders with up to 15

[[Page 13134]]

legs will be accepted.\11\ The new feature will be in Rule 
1063(e)(iii).\12\
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    \11\ Today, without a complex calculator feature, FBMS accepts 
up to 20 legs. The Exchange believes that 15 legs should be 
sufficient for Floor Brokers' current business needs.
    \12\ The Exchange is proposing to delete the existing language 
of Rule 1063(e)(ii),which is obsolete.
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    In this way, the Floor Broker can quickly: (i) Expose the order to 
the trading crowd; (ii) ascertain whether the order can be executed at 
the specified net debit or credit, and (iii) if so, submit the 
prospective prices of the components of the order that will achieve the 
specified net debit or credit to FBMS for execution. The Exchange 
believes that the new calculation functionality will substantially 
increase the speed with which Floor Brokers can ascertain the 
marketability of multi-leg orders at a specified net debit or credit 
price, and should result in more efficient executions in the trading 
crowd.
    Today, Floor Brokers can enter Complex Orders \13\ consisting of 
two option legs into FBMS for execution using the Complex Order 
functionality of Phlx XL, pursuant to Rule 1080.08(b)(iii). The 
Exchange is proposing to permit orders up to six legs (one of which may 
be stock) to be entered through FBMS.\14\ One-sided (not crosses) 
Complex Orders are then subject to the Exchange' Complex Order 
processing, including an auction, placement on the Complex Order Book 
and/or execution by the System. The new complex calculator 
functionality assists Floor Brokers with pricing multi-leg orders for 
representation in the trading crowd as one-sided orders as well as with 
pricing multi-leg orders for submission for execution as a two-sided 
order, as discussed further below.
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    \13\ As distinguished from multi-leg orders under Rule 1066, 
Complex Orders are the specific types of orders accepted into Phlx 
XL's Complex Order process. See Phlx Rule 1080.08.
    \14\ The Exchange is also proposing to permit Do Not Auction 
(``DNA'') orders to be entered into FBMS as one of the new 
enhancements to FBMS. DNA orders are Complex Orders that are 
prevented from triggering a Complex Order Live Auction or joining 
one that is in progress. See Phlx Rule 1080.08(a)(viii) and (e).
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Execution of Two-Sided Orders
    Phlx proposes to provide enhanced order handling functionality to 
its Floor Brokers as part of its various enhancements to FBMS. Orders 
represented in the trading crowd by a Floor Broker must now, under this 
proposal, be submitted to FBMS for execution. Specifically, Floor 
Brokers will submit orders represented in the trading crowd as two-
sided orders (or crosses).\15\ This is described in proposed Rule 
1063(e)(iv) and Advice C-2 (and cross-referenced in Rule 1080.06) as 
follows: FBMS is designed to execute two-sided orders entered by Floor 
Brokers for execution, including multi-leg orders, after representation 
in the trading crowd.\16\ When a Floor Broker submits a two-sided order 
for execution by FBMS, the order will be executed based on existing 
markets and Exchange rules. If the order cannot be executed due to, for 
example, change in the market, the System will attempt to execute the 
order a number of times for a period of no more than one second, which 
period shall be established by the Exchange and announced by Options 
Trader Alert, after which it will be returned to the Floor Broker on 
the FBMS. The Floor Broker may resubmit the two-sided order for 
execution, as long as the quotes/orders that comprise the order have 
not been withdrawn.\17\ Floor Brokers are responsible for handling all 
orders in accordance with Exchange priority and trade-through rules, 
including Rules 1014, 1033 and 1084.
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    \15\ The reason they are two-sided orders is either that the 
order came in to the Floor Broker with both sides and was handled 
pursuant to Rule 1064 or that the Floor Broker represented the order 
to the trading crowd, thereby finding the second side.
    \16\ This proposal does not permit executions in a Floor Broker 
booth or elsewhere, nor does it affect how Qualified Contingent 
Cross orders are handled.
    \17\ See discussion surrounding proposed Rule 1000(g) below.
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    The new FBMS functionality will thereby perform automatically the 
functions previously handled manually by Floor Brokers, such as 
checking the Phlx book.\18\ Accordingly, FBMS will now assist Floor 
Brokers with this function by ``clearing the book.'' For example, if a 
Floor Broker enters a two-sided order through the new FBMS and there is 
an order on the book at a price that prevents the Floor Broker's order 
from executing, FBMS will indicate to the Floor Broker how many 
contracts need to be satisfied before the Floor Broker's order can 
execute at the agreed-upon price. If the Floor Broker agrees to satisfy 
that order, consistent with the order placed in his care, he can cause 
FBMS to send a portion of one of his orders to Phlx XL to trade against 
the order on the book, thereby clearing it and permitting the remainder 
of the Floor Broker's order to trade. This functionality is optional in 
the sense that the Floor Broker can decide not to trade against the 
book, consistent with order instructions he has been given,\19\ and 
therefore not execute his two-sided order at that particular price. 
Today, the Floor Broker employs the same process, albeit in two 
separate steps, to clear the book, including considering whether one 
side of his two-sided order can, in effect, give up a certain number of 
contracts in order for the rest of the order to trade at that 
price.\20\ FBMS will not similarly assist the Floor Broker with 
checking and clearing away markets if the NBBO is better at another 
market, but FBMS will prevent the order from executing through the 
NBBO, consistent with Exchange rules, as described below.
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    \18\ Checking the Phlx book refers to making sure that an order 
is not executed outside of Phlx's priority provisions which 
generally give priority to the best price, and then customers at a 
given price.
    \19\ For example, the Floor Broker may have been instructed to 
trade a certain minimum amount.
    \20\ Of course, the Floor Broker must exercise due diligence in 
the execution of the order pursuant to Rule 155. Presumably, Floor 
Brokers' clients send them orders (rather than entering them 
electronically into Phlx XL), because they desire the order handling 
that a Floor Broker provides; if the client wanted a portion of 
their order to trade against the book, they could submit their order 
to do so. Nothing requires the book to be cleared if the client or 
Floor Broker determines not to pursue the execution of their order 
at that time.
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    FBMS will not execute an order that violates the priority of orders 
on the book \21\ or trades through the NBBO for an option.\22\ Thus, 
sometimes, when a Floor Broker submits an order for execution, the 
order will not be executed. One reason could be that the price of the 
trade would result in a trade through of the NBBO for that option, 
which is prohibited by Rule 1084(a). There is an exception from the 
trade through prohibition for ``Complex Trades.'' \23\ If an order 
meets the requirements of a Complex Trade, FBMS will execute such 
order.
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    \21\ See Rules 1014 and 1033.
    \22\ See Rule 1084(a).
    \23\ Rule 1084(b)(viii).
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    Another reason why an order might not be executable by FBMS is if 
the Exchange's priority rules would not permit an execution at a 
certain price, because, for example, there is an order on the book at 
that price and certain priority rules apply.\24\ FBMS, before executing 
an order, will validate that a multi-leg order meets the definition of 
Complex Order in Rule 1080.08 \25\ and will apply a new spread priority 
provision, which is the same in Rule 1080.08(c)(iii) applicable to the 
Exchange's complex order functionality in Phlx XL. The new provision 
will be in Rule 1033(i) \26\ and state that, in FBMS, an order can be 
executed at a

[[Page 13135]]

total net credit or debit with priority over either the bid or the 
offer established in the marketplace that is not better than the bids 
or offers comprising such total credit or debit, provided that (i) at 
least one option leg is executed at a better price than established bid 
or offer for that option contract, and (ii) no option leg is executed 
at a price outside of the established bid or offer for that option 
contract. For example, a multi-leg order to purchase option A and sell 
option B for a net debit of $0.50 would not be permitted to trade if 
option A was quoted as $1.00-$1.05 and option B was quoted as $0.50-
$0.55 because there are no prices which satisfy the net debit. However, 
if option A was quoted as $0.95 bid instead of $1.00 as stipulated 
above, FBMS would allow a $0.50 debit in this strategy to trade with 
option prices of $1.00 and $0.50.
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    \24\ Like executions of all electronic orders on Phlx XL, all-
or-none orders do not have standing and are not taken into 
consideration. See Advice A-9.
    \25\ Complex Orders must have a conforming ratio.
    \26\ The current language of Rule 1033(i) is being deleted, as 
explained below.
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    If a multi-leg order does not comply with the definition of Complex 
Order because it has more than six legs, its execution in FBMS will 
nevertheless be subject to new Rule 1033(i) if it is an order with a 
conforming ratio. Today, for executions on the trading floor, Rule 
1033(d), (e), (g) and (h) effectively require one leg of a spread to be 
improved for every two legs of a multi-leg order. Under this proposal, 
a different priority provision will apply to multi-leg orders executed 
through FBMS with more than six legs than does today on the trading 
floor. Rather than requiring one leg out of every two legs in a multi-
leg order to be improved, only one total leg needs to be improved. This 
is the same as for Complex Orders traded on Phlx XL pursuant to Rule 
1080.08(c)(iii). For example, assuming all of these options do not 
trade in penny increments, and assume that the market for option A is 
$1.00-$1.05, option B is $0.50-$0.55, option C is $0.60-$0.80 and 
option D is $0.20-$0.25. Based on these markets, the combined market 
for an order to buy option A, sell option B, buy option C, and sell 
option D is $0.80-$1.15. An order to buy option A, sell option B, buy 
option C, and sell option D could trade at $1.10 with option A trading 
at $1.05, option B trading at $0.50, option C trading at $0.75 (this is 
the leg improving the market), and option D trading at $0.20. The 
Exchange believes that extending the spread priority provision that 
exists for Complex Orders to orders with more than six legs executed 
through FBMS is consistent with the Act, as described further below. 
The Exchange notes that other options exchanges, such as the ISE, have 
similar complex order priority provisions for Complex Orders that do 
not limit the number of legs and require only one leg to be improved.
    In addition, an order may be subject to special priority treatment 
pursuant to Rule 1014.05. If an order is for 500 contracts or more or 
if one leg of a multi-leg order is for 500 contracts or more, then such 
order or individual leg of a multi-leg order has priority over bids/
offers other than customers on the book and crowd participants 
(including other Floor Brokers representing orders in the trading 
crowd). FBMS will prevent an execution if there is a customer order at 
that price; the Floor Broker must ensure that there is no bid/offer in 
the trading crowd. In the aforementioned example where the order is to 
buy option A and sell option B for a net debit of $0.50 and the market 
for option A is $1.00-$1.05 and option B is $0.50-$0.55, if each leg of 
the spread is for 500 contracts or more, then pursuant to Rule 1014.05, 
each leg has priority over existing bids/offers at that price, except 
customer interest and crowd participants. Thus, if each leg was for 500 
contracts, option A and option B would be permitted to trade at a net 
debit of $0.50 with execution prices of $1.00 and $0.50, respectively. 
The execution would not be allowed to occur if there was customer 
interest at either $1.00 in option A or $.50 in option B.
    Similarly, whether or not an order complies with the definition of 
a Complex Order, FBMS will execute orders at split prices like can be 
done on the trading floor today, consistent with Rule 1014(g)(i)(B). 
Rule 1014(g)(i)(B) provides that if a member purchases (sells) 50 or 
more option contracts of a particular series at a particular price or 
prices, he shall, at the next lower (higher) price have priority in 
purchasing (selling) up to the equivalent number of option contracts of 
the same series that he purchased (sold) at the higher (lower) price or 
prices, but only if his bid (offer) is made promptly and the purchase 
(sale) so effected represents the opposite side of a transaction with 
the same order or offer (bid) as the earlier purchase or purchases 
(sale or sales). When the market has a bid/ask differential of one 
minimum trading increment and the bid and/or offer represent the 
quotation of an out-of-crowd SQT or an RSQT, such member shall have 
priority over such SQT and/or RSQT with respect to both the bid and the 
offer. For example, a Floor Broker may purchase 100 options for $5.25 
when the quoted market is $5.20-$5.30 by executing 50 contracts at 
$5.30 and 50 contracts at $5.20.
    Exchange rules also govern the execution prices for multi-leg 
orders where one leg is the underlying security (stock). Rule 1033(e) 
provides that a synthetic option order may be executed at a total net 
credit or debit, provided that, the member executes the option leg at a 
better price than the established bid or offer for that option 
contract, in accordance with Rule 1014. If there is more than one 
option leg and stock, Rule 1033(d) applies. Synthetic option orders in 
open outcry, in which the option component is for a size of 100 
contracts or more, have priority over bids (offers) of crowd 
participants who are bidding (offering) only for the option component 
of the synthetic option order, but not over bids (offers) of public 
customers on the limit order book, and not over crowd participants that 
are willing to participate in the synthetic option order at the net 
debit or credit price. FBMS will validate that an order complies with 
these requirements.\27\
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    \27\ The stock portion of such orders is handled by the Floor 
Broker, not on the Exchange (off Exchange). The Floor Broker must 
validate, after representing the order in the trading crowd, whether 
there are crowd participants bidding/offering.
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    As discussed above, today, when a Floor Broker executes an order in 
the trading crowd verbally, that order is deemed executed; when the 
Floor Broker is entering the execution price into FBMS to complete the 
processing of the trade, including trade reporting to the tape, markets 
can change. Because the trade has already occurred, the fact that the 
Exchange's best bid/offer changes before the trade is reported does not 
matter, as long as the trade was at a valid price when the trade 
occurred. However, the trade may appear to have violated priority or 
trade through rules to someone looking at a time-sequenced audit trail. 
The Exchange's surveillance programs endeavor to ascertain whether such 
a violation occurred. From the Floor Broker's perspective, the time 
stamp on the order ticket is intended to capture the time of order 
execution and is the relevant time to determine whether a violation 
occurred, rather than the time of trade reporting. Determining whether 
or not a violation occurred and whether a disciplinary process should 
ensue is currently a manually-driven event; this proposal seeks to 
introduce better time sequencing and certainty about when a trade 
occurred, and, to the extent possible, cause executions through FBMS to 
comply with the applicable exchange rules.
    In short, the proposed execution functionality of FBMS should help 
ensure the certainty about when a trade

[[Page 13136]]

occurred and what the market was at the time, consistent with Exchange 
rules.
No Floor-Based Executions
    One of the most significant changes proposed herein is that most 
orders handled by Floor Brokers (limited exceptions apply) will now be 
executed through FBMS and not verbally by Floor Brokers in the trading 
crowd. Accordingly, the Exchange is proposing to amend a variety of 
rules applicable to Floor Brokers to make clear that Floor Brokers 
handle orders, rather than execute them. These include Rule 155, Rule 
1033(d), (e), (f), (h) and (i), Rule 1060, Rule 1063(c) and .02, and 
Advices C-1 and C-3.
    In addition, the Exchange proposes to adopt Rule 1000(f) to 
expressly state that all Exchange options transactions shall be 
executed in one of the following ways, once the Exchange's new FBMS 
functionality has been operating for a certain period to be established 
by the Exchange: (I) Automatically by the Exchange Trading System, Phlx 
XL, pursuant to Rule 1080 and other applicable options rules; (ii) by 
and among members in the Exchange's options trading crowd neither of 
whom is a Floor Broker; or (iii) through the FBMS for trades involving 
at least one Floor Broker. The rule will further state that although 
Floor Brokers represent orders in the trading crowd, Floor Brokers are 
not permitted to execute orders in the Exchange's options trading 
crowd, except when the Exchange determines to permit manual executions 
in the event of a problem with Exchange systems, except with respect to 
accommodation transactions pursuant to Rule 1059 and FLEX trades 
pursuant to Rules 1079 or 1079A, and except where there are more than 
15 legs of an order. Accordingly, certain executions will still occur 
manually in the trading crowd and not through FBMS. Specifically, FLEX 
orders will continue to be executable by Floor Brokers in the trading 
crowd pursuant to Rule 1079 and 1079A, rather than through FBMS. This 
is because FBMS will not be able to accept FLEX orders, which have 
varied and complicated terms. Similarly, accommodation transactions 
(also known as cabinet trades) will continue to be executable by Floor 
Brokers in the trading crowd pursuant to Rule 1059. Neither FLEX nor 
accommodation transactions are executed through Exchange systems today. 
Floor Brokers will also be permitted to execute orders in the trading 
crowd if they are handling an order with more than 15 legs, because the 
Exchange determined to limit the complexity of FBMS functionality and 
does not believe that many orders fall into this category or that Floor 
Brokers will be adversely affected.
    Trades not involving a Floor Broker will still be executable 
verbally in the trading crowd.\28\ For example, a specialist trading 
with a Registered Options Trader ('' ROT'') will continue to be able to 
do so; specialists and ROTs do not have FBMS, because it is a tool for 
Floor Brokers. The Exchange does not expect that the number of trades 
occurring manually will be significant.
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    \28\ The restriction from manual trading in Rule 1000(f) is 
limited to trades involving at least one Floor Broker. See proposed 
Rule 1000(f)(ii).
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    The Exchange proposes to amend the following rules to make clear 
that certain orders must be executed through the FBMS: Rule 1064(a), 
(b), (c) and 1064.04(h).\29\
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    \29\ Rather than making changes to Advice B-11, which generally 
tracks the language of Rule 1064, the Exchange proposes to delete 
it. Some Advices have fine schedules adopted pursuant to the 
Exchange's minor rule enforcement and reporting plan, such that they 
are necessary, but this one does not.
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    Specifically, such orders are not deemed executed upon agreement 
and verbalization in the trading crowd, but rather once entered and 
processed as two-sided orders through FBMS. The language will provide: 
All such orders are not deemed executed until entered into and executed 
by FBMS; bids and offers can be withdrawn pursuant to Rule 1000(g). As 
explained above, it will be possible that FBMS will not execute an 
order because market conditions have changed, preventing the execution 
from occurring, in which case FBMS ``returns'' the order to the Floor 
Broker,\30\ who can then determine to resubmit it. The Exchange also 
proposes to amend Rule 1014(g)(vi) and Advice F-2, which pertain to how 
trades are allocated, matched and time stamped. In order to facilitate 
timely tape reporting of trades, it is the duty of certain persons 
identified in these provisions to allocate, match and time stamp trades 
executed in open outcry and to submit the matched trade tickets to an 
Exchange Data Entry Technician (``DET'') located on the trading floor 
immediately upon execution. Trades executed electronically via the XL 
System are automatically trade reported without further action required 
by executing parties; these provisions will now also state that trades 
executed electronically through FBMS are also automatically trade 
reported.
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    \30\ The System will first attempt to execute the order a number 
of times for a certain number of seconds.
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    The Exchange also proposes to amend Rule 1066, Certain Types of 
Orders Defined, and rename it ``Certain Types of Floor-Based (Non-Phlx 
XL) Orders Defined'' to make clear that the order types in the rule 
reflect what can be traded on the floor. The order types that are 
handled and executed automatically by Phlx XL appear in Rule 1080. The 
Exchange is also proposing introductory language specifically stating 
that these order types are eligible for entry by a Floor Broker for 
execution through FBMS and, respecting transactions where there is no 
Floor Broker involved, for execution by members in the trading crowd. 
Rule 1066 is also proposed to be amended to delete the following order 
types, because FBMS will not accept these order types: \31\ Multi-part 
order, delta order, market-on-close order, and one-cancels-the-other 
order.\32\ These order types are being deleted because they are not 
easily automated and are rarely used. Once the proposal is in full 
effect, these deleted order types will not be available on the 
Exchange, neither through the PHLX XL nor on the trading floor 
(including by non-Floor Brokers such as ROTs and specialists). The 
Exchange does not believe that this is a significant change, because 
these are not common order types.
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    \31\ The Exchange is also proposing to delete Rule 1033(i), 
Inter-Currency Spread Priority, because FBMS will not handle order 
multi-leg orders involving two different underlying currencies; 
these trades rarely occur.
    \32\ This order type is also being deleted from Rule 1063(b).
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    The Exchange proposes to rename ``Hedge Order'' in Rule 1066(f) to 
``Multi-leg Order,'' and make corresponding changes in Rule 1033, 
1063(e) and Advices C-2 and F-14. A synthetic options order will also 
be re-categorized as a type of multi-leg order in Rule 1066(f)(5), 
rather than a separate order type in Rule 1066(g). The definition and 
description of an Intermarket Sweep Order will be moved from Rule 
1066(i) to Rule 1080.03 because it is (and will continue to be) only 
available on Phlx XL. The definition is not changing. Rule 1066(f) will 
also be amended to add three new definitions--Spread Type Order, and 
Complex Order, to help distinguish between the multi-leg orders that 
also meet the definition of Complex Order in Rule 1080.08 from those 
that do not,\33\ and DNA Order which will now be accepted through FBMS 
for all orders, not just Complex Orders. In sum, Rule 1066, as revised, 
will contain all of the order types available for open outcry trading 
on the trading floor and through FBMS; Rule 1080 will continue to

[[Page 13137]]

govern the order types available through PHLX XL.
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    \33\ A spread type order, which can only be entered through 
FBMS, can have up to 15 legs, while a Complex Order entered for 
handling through PHLX XL can have up to six legs, each including the 
underlying security.
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    Lastly, the Exchange proposes to adopt new Rule 1000(g) to codify 
how bids and offers are made and maintained on the trading floor, 
because the Exchange believes that eliminating most Floor Broker verbal 
executions will place additional emphasis on how long a bid/offer is in 
effect. Today, Rule 110 \34\ provides, in pertinent part, that bids and 
offers must be made in an audible tone of voice. A member shall be 
considered ``in'' on a bid or offer, while he remains at the post, 
unless he shall distinctly and audibly say ``out.'' A member bidding 
and offering in immediate and rapid succession shall be deemed ``in'' 
until he shall say ``out'' on either bid or offer. The Exchange 
proposes to add this language to new Rule 1000(g), Manner of Bidding 
and Offering, as well as additional language to address how a member 
can be ``out'' of a bid/offer when dealing with a Floor Broker using 
FBMS. Specifically, a member must say ``out'' before the Floor Broker 
submits the order into the FBMS for execution (and before each time the 
Floor Broker resubmits the order). Otherwise, once such order is 
submitted and electronically executed, the quoting member cannot 
withdraw his/her bid/offer. To more fully address this aspect of floor 
trading, the Exchange proposes to state that once the trading crowd has 
provided a quote, it will remain in effect until: (A) a reasonable 
amount of time has passed, or (B) there is a significant change in the 
price of the underlying security, or (C) the market given in response 
to the request has been improved. In the case of a dispute, the term 
``significant change'' will be interpreted on a case-by-case basis by 
an Options Exchange Official \35\ based upon the extent of the recent 
trading in the option and, in the case of equity and index options, in 
the underlying security, and any other relevant factors. This language 
is currently used in Rule 1064.02(v) to emphasize when bids/offers are 
in effect, which will be helpful to emphasize with these new FBMS 
enhancements. The concepts are not new; they are merely being codified 
into the options portion of the rules.
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    \34\ Rule 110 is also proposed to be renamed from ``Bids and 
Offers--Precedence'' to Bids and Offers--Manner,'' to better cover 
its content.
    \35\ See Rule 124.
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    The changes proposed herein will be incorporated into any 
applicable fine schedules under the Exchange's minor rule violation 
plan. Although the Exchange is not adding any new fine schedules or 
changing any fines, the Exchange is proposing to add the new electronic 
trading requirement to Advice C-2, Options Floor Broker Management 
System, which will continue to be subject to the existing fine 
schedule. The changes to Advices C-1, C-3 and F-14, which also have a 
fine schedule, are minor. Advice C-1 is being amended to require that a 
Floor Broker ascertain the presence of at least one ROT in the trading 
crowd where an option is traded (rather than executed). Advice C-3(c), 
regarding opening orders of ROTs, is being amended to reflect that 
Floor Brokers will handle rather than execute orders. Advice F-14 is 
being amended to replace the term ``hedge order'' with ``multi-leg 
order.'' The change to Advice F-2, Allocation, Time Stamping, Matching 
and Access to Matched Trades, results in fewer trades being subject to 
it, because electronic trades, which there will be more of, are 
automatically matched and reported.
Implementation
    The Exchange proposes to implement the enhancements with a trial 
period of two to four weeks, to be determined by the Exchange, during 
which the new FBMS enhancements and related rules will operate along 
with the existing FBMS and rules. The Exchange seeks to begin 
implementation in February 2013 and complete it in March 2013. Thus, 
Floor Brokers and their personnel will be able to get accustomed to the 
new features over a period of time, before the old FBMS is no longer 
available. During this period, Floor Brokers will still be able to 
execute orders verbally in the trading crowd and submit the execution 
reports through FBMS, like they do today. Floor Brokers will also be 
able to use the new FBMS to execute trades. The Exchange is adopting 
new rule language into Rule 1000(f) to address this trial period. The 
Exchange believes that this trial period is reasonable and should 
assist Floor Brokers and their staff in learning the new features.
Conclusion
    The Exchange believes that the proposed enhancements to FBMS (and 
resulting changes in priority rules) will strengthen its regulatory 
program and modernize how trading occurs on the options trading floor. 
The Exchange does not believe that the proposal will adversely impact 
Floor Brokers, specialists or ROTs significantly. Specifically, the 
additional automation should reduce the possibility of Floor Broker 
violations and mistakes, which should, in turn, reduce their regulatory 
liability. Of course, there is likely to be a period of adjustment 
while Floor Brokers become accustomed to executions occurring through 
the System rather than verbally, but the Exchange believes that the 
implementation period should be helpful. The Exchange believes that the 
benefit of reduced, and in some instances the elimination of certain 
violations outweighs the potential inconvenience of a new system where 
the system, rather than the Floor Broker executed the order.
    With respect to the potential adverse impact on specialists and 
ROTs, the Exchange acknowledges that it may be challenging for them to 
adapt to the new FBMS process, because they may be asked to make 
markets more quickly. As stated above, the trading crowd will continue 
to have a reasonable time period to respond, and the Exchange will 
continue to provide guidance to trading crowds regarding what is a 
reasonable time period to respond, depending on a number of factors, 
including market conditions and the type of order. Nevertheless, with 
respect to orders with multiple legs, the challenge for specialists and 
ROTs will be to respond to a Floor Broker with a market when the Floor 
Broker has had the opportunity to look at each leg and price the whole 
order, whereas specialists and ROTs first hear of the details when the 
Floor Broker announces the order in the trading crowd. To address this, 
the Exchange intends to, in providing guidance on what is a reasonable 
time period to respond before the Floor Broker can submit an order for 
execution, consider the complexity of multi-leg orders.
    The Exchange does not believe that this proposal will adversely 
affect market quality on the Exchange. To the contrary, the Exchange 
believes that it should enhance market quality by providing quicker and 
more reliable confirmation of trade executions, because automating 
executions of Floor Brokered orders results in automated trade 
reporting and more certainty about which orders have been executed. 
Crowd participants will benefit from increased trade certainty and 
fewer regulatory inquiries related to trades that are reported late and 
or out of sequence. Floor Brokered orders today are require to be 
reported within 90 seconds, which has proven to be challenging for 
multi-leg orders. The Exchange believes that quicker reporting and the 
resulting certainty about trade executions should benefit all market 
participants, including Floor Brokers, specialists and ROTs.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b)

[[Page 13138]]

of the Act \36\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \37\ 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. Specifically, the new calculation function of FBMS is a tool 
for Floor Brokers that should enhance their ability to calculate the 
prices of the components of a multi-leg order, which should increase 
the speed with which they can represent such orders, thereby making the 
Exchange's markets more efficient, all to the benefit of the investing 
public. In addition, the Exchange believes that the requirement to 
execute most Floor Broker transactions through FBMS is a sound one, 
consistent with the aforementioned provisions, intended to reduce 
certain types of rule violations and further automate Exchange trading, 
without imposing an undue burden on Floor Brokers. For the same 
reasons, the new FBMS execution functionality is also consistent with 
these statutory standards and should improve how trading occurs on the 
Exchange.
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    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange also believes that the proposal to adopt a new FBMS 
priority provision in Rule 1033(i) akin to Complex Order priority 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 improving Floor Brokers' ability to execute multi-
leg orders, to the benefit of customers and other market participants. 
Multi-leg orders are different than regular orders and more complicated 
to execute. The priority rules applicable to ``spread'' orders on the 
various exchanges balance the difficulty of executing related orders 
within existing individual markets with the importance maintaining a 
priority model that makes clear in what orders executions occur. The 
Exchange does not believe that this is a significant or controversial 
change, because other exchanges automatically execute orders with many 
legs and only require one leg to be improved.

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 
these enhancements to FBMS should result in the Exchange's trading 
floor operating in a more efficient way, which should help it compete 
with other floor-based exchanges and help the Exchange's Floor Brokers 
compete with floor brokers on other options exchanges. The proposal 
does not impose a burden on intra-market competition not necessary or 
appropriate in furtherance of the purposes of the Act, because it 
modernizes floor trading without undue impact on any particular segment 
of the membership, as explained above. Overall, the proposal is pro-
competitive for several reasons; in addition, to helping Phlx Floor 
Brokers compete for executions against floor brokers at other 
exchanges, it also helps them be more efficient and compete more 
effectively against fully electronic executions. This, in turn, helps 
the Exchange compete against other exchanges in a deeply competitive 
landscape comprised of ten other options exchanges. In addition, the 
proposal helps the Exchange compete by ensuring the robustness of its 
regulatory program, Floor Brokers' compliance with applicable rules, 
and enhancing customer protection through further utilization of 
electronic tools my members, which can be a differentiator in 
attracting participants and order flow and which should benefit 
customers in the long term.

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 Number SR-Phlx-2013-09 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-2013-09. 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 offices 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-2013-09, 
and should be submitted on or before March 19, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04359 Filed 2-25-13; 8:45 am]
BILLING CODE 8011-01-P