Document ID: SEC-2018-1522-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2018-10-02T04:00Z

[Federal Register Volume 83, Number 191 (Tuesday, October 2, 2018)]
[Notices]
[Pages 49596-49599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21365]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84290; File No. SR-Phlx-2018-59]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change To Amend Rules 1000, 1064, and 1069 To Allow 
for the Snapshot Functionality of the Floor Based Management System to 
be Used for All Orders

September 26, 2018.
    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 September 18, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 proposes to amend Exchange Rules 1000, 1064, and 1069 
to allow for the Snapshot functionality of the Floor Based Management 
System (``FBMS'') to be used for all orders.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.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
    On October 30, 2017, the Commission approved the Exchange's 
proposal to establish the ``Snapshot'' functionality within the Floor 
Broker Management System (now known as the ``Floor Based Management 
System'' or ``FBMS'').\3\ On July 17, 2018, the Commission approved 
another Exchange proposal to expand the availability of Snapshot to 
Registered Options Traders (``ROTs'') and Specialists.\4\
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    \3\ Securities Exchange Act Release No. 34-81980 (Oct. 30, 
2017), 82 FR 51313 (Nov. 3, 2017) (the ``Snapshot Approval Order''). 
As described in Exchange Rule 1063, FBMS is the electronic system 
that enables members to submit option orders represented or 
negotiated on the Exchange trading floor (the ``Floor'') to the 
Exchange's Trading System for execution and reporting to the 
consolidated tape. FBMS also facilitates the creation of an 
electronic audit trail for such orders.
    \4\ Securities Exchange Act Release No. 34-83656 (July 17, 
2018), 83 FR 34899 (July 23, 2018).
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    As set forth in Rule 1069, Snapshot allows a Floor Broker, ROT, or 
Specialist, at the time when they ``provisionally execute'' \5\ a trade 
in the

[[Page 49597]]

trading crowd, to capture and record the market conditions that 
prevailed at the time of the provisional execution.\6\ Once a member 
triggers a Snapshot by pressing a button on FBMS, the member has up to 
30 seconds to use the information captured by the Snapshot for purposes 
of entering the terms of the provisionally-executed trade into FBMS and 
submitting the trade to the Trading System. After 30 seconds, a 
Snapshot expires and can no longer be used to capture the market that 
existed at the time when it was taken. When a trade that is subject to 
a valid Snapshot is submitted to the Trading System, the trade will 
execute only to the extent that it is consistent with applicable 
priority and trade-through rules based upon the prevailing market at 
the time of the Snapshot. The Trading System will reject a trade 
subject to a Snapshot if it would violate trade-through or priority 
rules. Whenever a Snapshot becomes invalid due to expiration, rejection 
by the Trading System, or cancellation in anticipation of expiration or 
rejection, a member may take a new Snapshot that reflects the market 
prevailing at the time the new Snapshot is taken, provided that the 
member first re-announces the trade to the trading crowd and reaches a 
new agreement as to the terms of the trade.
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    \5\ A ``provisional execution'' occurs in the trading crowd when 
either (i) the participants to a trade reach a verbal agreement in 
the trading crowd as to the terms of the trade, or (ii) a Floor 
Broker announces a cross in accordance with Phlx Rule 1064(a). See 
Rule 1069(a)(i)(A).
    \6\ Snapshot records the time when a member triggers the 
functionality and the prevailing market conditions for an options 
class or series, which includes all information required to 
determine compliance with priority and trade through requirements, 
including the Away Best Bid and Offer, the Exchange Best Bid and 
Offer, customer orders at the top of the Exchange book, and the best 
bid and offer of all-or-none orders. See Rule 1069(a). The market 
conditions captured by Snapshot are derived from the same real-time 
market information that exists in the Trading System.
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    Snapshot exists to provide members with a means of mitigating risks 
that are inherent in a Floor-based options trading environment. In 
particular, Snapshot mitigates the risk that market conditions will 
shift between the time when members provisionally execute trades on the 
Floor in open outcry and the time when they enter such trades into FBMS 
and submit them to the Trading System for execution. This risk exists 
because, even with the advent of FBMS, which is the Exchange's 
electronic Floor order entry system, a member still must manually enter 
the terms of a trade into FBMS prior to submission to the Trading 
System. This manual process can take several seconds or more to 
complete, depending upon the complexity of the trade. The Exchange 
notes that this manual process is not required when trading in an all-
electronic environment, such that Snapshot also serves the purpose of 
rendering Floor trading venues more competitive with electronic venues.
    When the Exchange developed Snapshot, it made certain design 
choices, in coordination with the Commission, to mitigate the risk that 
Snapshot could be subject to overuse or abuse. For example, the 
Exchange limited the time period during which a Snapshot remains valid 
to 30 seconds. Moreover, once a Snapshot expires, a member may take a 
new Snapshot only after it re-announces the trade to the trading crowd 
and reaches a new agreement regarding its terms. Additionally, a member 
may have only one Snapshot outstanding across all option classes and 
series at a time. The Exchange also prohibits members from triggering 
Snapshot to obtain favorable priority or trade-through conditions or to 
improperly avoid unfavorable priority or trade-through conditions, and 
it surveils the market for proper use of Snapshot, both on a post-trade 
and a real-time basis.\7\
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    \7\ Conduct that would constitute a violation includes repeated 
instances in which members permit valid Snapshots to expire without 
submitting associated trades to the Trading System for verification 
and reporting to the Consolidated Tape, as well as repeated 
instances in which a member waits longer than is reasonably 
necessary to submit a trade subject to a Snapshot to the Trading 
System for execution.
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    Finally, to mitigate the risk of Snapshot overuse, the Exchange 
initially limited its applicability only to multi-leg orders and simple 
orders involving options on exchange traded funds (``ETFs'') that are 
included in the Options Penny Pilot. The Exchange limited Snapshot to 
these two categories of orders because they presented the most 
immediately compelling use cases for Snapshot.\8\
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    \8\ Snapshot Approval Order, supra, at 51315 (These types of 
orders were at ``heightened risk of failing to execute when market 
conditions change between the time when Floor Brokers and 
participants in the crowd agree upon the terms of the trade and the 
time when the Trading System receives the trade for verification and 
execution.'').
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    Snapshot became available for use by Floor Brokers on December 4, 
2017 and it recently became available to ROTs and Specialists. Since 
the Exchange first introduced Snapshot, it has monitored when Snapshot 
has been used and the frequency of such uses. Such monitoring reveals 
that concerns regarding the prospective misuse and abuse of Snapshot 
were greatly overstated. In fact, Snapshot was utilized only 24 times 
(21 times in executed trades, 3 times in rejected trades) over the 
course of eight months (December 2017-July 2018). In four of these 
eight months, it was not used at all. In the other four months in which 
Snapshot was used, it was used (successfully or otherwise) only once 
more than 10 times in a month and otherwise, no more than six times in 
a month.
    To improve the competitive position of the Exchange Floor relative 
to other venues, the Exchange now proposes to broaden the applicability 
of Snapshot to all orders. The Exchange believes that this proposal 
will make Snapshot simpler, more consistent, and useful in more 
circumstances than it is now. Moreover, the Exchange believes that its 
experience with Snapshot demonstrates that it can accommodate this 
proposal while continuing to systematically enforce trade-through and 
priority rules and without materially raising the risk that Snapshot 
will be overused or abused. The existing design controls that mitigate 
such risks will continue to apply, and if Surveillance--which will 
continue monitor Snapshot usage closely--detects a significant uptick 
in improper usage, then the Exchange will evaluate whether additional 
controls are appropriate.
    The Exchange expects to begin making Snapshot available for all 
orders before the end of the fourth quarter of 2018. The Exchange will 
notify members via an Options Trader Alert, to be posted on the 
Exchange's website, at least seven calendar days prior to the date when 
Snapshot will be available for expanded use.
    Lastly, the Exchange proposes to remove from Rules 1000 and 1064 
language that announced the initial launch of the Snapshot 
functionality in Q4 2017. This language is no longer required as 
Snapshot is operational.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ 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 to protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    Snapshot promotes just and equitable principles of trade and serves 
the interests of investors and the public by increasing the likelihood 
that investors will be able to execute their orders and do so in line 
with their expectations and needs. Similarly, Snapshot mitigates the 
risk that the Trading System will reject

[[Page 49598]]

a trade due to a change in market conditions that occurs between the 
time when the parties negotiate a lawful and valid trade on the Floor 
and the time when the Trading System receives it. The proposal to 
expand the applicability of Snapshot to all orders will broaden the 
scope of such protections.
    The expansion of Snapshot to all orders will also help Snapshot to 
better achieve its intended purpose of rendering the Exchange Floor 
more competitive with other trading venues at which the Exchange 
observes trade executions occurring seconds or even minutes after 
verifications occur, but on trading terms that existed as of the time 
of verification.
    The Exchange believes that it is consistent with the Act to broaden 
the applicability of Snapshot to all option orders traded on the 
Exchange Floor. Although multi-leg orders and simple orders in options 
on Options Penny Pilot ETFs were perhaps the most immediately 
compelling use cases for Snapshot, they are by no means the only use 
cases for the functionality. Indeed, all options orders that are 
negotiated on the Exchange Floor are subject to the same risk of market 
movement, to varying extents, from the time of their negotiation in 
open outcry to the time of their submission to the Trading System. For 
all of these orders, Snapshot will help to mitigate this risk. Enabling 
members to provisionally execute all categories of options on the Floor 
(using Snapshot when needed), rather than execute them in the Trading 
System, will not adversely impact investors or the quality of the 
market due to the controls that the Exchange proposes on the 
circumstances in which members may use Snapshot. In fact, the proposal 
will protect investors and the public interest by improving members' 
ability to execute orders negotiated on the Floor while continuing to 
ensure that all priority and trade through rules are systematically 
enforced.
    Moreover, this proposal is consistent with Rule 611 of Regulation 
NMS,\11\ which requires the Exchange to establish policies and 
procedures that are reasonably designed to prevent trade-throughs of 
protected quotations. Presently, the Exchange verifies that a proposed 
trade complies with the trade-through and priority rules as of the time 
when the Trading System receives the trade from FBMS; if the trade 
complies, then the Trading System executes the trade and reports it to 
the consolidated tape. However, the proposal would serve as an 
exception to this practice. It would permit members, upon reaching a 
meeting of the minds in the trading crowd regarding the terms of a 
trade, to take a Snapshot that provisionally executes the trade on the 
Floor. When the member submits the trade to the Trading System using 
Snapshot, the Trading System will verify that the provisionally 
executed trade complied with the trade-through and priority rules as of 
the time of its execution--i.e., the time when the crowd agreed to the 
terms of the trade and Snapshot was taken--rather than at the time when 
the Trading System receives the trade. If the Trading System determines 
that the provisionally executed trade complied with the trade-through 
and priority rules, then it will report the trade to the Consolidated 
Tape. If, however, the Trading System determines that the provisionally 
executed trade was non-compliant with the trade-through and priority 
rules as of the time when the Snapshot was taken, then it will reject 
the trade. In other words, even though the proposal will change the 
time of execution of a trade for purposes of verifying compliance with 
the trade-through and priority rules, the automated compliance 
verification process will otherwise be unchanged and will still apply 
to systematically prevent any violation of the trade-through and 
priority rules for all trades, including those utilizing Snapshot.
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    \11\ 12 CFR 242.611 [sic].
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    Finally, the Exchange's proposal accomplishes the above in a manner 
that: (1) Continues to provide automated and verifiable enforcement of 
applicable trade-through and priority rules; (2) is documented in 
writing and transparent; (3) provides for trade reporting to occur in a 
timely fashion, even for the most complex trades, and within a 30 
second time frame that is far less than the maximum 90 second reporting 
period allowable; and (4) imposes surveillance and responsible 
limitations upon Snapshot that ensure appropriate usage and prevents 
violations and abuse.

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.
    In fact, the proposal is pro-competitive for several reasons. The 
Exchange believes that the Snapshot feature will result in the 
Exchange's Floor operating more efficiently, which will help it compete 
with other floor-based exchanges.
    Moreover, the proposal helps the Exchange compete by ensuring the 
robustness of its regulatory program, ensuring members' compliance with 
that program, and by enhancing Customer protections through further 
utilization of electronic tools by members. The Exchange considers all 
of these things to be differentiators in attracting participants and 
order flow.
    Finally, the proposal does not impose an unreasonable burden on 
intramarket competition because the Exchange would make Snapshot 
available for use for all orders by all members that trade on the 
Options Floor.

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 [email protected]. Please include 
File Number SR-Phlx-2018-59 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-2018-59. 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 website (http://www.sec.gov/

[[Page 49599]]

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 website 
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 the filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2018-59 and should be 
submitted on or before October 23, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Eduardo A. Aleman,
Assistant Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-21365 Filed 10-1-18; 8:45 am]
 BILLING CODE 8011-01-P