Document ID: SEC-2017-1836-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2017-11-08T05:00Z

[Federal Register Volume 82, Number 215 (Wednesday, November 8, 2017)]
[Notices]
[Pages 51899-51902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24253]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81999; File No. SR-Phlx-2017-85]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the Price 
Improvement XL Auction

November 2, 2017.
    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 October 26, 2017, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III, below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend Rule 1080(n) related to Phlx's Price 
Improvement XL (``PIXL'') auction.
    The text of the proposed rule change is available on the Exchange's 
Web site 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
    The Exchange proposes to amend the PIXL rule at 1080(n) to: 1. 
Include a surrender provision; 2. update a reference to the NBBO to 
provide specificity to the rule; and 3. correct a typographical error, 
update a cross-reference and relocate rule text.
Surrender
    The Exchange proposes to adopt a surrender provision within Rule 
1080(n) for its PIXL auction similar to the surrender provision that is 
applicable to Nasdaq BX, Inc.'s (``BX'') surrender provision in the BX 
price improvement auction (``PRISM'') at Chapter VI, Section 9.
Current PIXL
    By way of background, today, only one PIXL Auction may be conducted 
at a time in any given series. Once commenced, an Auction may not be 
cancelled and would proceed as described herein. To initiate the 
Auction, the Initiating Member must mark the PIXL Order for Auction 
processing, and specify either: (a) A single price at which it seeks to 
execute the PIXL Order (a ``stop price''); (b) that it is willing to 
automatically match as principal or as agent on behalf of an Initiating 
Order the price and size of all PIXL Auction Notifications (``PAN'') 
responses, and trading interest (``auto-match'') in which case the PIXL 
Order will be stopped at the better of the NBBO or the Reference BBO 
\3\ on the Initiating Order side; \4\ or (c) that it is willing to 
either: (i) Stop the entire order at a single stop price and auto-match 
PAN responses and trading interest at a price or prices that improve 
the stop price to a specified price (a ``No Worse Than'' or ``NWT'' 
price); (ii) stop the entire order at a single stop price and auto-
match all PAN responses and trading interest at or better than the stop 
price; or (iii) stop the entire order at the better of the NBBO or 
Reference BBO on the Initiating Order side, and auto-match PAN 
responses and trading interest at a price or prices that improve the 
stop price up to the NWT price. In all cases, if the PBBO on the same 
side of the market as the PIXL Order represents a limit order on the 
book, the stop price must be at least one minimum price improvement 
increment better than the booked limit order's limit price. Once the 
Initiating Member has submitted a PIXL Order for processing as 
described herein, such PIXL Order may not be modified or cancelled.\5\
---------------------------------------------------------------------------

    \3\ The Reference BBO shall mean the internal best bid and offer 
on Phlx.
    \4\ This is accomplished by marking the Initiating Order with a 
market price.
    \5\ Under no circumstances will the Initiating Member receive an 
allocation percentage, at the final price point, of more than 50% 
with one competing quote, order or PAN response or 40% with multiple 
competing quotes, orders or PAN responses when competing quotes, 
orders or PAN responses have contracts available for execution.
---------------------------------------------------------------------------

Proposed PIXL Amendment
    At this time, the Exchange proposes to add a paragraph to Rule 
1080(n)(ii)(A)(1) stating that, when starting an Auction, the 
Initiating Member may submit the Initiating Order with a designation of 
``surrender'' to other PIXL participants (``Surrender''), which will 
result in the Initiating Member forfeiting priority and trade 
allocation privileges which he or she is otherwise entitled to as per 
subsection

[[Page 51900]]

(n)(ii)(E)(a) of Rule 1080(n).\6\ If Surrender is specified the 
Initiating Order will only trade if there is not enough interest 
available to fully execute the PIXL Order at prices which are equal to 
or improve upon the stop price. Phlx will allow surrender only for the 
entire amount, not for a partial amount. Surrender will not be applied 
if both the Initiating Order and PIXL Order are Public Customer Orders.
---------------------------------------------------------------------------

    \6\ Depending on the option selected, the Initiating Member may 
elect in the single stop option selection to give up the allocation 
priority, if Surrender is selected, or with the auto-match option 
the Initiating Member will only be allocated the remainder in 
accordance with the allocation percentages specified in Rule 
1080(n)(ii)(E)(2)(b). The Surrender feature only applies to the 
single stop price feature. By definition the purpose of the auto-
match feature is that the Initiating Member is going to match all 
responses and seek a greater allocation. This language is at odds 
with the Surrender feature where the Initiating Member is not 
seeking allocation.
---------------------------------------------------------------------------

    The Surrender function will never result in more than the maximum 
allowable allocation percentage to the Initiating Participant than that 
which the Initiating Member would have otherwise received in accordance 
with the allocation procedures set forth in this Rule. Surrender 
information will not be available to other market participants and may 
not be modified. The proposed provisions are similar to surrender 
provisions on BX PRISM.\7\
---------------------------------------------------------------------------

    \7\ See Chapter VI, Section 9(ii)(A)(i).
---------------------------------------------------------------------------

    Similarly, the Exchange proposes to add a new paragraph at Rule 
1080(n)(ii)(A)(2) which provides a similar provision for Complex 
Orders.\8\ The proposed provision would provide that when starting a 
PIXL Complex Order Auction, the Initiating Member may submit the 
Initiating Order with a designation of Surrender to the other PIXL 
participants which will result in the Initiating Member forfeiting the 
priority and trade allocation privileges which he is otherwise entitled 
to as per subsection (n)(ii)(E)(2)(d) of Rule 1080(n). If Surrender is 
specified the Initiating Order will only trade if there is not enough 
interest available to fully execute the PIXL Order at prices which are 
equal to or improve upon the stop price. Throughout the rule where 
allocation is specified a notation is added to account for any 
surrender, if applicable such as in 1080(n)(ii)(E)(2)(a) and (d).
---------------------------------------------------------------------------

    \8\ Today, BOX Options Exchange LLC (``BOX'') utilizes a 
Surrender feature in its Complex Order Price Improvement Period or 
``COPIP.'' See also BOX Rule 7245.
---------------------------------------------------------------------------

NBBO Reference
    The Exchange proposes to reword Rule 1080(n)(ii)(F) to add 
specificity to the current rule text. The Exchange proposes to state 
that ``If there are PAN responses (except if it is a Complex Order) 
that cross the better of the Reference BBO and NBBO (provided such NBBO 
is not crossed) or Complex Order PAN responses that cross the then-
existing cPBBO at the time of the conclusion of the Auction, such PAN 
responses will be executed, if possible, at their limit price(s).'' In 
certain instances, a resting order or quote may be internally priced at 
a non-displayed price and would differ from the PBBO. The Internal BBO 
or ``Reference BBO'' would differ from the PBBO in a situation where 
the System prevents trade-throughs and locked and crossed markets. In 
these instances, interest will not be executed at a price that trades 
through another market or is displayed at a price that would lock or 
cross another market. If, at the time of entry, an order or quote would 
cause a locked or crossed market violation or would cause a trade-
through violation, it will be re-priced to the current national best 
offer (for bids) or the current national best bid (for offers) and 
displayed at one minimum price variance above (for offers) or below 
(for bids) the national best price. For this reason, the Exchange is 
proposing more precise rule text at Rule 1080(n)(ii)(F) to account for 
these situations where there is an automatic repricing in order to 
prevent trade-throughs and locked and crossed markets. The Exchange 
proposes to change the rule text to acknowledge that repricing would 
result in the better of the NBBO (or PBBO) or the Reference BBO.
Typographical Error, Clarifying Change, Cross Reference and Relocated 
Text
    The Exchange proposes to correct a word in Rule 1080(n)(i)(C) from 
``of'' to ``or'' to correct an unintentional typographical error. The 
Exchange also proposes to replace a reference to ``Rule 1080(n) at 
Commentary .07'' to ``Rule 1098'' to properly reference rule text 
related to Complex Orders at Rule 1080(n)(ii)(E)(2)(f). A reference to 
``remaining'' shares as Rule 1080(n)(ii)(E)(2)(f) is also proposed to 
be amended to ``residual'' simply to conform to the language utilized 
in other parts of the rule. Finally, rule text related to PIXL ISO in 
Commentary .08 to Rule 1080(n) is being relocated within the rule to 
new 1080(n)(ii)(K) simply to add the text in an appropriate location 
within the rule. A space is also being added within the rule text that 
was inadvertently left out of a prior version.
Implementation
    The Exchange proposes to implement this functionality before Q1 
2018. Members will be notified of the deployment date by way of an 
Options Trader Alert.
    Below is an example of the manner in which the Surrender feature 
would operate:
    EXAMPLE (Related to Rule 1080(n)(ii)(A)(i) (Initiating Participant 
utilizing Surrender):

NBBO = .97-1.03
PHLX BBO = .95-1.03(60) with Market Maker A and Market Maker B offering 
30 contracts each PIXL Order to buy 100 contracts stopped at 1.02 
marked as `Surrender' is received,

    Auction begins,
    During auction, Market Maker C responds to sell 5 at 1.01, Market 
Maker A responds to sell 5 contracts at 1.02, Market Maker B responds 
to sell 40 contracts at 1.02, and Market Maker D responds to sell 20 
contracts at 1.02.
    During auction, Market Maker A moves his quote and PHLX BBO becomes 
.95-1.02 for 5 contracts and NBBO becomes .97-1.02.
    Auction ends, Market Maker C trades 5 at 1.01; Remaining Market 
Maker interest trades 70 contracts in a Pro-Rata fashion: Market Maker 
A executes 10 contracts with 5 being given to the Market Maker A 
response at 1.02 and 5 to the Market Maker A quote at 1.02; Market 
Maker B response executes 40 contracts at 1.02; Market Maker D response 
executes 20 contracts at 1.02. The PIXL Contra executes the remaining 
25 contracts at 1.02. This is because the initiator will end up trading 
if not enough interest is there to satisfy the stop price.
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, in general to protect investors and the public 
interest, by proposing a functionality which allows members more 
optionality to transact orders in the PIXL auction. The Exchange 
believes that the proposed feature will provide members with more 
flexibility, similar to functionality currently offered on BX. In 
addition the

[[Page 51901]]

Exchange proposes other amendments which add clarity to the rule text 
so that members will gain a greater understanding of the rule. Each 
proposal is discussed below.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Surrender
    The Exchange believes that the Surrender feature is consistent with 
the Act because it promotes just and equitable principles of trade by 
allowing members who submit orders into the PIXL Auction to continue to 
be executed pursuant to a pre-determined set of rules which would allow 
members to forfeit priority and trade allocation privileges and only 
trade if there is not enough interest available to fully execute the 
PIXL Order at prices which are equal to or improve upon the stop price. 
Members are not required to elect this feature, but is would be 
available, as it is today on BX, if a member desired to utilize the 
Surrender feature. The new Surrender feature would provide the 
Initiator with flexibility, thereby increasing the likelihood that the 
Initiator would be inclined to commence more auctions.
    The feature would only permit the member to surrender the entire 
amount, not a partial amount. Also, Surrender will not be applied if 
both the Initiating Order and PIXL Order (or PIXL Complex Order) are 
Public Customer Orders. The Surrender feature will not permit a member 
to have any control over an order. Further, the election to Surrender 
an order would be available prior to the submission of the order and 
therefore could not be utilized to gain influence or guide the 
execution of the PIXL Order or PIXL Complex Order. Initiating Members 
submitting PIXL Orders or PIXL Complex Orders will relinquish control 
of their PIXL Orders or PIXL Complex Orders upon transmission to the 
Exchange's System. Further, no Participant, including the Initiating 
Participant, will see a PAN response submitted into PIXL and therefore 
and will not be able to influence or guide the execution of their PIXL 
Orders or PIXL Complex Orders. The information provided with respect to 
the Surrender feature by the member will not be broadcast and further, 
the information may not be modified by the member during the auction.
NBBO Reference
    The Exchange's proposal to amend Rule 1080(n)(ii)(F) to amend the 
current rule text for the addition of language to include the 
``Reference BBO'' to clarify where the price is equal to or better than 
the NBBO or PBBO and the Reference BBO (internal market BBO), due to 
repricing for trade-throughs or locked and crossed markets, adds 
clarity and precision to the current rule text. The Exchange believes 
that these proposed amendments are consistent with the Act and do not 
otherwise create an impediment to a free and open market because today 
investors are subject to this repricing. Also, by reflecting the proper 
rule text to account for these order types the Exchange is providing 
members with additional information with which to anticipate the manner 
in which the Exchange's trading system reprices interest to prevent a 
trade-through or locked and crossed market.
Typographical Error, Clarifying Change, Cross Reference and Relocated 
Text
    The Exchange's proposals to: (a) Correct a word in Rule 
1080(n)(i)(C) from ``of'' to ``or''; (b) replace a reference to Rule 
1080(n) at Commentary .07 to Rule 1098 to properly reference rule text 
related to Complex Orders at Rule 1080(n)(ii)(E)(2)(f); (c) change a 
reference to ``remaining'' shares as Rule 1080(n)(ii)(E)(2)(f) to 
``residual''; and (d) relocate PIXL ISO in Commentary .08 to Rule 
1080(n) to 1080(n)(ii)(K) are consistent with the Act because these 
amendments provide greater detail and clarity to the rule text.

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 competition among the 
options exchanges is vigorous and this proposal is intended to afford 
the Exchange the opportunity to compete for order flow by offering an 
auction mechanism with a surrender feature similar to that of other 
exchanges.\11\
---------------------------------------------------------------------------

    \11\ Today, BX offers a surrender feature. See BX Rule at 
Chapter VI, Section 9. The Chicago Board Options Exchange, 
Incorporated (``CBOE'') has a process whereby initiating 
participants may elect to receive last priority in an allocation. 
See CBOE Rule 6.74A(b)(3)(J), entitled Automated Improvement 
Mechanism (``AIM''). Finally, BOX utilizes a Surrender feature in 
its PIP and COPIP, similar to the proposed Phlx Surrender for simple 
and complex orders. The Exchange notes that BOX Initiators may 
forfeit less than the entire amount pursuant to the BOX rule. See 
BOX Rules 7150 and 7245. Phlx will allow surrender only for the 
entire amount, not for a partial amount.
---------------------------------------------------------------------------

    With respect to intra-market competition, the auction will be 
available to all Phlx members. The Exchange's proposal to submit the 
Surrender amendment does not result in less competition, the PIXL 
mechanism should continue to encourage Phlx members to compete amongst 
each other by responding with their best price and size for a 
particular auction. The Exchange believes that the Initiator may be 
incentivized to initiate more PIXL auctions in light of the proposal. 
The Exchange's proposal is a competitive response to similar provisions 
in the price improvement auction rules of other options exchanges.\12\ 
The Exchange believes this proposed rule change is necessary to permit 
fair competition among the options exchanges and to establish more 
uniform price improvement auction rules on the various options 
exchanges. The Exchange anticipates that this auction proposal will 
allow Phlx to compete on equal footing with other options exchanges and 
for this reason the proposal does not create an undue burden on inter-
market competition.
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

    The Exchange's proposal to amend Rule 1080(n)(ii)(F) to amend the 
current rule text for the addition of language to include the 
``Reference BBO'' to clarify where the price is equal to or better than 
the NBBO or PBBO and the Reference BBO (internal market BBO), due to 
repricing for trade-throughs or locked and crossed markets, adds 
clarity and precision to the current rule text. The proposed amendments 
would apply uniformly to all Phlx members that elect to enter orders 
into the PIXL auction. The Exchange believes that these proposed 
amendments are consistent with the Act and do not otherwise create an 
impediment to a free and open market because today investors are 
subject to this repricing.
    The Exchange's proposals to: (a) Correct a word in Rule 
1080(n)(i)(C) from ``of'' to ``or''; (b) replace a reference to Rule 
1080(n) at Commentary .07 to Rule 1098 to properly reference rule text 
related to Complex Orders at Rule 1080(n)(ii)(E)(2)(f); (c) change a 
reference to ``remaining'' shares as Rule 1080(n)(ii)(E)(2)(f) to 
``residual''; and (d) relocate PIXL ISO in Commentary .08 to Rule 
1080(n) to 1080(n)(ii)(K) simply provide greater detail and clarity to 
the rule text.

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

[[Page 51902]]

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 \13\ and subparagraph 
(f)(6) of Rule 19b-4 thereunder.\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 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.
---------------------------------------------------------------------------

    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 [email protected]. Please include 
File Number SR-Phlx-2017-85 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2017-85. 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 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-2017-85 and should be 
submitted on or before November 29, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24253 Filed 11-7-17; 8:45 am]
 BILLING CODE 8011-01-P