Document ID: SEC-2010-1316-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-08-30T04:00Z

[Federal Register: August 30, 2010 (Volume 75, Number 167)]
[Notices]               
[Page 53010-53012]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30au10-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62760; File No. SR-Phlx-2010-112]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX, Inc. Relating to Trade Reporting

August 24, 2010.
    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 August 10, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Exchange Options Floor Procedure 
Advice (``OFPA'') F-2 Allocation, Time Stamping, Matching and Access to 
Matched Trades, and Exchange Rule 1051, General Comparison and 
Clearance Rule, to state that late reports of transactions in complex 
spread transactions executed in open outcry may be considered 
``exceptional circumstances'' under the rule.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
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 purpose of the proposed rule change is to codify certain 
factors that the Exchange may consider to be ``exceptional 
circumstances'' when determining whether an Exchange member has engaged 
in a pattern or practice of late trade reporting.\5\
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    \5\ The proposal is not intended to limit the Exchange to these 
factors in determining whether exceptional circumstances exist.
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    Currently, OFPA F-2 and Rule 1051 require a member or member 
organization initiating an options transaction, whether acting as 
principal or agent, to report or ensure that the transaction is 
reported within 90 seconds of the execution to the tape. Each also 
states that a pattern or practice of late reporting without exceptional 
circumstances may be considered conduct inconsistent with just and 
equitable principles of trade.
    The Exchange proposes to modify OFPA F-2 and Rule 1051 to state 
that, in determining whether exceptional circumstances exist, the 
Exchange may consider late reports resulting from open outcry 
executions in: (i) A hedge order (as defined in Rule 1066(f)); \6\ (ii)

[[Page 53011]]

a synthetic option (as defined in Rule 1066(g)); \7\ or (ii) any other 
order consisting of multiple option and/or stock components.
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    \6\ Rule 1066(f) defines a hedge order is any spread type order 
(including a spread, straddle and combination order) for the same 
account or tied hedge order as defined below:
    (1) Spread Order. A spread order is an order to buy a stated 
number of option contracts and to sell a stated number of option 
contracts in a different series of the same option and may be bid 
for or offered on a total net debit or credit basis.
    (A) Inter-Currency Spread Order. In the case of foreign currency 
options, a spread order may consist of an order to buy a stated 
number of option contracts in one foreign currency and to sell the 
same number of option contracts in a different foreign currency 
option.
    (2) Straddle Order. A straddle order is an order to buy a number 
of call option contracts and the same number of put option contracts 
with respect to the same underlying security (in the case of options 
on a stock or Exchange-Traded Fund Share) or the same underlying 
foreign currency (in the case of options on a foreign currency) and 
having the same exercise price and expiration date; or an order to 
sell a number of call option contracts and the same number of put 
option contracts with respect to the same underlying security (in 
the case of options on a stock or Exchange-Traded Fund Share) or the 
same underlying foreign currency (in the case of options on a 
foreign currency) and having the same exercise price and expiration 
date (e.g., an order to buy two XYZ July 50 calls and to buy two XYZ 
July 50 puts is a straddle order). In the case of adjusted stock 
option contracts, a straddle order need not consist of the same 
number of put and call contracts if such contracts both represent 
the same number of shares at option.
    (3) Combination Order. A combination order is an order involving 
a number of call option contracts and the same number of put option 
contracts in the same underlying security and representing the same 
number of shares at option (if the underlying security is a stock or 
Exchange-Traded Fund Share) or the same number of foreign currency 
units (if the underlying security is a foreign currency). A 
combination order includes a conversion (generally, buying a put, 
selling a call and buying the underlying stock or Exchange-Traded 
Fund Share) and a reversal (generally, selling a put, buying a call 
and selling the underlying stock or Exchange-Traded Fund Share). In 
the case of adjusted option contracts, a combination order need not 
consist of the same number of shares at option.
    (4) Tied Hedge Order. A tied hedge order is an option order that 
is tied to a hedge transaction as defined in Commentary .04 to Rule 
1064, following the receipt of an option order in a class determined 
by the Exchange as eligible for ``tied hedge'' transactions.
    A tied hedge order involves buying or selling a stock, security 
futures or futures position following receipt of an option order, 
including a complex order, but prior to announcing such order to the 
trading crowd, provided that certain conditions are met. See Rule 
1064, Commentary .04.
    \7\ Rule 1066(g) defines a synthetic option order as an order to 
buy or sell a stated number of units of an underlying stock or a 
security convertible into the underlying stock (``convertible 
security'') coupled with either (i) the purchase or sale of option 
contract(s) on the opposite side of the market representing either 
the same number of units of the underlying stock or convertible 
security or the number of units of the underlying stock or 
convertible security necessary to create a delta neutral position, 
or (ii) the purchase or sale of an equal number of put and call 
option contracts, each having the same exercise price, expiration 
date, and each representing the same number of units of stock as, 
and on the opposite side of the market from, the stock or 
convertible security portion of the order.
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    Currently, in order to establish whether a member or member 
organization has engaged in a pattern or practice of violating a 
specific order handling rule the Exchange may aggregate, or ``batch,'' 
individual violations of order handling OFPAs, and consider such 
``batched'' violations as a single occurrence of a violation by a 
member or member organization over a specific time period.\8\ Late 
trade reporting is currently included in the Exchange's ``batching'' 
program. The Exchange has observed that a disproportionate number of 
late trade reports are due to transactions in complex spread 
transactions executed in open outcry.\9\
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    \8\ Exchange Rule 970.01 states that, for purposes of imposing 
fines under the Options Floor Procedure Advices (``OFPAs''), when 
the number of violations under Exchange Rules is determined based 
upon an exception-based surveillance program the Exchange may 
aggregate, or ``batch,'' individual violations of order handling 
OFPAs, and consider such ``batched'' violations as a single 
Occurrence only in accordance with the guidelines set forth in the 
Exchange's Numerical Criteria for Bringing Cases for Violations of 
Phlx Order Handling Rules. In addition, the Exchange may batch 
individual violations of Rule 1014(c)(i)(A) pertaining to quote 
spread parameters (and corresponding Options Floor Procedure Advice 
F-6). In the alternative, the Exchange may refer the matter to the 
Business Conduct Committee for possible disciplinary action when (i) 
the Exchange determines that there exists a pattern or practice of 
violative conduct without exceptional circumstances, or (ii) any 
single instance of violative conduct without exceptional 
circumstances is deemed to be so egregious that referral to the 
Business Conduct Committee for possible disciplinary action is 
appropriate.
    \9\ This proposal applies only to executions in open outcry, and 
not to complex orders executed and reported automatically by the 
Exchange's Complex Order System. See Exchange Rule 1080.08.
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    Hedge orders and synthetic options are presented as a single order 
[sic] in the crowd, often including multiple option and/or stock 
components, on a net debit or credit basis. It is not unusual for the 
individual components of such an order to be executed at different 
times (especially in situations involving the execution of a stock 
component on an away equity market). Therefore, some components of the 
order may be executed while other components are pending execution. In 
many cases execution of the entire hedge or synthetic option order 
takes longer than 90 seconds to complete, resulting in late reporting 
for the individual components upon completion of the entire order at 
the net debit or credit price.
    The Exchange believes that the inclusion of late trade reporting 
violations in the ``batch'' of violations respecting hedge or synthetic 
order transactions in open outcry unfairly penalizes a member or member 
organization engaging in legitimate hedge and synthetic option orders 
and thus proposes, when determining whether exceptional circumstances 
exist, to consider late reports of transactions in such orders executed 
in open outcry to be ``exceptional circumstances'' under the rule.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \11\ 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 Exchange believes that the proposal 
benefits customers by encouraging Exchange Floor Brokers, market makers 
and specialists to introduce and/or participate in legitimate complex 
transactions in open outcry without being penalized for late trade 
reporting in the specific instances described above.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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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.

C. Self-Regulatory Organization's Statement on Comments Regarding 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 up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2010-112 on the subject line.

[[Page 53012]]

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-2010-112. This file 
number should be included on the subject line if e-mail 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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-Phlx-2010-112 and should be 
submitted on or before September 20, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-21474 Filed 8-27-10; 8:45 am]
BILLING CODE 8010-01-P