Document ID: SEC-2020-0675-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2020-04-28T04:00Z

[Federal Register Volume 85, Number 82 (Tuesday, April 28, 2020)]
[Notices]
[Pages 23564-23571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08939]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88728; File No. SR-Phlx-2020-20]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Phlx Rules 
at Options 3, Section 8, Titled Options Opening Process

April 22, 2020.
    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 April 14, 2020, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 Substance 
of the Proposed Rule Change

    The Exchange proposes to a proposal to amend Phlx Rules at Options 
3, Section 8, titled ``Options Opening Process.''
    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
    The Exchange proposes to amend Phlx Rules at Options 3, Section 8, 
titled ``Options Opening Process.'' The proposal seeks to amend aspects 
of the current functionality of the Exchange's System regarding the 
opening of trading in an option series. Each amendment is described 
below.
Definitions
    The Exchange proposes to define the term ``imbalance'' at proposed 
Options 3, Section 8(a)(xi) as the number of unmatched contracts priced 
through the Potential Opening Price. The Exchange believes that the 
addition of this defined term will bring greater clarity to the manner 
in which the term ``imbalance'' is defined within the System. This 
description is consistent with the current System operation. This is a 
non-substantive rule change. In conjunction with this rule change, the 
Exchange proposes to remove the text within Options 3, Section 8(k)(A) 
which seeks to define an imbalance as an unmatched contracts. The 
Exchange is proposing a description which is more specific than this 
rule text and is intended to bring greater clarity to the term 
``imbalance.''
Eligible Interest
    The Exchange proposes to amend Options 3, Section 8(b)(ii) to amend 
the current phrase, ``The System will aggregate the size of all 
eligible interest for a particular participant category at a particular 
price level for trade allocation purposes pursuant to Options 3, 
Section 10.'' The Exchange proposes to instead provide, ``The System 
will allocate interest pursuant to Options 3, Section 10.'' The 
Exchange is proposing this amendment because Options 3, Section 10 
explains how the Exchange will aggregate the size of all eligible 
interest for a particular participant category at a particular price 
level and the citation to that rule will provide that detail.
All-or-None Orders
    The Exchange proposes to amend Options 3, Section 8(b) to remove 
the phrase ``that can be satisfied'' in relation to All-or-None 
Orders.\3\ The Exchange notes that all All-or-None Orders are 
considered for execution and in determining the Opening Price 
throughout the Opening Process. At this point in the Opening Process 
the Exchange would be unable to determine which All-or-None Orders 
could be satisfied, so all All-or-None Orders are eligible.
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    \3\ An All-or-None Order is a limit order or market order that 
is to be executed in its entirety or not at all. An All-or None 
Order may only be submitted by a Public Customer. All-or-None Orders 
are non-displayed and non-routable. All-or-None Orders are executed 
in price-time priority among all Public Customer orders if the size 
contingency can be met. The Acceptable Trade Range protection in 
Options 3, Section 15(a) is not applied to All-Or-None Orders. See 
Options 3, Section 7(b)(5).
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    Similarly, the Exchange proposes to amend Options 3, Section 8(h) 
to remove the phrase ``except All-or-None interest that cannot be 
satisfied.'' The Exchange proposes to instead provide, ``To calculate 
the Potential Opening Price, the System will take into consideration 
all Valid Width Quotes and orders (including Opening Sweeps, including 
All-or-None interest, for the option series and identify the price at 
which the maximum number of contracts can trade (``maximum quantity 
criterion'').'' Similarly, for purposes of determining the Potential 
Opening Price, the Exchange will consider all All-or-None interest 
because the Exchange would be unable to determine which All-or-None 
Orders could be satisfied until the Opening Process concludes.
Valid Width Quotes
    The Exchange proposes to amend the requirements for Phlx Electronic 
Market Makers \4\ to enter Valid Width Quotes within Options 3, Section 
8(d). Today, a Lead Market Maker is required to enter a Valid Width 
Quote within two minutes (or such shorter time as determined by the 
Exchange and disseminated to membership on the Exchange's website) of 
the opening trade or quote on the market for the underlying security in 
the case of equity options or, in the case of index options, within two 
minutes of the receipt of the opening price in the underlying index (or 
such shorter time as determined by the Exchange and disseminated to 
membership on the Exchange's website), or within two minutes of market 
opening for the underlying currency in the case of U.S. dollar-settled 
FCO. Alternatively, the Valid Width Quote of at least two Phlx 
Electronic Market Makers other than a Lead Market Maker entered within 
the above-referenced timeframe would also open an option series. 
Finally, if neither the Lead

[[Page 23565]]

Market Maker's Valid Width Quote nor the Valid Width Quotes of two Phlx 
Electronic Market Makers have been submitted within such timeframe, one 
Phlx Electronic Market Maker may submit a Valid Width Quote to open the 
options series.
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    \4\ Phlx Electronic Market Makers are defined with Options 3, 
Section 8 as a Lead Market Maker, Streaming Quote Trader (``SQT'') 
or Remote SQT (``RSQT'') who is required to submit two sided 
electronic quotations pursuant to Options 2, Section 5.
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    The Exchange proposes to amend the requirement to submit Valid 
Width Quotes in an effort to streamline its current process. The 
Exchange proposes to continue to require a Lead Market Maker to submit 
a Valid Width Quote, but also would permit the Valid Width Quote of one 
Phlx Electronic Market Maker other than the Lead Market Maker to open 
an option series without waiting for the two minute timeframe described 
above to conclude. This effectively would take the 2 step process for 
accepting quotes to a one step process. The Exchange believes this 
proposal would allow the market to open more efficiently as well as 
enable greater participation by SQTs and RSQTs in the Opening Process. 
As is the case today, Lead Market Makers are required to ensure each 
option series to which it is appointed is opened each day by submitting 
a Valid Width Quote.\5\ Moreover, a Lead Market Maker has continuing 
obligations to quote intra-day pursuant to Options 2, Section 5.
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    \5\ Options 3, Section 8(d)(iii) provides, ``The Lead Market 
Maker assigned in a particular equity or index option must enter a 
Valid Width Quote, in 90% of their assigned series, not later than 
one minute following the dissemination of a quote or trade by the 
market for the underlying security or, in the case of index options, 
following the receipt of the opening price in the underlying index. 
The Lead Market Maker assigned in a particular U.S. dollar-settled 
FCO must enter a Valid Width Quote, in 90% of their assigned series, 
not later than 30 seconds after the announced market opening. The 
Lead Market Maker must promptly enter a Valid Width Quote in the 
remainder of their assigned series, which did not open within one 
minute following the dissemination of a quote or trade by the market 
for the underlying security or, in the case of index options, 
following the receipt of the opening price in the underlying index 
or, with respect to a U.S. dollar-settled FCO, following the 
announced market opening.''
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Potential Opening Price
    The Exchange proposes to amend Options 3, Section 8(h) to add an 
introductory sentence to the Potential Opening Process paragraph which 
provides, ``The Potential Opening Price indicates a price where the 
System may open once all other Opening Process criteria is met.'' This 
paragraph is not intended to amend the function of the Opening Process, 
rather it is intended to provide context to the process and describe a 
Potential Opening Price within Options 3, Section 8(h). This is a non-
substantive amendment.
    An amendment is proposed to Options 3, Section 8(h)(C) to replace 
the words ``Potential Opening Price calculation'' with the more defined 
term ``Opening Price.'' The Opening Price is defined within Options 3, 
Section 8(a)(iii) and provides, ``The Opening Price is described herein 
in sections (i) and (k).'' The Exchange notes that ``Opening Price'' is 
the more accurate terms that represents current System functionality as 
compared to Potential Opening Price. Options 3, Section 8(h)(C) 
provides that the Potential Opening Price calculation is bounded by the 
better away market price that may not be satisfied with the Exchange 
routable interest.'' In fact, the Opening Price is bounded by the 
better away market price that may not be satisfied with the Exchange 
routable interest pursuant to sections (i) and (k). The Potential 
Opening Price indicates a price where the System may open once all 
other Opening Process criteria is met. The Potential Opening Price is a 
less accurate term and the Exchange proposes to utilize the more 
precise term by changing the words in this sentence to ``Opening 
Price'' for specificity. This amendment is not substantive, rather it 
is clarifying.
Opening Quote Range
    The Exchange proposes to add a sentence to Options 3, Section 8(j) 
to describe the manner in which the Opening Quote Range or ``OQR'' is 
bound. The Exchange proposes to provide, ``OQR is constrained by the 
least aggressive limit prices within the broader limits of OQR. The 
least aggressive buy order or Valid Width Quote bid and least 
aggressive sell order or Valid Width Quote offer within the OQR will 
further bound the OQR.'' The Exchange previously described \6\ the OQR 
as an additional type of boundary beyond the boundaries mentioned in 
Options 3, Section 8 at proposed paragraph (i). OQR is intended to 
limit the Opening Price to a reasonable, middle ground price and thus 
reduce the potential for erroneous trades during the Opening Process. 
Although the Exchange applies other boundaries such as the Best Bid or 
Best Offer (``BBO''), the OQR is outside of the BBO. It is meant to 
provide a price that can satisfy more size without becoming 
unreasonable. The Exchange proposes to add rule text within Options 3, 
Section 8 to describe the manner in which today OQR is bound. This 
proposed amendment does not change the manner in which Phlx's System 
operates today. The Exchange believes that this rule text will bring 
greater transparency to the manner in which the Exchange arrives at an 
Opening Price. Below is an example of the manner in which OQR is 
constrained.
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    \6\ See Securities Exchange Commission Release No. 78408 (July 
25, 2016), 81 FR 50026 (July 29, 2016) (SR-Phlx-2016-76).
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Assume the below pre-opening interest:

Lead Market Maker quotes 4.10 (100) x 4.20 (50)
Order 1: Public Customer Buy 300 @ 4.39
Order 2: Public Customer Sell 50 @ 4.13
Order 3: Public Customer Sell 5 @ 4.37
Opening Quote Range configuration in this scenario is +/-0.18

9:30 a.m. events occur, underlying opens
First imbalance message: Buy imbalance @ 4.20, 100 matched, 200 
unmatched
Next 4 imbalance messages: Buy imbalance @ 4.37, 105 matched, 195 
unmatched
Potential Opening Price calculation would have been 4.20 + 0.18 = 4.38, 
but OQR is further bounded by the least aggressive Sell order @ 4.37

Order 1 executes against Order 2 50 @ 4.37
Order 1 executes against Lead Market Maker quote 50 @ 4.37
Order 1 executes against Order 3 5 @ 4.37
Remainder of Order1 cancels as it is through the Opening Price
Lead Market Maker quote purges as its entire offer side volume has been 
exhausted

    Similarly, the Exchange proposes to amend Options 3, Section 
8(j)(3) which currently provides, ``If one or more away markets are 
disseminating a BBO that is not crossed (the Opening Process will stop 
and an options series will not open if the ABBO becomes crossed 
pursuant to (d)(v)) and there are Valid Width Quotes on the Exchange 
that are executable against each other or the ABBO:''. The Exchange 
proposes to instead state, ``If one or more away markets are 
disseminating a BBO that is not crossed (the Opening Process will stop 
and an options series will not open if the ABBO becomes crossed 
pursuant to (d)(v)) and there are Valid Width Quotes on the Exchange 
that cross each other or are marketable against the ABBO:''. The 
proposed language more accurately describes the current Opening 
Process. Valid Width Quotes are not routable and would not execute 
against the ABBO. This rule text is more specific than ``executable 
against each other.'' A similar change is also proposed to Options 3, 
Section 8(j)(4) to replace the words ``are executable against'' with 
``cross''. The Exchange believes that the amended rule text adds

[[Page 23566]]

greater transparency to the Opening Process. These are non-substantive 
amendments.
    The Exchange proposes to make a non-substantive change to amend 
Options 3, Section 8(j)(7) to amend the last sentence to change the 
phrase ``consider routable'' with ``route routable.'' The Exchange also 
proposes to replace the phrase ``in price/time priority to satisfy the 
away market'' with the citation to Options 3, Section 10(a)(1)(A) which 
describes price/time priority within Options 3, Section 8(j)(7). This 
is a non-substantive amendment which is intended to bring greater 
clarity to the Exchange's Rules.
Price Discovery Mechanism
    The Exchange proposes to add new rule text to Options 3, Section 
8(k)(A)(1) to describe the information conveyed in an Imbalance 
Message. The Exchange proposes to provide at Options 3, Section 
8(k)(A)(1),

    An Imbalance Message will be disseminated showing a ``0'' volume 
and a $0.00 price if: (i) No executions are possible but routable 
interest is priced at or through the ABBO; (ii) internal quotes are 
crossing each other; or (iii) there is a Valid Width Quote, but 
there is no Quality Opening Market. Where the Potential Opening 
Price is through the ABBO, an imbalance message will display the 
side of interest priced through the ABBO.

    This rule text is consistent with the current operation of the 
System. The purpose of this proposed text is to provide greater 
information to market participants to explain the information that is 
being conveyed when an imbalance message indicates ``0'' volume. The 
Exchange believes that explaining the potential scenarios which led to 
the dissemination of a ``0'' volume, such as (i) when no executions are 
possible and routable interest is priced at or through the ABBO; (ii) 
internal quotes are crossing; and (iii) there is a Valid Width Quote, 
but there is no Quality Opening Market, will provide greater detail to 
the potential state of the interest available. The Exchange further 
clarifies in this new rule text, ``Where the Potential Opening Price is 
through the ABBO, an imbalance message will display the side of 
interest priced through the ABBO.'' The Exchange believes that this 
proposed text will bring greater transparency to the information 
available to market participants during the Opening Process.
    The Exchange proposes to amend Options 3, Section 8(k)(C)(2) to 
remove the phrase ``at the Opening Price'' within the paragraph. The 
current second sentence of paragraph 8(j)(3)(B) states, ``If during the 
Route Timer, interest is received by the System which would allow the 
Opening Price to be within OQR without trading through away markets and 
without trading through the limit price(s) of interest within OQR which 
is unable to be fully executed at the Opening Price, the System will 
open with trades at the Opening Price and the Route Timer will 
simultaneously end.'' The Exchange proposes to remove the words ``at 
the Opening Price'' because while anything traded on Phlx would be at 
the Opening Price, the trades that are routed away would be at an ABBO 
price which may differ from the Phlx Opening Price. To avoid any 
confusion, the Exchange is amending the sentence to remove the 
reference to the Opening Price. In addition, the Exchange proposes to 
add the phrase ``and orders'' to Options 3, Section 8(k)(C)(2) which 
currently only references quotes. During the Price Discovery Mechanism, 
both quotes and orders are considered.
    The Exchange proposes to amend the last sentence of Options 3, 
Section 8(k)(C)(5) to add the phrase ``if consistent with the Member's 
instructions'' to the end of the paragraph at Options 3, Section 
8(k)(C)(5) to make clear that the instructions provided by a member in 
terms of order types and routing would be applicable to interest 
entered during the Opening Process which remains eligible for intra-day 
trading. This amendment brings greater clarity to the Exchange's Rules.
    The Exchange proposes to add an introductory phrase to Options 3, 
Section 8(k)(D) which provides, ``Pursuant to Options 3, Section 
8(k)(C)(6) . . .'' the System will re-price Do Not Route orders (that 
would otherwise have to be routed to the exchange(s) disseminating the 
ABBO for an opening to occur) to a price that is one minimum trading 
increment inferior to the ABBO, and disseminate the re-priced DNR Order 
as part of the new PBBO.'' The addition of this sentence is intended to 
provide a transition from the prior paragraph relating to the routing 
of orders. The Exchange opens and routes simultaneously during its 
Opening Process. This sentence is being added to indicate that at this 
stage in the Opening Process, routable interest would have routed. The 
manner in which the System will handle orders marked with the 
instruction ``Do Not Route'' (``DNR Orders'') is described in Options 
3, Section 8(k)(D). This rule text is consistent with the behavior of 
the System. This non-substantive amendment is intended to add greater 
clarity to the Exchange's Rules. The Exchange also proposes to add a 
hyphen to the word ``re-price'' in this paragraph.
    The Exchange proposes to add a new paragraph at Options 3, Section 
8(k)(G) which provides, ``Remaining contracts which are not priced 
through the Exchange Opening Price after routing a number of contracts 
to satisfy better priced away contracts will be posted to the Order 
Book at the better of the away market price or the order's limit 
price.'' The Exchange notes that this paragraph describes current 
System behavior. This rule text accounts for orders which have routed 
away and returned unsatisfied and also accounts for interest that 
remain unfilled during the Opening Process, provided it was not priced 
through the Opening Price. This sentence is being included to account 
for the manner in which all interest is handled and how certain 
interest rests on the order book once the Opening Process is complete. 
The Exchange notes that the posted interest will be priced at the 
better of the away market price or the order's limit price. This 
additional clarity will bring greater transparency to the Rules and is 
consistent with the Exchange's current System operation. The Exchange 
believes that this detail will provide market participants with all 
possible scenarios that may occur once Phlx opens an options series.
Opening Process Cancel Timer
    The Exchange proposes to adopt an Opening Process Cancel Timer 
within Options 3, Section 8(l), similar to The Nasdaq Options Market 
LLC's (``NOM'') and Nasdaq BX, Inc's (``BX'') Rules at Options 3, 
Section 8(c).\7\ The Exchange proposes to add a process whereby if an 
options series has not opened before the conclusion of the Opening 
Process Cancel Timer, a member may elect to have orders returned by 
providing written notification to the Exchange. The Opening Process 
Cancel Timer would be established by the Exchange and posted on the 
Exchange's website. Similar to NOM and BX, orders submitted through FIX 
with a TIF of Good-Till-Canceled \8\ or ``GTC'' may not

[[Page 23567]]

be cancelled. Phlx has monitored the operation of the Opening Process 
to identify instances where market efficiency can be enhanced. The 
Exchange believes that adopting a cancel timer similar to NOM and BX 
will increase the efficiency of Phlx's Opening Process. This provision 
would provide for the return of orders for un-opened options symbols. 
This enhancement will provide market participants the ability to elect 
to have orders returned, except for non-GTC orders, when options do not 
open. It provides members with choice about where, and when, thy can 
send orders for the opening that would afford them the best experience. 
The Exchange believes that this additional feature will attract 
additional order flow to the Exchange. The proposed changes should 
prove to be very helpful to market participants, particularly those 
that are involved in adding liquidity during the Opening Cross. These 
proposed enhancements will allow Phlx to continue to have a robust 
Opening Process.
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    \7\ NOM Options 3, Section 8(c) provides, ``Absence of Opening 
Cross. If an Opening Cross in a symbol is not initiated before the 
conclusion of the Opening Process Cancel Timer, a firm may elect to 
have orders returned by providing written notification to the 
Exchange. These orders include all non GTC orders received over the 
FIX protocol. The Opening Process Cancel Timer represents a period 
of time since the underlying market has opened, and shall be 
established and disseminated by Nasdaq on its website.'' BX Options 
3, Section 8 is worded similarly.
    \8\ A Good Til Cancelled (``GTC'') Order entered with a TIF of 
GTC, if not fully executed, will remain available for potential 
display and/or execution unless cancelled by the entering party, or 
until the option expires, whichever comes first. GTC Orders shall be 
available for entry from the time prior to market open specified by 
the Exchange until market close. See Options 3, Section 7(c)(4).
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Implementation
    The Exchange proposes to implement the amendments proposed herein 
prior to Q3 2020. The Exchange will issue an Options Trader Alert 
announcing the date of implementation.
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 and to protect investors 
and the public interest by enhancing its Opening Process. The Exchange 
believes that the proposed changes significantly improve the quality of 
execution of Phlx's opening.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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Definitions
    The Exchange's proposal to define the term ``imbalance'' at 
proposed Options 3, Section 8(a)(xi) and remove the text within Options 
3, Section 8(j)(1), which seeks to define an imbalance as an unmatched 
contract, will bring greater clarity to the manner in which the term 
``imbalance'' is defined within the System. This is a non-substantive 
rule change and represents current System functionality. Today, the 
term ``imbalance'' is simply defined as unmatched contracts. The 
proposed definition is more precise in its representation of the 
current System functionality.
Eligible Interest
    The Exchange's proposal to amend Options 3, Section 8(b)(ii) to 
amend the current phrase, ``The System will aggregate the size of all 
eligible interest for a particular participant category at a particular 
price level for trade allocation purposes pursuant to Options 3, 
Section 10'' to instead provide, ``The System will allocate interest 
pursuant to Options 3, Section 10'' will bring greater clarity to the 
rule text. The Exchange is proposing this amendment because Options 3, 
Section 10 explains how the Exchange will aggregate the size of all 
eligible interest for a particular participant category at a particular 
price level and the citation to that rule will provide that detail.
All-or-None Orders
    The Exchange's proposal to amend Options 3, Section 8(b) to remove 
the phrase ``that can be satisfied'' in relation to All-or-None Orders 
and to amend Options 3, Section 8(h) to remove the phrase ``except All-
or-None interest that cannot be satisfied'' are consistent with the 
Act. The Exchange would include all All-or-None Orders as eligible 
interest and also consider all All-or-None Orders for purposes of 
determining the Potential Opening Price, because the Exchange would be 
unable to determine which All-or-None Orders could be satisfied.
Valid Width Quotes
    The Exchange's proposal to amend the requirements within Options 3, 
Section 8(d) for Phlx Electronic Market Makers to enter Valid Width 
Quotes by permitting the Valid Width Quote of one Phlx Electronic 
Market Maker other than the Lead Market Maker to open an option series 
without waiting for the two minute timeframe is consistent with the 
Act. This proposal would allow the market to open more efficiently as 
well as enable greater participation by Phlx Electronic Market Makers 
in the Opening Process. A Lead Market Maker has continuing obligations 
to quote throughout the trading day pursuant to Options 2, Section 5. 
In addition, Lead Market Makers are required to ensure each option 
series to which it is appointed is opened each day Phlx is open for 
business by submitting a Valid Width Quote.\11\ Primary Market Makers 
will continue to remain responsible to open an options series, unless 
it is otherwise opened by a Competitive Market Maker. A Competitive 
Market Maker also has obligations to quote intra-day, once they 
commence quoting for that day.\12\ The Exchange notes if Electronic 
Market Makers entered quotes during the Opening Process to open an 
option series, those quote must qualify as Valid Width Quotes. This 
ensures that the quotations that are entered are in alignment with 
standards that help ensure a quality opening. The Exchange believes 
that allowing one Electronic Market Maker to enter a quotation 
continues to protect investors and the general public because the 
Electronic Market Maker will be held to the same standard for entering 
quotes as a Lead Market Maker and the process will also ensure an 
efficient and timely opening, while continuing to hold Lead Market 
Makers responsible for entering Valid Width Quotes during the Opening 
Process.
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    \11\ See note 5 above.
    \12\ See Options 2, Section 5.
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Potential Opening Price
    The Exchange's proposal to amend Options 3, Section 8(h) to add an 
introductory sentence to the Potential Opening Process which provides, 
``The Potential Opening Price indicates a price where the System may 
open once all other Opening Process criteria is met,'' is consistent 
with the Act. This paragraph is not intended to amend the current 
function of the Opening Process, rather it is intended to provide 
context to the process described within Options 3, Section 8(h). The 
Opening Price is bounded by the better ABBO in this case. This rule 
text is consistent with the current operation of the System. This is a 
non-substantive amendment.
    Similarly, the proposed amendment to Options 3, Section 8(h)(C) to 
replace ``Potential Opening Price calculation'' with the more accurate 
defined term ``Opening Price'' will bring greater clarity to the 
Exchange's Rule. This amendment is not substantive.
Opening Quote Range
    The Exchange's proposal to add a sentence to Options 3, Section 
8(j) to describe the manner in which the OQR is bound will bring 
greater clarity to the manner in which OQR is calculated. OQR is an 
additional type of boundary beyond the boundaries mentioned within the 
Opening Process rule. The System will calculate an OQR for a particular 
option series that will be utilized in the Price Discovery Mechanism if 
the Exchange has not opened, pursuant to the provisions in

[[Page 23568]]

Options 3, Section 8(d)-(i). OQR would broaden the range of prices at 
which the Exchange may open to allow additional interest to be eligible 
for consideration in the Opening Process. OQR is intended to limit the 
Opening Price to a reasonable, middle ground price and thus reduce the 
potential for erroneous trades during the Opening Process. Although the 
Exchange applies other boundaries such as the BBO, the OQR provides a 
range of prices that may be able to satisfy additional contracts while 
still ensuring a reasonable Opening Price. More specifically, the 
Exchange's Opening Price is bounded by the OQR without trading through 
the limit price(s) of interest within OQR, which is unable to fully 
execute at the Opening Price in order to provide participants with 
assurance that their orders will not be traded through. The Exchange 
seeks to execute as much volume as is possible at the Opening Price. 
The Exchange's method for determining the Potential Opening Price and 
Opening Price is consistent with the Act because the proposed process 
seeks to discover a reasonable price and considers both interest 
present in System as well as away market interest. The Exchange's 
method seeks to validate the Opening Price and avoid opening at 
aberrant prices. The rule provides for opening with a trade, which is 
consistent with the Act because it enables an immediate opening to 
occur within a certain boundary without the need for the price 
discovery process. The boundary provides protections while still 
ensuring a reasonable Opening Price. The Exchange's proposal protects 
investors and the general public by more clearly describing how the 
boundaries are handled by the System. This proposed amendment does not 
change the manner in which Phlx's System operates today. The Exchange 
believes that this rule text will bring greater transparency to the 
manner in which the Exchange arrives at an Opening Price.
    The Exchange's proposal to amend Options 3, Section 8(j)(3) to 
replace the phrase ``that are executable against each other or the 
ABBO:'' with ``that cross each other or are marketable against the 
ABBO:'' will more accurately describe the current Opening Process. 
Valid Width Quotes are not routable and would not execute against the 
ABBO. This rule text is more specific than ``executable against each 
other.'' The Exchange believes that this rule text adds greater 
transparency to the Opening Process. This is a non-substantive 
amendment.
    The Exchange's proposal to amend the phrase ``consider routable'' 
to ``route routable'' and replacing the phrase ``in price/time priority 
to satisfy the away market'' with the citation to Options 3, Section 
10(a)(1)(A), which describes price/time priority within Options 3, 
Section 8(j)(7), are non-substantive rule changes. These proposals will 
add greater clarity to the Exchange's Rules.
Price Discovery Mechanism
    The Exchange's proposal to add new rule text at Options 3, Section 
8(k)(A)(1) to describe the current operation of the System with respect 
to imbalance messages is consistent with the Act. The propose of this 
proposed text is to provide greater information to market participants 
to explain the information that is being conveyed when an imbalance 
message indicates ``0'' volume. An imbalance process is intended to 
attract liquidity to improve the price at which an option series will 
open, as well as to maximize the number of contracts that can be 
executed on the opening. This process will only occur if the Exchange 
has not been able to otherwise open an option series utilizing the 
other processes available in Options 3, Section 8. The Imbalance Timer 
is intended to provide a reasonable time for participants to respond to 
the Imbalance Message before any opening interest is routed to away 
markets and, thereby, maximize trading on the Exchange. The Exchange 
believes that the proposed rule text provides market participants with 
additional information as to the imbalance message. The following 
potential scenarios, which may lead to the dissemination of a ``0'' 
volume, include (1) when no executions are possible and routable 
interest is priced at or through the ABBO: (2) internal quotes are 
crossing; and (3) there is a Valid Width Quote, but there is no Quality 
Opening Market. The Exchange believes adding this detail will provide 
greater information as to the manner in which Imbalance Messages are 
disseminated today. The Exchange's process of disseminating zero 
imbalance messages is consistent with the Act because the Exchange is 
seeking to identify a price on the Exchange without routing away, yet 
which price may not trade through another market and the quality of 
which is addressed by applying the OQR boundary. Announcing a price of 
zero will permit market participants to respond to the Imbalance 
Message, which interest would be considered in determining a fair and 
reasonable Opening Price.
    The Exchange's proposal to amend Options 3, Section 8(k)(C)(2) to 
remove the phrase ``at the Opening Price'' within the paragraph is 
consistent with the Act because removing the current phrase will avoid 
confusion. The Exchange notes that anything traded on Phlx would be at 
the Opening Price, the trades that are routed away would be at an ABBO 
price which differs from the Phlx Opening Price. To avoid any confusion 
the Exchange is amending the sentence to remove the reference to the 
Opening Price. In addition, the Exchange proposes to add the phrase 
``and orders'' to Options 3, Section 8(j)(3)(B) which currently only 
references quotes. During the Price Discovery Mechanism both quotes and 
orders are considered.
    The Exchange's proposal to amend the last sentence of Options 3, 
Section 8(k)(C)(5) to amend the phrase ``Any unexecuted contracts'' to 
``Any unexecuted interest'' will make clear that this includes orders, 
quotes and sweeps. The Exchange's proposal to add the phrase ``if 
consistent with the Member's instructions'' to the end of the paragraph 
at Options 3, Section 8(k)(C)(5) will make clear that the instructions 
provided by a member in terms of order types and routing would be 
applicable to interest entered during the Opening Process which remains 
eligible for intra-day trading. This proposal is consistent with the 
Act and will add greater clarity to the Exchange's Rules.
    The Exchange's proposal to add an introductory phrase to Options 3, 
Section 8(k)(D) which provides, ``Pursuant to Options 3, Section 
8(k)(C)(6),'' is consistent with the Act. The prior paragraph, Options 
3, Section 8(k)(C)(6), describes how the System executes and routes 
orders. This introductory sentence is being added as a transition from 
the prior paragraph at Options 3, Section 8(k)(C)(6), relating to the 
routing of orders. All routable interest would have routed and non-
routable interest, which does not route, is subsequently described. 
This introductory paragraph is meant to be informative. This non-
substantive amendment is consistent with the Act because it adds 
greater clarity to the Exchange's Rules.
    The Exchange's proposal to add a new paragraph at Options 3, 
Section 8(k)(G) which provides, ``Remaining contracts which are not 
priced through the Exchange Opening Price after routing a number of 
contracts to satisfy better priced away contracts will be posted to the 
Order Book at the better of the away market price or the order's limit 
price,'' will bring greater transparency to the handling of orders once 
an option series is opened for trading. After away interest is cleared 
by routable interest and the opening cross has occurred, DNR Orders are 
handled by the System.

[[Page 23569]]

DNR Order interest will rest on the Order Book, provided it was not 
priced through the Opening Price. This rule text accounts for orders 
which have routed away and returned to Phlx unsatisfied and also 
accounts for interest that remains unfilled during the Opening Process, 
provided it was not priced through the Opening Price. The Exchange 
notes that the posted interest will be priced at the better of the away 
market price or the order's limit price. This additional clarity will 
protect investors and the general public by adding greater transparency 
to the Exchange's current System operation by explaining how all 
interest is handled during the Opening Process. The Exchange believes 
that this detail will provide market participants with all possible 
scenarios that may occur once Phlx opens its options series. This 
amendment represents the System's current function.
Opening Process Cancel Timer
    The Exchange's proposal to adopt an Opening Process Cancel Timer 
within Options 3, Section 8(l), similar to NOM's and BX's Rules at 
Options 3, Section 8(c) is consistent with the Act. The Exchange's 
proposal to add a process whereby if an options series has not opened 
before the conclusion of the Opening Process Cancel Timer, a member may 
elect to have orders returned by providing written notification to the 
Exchange is consistent with the Act. Phlx believes that this amendment 
will promote just and equitable principles of trade and to protect 
investors and the public interest by enhancing its Opening Process. 
Adopting a cancel timer similar to NOM and BX will increase the 
efficiency of Phlx's Opening Process by providing Members with the 
ability to elect to have orders returned, except for non-GTC orders. 
This functionality provides members with choice, when symbols do not 
open, about where, and when, they can send orders for the opening that 
would afford them the best experience. The Exchange believes that this 
additional feature will attract additional order flow to the Exchange. 
The proposed changes should prove to be very helpful to market 
participants, particularly those that are involved in adding liquidity 
during the Opening Cross. These proposed enhancements will allow Phlx 
to continue to have a robust Opening Process.

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. While the Exchange does not 
believe that the proposal should have any direct impact on competition, 
it believes the proposal will enhance the Opening Process by making it 
more efficient and beneficial to market participants. Moreover, the 
Exchange believes that the proposed amendments will significantly 
improve the quality of execution of Phlx's Opening Process. The 
proposed amendments provide market participants more choice about 
where, and when, they can send orders for the opening that would afford 
them the best experience. The Exchange believes that this should 
attract new order flow.
Definitions
    With respect to the amendment to the definition of ``imbalance'' at 
proposed Options 3, Section 8(a)(xi) as the number of unmatched 
contracts priced through the Potential Opening Price. The Exchange 
believes that the addition of this defined term will bring greater 
clarity to the manner in which the term ``imbalance'' is defined within 
the System. This description is consistent with the current System 
operation. This is a non-substantive rule change.
Eligible Interest
    The Exchange's proposal to amend Options 3, Section 8(b)(ii) will 
bring greater clarity to the rule text. This proposal does not impose 
an undue burden on competition. The Exchange is proposing this 
amendment because Options 3, Section 10 explains how the Exchange will 
aggregate the size of all eligible interest for a particular 
participant category at a particular price level and the citation to 
that rule will provide that detail.
All-or-None Orders
    The Exchange's proposal to amend Options 3, Section 8(b) to remove 
the phrase ``that can be satisfied'' in relation to All-or-None Orders 
and to amend Options 3, Section 8(h) to remove the phrase ``except All-
or-None interest that cannot be satisfied'' does not impose an undue 
burden on competition. The Exchange would include all All-or-None 
Orders as eligible interest and also consider all All-or-None Orders 
for purposes of determining the Potential Opening Price, because the 
Exchange would be unable to determine which All-or-None Orders could be 
satisfied. Only Public Customers may submit All-or-None Orders.\13\
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    \13\ See note 3 above.
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Valid Width Quotes
    The Exchange's proposal to amend the requirements within Options 3, 
Section 8(d) for Phlx Electronic Market Makers to enter Valid Width 
Quotes by permitting the Valid Width Quote of one Phlx Electronic 
Market Maker other than the Lead Market Maker to open an option series 
without waiting for the two minute timeframe does not impose an undue 
burden on competition. This proposal would allow the market to open 
more efficiently as well as enable greater participation by Phlx 
Electronic Market Makers in the Opening Process. Lead Market Makers 
continue to remain obligated to open their appointed options series. 
Electronic Market Maker may participate in the Opening Process, as is 
the case today, provided they enter Valid Width Quotes, which is 
intended to ensure a quality opening. The Exchange does not believe 
this proposal would burden the ability of market participants who enter 
quotes to participate in the Opening Process.
Potential Opening Price
    The Exchange's proposal to amend Options 3, Section 8(h) to add an 
introductory sentence to the Potential Opening Process does not impose 
an undue burden on competition. This paragraph is not intended to amend 
the current function of the Opening Process, rather it is intended to 
provide context to the process described within Options 3, Section 
8(h). The Opening Price is bounded by the better ABBO in this case. 
This rule text is consistent with the current operation of the System. 
This is a non-substantive amendment.
    Similarly, the proposed amendment to Options 3, Section 8(h)(C) to 
replace ``Potential Opening Price calculation'' with the more accurate 
defined term ``Opening Price'' will bring greater clarity to the 
Exchange's Rule. This amendment is not substantive.
Opening Quote Range
    The Exchange's proposal to add a sentence to Options 3, Section 
8(j) to describe the manner in which the OQR is bound does not impose 
an undue burden on competition. OQR is intended to limit the Opening 
Price to a reasonable, middle ground price and thus reduce the 
potential for erroneous trades during the Opening Process. The 
Exchange's method seeks to validate the Opening Price and avoid opening 
at aberrant prices for the protection of all investors. This proposed 
amendment does not change the manner in which Phlx's System operates 
today. The Exchange believes that this rule text will bring greater 
transparency to the manner

[[Page 23570]]

in which the Exchange arrives at an Opening Price.
    The Exchange's proposal to amend Options 3, Section 8(j)(3) to 
replace the phrase ``that are executable against each other or the 
ABBO:'' with ``that cross each other or are marketable against the 
ABBO:'' does not impose an undue burden on competition, rather, this 
proposal will more accurately describe the current Opening Process. 
Valid Width Quotes are not routable and would not execute against the 
ABBO. This rule text is more specific than ``executable against each 
other.'' The Exchange believes that this rule text adds greater 
transparency to the Opening Process. This is a non-substantive 
amendment.
    The Exchange's proposal to amend the phrase ``consider routable'' 
to ``route routable'' and replacing the phrase ``in price/time priority 
to satisfy the away market'' with the citation to Options 3, Section 
10(a)(1)(A), which describes price/time priority within Options 3, 
Section 8(j)(7), are non-substantive rule changes. These proposals will 
add greater clarity to the Exchange's Rules.
Price Discovery Mechanism
    The Exchange's proposal to add new rule text at Options 3, Section 
8(k)(A)(1) to describe the current operation of the System with respect 
to imbalance messages does not impose an undue burden on competition. 
The propose of this proposed text is to provide greater information to 
market participants to explain the information that is being conveyed 
when an imbalance message indicates ``0'' volume. All market 
participants are able to respond to an imbalance messages and have 
their interest considered in determining a fair and reasonable Opening 
Price.
    The Exchange's proposal to amend Options 3, Section 8(k)(C)(2) to 
remove the phrase ``at the Opening Price'' within the paragraph does 
not impose an undue burden on competition, rather, removing the current 
phrase will avoid confusion. In addition, the Exchange's proposal to 
add the phrase ``and orders'' to Options 3, Section 8(j)(3)(B) which 
currently only references quotes does not impose an undue burden on 
competition. During the Price Discovery Mechanism both quotes and 
orders are considered.
    The Exchange's proposal to amend the last sentence of Options 3, 
Section 8(k)(C)(5) to amend the phrase ``Any unexecuted contracts'' to 
``Any unexecuted interest'' does not impose an undue burden on 
competition, rather, it will make clear that this includes orders, 
quotes and sweeps. The Exchange's proposal to add the phrase ``if 
consistent with the Member's instructions'' to the end of the paragraph 
at Options 3, Section 8(k)(C)(5) does not impose an undue burden on 
competition. This rule text will make clear that the instructions 
provided by a member in terms of order types and routing would be 
applicable to interest entered during the Opening Process which remains 
eligible for intra-day trading.
    The Exchange's proposal to add an introductory phrase to Options 3, 
Section 8(k)(D) which provides, ``Pursuant to Options 3, Section 
8(k)(C)(6),'' does not impose an undue burden on competition. The prior 
paragraph, Options 3, Section 8(k)(C)(6), describes how the System 
executes and routes orders. This introductory sentence is being added 
as a transition from the prior paragraph at Options 3, Section 
8(k)(C)(6), relating to the routing of orders. This is a non-
substantive amendment.
    The Exchange's proposal to add a new paragraph at Options 3, 
Section 8(k)(G) which provides, ``Remaining contracts which are not 
priced through the Exchange Opening Price after routing a number of 
contracts to satisfy better priced away contracts will be posted to the 
Order Book at the better of the away market price or the order's limit 
price,'' does not impose an undue burden on competition, rather this 
proposal will bring greater transparency to the handling of orders once 
an option series is opened for trading. This rule text accounts for 
orders which have routed away and returned to Phlx unsatisfied and also 
accounts for interest that remains unfilled during the Opening Process, 
provided it was not priced through the Opening Price. This additional 
clarity will explain how all interest is handled during the Opening 
Process.
Opening Process Cancel Timer
    The Exchange's proposal to adopt an Opening Process Cancel Timer 
within Options 3, Section 8(l), similar to NOM's and BX's Rules at 
Options 3, Section 8(c) does not impose an undue burden on competition. 
Adopting a cancel timer similar to NOM and BX will increase the 
efficiency of Phlx's Opening Process for all market participants. All 
market participants will have the ability to elect to have orders 
returned, except for non-GTC Orders, when symbols do not open. This 
feature provides Members with choice about where, and when, they can 
send orders for the opening that would afford them the best experience. 
The Exchange believes that this additional feature will attract 
additional order flow to the Exchange.
    The remainder of the proposed rule text is intended to bring 
greater transparency to the Opening Process rule while also adding 
additional detail and clarity and therefore does not have an impact on 
competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
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 change 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

[[Page 23571]]

     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2020-20 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-2020-20. 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/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-2020-20 and should be submitted on 
or before May 19, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08939 Filed 4-27-20; 8:45 am]
 BILLING CODE 8011-01-P