Document ID: SEC-2016-1910-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-10-31T04:00Z

[Federal Register Volume 81, Number 210 (Monday, October 31, 2016)]
[Notices]
[Pages 75473-75476]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26139]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79156; File No. SR-Phlx-2016-106]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change to Add Commentary 
.14 to Rule 3317 (Compliance With Regulation NMS Plan To Implement a 
Tick Size Pilot)

October 25, 2016.
    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 17, 2016, 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 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 add Commentary .14 to Rule 3317 
(Compliance with Regulation NMS Plan to Implement a Tick Size Pilot) to 
provide the SEC with notice of its efforts to re-program its systems to 
eliminate a re-pricing functionality for certain orders in Test Group 
Three securities in connection with the Regulation NMS Plan to 
Implement a Tick Size Pilot Program (``Plan'' or ``Pilot'').\3\ Phlx 
also

[[Page 75474]]

proposes to re-number current Commentary .12 relating to the Block Size 
exception to Commentary .13 as a technical correction.
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    \3\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order'').
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    The text of the proposed rule change is set forth below. Proposed 
new language is in italics; deleted text is in brackets.
* * * * *

NASDAQ PHLX Rules

* * * * *

3317. Compliance with Regulation NMS Plan to Implement a Tick Size 
Pilot

    (a) through (d) No Change.
    Commentary: .01-.12 No change.
    .1[2]3 For purposes of qualifying for the Block Size exception 
under paragraph (c)(3)(D)(iii) of this Rule, the Order must have a 
size of 5,000 shares or more and the resulting execution upon entry 
must have a size of 5,000 shares or more in aggregate.
    .14 Until October 31, 2016, the treatment of Price to Comply 
Orders, Price to Display Orders, Non-Displayed Orders, and Post-Only 
Orders that are entered through the OUCH or FLITE protocols in Test 
Group Three securities shall be as follows:
    Following entry, and if market conditions allow, a Price to 
Comply Order in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO until such time as 
the Price to Comply Order is able to be ranked and displayed at its 
original entered limit price.
    Following entry, and if market conditions allow, a Price to 
Display Order in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO until such time as 
the Price to Display Order is able to be ranked and displayed at its 
original entered limit price.
    Following entry, and if market conditions allow, a Non-Displayed 
Order in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO up (down) to the 
Order's limit price.
    Following entry, and if market conditions allow, the Post-Only 
Order in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO or the best price 
on the Exchange Book, as applicable until such time as the Post-Only 
Order is able to be ranked and displayed at its original entered 
limit price.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On September 7, 2016, the Exchange filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
(``Proposal'') to adopt paragraph (d) and Commentary .12 to Exchange 
Rule 3317 to describe changes to system functionality necessary to 
implement the Plan. The Exchange also proposed amendments to Rule 
3317(a) and (c) to clarify how the Trade-at exception may be satisfied. 
The SEC published the Proposal in the Federal Register for notice and 
comment on September 20, 2016.\4\ Phlx subsequently filed three Partial 
Amendments to clarify aspects of the Proposal. The Commission approved 
the Proposal, as amended, on October 7, 2016.\5\
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    \4\ See Securities Exchange Act Release No. 78835 (September 14, 
2016), 81 FR 64552 (September 20, 2016) (SR-Phlx-2016-92).
    \5\ See Securities Exchange Act Release No. 79074 (October 7, 
2016) (SR-Phlx-2016-92).
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    In SR-Phlx-2016-92, Phlx had initially proposed a re-pricing 
functionality for Price to Comply Orders, Non-Displayed Orders, and 
Post-Only Orders entered through the OUCH and FLITE protocols in Group 
Three securities.\6\ Phlx subsequently determined that it would not 
offer this re-pricing functionality for Price to Comply Orders, Non-
Displayed Orders, and Post-Only Orders entered through the OUCH and 
FLITE protocols in Group Three securities. As part of Partial Amendment 
No. 2 to SR-Phlx-2016-92, Phlx proposed to delete the relevant language 
from Rule 4770 [sic] related to this re-pricing functionality.
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    \6\ As originally proposed, Rule 3317(d)(2) stated that Price to 
Comply Orders in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO until such time as 
the Price to Comply Order is able to be ranked and displayed at its 
original entered limit price. Rule 3317(d)(3) stated that, if market 
conditions allow, a Non-Displayed Order in a Test Group Three Pilot 
Security will be adjusted repeatedly in accordance with changes to 
the NBBO up (down) to the Order's limit price. Rule 3317(d)(4) 
stated that, if market conditions allow, the Post-Only Order in a 
Test Group Three Pilot Security will be adjusted repeatedly in 
accordance with changes to the NBBO or the best price on the Phlx 
Book, as applicable until such time as the Post-Only Order is able 
to be ranked and displayed at its original entered limit price.
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    In that amendment, Phlx noted that this change would only impact 
the treatment of Price to Comply Orders, Non-Displayed Orders, and 
Post-Only orders that are submitted through the OUCH and FLITE 
protocols in Test Group Three Pilot Securities, as these types of 
Orders that are currently submitted to Phlx through the RASH or FIX 
protocols are already subject to this re-pricing functionality and will 
remain subject to this functionality under the Pilot.
    In the Amendment, Phlx further noted that its systems are currently 
programmed so that Price to Comply Orders, Non-Displayed Orders and 
Post-Only Orders entered through the OUCH and FLITE protocols in Test 
Group Three Securities may be adjusted repeatedly to reflect changes to 
the NBBO and/or the best price on the Phlx book. Phlx stated that it is 
re-programming its systems to remove this functionality for Price to 
Comply Orders, Non-Displayed Orders and Post-Only Orders entered 
through the OUCH and FLITE protocols in Test Group Three Securities.\7\ 
In the Amendment, Phlx stated that it anticipated that this re-
programming shall be completed no later than November 30, 2016. If it 
appears that this functionality will remain operational by October 17, 
2016, Phlx indicated that it would file a proposed rule change with the 
SEC and will provide notice to market participants sufficiently in 
advance of that date to provide effective notice. The rule change and 
the notice to market participants will describe the current operation 
of the Phlx systems in this regard, and the timing related to the re-
programming.
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    \7\ BX [sic] has become aware that this re-pricing functionality 
also applies to Price to Display Orders that are entered through the 
OUCH and FLITE protocols in Test Group Three Securities, and is 
including those Orders as part of this proposal accordingly. Price 
to Display Orders will be treated in the same manner as Price to 
Comply Orders under the re-pricing functionality.
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    At this time, Phlx is still in the process of re-programming its 
systems to eliminate the re-pricing functionality in Test Group Three 
securities for Price to Comply Orders, Non-Displayed Orders, and Post-
Only Orders that are entered through the OUCH or FLITE protocols. Phlx 
anticipates that this re-programming shall be complete on or before 
October 31, 2016.
    Therefore, the current treatment of Price to Comply Orders, Price 
to Display Orders, Non-Displayed Orders, and Post-Only Orders that are 
entered through the OUCH or FLITE protocols in Test Group Three 
securities shall be as follows:
    Following entry, and if market conditions allow, a Price to Comply 
Order in a Test Group Three Pilot Security will be adjusted repeatedly 
in accordance with changes to the NBBO until such time as the Price to 
Comply

[[Page 75475]]

Order is able to be ranked and displayed at its original entered limit 
price.
    Following entry, and if market conditions allow, a Price to Display 
Order in a Test Group Three Pilot Security will be adjusted repeatedly 
in accordance with changes to the NBBO until such time as the Price to 
Display Order is able to be ranked and displayed at its original 
entered limit price.
    Following entry, and if market conditions allow, a Non-Displayed 
Order in a Test Group Three Pilot Security will be adjusted repeatedly 
in accordance with changes to the NBBO up (down) to the Order's limit 
price.
    Following entry, and if market conditions allow, a Post-Only Order 
in a Test Group Three Pilot Security will be adjusted repeatedly in 
accordance with changes to the NBBO or the best price on the Phlx Book, 
as applicable until such time as the Post-Only Order is able to be 
ranked and displayed at its original entered limit price.
    In addition to this proposal, Phlx will also issue an Equity Trader 
Alert that describes the current operation of the Phlx systems in this 
regard, and the timing related to the removal of this re-pricing 
functionality.\8\
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    \8\ Phlx anticipates providing additional specificity to market 
participants as to the timing of the new functionality at a later 
date.
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    Phlx also proposes to re-number Commentary .12, which relates to 
the Block Size exception, to Commentary .13. A previous filing (SR-
Phlx-2016-90) added Commentary to Rule 3317 that resulted in Commentary 
.11, which addresses the effective date of the Rule, being re-numbered 
as Commentary .12. Phlx therefore proposes to re-number the Commentary 
.12 that addresses the Block Size exception as Commentary .13.

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. The purpose of this filing is to inform the SEC and market 
participants of the status of Phlx's attempts to re-program its systems 
to remove the re-pricing functionality in Test Group Three securities 
for Price to Comply Orders, Price to Display Orders, Non-Displayed 
Orders, and Post-Only Orders that are entered through the OUCH or FLITE 
protocols, and the current treatment of such orders pending the removal 
of this functionality. This proposal is consistent with the Act because 
it provides the SEC and market participants with notice of Phlx's 
efforts in this regard, and is being submitted in connection with the 
statements made by Phlx in SR-Phlx-2016-92 in proposing the removal of 
this functionality.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    Phlx also believes that the proposal is consistent with the Act 
because the re-pricing functionality will not significantly impact the 
data gathered pursuant to the Pilot. Phlx notes that this re-pricing 
functionality only affects Price to Comply Orders, Price to Display 
Orders, Non-Displayed Orders, and Post-Only Orders that are entered 
through the OUCH or FLITE protocols for Test Group Three securities 
until the re-pricing functionality is eliminated, and only becomes 
relevant when an Order in a Test Group Three security would cross a 
Protected Quotation of another market center. Phlx has analyzed data 
relating to the frequency with which Orders in Test Group Three 
securities are entered with a limit price that would cross a Protected 
Quotation of another market center, and believes that the re-pricing 
functionality will be triggered infrequently once Test Group Three 
becomes operational.\11\ The Exchange also notes that it is diligently 
working to re-program its systems to remove this re-pricing 
functionality, and that it anticipates this re-programming to be 
complete on or before October 31, 2016.
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    \11\ For example, on September 23, 2016, 0.3% of orders in Test 
Group Three securities were entered on the NASDAQ Stock Market LLC 
at a price that crossed the NBBO. Phlx believes that this number 
will be even lower starting October 17, 2016, when the $0.05 tick 
increment for Test Group Three securities is in place.
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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. The purpose of this proposal is 
to provide the SEC and market participants with notice of Phlx's 
efforts to remove its re-pricing functionality in Test Group Three 
securities for Price to Comply Orders, Price to Display Orders, Non-
Displayed Orders, and Post-Only Orders that are entered through the 
OUCH or FLITE protocols, consistent with its statements in SR-Phlx-
2016-92.

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)(iii) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. Rule 
19b-4(f)(6)(iii), however, permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange requests that the 
Commission waive the 30-day operative delay contained in Rule 19b-
4(f)(6)(iii) so that this proposed change will be in operative as of 
October 17, 2016, the date that Test Group Three securities begin to be 
subject to the quoting and trading restrictions of the Plan and, 
therefore, the relevant language in Rule 3317.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will allow the Exchange to implement the proposed rules 
immediately thereby preventing delays in the implementation of the 
Plan. The Commission notes that the Pilot started implementation on 
October 3, 2016, Test Group Three securities were phased into the Pilot 
starting on October 17, 2016, and waiving the 30-day operative delay 
would ensure that the rules of the Exchange would be in place during 
implementation. Therefore, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change to be operative 
upon filing with the Commission.\14\
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    \14\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the

[[Page 75476]]

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 rule-comments@sec.gov. Please include 
File Number SR-Phlx-2016-106 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-2016-106. 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2016-106, and should be 
submitted on or before November 21, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-26139 Filed 10-28-16; 8:45 am]
 BILLING CODE 8011-01-P