Document ID: SEC-2011-0516-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-04-13T04:00Z

[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20773-20775]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8803]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64249; File No. SR-Phlx-2011-47]

Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX LLC To 
Establish a Qualified Contingent Cross Order

April 7, 2011.
    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 1, 2011, NASDAQ OMX PHLX LLC (``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 amend PHLX Rule 1080 to establish a 
Qualified Contingent Cross Order (``QCC Order'') for execution in the 
PHLX XL II System (``System'' or ``Exchange System''). The QCC Order 
will facilitate the execution of stock/option Qualified Contingent 
Trades that satisfy the requirements of the trade through exemption in 
connection with Rule 611(d) of Regulation NMS (``QCT Trade 
Exemption'').\3\ The text of the proposed rule change is below. 
Proposed new language is italicized; proposed deletions are in 
brackets.
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    \3\ See Securities Exchange Act Release No. 54389 (August 31, 
2006), 71 FR 52829 (September 7, 2006); Securities Exchange Act 
Release No. 57620 (April 4, 2008) 73 FR 19271 (April 9, 2008).
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* * * * *
NASDAQ OMX PHLX Rules
* * * * *

Rule 1080. PHLX XL and XL II

    (a)-(n) No Change.
    (o) Qualified Contingent Cross Order.
    A Qualified Contingent Cross Order is comprised of an order to buy 
or sell at least 1,000 contracts that is identified as being part of a 
qualified contingent trade, as that term is defined in subsection (3) 
below, coupled with a contra-side order to buy or sell an equal number 
of contracts.
    (1) Qualified Contingent Cross Orders are immediately executed upon 
entry into the System by an Order Entry Firm provided that (i) no 
Customer Orders are at the same price on the Exchange's limit order 
book and (ii) the price is at or between the NBBO.
    (a) Qualified Contingent Cross Orders will be automatically 
rejected if they cannot be executed.
    (b) Qualified Contingent Cross Orders may only be entered in the 
regular trading increments applicable to the options class under Rule 
1034.
    (2) Qualified Contingent Cross Orders shall only be submitted 
electronically from off the Floor to the PHLX System. Order Entry Firms 
must maintain books and records demonstrating that each Qualified 
Contingent Cross Order was routed to the Exchange System from off of 
the Floor. Any Qualified Contingent Cross Order that does not have a 
corresponding record required by this subsection shall be deemed to 
have been entered from on the Floor in violation of this Rule.
    (3) A ``qualified contingent trade'' is a transaction consisting of 
two or more component orders, executed as agent or principal, where:
    (a) At least one component is an NMS Stock, as defined in Rule 600 
of Regulation NMS under the Exchange Act;
    (b) All components are effected with a product or price contingency 
that either has been agreed to by all the respective counterparties or 
arranged for by a broker-dealer as principal or agent;
    (c) The execution of one component is contingent upon the execution 
of all other components at or near the same time;
    (d) The specific relationship between the component orders (e.g., 
the spread between the prices of the component orders) is determined by 
the time the contingent order is placed;
    (e) The component orders bear a derivative relationship to one 
another, represent different classes of shares of the same issuer, or 
involve the securities of participants in mergers or with intentions to 
merge that have been announced or cancelled; and
    (f) The transaction is fully hedged (without regard to any prior 
existing position) as a result of other components of the contingent 
trade.
* * * * *
    (b) Not applicable.
    (c) Not applicable.
* * * * *

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.

[[Page 20774]]

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

1. Purpose
    On February 24, 2011, the Commission issued an order approving SR-
ISE-2010-073, a proposal by the ISE to establish a Qualified Contingent 
Cross (``ISE QCC Proposal'').\4\ The ISE QCC Proposal was 
controversial, attracting opposition from multiple exchanges including 
PHLX. In its comment letter on the ISE QCC Proposal, PHLX asserted that 
the QCC Proposal deviated from ``long-held principles in the options 
market by permitting the crossing of orders without requiring prior 
exposure'' and that the ISE QCC Proposal failed adequately to protect 
customers with orders resting on the ISE limit order book.\5\
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    \4\ The Commission notes that the order approving the ISE QCC 
Proposal was published in the Federal Register on March 2, 2011. See 
Securities Exchange Act Release No. 63955 (February 24, 2011), 76 FR 
11533 (``Approval Order'').
    \5\ See Letter, dated August 13, 2010, from Thomas Wittman, 
President, NASDAQ OMX PHLX to Elizabeth Murphy, Secretary, U.S. 
Securities and Exchange Commission.
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    The Commission, in a thorough and thoughtful decision, concluded 
that the QCC Proposal--including the lack of prior order exposure--is 
consistent with the Act. With respect to order exposure, the Commission 
stated:

    While the Commission believes that order exposure is generally 
beneficial to options markets in that it provides an incentive to 
options market makers to provide liquidity and therefore plays an 
important role in ensuring competition and price discovery in the 
options markets, it also has recognized that contingent trades can 
be ``useful trading tools for investors and other market 
participants, particularly those who trade the securities of issuers 
involved in mergers, different classes of shares of the same issuer, 
convertible securities, and equity derivatives such as options 
[italics added].'' and that ``[t]hose who engage in contingent 
trades can benefit the market as a whole by studying the 
relationships between the prices of such securities and executing 
contingent trades when they believe such relationships are out of 
line with what they believe to be fair value.'' As such, the 
Commission stated that transactions that meet the specified 
requirements of the NMS QCT Exemption could be of benefit to the 
market as a whole, contributing to the efficient functioning of the 
securities markets and the price discovery process.\6\
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    \6\ Approval Order at p. 28 (citing to Reg NMS QCT Exemption).

    The Approval Order succinctly sets forth the material elements of 
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ISE's Qualified Contingent Cross:

    Thus, as modified, an ISE member effecting a trade pursuant to 
the NMS QCT Exemption could cross the options leg of the trade on 
ISE as a QCC Order immediately upon entry, without exposure, only if 
there are no Priority Customer orders on the Exchange's limit order 
book at the same price and if the order: (i) Is for at least 1,000 
contracts; (ii) meets the six requirements of the NMS QCT Exemption; 
and (iii) is executed at a price at or between the NBBO (``Modified 
QCC Order''). In the Notice, ISE stated that the modifications to 
the Original QCC Order (i.e., to prevent the execution of a QCC if 
there is a Priority Customer on its book and to increase the minimum 
size of a QCC Order) remove the appearance that such orders are 
trading ahead of Priority Customer orders or that the QCC Order 
could be used to disadvantage retail customers (citations 
omitted).\7\
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    \7\ Id. at p. 18.

    The Commission, having considered and addressed all arguments in 
favor and in opposition to the QCC, has established binding precedent 
under which other exchanges can establish a QCC Order that is also 
consistent with the Act.\8\
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    \8\ The Exchange has filed its proposed rule change pursuant to 
Rule 19b-4(f)(6). The Commission notes that it has previously 
provided guidance regarding the appropriate analysis for when a 
self-regulatory organization may submit a proposed rule change under 
Rule 19b-4(f)(6) for immediate effectiveness. See Securities 
Exchange Act Release No. 58092 (July 3, 2008), 73 FR 40143 (July 11, 
2008).
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    In keeping with that precedent, PHLX hereby proposes to add PHLX 
Rule 1080(o) to establish a QCC Order based on the precedent of ISE's 
QCC Order. Specifically, PHLX proposes to amend Rule 1080 to provide 
that a PHLX Order Entry Firm effectuating a trade via the System 
pursuant to the Regulation NMS Qualified Contingent Trade Exemption to 
Rule 611(a) (``QCT Exemption'') can cross the options leg of the trade 
on PHLX as a QCC Order immediately upon entry and without order 
exposure if no Customer Orders \9\ exist on the Exchange's order book 
at the same price.
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    \9\ PHLX will reject QCC Orders that attempt to execute when any 
Customer orders are resting on the Exchange limit order book at the 
same price. ISE QCC Orders will be cancelled only when they 
encounter resting orders of Priority Customers. The Commission has 
previously approved the rejection of crossing transactions when 
there is a customer order on the book at the same price. See, e.g., 
ISE Rule 721(a); and CBOE Rule 6.74A, Interpretations and Policies 
.08.
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    As set forth in proposed Rule 1080(o), the QCC Order must: (i) Be 
for at least 1,000 contracts, (ii) meet the six requirements of Rule 
1080(o)(3) which are modeled on the QCT Exemption, (iii) be executed at 
a price at or between the National Best Bid and Offer (``NBBO''); and 
(iv) be rejected if a Customer order is resting on the Exchange book at 
the same price.\10\ As a result, the PHLX QCC Order proposed herein 
satisfies all of the requirements the Commission enumerated in the 
Approval Order.
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    \10\ While the QCC would not provide exposure for price 
improvement for the options leg of a stock-option order, the options 
leg must be executed at the NBBO or better. The Commission has 
previously approved crossing transactions with no opportunity for 
price improvement. See, e.g., ISE Rule 721(a) and Chicago Board 
Options Exchange Rule 6.74A, Interpretations and Policies .08.
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    Under this proposal, the Exchange would only permit QCCs to be 
submitted electronically from off the Floor through the Exchange 
System. In this regard, a Floor Broker located on the Floor of the 
Exchange would not be allowed to enter QCCs into the System, or 
otherwise effect them in open outcry. We plan to file a separate 
proposed rule change to address effecting QCCs in open outcry on the 
Floor of the Exchange.\11\
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    \11\ It is PHLX's position that the Approval Order contemplates 
the submission of QCC Orders from the Floor of the Exchange. Nothing 
in this filing should be construed as being inconsistent with that 
position.
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    To provide a mechanism for the Exchange to review for whether QCC 
Orders have been entered from off of the Floor, the Exchange proposes 
to adopt proposed Rule 1080(o)(2). This provision would require members 
to maintain books and records demonstrating that each Qualified 
Contingent Cross Order was routed to the Exchange System from off of 
the Floor. Any Qualified Contingent Cross Order that does not have a 
corresponding record required by this provision would be deemed to have 
been entered from on the Floor in violation of Rule 1080(o).
    The Exchange's proposal addresses the mechanics of executing the 
stock and options components of a net-price transaction. The Exchange 
believes that it is necessary that it provide members and their 
customers with the same trading capabilities available on other 
exchanges with respect to QCCs, including the change proposed herein, 
which would permit members to execute the options legs of their 
customers' large complex orders on the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) \13\ and 6(b)(8) \14\of the Act 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

[[Page 20775]]

and a national market system, and, in general to protect investors and 
the public interest and the rules of an exchange do not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. In addition, the proposed rule change is 
consistent with Section 11A(a)(1)(C) of the Act,\15\ in which Congress 
found that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure, among other things, the economically efficient execution of 
securities transactions.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(8).
    \15\ 15 U.S.C. 78k-1(a)(1)(C).
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    The statutory basis for PHLX's proposed QCC Order is identical to 
the Commission's basis for finding that the ISE's QCC Proposal is 
consistent with the Act ``in that it would facilitate the execution of 
qualified contingent trades, for which the Commission found in the 
Original QCT Exemption to be of benefit to the market as a whole, 
contributing to the efficient functioning of the securities markets and 
the price discovery process. The QCC Order would provide assurance to 
parties to stock-option qualified contingent trades that their hedge 
would be maintained by allowing the options component to be executed as 
a clean cross.'' In addition, like the ISE's QCC Order, the Exchange's 
Modified QCC Order ``is narrowly drawn to provide a limited exception 
to the general principle of exposure, and retains the general principle 
of customer priority.''
    PHLX's proposed QCC Order promotes the same Commission goals as or 
more effectively, and it is as or more narrowly drawn than ISE's QCC 
Order. Accordingly, the Exchange believes that the proposed rule change 
must also be consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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

    Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6)(iii) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the self-regulatory organization to submit to 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 such 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.

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-2011-47 on the subject line.

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-2011-47. 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 available publicly. All 
submissions should refer to File No. SR-Phlx-2011-47 and should be 
submitted on or before May 4, 2011.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8803 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P