Document ID: SEC-2013-1244-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2013-07-09T04:00Z

[Federal Register Volume 78, Number 131 (Tuesday, July 9, 2013)]
[Notices]
[Pages 41163-41166]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16476]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69921; File No. SR-Phlx-2013-72]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend the 
Acceptable Complex Execution Parameter

July 2, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 41164]]

(``Act'') \1\, and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 1, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend the Acceptable Complex Execution 
Parameter (``ACE Parameter'') in Rule 1080.08(i), which is the price 
range outside of which a Complex Order (as defined below) will not be 
executed.
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; deleted text is in brackets.
* * * * *

Rule 1080. Phlx XL and Phlx XL II

    (a)-(o) No change.
       Commentary: ------------
    .01-.07 No change.
    .08 Complex Orders on Phlx XL.
    (a)-(h) No change.
* * * * *
    (i) Acceptable Complex Execution (``ACE'') Parameter. The ACE 
Parameter defines a price range outside of which a Complex Order 
will not be executed [following a COLA]. The ACE Parameter is either 
a percentage or number defined by the Exchange on an issue-by-issue 
basis. [The ACE Parameter percentage shall not be less than 3 
percent.] The ACE Parameter price range is based on the cNBBO at the 
time an order would be executed. A Complex Order to sell will not be 
executed at a price that is lower than the cNBBO bid by more than 
the ACE Parameter [percentage]. A Complex Order to buy will not be 
executed at a price that is higher than the cNBBO offer by more than 
the ACE Parameter [percentage]. A Complex Order or a portion of a 
Complex Order that cannot be executed within the ACE Parameter 
pursuant to this rule will be placed on the CBOOK. The Exchange will 
issue an Options Trader Alert (``OTA'') to membership indicating the 
issue-by-issue ACE Parameters [percentages]. The Exchange will also 
maintain a list of ACE Parameters [percentages] on its Web site.
* * * * *

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 ACE Parameter feature is designed to help maintain a fair and 
orderly market by helping to mitigate the potential risk of executions 
at prices which are extreme and potentially erroneous. Specifically, 
the ACE Parameter prevents Complex Orders \3\ from automatically 
executing at potentially erroneous prices by establishing a price range 
outside of which a Complex Order will not be executed. Currently, the 
ACE Parameter is a percentage defined by the Exchange on an issue-by-
issue basis. The purpose of this proposal is to make the ACE Parameter 
more flexible and relevant to different types of options by eliminating 
the 3 percent limit and permitting the ACE Parameter to a number, in 
addition to a percentage.
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    \3\ See Rule 1080.08(a).
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    Currently, the ACE Parameter is always a percentage, not less than 
3 percent. The ACE Parameter is based on the Complex National Best Bid 
or Offer (``cNBBO'') \4\ at the time an order would be executed. A 
Complex Order to sell will not be executed at a price that is lower 
than the cNBBO bid by more than the ACE Parameter. A Complex Order to 
buy will not be executed at a price that is higher than the cNBBO offer 
by more than the ACE Parameter percentage. A Complex Order or a portion 
of a Complex Order that cannot be executed within the ACE Parameter 
will be placed on Exchange's Complex Limit Order Book (``CBOOK'').\5\
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    \4\ See Rule 1080.08(a)(vi).
    \5\ See Rule 1080.08(f). The Exchange notes that Complex Orders 
are placed on the CBOOK at their limit price and may trade pursuant 
to Rule 1080.08(f)(iii), depending on the movement of the cNBBO and 
application of the ACE Parameter. Although at any given time, the 
price of a Complex Order may lock or cross another Complex Order on 
the CBOOK, this is not a prohibited locked or crossed market for 
purposes of Rule 1086, because such Complex Orders do not constitute 
a Protected Quotation as defined in Rule 1083. Complex Orders 
consist of multiple components (rather than one series) and are not 
disseminated pursuant to the OPRA Plan. If two Complex Orders on the 
CBOOK cross, they may nevertheless execute against each other, if 
the execution price is within the ACE Parameter. If, however, the 
potential execution price is not within the ACE Parameter for one of 
those orders, those orders would not trade.
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    For example, assume the ACE parameter is set at 10%, and a PHLX XL 
participant submits a Complex Order to buy Series A and buy Series B 
(30 units of the strategy) for a net debit of $8.40 and a COLA \6\ is 
initiated. At the end of the COLA, the market is:
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    \6\ COLA is the automated Complex Order Live Auction process. 
See Rule 1080.08(e).
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    NBBO for Series A is $4.50-$4.60, size 10 X 10.
    NBBO for Series B is $2.90-$3.00, size 10 X 10.
    cNBBO for the strategy is $7.40-$7.60.
    If the ACE Parameter is set at 10%, executions to buy the strategy 
(buy Series A and buy Series B) will occur up to $8.36 ($7.60 + [0.10 x 
$7.60]) but no higher. Any remainder of the order will be placed on the 
CBOOK at $8.40.
    In its proposal to adopt the ACE Parameter, the Exchange adopted a 
minimum 3 percent level, similar to the CBOE.\7\ At the time, the 
Exchange believed that this level was reasonable and appropriate, 
because a marketable order that would deviate from the cNBBO by more 
than 3% may be indicative of an extreme or potentially erroneous price, 
and an Exchange participant would likely want to evaluate the affected 
Complex Order further before receiving an automatic execution. At this 
time, based on its experience, the Exchange believes that this amount 
may not be appropriate for all options, such that a lower percentage 
could be necessary. For example, higher priced options series may 
benefit from an ACE Parameter of 1%. Consider the following scenario: 
Assume the ACE Parameter is set at 10%, and a PHLX XL participant 
submits a Complex Order to buy Series A and buy Series B (30 units of 
the strategy) at the market. Further assume:
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    \7\ See Securities Exchange Act Release No. 66602 (March 14, 
2012), 77 FR 16579 (March 21, 2012) (SR-Phlx-2012-31). See also CBOE 
Rule 6.53C.08(e).
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    NBBO for Series A is $124.50-$124.60, size 10 X 10.
    NBBO for Series B is $12.90-$13.00, size 10 X 10.
    cNBBO for the strategy is $137.40-$137.60.
    If the ACE Parameter is set at 10%, executions to buy the strategy 
(buy Series A and buy Series B) will occur up to $151.36 ($137.60 + 
[0.10 x $137.60]) but no higher. The resulting executions of the 
Complex Order could vary in price by up to $13.76 ($151.36-$137.60). If 
the ACE

[[Page 41165]]

Parameter is set at 1% rather than 10%, executions to buy the strategy 
will occur only up to $138.97 ($137.60 + [0.01 x $137.60]) but no 
higher. With the ACE Parameter set at 1%, the variation in execution 
prices is drastically reduced.
    The Exchange also seeks to operate the ACE Parameter not only as a 
percentage but as an absolute number, representing a certain dollar 
amount around the cNBBO. The Exchange believes that sometimes an 
absolute number rather than a percentage would be appropriate, such as 
when the cNBBO is low priced.
    For example, assume the ACE Parameter is set at 10%, and a PHLX XL 
participant submits a Complex Order to buy Series A and sell Series B 
(30 units of the strategy) for a net debit of $0.08.
    NBBO for Series A is $0.25-$0.28, size 10 X 10.
    NBBO for Series B is $0.20-$0.25, size 10 X 10.
    cNBBO for the strategy is $0.00-$0.08.
    If the ACE Parameter is set at 10%, executions to buy the strategy 
(buy Series A and sell Series B) will only be permitted to occur at the 
offer of $0.08 since a 10% range of that offer equates to a sub-penny 
increment ($0.08 + [.10 x $0.08]) = .088). Allowing an absolute number 
rather than a percentage for the ACE Parameter in this instance would 
give the Exchange the ability to offer a range of allowable execution 
prices rather than only the cNBBO offer.
    The Exchange intends to implement these changes to the ACE 
Parameter in July or August, and will issue an Options Trader Alert 
(``OTA'') indicating when the changes become operative as well as the 
issue-by-issue ACE Parameters. The Exchange will also maintain a list 
of ACE Parameters on its Web site.
    The Exchange also proposes to amend the first sentence of Rule 
1080.08(i) by deleting reference to the COLA. The Exchange believes 
that this was an inadvertent drafting error and now seeks to correct 
it. Consistent with the fourth sentence, the ACE Parameter applies and 
is based on the cNBBO at the time an order would be executed, whether 
or not there was a COLA. The Exchange believes that the fifth and sixth 
sentences further support this and do not mention a COLA. Regardless, 
the Exchange believes that it is appropriate to apply the ACE Parameter 
even when there is no COLA, because the purpose of the ACE Parameter is 
to protect orders from an execution at a faraway price, which purpose 
is equally relevant when there is an execution without a COLA. 
Accordingly, the Exchange believes that applying the ACE Parameter to 
orders than are not subject to a COLA should be beneficial to users 
submitting Complex Orders to the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \9\ in particular, in that it is designed to promote 
just and equitable principles of trade and protect investors and the 
public interest, by making slight modifications to the ACE Parameter so 
that it can better protect investors from extreme and potentially 
erroneous executions of their Complex Orders. The ACE Parameter, as 
modified, will continue to promote just and equitable principles of 
trade by preventing executions at prices that are significantly worse 
than the cNBBO, which the Exchange believes is a fair representation of 
then-available prices. Like other order protections, such as an 
Acceptable Trade Range feature,\10\ the ACE Parameter is a protection 
against executions at inappropriate prices and the Exchange believes 
that it will do so better with the modifications proposed herein.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See NOM Rules, Chapter VI, Section 10(7) and BX Options 
Rules, Chapter VI, Section 10(7).
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    Respecting the amendment to the first sentence of Rule 1080.08(i), 
the Exchange believes that applying the ACE Parameter when there is no 
COLA is consistent with the aforementioned statutory principles, 
because the ACE Parameter will protect orders from an execution at a 
faraway price. Specifically, when there is no COLA and therefore no 
opportunity for price improvement over existing markets, protection 
from executions at faraway prices is especially useful and likely to 
promote just and equitable principles of trade and protect investors 
and the public interest.
    The Exchange noted above that Complex Orders are placed on the 
CBOOK at their limit price and may trade from the CBOOK pursuant to 
Rule 1080.08(f)(iii). At any given time, the price of a Complex Order 
may lock or cross another Complex Order on the CBOOK, which is not 
prohibited, as explained above. The Exchange believes that it is 
consistent with just and equitable principles of trade and the 
protection of investors and the public interest for Complex Orders on 
the CBOOK to, in this way, lock or cross, including because of the 
application of the ACE Parameter, without interacting, because those 
orders benefit from the protections of the ACE Parameter in terms of 
pricing at a reasonable price from the market. Although such orders 
could have potentially interacted but for the ACE Parameter, the orders 
are nevertheless protected from unreasonable execution prices, which 
benefits those who enter such Complex Orders.

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. Specifically, the proposal does 
not impose an intra-market burden on competition, because it will be 
available to all Phlx participants who enter Complex Orders. Nor will 
the proposal impose a burden on competition among the options 
exchanges, because, in addition to the vigorous competition for order 
flow among the options exchanges generally, many options exchanges 
offer complex order functionality. To the extent that market 
participants disagree with the particular approach taken by the 
Exchange herein, market participants can easily and readily direct 
order flow to competing venues. The ACE Parameter, as amended by this 
proposed rule change, will not impose a burden 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)(ii) of the Act \11\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.

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[[Page 41166]]

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2013-72 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-2013-72. 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 on official business 
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal offices 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-2013-72, and should be submitted on or before July 
30, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-16476 Filed 7-8-13; 8:45 am]
BILLING CODE 8011-01-P