Document ID: SEC-2010-1532-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2010-10-07T04:00Z

[Federal Register: October 7, 2010 (Volume 75, Number 194)]
[Notices]               
[Page 62160-62167]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc10-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63027; File No. SR-Phlx-2010-108]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval to a Proposed Rule Change Relating to a Proposed 
Price Improvement System, Price Improvement XL

October 1, 2010.

I. Introduction

    On July 30, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (the ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
establish Price Improvement XL (``PIXL''). The proposed rule change was 
published for

[[Page 62161]]

comment in the Federal Register on August 16, 2010.\3\ The Commission 
received no comment letters on the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62678 (August 10, 
2010), 75 FR 50021 (``Notice'').
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II. Description of the Proposal

    In its filing, Phlx proposes to establish a price-improvement 
mechanism in which a member (an ``Initiating Member'') may 
electronically submit for execution an order it represents as agent on 
behalf of a public customer, broker-dealer, or any other entity (this 
initial order is referred to as the ``PIXL Order'') against principal 
interest or against any other order it represents as agent (this 
matching order is referred to as the ``Initiating Order'') provided it 
submits the PIXL Order for electronic execution into the PIXL Auction 
(``Auction'') pursuant to the proposed Rule.\4\ In addition, Phlx 
proposes to provide for the automatic execution, under certain 
conditions, of a crossing transaction where there is a public customer 
order in the same options series on each side.
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    \4\ For a more detailed discussion of the purpose of the 
proposal and examples, see Notice.
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III. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change to establish rules for the implementation of the 
PIXL auction is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange \5\ and, in particular, the requirements of Section 6 of the 
Act.\6\ Specifically, as discussed further below, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\7\ 
which requires, in part, that the rules of an exchange be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
and processing information with respect to, and facilitating 
transactions in securities, 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. Section 
6(b)(5) of the Act also requires that the rules of an exchange not be 
designed to permit unfair discrimination among customers, issuers, 
brokers, or dealers. The Commission believes that approving the 
Exchange's proposal to establish PIXL should increase competition among 
those options exchanges that offer similar functionality. For the 
reasons discussed below, the Commission finds that the Exchange's 
proposal is consistent with the Act.
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    \5\ In approving this proposal, the Commission has considered 
the proposed rule change's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
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A. Auction Eligibility

    Proposed Rule 1080(n)(i) describes the circumstances under which an 
Initiating Member may initiate a PIXL Auction. Notably, the proposal 
draws a distinction between orders for less than 50 contracts and those 
for 50 contracts or more, and affords slightly different treatment 
based on that distinction. The specific treatment of public customer 
and non-public customer orders for above and below 50 contracts is 
described directly below.\8\
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    \8\ In addition, the Notice contains an example that illustrates 
the application of these specific provisions. See Notice, supra note 
3, at 75 FR 50022.
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    For public customer orders, if the PIXL Order is for 50 contracts 
or more, the Initiating Member must stop the entire PIXL Order at a 
price that is equal to or better than the National Best Bid/Offer 
(``NBBO'') on the opposite side of the market from the PIXL Order, 
provided that such price must be at least one minimum price improvement 
increment (as determined by the Exchange but not smaller than one cent) 
better than any limit order on the limit order book on the same side of 
the market as the PIXL Order. If the PIXL Order is for a size of less 
than 50 contracts, the Initiating Member must stop the entire PIXL 
Order at a price that is the better of: (i) The PBBO price on the 
opposite side of the market from the PIXL Order improved by at least 
one minimum price improvement increment, or (ii) the PIXL Order's limit 
price (if the order is a limit order), provided in either case that 
such price is better than the NBBO, and at least one minimum price 
improvement increment better than any limit order on the book on the 
same side of the market as the PIXL Order.
    For non-public customer orders (i.e., where the order is for the 
account of a broker-dealer or any other person or entity that is not a 
public customer), if the order is for 50 contracts or more, the 
Initiating Member must stop the entire PIXL Order at a price that is 
the better of: (i) The PBBO price improved by at least one minimum 
price improvement increment on the same side of the market as the PIXL 
Order, or (ii) the PIXL Order's limit price (if the order is a limit 
order), provided in either case that such price is at or better than 
the NBBO. If the PIXL Order is for less than 50 contracts, the 
Initiating Member must stop the entire PIXL Order at a price that is 
the better of: (i) The PBBO price improved by at least one minimum 
price improvement increment on the same side of the market as the PIXL 
Order, or (ii) the PIXL Order's limit price (if the order is a limit 
order), provided in either case that such price is at or better than 
the NBBO and at least one minimum improvement increment better than the 
PBBO on the opposite side of the market from the PIXL Order.
    The Commission finds that the Exchange's proposed rule with respect 
to auction eligibility requirements for PIXL is consistent with the 
Act. The Commission notes that the PIXL Order will be guaranteed an 
execution price of at least the NBBO in all cases and will be given an 
opportunity for execution at a price better than the NBBO.\9\ Further, 
for public customer orders of less than 50 contracts, the Commission 
notes that minimum stop price must be one minimum increment better than 
the NBBO. In addition, the proposal seeks to protect the priority of 
resting limit orders on the Exchange book. The Commission notes that 
proposed Rule 1080(n)(i)(A)(2) and (n)(i)(B)(2), concerning orders that 
are submitted with a size of less than 50 contracts, will be effective 
on a pilot basis expiring August 31, 2011. The Exchange has agreed to 
provide the Commission with detailed information each month during the 
pilot period to assist the Commission, as well as the Exchange, in

[[Page 62162]]

ascertaining the level of price improvement attained for smaller-sized 
orders during the pilot period.
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    \9\ The Boston Options Exchange (``BOX''), a trading facility of 
NASDAQ OMX BX, Inc., operates an auction known as the PIP, see 
Securities Exchange Act Release No. 49068 (January 13, 2004), 69 FR 
2775 (January 20, 2004) (Order approving SR-BSE-2002-15 to establish 
trading rules for the BOX facility (``PIP Order'')), the 
International Securities Exchange, LLC. (``ISE'') operates an 
auction known as the PIM, see Securities Exchange Act Release No. 
50819 (December 8, 2004), 69 FR 75093 (December 15, 2004) (Order 
approving SR-ISE-2003-06 to adopt rules for the PIM (``PIM 
Order'')), and the Chicago Board Stock Exchange, Incorporated 
(``CBOE'') operates an auction known as the AIM, see Securities 
Exchange Act Release No. 53222 (February 3, 2006), 71 FR 7089 
(February 10, 2006) (Order approving SR-CBOE 2005-60 to adopt rules 
for the AIM (``AIM Order'')). The PIP and PIM also require a member 
to enter an order into the auction at a price that is at least equal 
to the NBBO. See BOX Rules, Chapter V, Section 18(e) and ISE Rule 
723(b)(1). The CBOE requires an agency order that is for 50 
contracts or more to be entered into the AIM at a price that is the 
better of the NBBO or the agency order's limit price, and an agency 
order that is less than 50 contracts at a price that is the better 
of the NBBO price improved by one minimum price improvement 
increment or the agency order's limit price. See CBOE Rule 6.74A(a).
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B. Initiating the Auction

    An Initiating Member may initiate a PIXL Auction by submitting a 
PIXL Order in one of three ways: (1) Single stop price, (2) auto-match 
price, or (3) not-worse-than price.
    Under the first option, the Initiating Member could submit a PIXL 
Order specifying a single ``stop'' price at which it seeks to execute 
the PIXL Order. Under the second option, an Initiating Member could 
submit a PIXL Order specifying that it is willing to automatically 
match (``auto-match'') as principal or as agent on behalf of an 
Initiating Order the price and size of all trading interest \10\ and 
responses to the PIXL Auction Notification (``PAN,'' as described 
below), in which case the PIXL Order would be stopped at the NBBO on 
the Initiating Order side of the market (if 50 contracts or greater) 
or, if less than 50 contracts, the better of: (i) The PBBO price on the 
opposite side of the market from the PIXL Order improved by at least 
one minimum price improvement increment, or (ii) the PIXL Order's limit 
price (if the order is a limit order), provided in either case that 
such price is at or better than the NBBO and at least one increment 
better than the limit of an order on the book on the same side as the 
PIXL Order.
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    \10\ ``Trading interest'' refers to unrelated orders received 
during the Auction, booked orders, and quotes that are considered 
for execution and allocation against the PIXL Order following the 
Auction.
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    Under the third and final option, an Initiating Member could submit 
a PIXL Order specifying that it is willing to either: (i) Stop the 
entire order at a single stop price and auto-match PAN responses, as 
described below, together with trading interest, at a price or prices 
that improve the stop price to a specified price above or below which 
the Initiating Member will not trade (a ``Not Worse Than'' or ``NWT'' 
price); (ii) stop the entire order at a single stop price and auto-
match all PAN responses and trading interest at or better than the stop 
price; or (iii) stop the entire order at the NBBO on the Initiating 
Order side (if 50 contracts or greater) or the better of: (A) The PBBO 
price on the opposite side of the market from the PIXL Order improved 
by one minimum price improvement increment, or (B) the PIXL Order's 
limit price (if the order is a limit order) on the Initiating Order 
side (if for less than 50 contracts), and auto-match PAN responses and 
trading interest at a price or prices that improve the stop price up to 
the NWT price. In all cases, if the PBBO on the same side of the market 
as the PIXL Order represents a limit order on the book, the stop price 
must be at least one minimum price improvement increment better than 
the booked limit order's limit price.
    Once the Initiating Member has submitted a PIXL Order for 
processing, the PIXL Order may not be cancelled. The Initiating Member 
may improve the stop price or NWT price of its Initiating Order, 
however such price may be improved only to the benefit of the PIXL 
Order during the Auction, and the order may not be cancelled.
    The Commission notes that the proposed PIXL procedures regarding 
the submission of a PIXL Order using the auto-match and NWT prices are 
similar to the rules of the CBOE, BOX, and ISE.\11\ One notable 
difference is that the BOX and ISE Rules prohibit a member from 
cancelling or modifying the auto-match price during the price 
improvement auction \12\ whereas the Phlx proposal would allow a member 
to modify the stop or NWT price, but such price may only be improved to 
the benefit of the PIXL Order during the Auction and the order may not 
be cancelled after it is entered. The Commission notes that when the 
Initiating Member selects the auto-match or NTW price prior to the 
start of the auction, competitive final pricing would be out of the 
Initiating Member's control. The Commission believes that permitting 
the Initiating Member to improve the NWT price during the PIXL Auction 
could allow members to quickly react to an improving market and thereby 
provide additional opportunity for the member to offer price 
improvement to the PIXL Order.
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    \11\ See BOX Rules, Ch. V, Section 18(e), CBOE Rule 
6.74A(b)(1)(A), and ISE Rule 716(d)(iii).
    \12\ See BOX Rules, Ch. V, Section 18(e) and ISE Rule 
716(d)(iii).
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    In addition, the Exchange has undertaken to provide the Commission 
with the following data on a monthly basis, which the Commission and 
the Exchange can use to evaluate the proposed auto-match functionality: 
the percentage of all Phlx trades effected through the PIXL Auction in 
which the Initiating Member has chosen the auto-match feature, and the 
average amount of price improvement provided to the PIXL Order when the 
Initiating Member has chosen the auto-match feature versus the average 
amount of price improvement provided to the PIXL Order when the 
Initiating Member has chosen a stop price submission.

C. PIXL Auction Notification (``PAN'')

    When the Exchange receives a PIXL Order for Auction processing, a 
PAN detailing the side, size, and the stop price of the PIXL Order will 
be sent over the Exchange's TOPO Plus Orders data feed.\13\ An updated 
PAN message will be sent over the Exchange's TOPO Plus Orders data feed 
when the Initiating Member improves the stop price of the PIXL Order. 
The updated PAN will include the side, size, and improved stop price of 
the PIXL Order. Messages concerning updates to the stop price by the 
Initiating Member would be used by PAN respondents to improve a 
previously-submitted price when they are alerted that a stop price has 
been improved. Any person or entity may submit PAN responses, provided 
such response is properly marked specifying price, size, and side of 
the market. The Commission believes that access to the PIXL auction for 
those who may wish to compete for a PIXL Order should be sufficient to 
provide opportunities for a meaningful, competitive auction.\14\
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    \13\ For a description of TOPO Plus Orders, see Securities 
Exchange Act Release No. 60877 (October 26, 2009), 74 FR 56255 
(October 30, 2009) (SR-Phlx-2009-92). See also Securities Exchange 
Act Release No. 62194 (May 28, 2010), 75 FR 31830 (June 4, 2010) 
(SR-Phlx-2010-48) (Order approving market data fees for TOPO Plus 
Orders) (``TOPO Plus Approval Order''). Members who are 
``Professional Subscribers'' to the TOPO Plus Orders data feed are 
subject to lower fees than the ``External Distributors'' from whom 
they receive TOPO Plus Orders.
    \14\ See TOPO Plus Approval Order, supra note 13 (approving 
market data fees for TOPO Plus Orders as consistent with Sections 
6(b)(4) and 6(b)(5) of the Act).
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D. PIXL Auction

    A PIXL Auction would last for one second,\15\ unless it is 
concluded early as the result of any of the circumstances described 
below. PAN responses will not be visible to Auction participants, and 
will not be disseminated to the Options Price Reporting Authority 
(``OPRA'').\16\ A PAN response must be equal to or better than the NBBO 
at the time of receipt of the PAN response. A PAN response with a price 
that is outside the NBBO would be rejected. PAN responses may be 
modified or cancelled during the Auction.\17\ PAN responses on the same 
side of the market as the PIXL Order are considered

[[Page 62163]]

invalid and will be rejected.\18\ Multiple PAN responses from the same 
member may be submitted during the Auction. Multiple orders at a 
particular price level submitted by a member in response to a PAN may 
not exceed, in the aggregate, the size of the PIXL Order.\19\
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    \15\ The PIP, AIM, and PIM also are one-second auctions. See BOX 
Rules, Chapter V, Section 18(e)(i), CBOE Rule 6.74A(b)(1)(C), and 
ISE Rule 723(c)(1).
    \16\ CBOE's AIM also provides that responses to the auction will 
not be visible to other participants and will not be disseminated to 
OPRA. See CBOE Rule 6.74A(b)(1)(F).
    \17\ See also CBOE Rule 6.74A(b)(1)(I).
    \18\ The Exchange stated in its proposal that any PAN response 
on the same side of the market as the PIXL Order would be the result 
of an error, and therefore Phlx would reject such response.
    \19\ A pattern or practice of submitting multiple orders in 
response to a PAN at a particular price point that exceed, in the 
aggregate, the size of the PIXL Order, will be deemed conduct 
inconsistent with just and equitable principles of trade and a 
violation of Phlx Rule 707. See Phlx Rule 1080(n)(iv).
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E. Conclusion of the PIXL Auction

    An Auction could conclude early any time: (i) The PBBO crosses the 
PIXL Order stop price on the same side of the market as the PIXL Order 
(since further price improvement will be unlikely and any responses 
offering improvement are likely to be cancelled), or (ii) there is a 
trading halt on the Exchange in the affected series. The proposed rules 
concerning the early conclusion of an Auction will be effective for a 
pilot period scheduled to expire August 31, 2011. The Exchange has 
undertaken to provide the Commission with detailed information each 
month during the pilot period to assist the Commission, as well as the 
Exchange, in ascertaining the effect of early Auction conclusions 
during the pilot period.
    If the Auction concludes before the expiration of one second as the 
result of the PBBO crossing the stop price, the entire PIXL Order will 
be executed at the best response price(s) or, if the stop price is the 
best price in the Auction, at the stop price, unless the best response 
price is equal to the price of a limit order resting on the Phlx book 
on the same side of the market as the PIXL Order, in which case the 
PIXL Order will be executed against that response, but at a price that 
is at least one minimum price improvement increment better than the 
price of such limit order at the time of the conclusion of the Auction. 
The Commission notes that Phlx Rule 1080(n)(v) states that a pattern or 
practice of submitting unrelated orders or quotes that cross the stop 
price, causing a PIXL Auction to conclude before the end of the PIXL 
Auction period will be deemed conduct inconsistent with just and 
equitable principles of trade and a violation of Phlx Rule 707.
    If the Auction concludes early as the result of a trading halt on 
the Exchange in the affected series, the entire PIXL Order would 
execute against the Initiating Order at the stop price, since the 
Initiating Member had guaranteed that an execution would occur at the 
stop price (or better) prior to the initiation of the trading halt.
    An unrelated market or marketable limit order on the opposite side 
of the market from the PIXL Order received during the Auction will not 
cause the Auction to end early. Such order would execute against 
interest outside of the Auction. If contracts remain from such 
unrelated order at the time the Auction ends, however, they would 
participate in the PIXL order allocation process. This provision would 
be effective for a pilot period scheduled to expire on August 31, 2011. 
The Commission believes that allowing the PIXL auction to continue for 
the full auction period despite receipt of unrelated orders outside the 
Auction would allow the auction to run its full course and, in so 
doing, will provide a full opportunity for price improvement to the 
PIXL Order. Further, the unrelated order would be available to 
participate in the PIXL order allocation.
    The Commission believes that approval of these provisions on a 
pilot basis is appropriate and will afford both the Exchange and the 
Commission an opportunity to analyze the impact of early terminations 
and unrelated orders on the PIXL process, as well as the Exchange's 
surveillance procedures with respect to PIXL.\20\ In particular, the 
Exchange has agreed to provide the Commission with data on a monthly 
basis to assist the Commission, and the Exchange, in evaluating the 
operation of the PIXL Auction and the provisions for early termination 
of an Auction. In addition, the Exchange has agreed to provide 
information on (1) the number of times an unrelated market or 
marketable limit order (against the PBBO) on the opposite side of the 
PIXL Order is received during the Auction Period and (2) the price(s) 
at which an unrelated market or marketable limit order (against the 
PBBO) on the opposite side of the PIXL Order that is received during 
the Auction Period is executed, compared to the execution price of the 
PIXL Order. The Commission expects to be able to use this information 
to consider the impact of the proposed rule on the PIXL Order as well 
as the unrelated order.
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    \20\ The Exchange's surveillance plan and procedures are subject 
to inspection by the Commission, to ensure that the Exchange 
adequately monitors its market and its members, and enforces its 
rules and the federal securities laws, including the anti-fraud 
provisions.
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F. Order Allocation

    At the conclusion of the Auction, the PIXL Order would be allocated 
at the best price(s), which may include non-Auction quotes and orders 
that may be present at each price level. Public customer orders would 
have priority at each price level, after which contracts would be 
allocated among all Exchange quotes, orders, and PAN responses.\21\ Any 
unexecuted PAN responses would be cancelled.
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    \21\ Proposed Rules 1080(n)(ii)(F) through (H) address the 
handling of the PIXL Order and other orders, quotes and PAN 
responses when certain conditions are present. Specifically, if 
there are PAN responses that cross the then-existing NBBO (provided 
such NBBO is not crossed) at the time of the conclusion of the 
Auction, such PAN responses will be executed, if possible, at their 
limit price(s). If the final PIXL Auction price is the same as an 
order on the limit order book on the same side of the market as the 
PIXL Order, the PIXL Order may only be executed at a price that is 
at least one minimum price improvement increment better than the 
resting order's limit price or, if such resting order's limit price 
crosses the stop price, then the entire PIXL Order will trade at the 
stop price with all better priced interest being considered for 
execution at the stop price.
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1. Single Price Submission Option
    Under the single stop price option, allocations would be made first 
at prices that improve the stop price, and then at the stop price with 
up to 40% of the remaining contracts after public customer interest is 
satisfied being allocated to the Initiating Member at the stop 
price.\22\ Remaining contracts would be allocated among remaining 
quotes, orders, and PAN responses at the stop price, and then to the 
Initiating Member.\23\
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    \22\ However, if only one specialist, SQT or RSQT matches the 
stop price, then the Initiating Member may be allocated up to 50% of 
the contracts executed at such price. This allocation is consistent 
with CBOE Rule 6.74A(b)(3)(F).
    \23\ Under the proposed Rule, the specialist would not be 
entitled to receive orders for 5 contracts or fewer.
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2. Auto-Match Option
    Under the auto-match option, the Initiating Member would be 
allocated an equal number of contracts as the aggregate size of all 
other quotes, orders, and PAN responses at each price point until a 
price point is reached where the balance of the order can be fully 
executed, except that the Initiating Member would receive up to 40% of 
the contracts remaining at the final price point (including situations 
where the final price point is the stop price).
3. Stop and NWT Option
    Under the NWT option, after public customer interest is satisfied, 
contracts would be allocated first to quotes, orders, and PAN responses 
at prices

[[Page 62164]]

better than the NWT price (if any), beginning with the best price. 
Next, contracts would be allocated among quotes, orders, and PAN 
responses at prices equal to the Initiating Member's NWT price and 
better than the Initiating Member's stop price, beginning with the NWT 
price. The Initiating Member would receive an equal number of contracts 
as the aggregate size of all other quotes, orders, and PAN responses at 
each price point, except that the Initiating Member would be entitled 
to receive up to 40% of the contracts remaining at the final price 
point (including situations where the final price point is the stop 
price).
    The Commission believes that the proposed PIXL rules should promote 
price competition within a PIXL auction by providing Phlx members with 
a reasonable opportunity to compete for a significant percentage of the 
PIXL order and, therefore, should protect investors and the public 
interest. The Commission continues to believe that a 40% allocation is 
consistent with the statutory standards for competition and free and 
open markets.\24\
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    \24\ See PIP Order, supra note 9, at 2789-2790 and PIM Order, 
supra note 9, at 75097-75098.
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G. Professionals

    Phlx Rule 1000(b)(14) defines the term ``professional'' and 
provides that professional orders will be treated in the same manner as 
orders for an off-floor broker-dealer for the purposes of certain 
rules.\25\ The definition provides an exception for professional all-
or-none orders, which are treated like customer orders. Phlx proposes 
to amend this definition to provide that professional orders will be 
treated in the same manner as orders for an off-floor broker-dealers 
for the purposes of PIXL and to also provide that PIXL orders for the 
beneficial accounts of professionals with an all-or-none designation 
\26\ will be treated in the same manner as off-floor broker-dealer 
orders (i.e., not treated like customer orders). The Commission notes 
that this is consistent with the ISE's PIM, where ISE Priority Customer 
interest is executed in full before Professional Orders and market 
maker quotes.\27\
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    \25\ See Securities Exchange Act Release No. 61802 (March 30, 
2010), 75 FR 17193 (April 5, 2010)(SR-Phlx-2010-05) (adopting the 
term ``professional'' as a person or entity that (i) is not a broker 
or dealer in securities, and (ii) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s)).
    \26\ According to the Exchange, PIXL Orders are inherently all-
or-none orders because the Initiating Member guarantees that the 
PIXL Order will be filled in its entirety.
    \27\ See ISE Rule 723(d)(1).
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H. Crossing Public Customer Orders on PIXL

    Proposed Rule 1080(n)(v) addresses the situation where an 
Initiating Member holds public customer orders on both sides of the 
market in the same option series. Instead of initiating a PIXL Auction, 
an Initiating Member would be able to enter a PIXL Order for the 
account of a public customer paired with an order for the account of 
another public customer and such paired orders would be automatically 
executed without the need to commence a PIXL Auction. The execution 
price would be required to be expressed in the minimum quoting 
increment applicable to the series (e.g., a penny where the series 
trades in penny increments). An execution may not trade through the 
NBBO or at the same price as any resting customer order. The Commission 
believes that these specifications are designed to protect resting 
limit orders on the book, and would ensure that this mechanism could 
not be used to trade in increments that would not otherwise be 
available for trading outside the PIXL context.
    Phlx Rule 1080(c)(ii)(C) prevents an Order Entry Firm from 
executing agency orders to increase its economic gain from trading 
against the order without first giving other trading interests on the 
Exchange an opportunity to either trade with the agency order or to 
trade at the execution price when the member was already bidding or 
offering on the book. However, the Exchange recognizes that it may be 
possible for a firm to establish a relationship with a customer or 
other person to deny agency orders the opportunity to interact on the 
Exchange and to realize similar economic benefits as it would achieve 
by executing agency orders as principal. The proposed rule would 
provide that it would be a violation of Rule 1080(c)(ii)(C) for a firm 
to circumvent Rule 1080(c)(ii)(C) by providing an opportunity for (i) a 
customer affiliated with the firm, or (ii) a customer with whom the 
firm has an arrangement that allows the firm to realize similar 
economic benefits from the transaction as the firm would achieve by 
executing agency orders as principal, to regularly execute against 
agency orders handled by the firm immediately upon their entry as PIXL 
customer-to-customer immediate crosses. These provisions are 
substantially similar to those of CBOE.\28\
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    \28\ See CBOE Rule 6.74A.09.
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I. No Minimum Size Requirement for PIXL

    Like the BOX's PIP auction, the ISE's PIM auction, and the CBOE's 
AIM auction, the PIXL auction would be available for orders of fewer 
than 50 contracts. Under the Exchange's proposal, there would be no 
minimum size requirement for orders entered into the PIXL for a pilot 
period expiring on August 31, 2011.
    The Commission believes that the Exchange's proposal should provide 
small customer orders with the opportunity for price improvement in a 
manner that is consistent with the Act. The Commission will evaluate 
the PIXL auction during the Pilot Period to determine whether it would 
be beneficial to customers and to the options market as a whole to 
approve any proposal requesting permanent approval to permit orders of 
fewer than 50 contracts to be submitted to the PIXL auction. In 
addition, the Commission will examine the data submitted by the 
Exchange with respect to situations in which the PIXL auction is 
terminated prematurely by an unrelated order. To aid the Commission in 
its evaluation, the Exchange represents that it will provide the 
following information each month:
    Regarding the early conclusion of an Auction due to the PBBO 
crossing the PIXL Order stop price on the same side of the market as 
the PIXL order, or due to a trading halt, the Exchange has undertaken 
to provide the following information on a monthly basis during the 
pilot period:
    (1) The number of times that the PBBO crossed the PIXL Order stop 
price on the same side of the market as the PIXL Order and prematurely 
ended the PIXL Auction, and at what time the PIXL Auction ended;
    (2) The number of times that a trading halt prematurely ended the 
PIXL auction and at what time the trading halt ended the PIXL Auction;
    (3) Of the Auctions terminated early due to the PBBO crossing the 
PIXL order stop price, the number that resulted in price improvement 
over the PIXL Order stop price, and the average amount of price 
improvement provided to the PIXL Order;
    (4) In the Auctions terminated early due to the PBBO crossing the 
PIXL order stop price, the percentage of contracts that received price 
improvement over the PIXL order stop price;
    (5) Of the Auctions terminated early due to a trading halt, the 
number that resulted in price improvement over the PIXL Order stop 
price, and the average amount of price improvement provided to the PIXL 
Order;

[[Page 62165]]

    (6) In the auctions terminated early due to a trading halt, the 
percentage of contracts that received price improvement over the PIXL 
order stop price; and
    (7) The average amount of price improvement provided to the PIXL 
Order when the PIXL Auction is not terminated early (i.e., runs the 
full one second).
    (8) The number of times an unrelated market or marketable limit 
order (against the PBBO) on the opposite side of the PIXL Order is 
received during the Auction Period; and
    (9) The price(s) at which an unrelated market or marketable limit 
order (against the PBBO) on the opposite side of the PIXL Order that is 
received during the Auction Period is executed, compared to the 
execution price of the PIXL Order.
    Regarding PIXL Orders of fewer than 50 contracts, the Exchange has 
undertaken to provide the following information on a monthly basis 
during the pilot period:
    (1) The number of orders of fewer than 50 contracts entered into 
the PIXL Auction;
    (2) The percentage of all orders of fewer than 50 contracts sent to 
Phlx that are entered into the PIXL Auction;
    (3) The percentage of all Phlx trades represented by orders of 
fewer than 50 contracts;
    (4) The percentage of all Phlx trades effected through the PIXL 
Auction represented by orders of fewer than 50 contracts;
    (5) The percentage of all contracts traded on Phlx represented by 
orders of fewer than 50 contracts;
    (6) The percentage of all contracts effected through the PIXL 
Auction represented by orders of fewer than 50 contracts;
    (7) The spread in the option, at the time an order of fewer than 50 
contracts is submitted to the PIXL Auction;
    (8) The number of orders of 50 contracts or greater entered into 
the PIXL Auction;
    (9) The percentage of all orders of 50 contracts or greater sent to 
Phlx that are entered into the PIXL Auction;
    (10) The spread in the option, at the time an order of 50 contracts 
or greater is submitted to the PIXL Auction;
    (11) Of PIXL trades where the PIXL Order is for the account of a 
public customer, and is for a size of fewer than 50 contracts, the 
percentage done at the NBBO plus $.01, plus $.02, plus $.03, etc.;
    (12) Of PIXL trades where the PIXL Order is for the account of a 
public customer, and is for a size of 50 contracts or greater, the 
percentage done at the NBBO plus $.01, plus $.02, plus $.03, etc.; and
    (13) Of PIXL trades where the PIXL Order is for the account of a 
broker dealer or any other person or entity that is not a public 
customer, and is for a size of fewer than 50 contracts, the percentage 
done at the NBBO plus $.01, plus $.02, plus $.03, etc.
    (14) Of PIXL trades where the PIXL Order is for the account of a 
broker dealer or any other person or entity that is not a public 
customer, and is for a size of 50 contracts or greater, the percentage 
done at the NBBO plus $.01, plus $.02, plus $.03, etc.; and
    (15) The number of orders submitted by Initiating Members when the 
spread was $.05, $.10, $.15, etc. For each spread, specify the 
percentage of contracts in orders of fewer than 50 contracts submitted 
to the PIXL Auction that were traded by: (a) The Initiating Member that 
submitted the order to the PIXL; (b) Phlx Market Makers assigned to the 
class; (c) other Phlx members; (d) Public Customer Orders; and (e) 
unrelated orders (orders in standard increments entered during the PIXL 
Auction). For each spread, also specify the percentage of contracts in 
orders of 50 contracts or greater submitted to the PIXL Auction that 
were traded by: (a) the Initiating Member that submitted the order to 
the PIXL Auction; (b) Phlx market makers assigned to the class; (c) 
other Phlx members; (d) Public Customer Orders; and (e) unrelated 
orders (orders in standard increments entered during the PIXL Auction).
    Regarding PIXL auto-match, the Exchange has undertaken to provide 
the following information on a monthly basis during the pilot period:
    (1) The percentage of all Phlx trades effected through the PIXL 
Auction in which the Initiating Member has chosen the auto-match 
feature, and the average amount of price improvement provided to the 
PIXL Order when the Initiating Member has chosen the auto-match feature 
vs. the average amount of price improvement provided to the PIXL Order 
when the Initiating Member has chosen a stop price submission.
    Regarding competition, the Exchange has undertaken to provide the 
following information on a monthly basis during the pilot period:
    (1) For the first Wednesday of each month: (a) The total number of 
PIXL auctions on that date; (b) the number of PIXL auctions where the 
order submitted to the PIXL was fewer than 50 contracts; (c) the number 
of PIXL auctions where the order submitted to the PIXL was 50 contracts 
or greater; (d) the number of PIXL auctions (for orders of fewer than 
50 contracts) with 0 participants (excluding the initiating 
participant), 1 participant (excluding the initiating participant), 2 
participants (excluding the initiating participant), 3 participants 
(excluding the initiating participant), 4 participants (excluding the 
initiating participant), etc., and (e) the number of PIXL auctions (for 
orders of 50 contracts or greater) with 0 participants (excluding the 
initiating participant), 1 participant (excluding the initiating 
participant), 2 participants (excluding the initiating participant), 3 
participants (excluding the initiating participant), 4 participants 
(excluding the initiating participant), etc.; and
    (2) For the third Wednesday of each month: (a) The total number of 
PIXL auctions on that date; (b) the number of PIXL auctions where the 
order submitted to the PIXL was fewer than 50 contracts; (c) the number 
of PIXL auctions where the order submitted to the PIXL was 50 contracts 
or greater; (d) the number of PIXL auctions (for orders of fewer than 
50 contracts) with 0 participants (excluding the initiating 
participant), 1 participant (excluding the initiating participant), 2 
participants (excluding the initiating participant), 3 participants 
(excluding the initiating participant), 4 participants (excluding the 
initiating participant), etc., and (e) the number of PIXL auctions (for 
orders of 50 contracts or greater) with 0 participants (excluding the 
initiating participant), 1 participant (excluding the initiating 
participant), 2 participants (excluding the initiating participant), 3 
participants (excluding the initiating participant), 4 participants 
(excluding the initiating participant), etc.

J. Section 11(a) of the Act

    Section 11(a)(1) of the Act \29\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\30\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution

[[Page 62166]]

of the transaction once it has been transmitted to the member 
performing the execution; \31\ (iii) may not be affiliated with the 
executing member; and (iv) with respect to an account over which the 
member has investment discretion, neither the member nor its associated 
person may retain any compensation in connection with effecting the 
transaction except as provided in the Rule.
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    \29\ 15 U.S.C. 78k(a)(1).
    \30\ 17 CFR 240.11a2-2(T).
    \31\ The member may, however, participate in clearing and 
settling the transaction.
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    In a letter to the Commission, the Exchange requests that the 
Commission concur with Phlx's conclusion that members who enter orders 
into the Auction satisfy the requirements of Rule 11a2-2(T).\32\ For 
the reasons set forth below, the Commission believes that Exchange 
members entering orders into the Auction would satisfy the conditions 
of the Rule.
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    \32\ See Letter from Richard S. Rudolph, Associate General 
Counsel, Phlx, to Elizabeth M. Murphy, Secretary, Commission, dated 
October 1, 2010 (``Phlx 11(a) Letter'').
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    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\33\ Phlx has represented that only specialists and 
on-floor Streaming Quote Traders (``SQTs'') \34\ have the ability to 
submit orders into the Auction from on the floor of the Exchange.\35\ 
These members, however, would be subject to the ``market maker'' 
exception to Section 11(a) of the Act and Rule 11a2-2(T)(a)(1) 
thereunder.\36\ Remote Streaming Quote Traders (``RSQTs'') may only 
submit orders into the Auction from off the floor of the Exchange.\37\ 
Phlx has also represented that, while Floor Brokers have the ability to 
submit orders they represent as agent to the electronic limit order 
book through the Exchange's Options Floor Broker Management System 
(``FBMS''), there is no mechanism by which such Floor Brokers can 
directly submit orders to the Auction or send orders to off-floor 
broker-dealers through FBMS for indirect submission into the 
Auction.\38\ Because no Exchange members, other than specialists and 
SQTs, may submit orders into the Auction from on the floor of the 
Exchange, the Commission believes that PIXL satisfies the off-floor 
transmission requirement.
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    \33\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \34\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through AUTOM in eligible options 
to which such SQT is assigned. An SQT may only submit such 
quotations while such SQT is physically present on the floor of the 
Exchange. See Exchange Rule 1014(b)(ii)(A).
    \35\ See Phlx 11(a) Letter, supra note 32, at note 21 and 
accompanying text. Also, the Exchange represented that SQTs and 
RSQTs are market makers on the Exchange. See Phlx 11(a) Letter, 
supra note 32.
    \36\ See 15 U.S.C. Section 78k(a)(1)(A); 17 CFR 240.11a2-
2(T)(a)(1). According to the Exchange, there are no other on-floor 
members, other than Exchange specialists and SQTs, who have the 
ability to submit orders into the Auction.
    \37\ See Phlx 11(a) Letter, supra note 32, at note 18 and 
accompanying text. An RSQT is an ROT that is a member or member 
organization with no physical trading floor presence and who has 
received permission from the Exchange to generate and submit option 
quotations electronically through AUTOM in eligible options to which 
such RSQT has been assigned. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(B).
    The Commission notes that, while RSQTs may only submit orders 
into the Auction from off the Exchange floor, RSQTs also would be 
subject to the ``market maker'' exception to Section 11(a) of the 
Act and Rule 11a2-2(T)(a)(1) thereunder.
    \38\ The Exchange represented that because FBMS does not have 
the coding required to enter orders into the Auction, and, as a 
result, it is impossible for such Floor Brokers to submit orders 
into the Auction. See Phlx 11(a) Letter, supra note 32, at note 20 
and accompanying text.
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    Second, the Rule requires that the member not participate in the 
execution of its order. Phlx has represented that at no time following 
the submission of an order is a member organization able to acquire 
control or influence over the result or timing of an order's 
execution.\39\ According to the Exchange, the execution of a member's 
order is determined by what other orders are present in the Auction and 
the priority of those orders.\40\ Accordingly, the Commission believes 
that a member does not participate in the execution of an order 
submitted to the Auction.
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    \39\ See Phlx 11(a) Letter, supra note 32.
    \40\ See id. A member may cancel or modify the order, or modify 
the instruction for executing the order, but only from off the 
floor. The Commission has stated that the non-participation 
requirement is satisfied under such circumstances, so long as such 
modifications or cancellations are also transmitted from off the 
floor. See Securities Exchange Act Release No. 14713 (April 27, 
1978), 43 FR 18557 (May 1, 1978) (``1978 Release'') (stating that 
the ``non-participation requirement does not prevent initiating 
members from canceling or modifying orders (or the instructions 
pursuant to which the initiating member wishes orders to be 
executed) after the orders have been transmitted to the executing 
member, provided that any such instructions are also transmitted 
from off the floor'').
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated systems, such as PIXL, are used, as long as the design 
of these systems ensures that members do not possess any special or 
unique trading advantages in handling their orders after transmitting 
them to the exchange.\41\ Phlx has represented that the design of the 
Auction ensures that no member organization has any special or unique 
trading advantage in the handling of its orders after transmitting its 
orders to the Auction.\42\ Based on the Exchange's representation, the 
Commission believes that PIXL satisfies this requirement.
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    \41\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 33.
    \42\ See Phlx 11(a) Letter, supra note 32.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\43\ Phlx represents that member organizations relying 
on Rule 11a2-2(T) for transactions effected

[[Page 62167]]

through PIXL must comply with this condition of the Rule.\44\
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    \43\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 40 (stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \44\ See Phlx 11(a) Letter, supra note 32.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5) of the Act.\45\
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    \45\ 15 U.S.C. 78f(b)(5). In connection with the issuance of 
this approval order, neither the Commission nor its staff is 
granting any exemptive or no-action relief from the requirements of 
Rule 10b-0 under the Act. 17 CFR 240.10b-10. Accordingly, a broker-
dealer executing a customer order through the PIXL auction will need 
to comply with all applicable requirements of that Rule.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\46\ that the proposed rule change (SR-Phlx-2010-108) is approved, 
except that (1) paragraphs (n)(i)(A)(2), (n)(i)(B)(2), (n)(ii)(B)(4), 
and (n)(ii)(D) of Phlx Rule 1080 are approved on a pilot basis until 
August 31, 2011; and (2) there shall be no minimum size requirement for 
orders entered into the PIXL for a pilot period expiring on August 31, 
2011.
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    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25252 Filed 10-6-10; 8:45 am]
BILLING CODE 8011-01-P