Document ID: SEC-2012-1895-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-11-19T05:00Z

[Federal Register Volume 77, Number 223 (Monday, November 19, 2012)]
[Notices]
[Pages 69525-69527]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28066]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68217; File No. SR-Phlx-2012-130]

 Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Relating to SQT and RSQT Evaluations

November 13, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on October 31, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 510 titled ``SQT and RSQT 
Performance Evaluation'' to provide a different method for reviewing 
quote submissions in evaluating member organizations to determine 
whether they have fulfilled performance standards relating to the 
quality of markets.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The purpose of the proposed rule change is to amend a standard by 
which Streaming Quote Traders \3\ and Remote Streaming Quote Traders 
\4\ are evaluated to determine whether they have fulfilled performance 
standards relating to, among other things, quality of markets, 
efficient quote submission to the Exchange (including quotes submitted 
through a third party vendor), competition, observance of ethical 
standards, and administrative factors. Specifically, with respect to 
quote submission, the Exchange is proposing to amend its methodology 
for evaluating a factor of the Performance Evaluation with quote 
submissions.
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    \3\ A Streaming Quote Trader (``SQT'') is defined in Exchange 
Rule 1014(b)(ii)(A) as an Registered Options Trader (``ROT'') who 
has received permission from the Exchange to generate and submit 
option quotations electronically in options to which such SQT is 
assigned.
    \4\ A Remote Streaming Quote Trader (``RSQT'') is defined 
Exchange Rule in 1014(b)(ii)(B) as a ROT that is a member or member 
organization with no physical trading floor presence who has 
received permission from the Exchange to generate and submit option 
quotations electronically in options to which such RSQT has been 
assigned. An RSQT may only submit such quotations electronically 
from off the floor of the Exchange.
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    By way of background, Rule 510 establishes specific criteria for 
each option assigned to an SQT or RSQT that would be regularly 
evaluated by the Exchange. The Exchange periodically conducts an 
evaluation of member organizations that have SQTs and RSQTs, as defined 
in Exchange Rule 1014,\5\ to determine whether they have fulfilled 
performance standards relating to, among other things, efficient quote 
submission to the Exchange.\6\ The Exchange may review the Performance 
Evaluations and consider other relevant information including, but not 
limited to, trading data, regulatory history and

[[Page 69526]]

such other factors and data as may be pertinent in the 
circumstances.\7\
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    \5\ Rule 1014 titled ``Obligations and Restrictions Applicable 
to Specialists and Registered Options Traders'' provides that 
transactions of a Specialist and a ROT should constitute a course of 
dealings reasonably calculated to contribute to the maintenance of a 
fair and orderly market, and those members should not enter into 
transactions or make bids or offers that are inconsistent with such 
a course of dealings. See Rule 1014.
    \6\ This would include quotes that are submitted through a third 
party vendor.
    \7\ See Rule 510(b). If the Exchange finds any failure by the 
SQTs and RSQTs to meet Minimum Performance Standards, the Exchange 
may restrict assignments or suspend or terminate an assignment or 
registration, after written notice and after opportunity for an 
informal meeting.
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    With respect to Performance Evaluations, Commentary .01 to Rule 510 
specifies that the Exchange will evaluate Minimum Performance Standards 
on a monthly basis for each SQT and RSQT. Among other factors, the 
Exchange would review the percentage of total quotes that represent the 
PBBO, quoting requirements pursuant to Rule 1014, the number of 
requests for a quote spread parameter and efficient quote submission.
    This proposal seeks to amend the method by which the Exchange 
reviews efficient quote submission. Today the Exchange considers how an 
SQT or RSQT optimizes the submission of quotes through the Specialized 
Quote Feed,\8\ by evaluating the number of individual quotes per quote 
block \9\ received by the Exchange. The Exchange believes that this 
measure of efficiency may be outdated because it focuses more on 
technological ``load balance'' that may be unrelated to actual number 
of quotes submitted. The Exchange proposes to replace this measure with 
quote-to-trade and quote-to-contracts traded ratios to evaluate how an 
SQT or RSQT optimizes the submission of quotes submitted to the 
Exchange pursuant to Rule 1014. The Exchange believes that this method 
would be more useful in that it would allow the Exchange to better 
evaluate the efficiency with which an SQT or RSQT submits quotes and 
the quality of those quotes. For example, the Exchange would capture 
the following data in a report for each SQT and RSQT: Executed 
contracts, trade count, total quotes, executed contract to quote ratio 
and trade count to quote ratio. The Exchange believes that this 
information would provide the Exchange with additional data that is not 
captured today. The number of contracts executed would be analyzed in 
addition to the number of quotes received by the Exchange. Today, only 
quotes are analyzed. The executed contract to quote ratio would provide 
the Exchange with efficiency information. For example, an SQT could be 
evaluated in comparison to other liquidity providers to determine how 
much of their quote usage is actually resulting in liquidity being 
accessed by participants in the marketplace. The trade count to quote 
ratio would provide an additional subset of information that would 
reflect participation at the NBBO. This information is relevant because 
smaller participants may execute lesser size, but may provide value due 
to their presence at the top of the market.
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    \8\ A Specialist, RSQT or SQT may establish an option pricing 
model via a specialized connection, which is known as a specialized 
quote feed (``SQF''). See Commentary .01 to Rule 1080.
    \9\ A block contains up to 200 quotes.
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    The Exchange believes that updating the methodology utilized to 
review quote submissions with different statistical information, 
specifically quote-to-trade and quote-to-contracts traded ratios, would 
allow the Exchange to obtain more precise information with which to 
evaluate SQTs and RSQTs and determine Performance Evaluations.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \11\ in particular, in that it is 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 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.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would be 
beneficial because it would provide the Exchange with a better means to 
evaluate quote submissions in comparison to other liquidity providers 
to evaluate how much their quote usage is actually resulting in 
liquidity being accessed by participants in the marketplace. The trade 
count to quote ratio would provide an additional subset of information 
that would reflect participation at the NBBO. This information, which 
relates to efficiency, would allow the Exchange to obtain more precise 
information with which to evaluate the performance of SQTs and RSQTs, 
particularly market participants that execute at a lesser size. The 
information would allow the Exchange to evaluate the value provided to 
the marketplace. The Exchange believes that the quote-to-trade and 
quote-to-contract data would provide valuable information to utilize in 
evaluations as compared to the number of individual quotes per quote 
block because the Exchange believes the proposed information would 
provide better metrics overall.

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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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-2012-130 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-2012-130. 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

[[Page 69527]]

change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
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 Number SR-Phlx-2012-130 and should be submitted on or before 
December 10, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28066 Filed 11-16-12; 8:45 am]
BILLING CODE 8011-01-P