Document ID: SEC-2014-0461-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2014-03-24T04:00Z

[Federal Register Volume 79, Number 56 (Monday, March 24, 2014)]
[Notices]
[Pages 16083-16085]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06302]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71731; File No. SR-Phlx-2014-16]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Provide 
That Market Maker Complex Orders Cannot Initiate a Complex Order Live 
Auction

March 18, 2014.
    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 March 12, 2014, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to provide that market maker Complex Orders 
cannot initiate a Complex Order Live Auction.
    The text of the proposed rule change is below; proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *
Rule 1080. Phlx XL and Phlx XL II
    (a)-(p) No change.

Commentary

    .01-.07 No change.
    .08 Complex Orders on Phlx XL.
    (a)-(d) No change.
    (e) Process for Complex Order Live Auction (``COLA''). Complex 
Orders on the Complex Order Book (``CBOOK,'' as defined below) may be 
subject to an automated auction process.
    (i) For purposes of paragraph (e):
    (A) No change.
    (B) (1) A ``COLA-eligible order'' means a Complex Order (a) 
identified by way of a COOP, or (b) that, upon receipt, improves the 
cPBBO respecting the specific Complex Order Strategy that is the 
subject of the Complex Order and is not for a market maker, as 
specified in Rule 1080.08(b)(ii). If the Phlx XL system identifies the 
existence of a COLA-eligible order following a COOP

[[Page 16084]]

or by way of receipt during normal trading of a Complex Order that 
improves the cPBBO, such COLA-eligible order will initiate a COLA, 
during which Phlx XL participants may bid and offer against the COLA-
eligible order pursuant to this rule. COLA-eligible orders will be 
executed without consideration of any prices that might be available on 
other exchanges trading the same options contracts.
    (2) No change.
    (ii)-(ix) No change.
    (f)-(i) No change.
* * * * *

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 proposal is to correct the rule text to provide 
that market maker Complex Orders cannot trigger a COLA. The Exchange's 
Complex Order System is governed by Rule 1080.08 and provides that 
COLA-eligible orders will trigger a COLA.\3\ The COLA is an automated 
auction that is intended to seek additional liquidity and price 
improvement for Complex Orders. Rule 1080.08(e) provides that a COLA-
eligible order means a Complex Order identified by way of a COOP, or 
that, upon receipt, improves the cPBBO respecting the specific Complex 
Order Strategy that is the subject of the Complex Order.
---------------------------------------------------------------------------

    \3\ Rule 1080.08(e)(i)(B)(1).
---------------------------------------------------------------------------

    However, Phlx's system is programmed such that market maker \4\ 
orders do not trigger a COLA, regardless of whether such orders are IOC 
or DAY orders.\5\ Rather than triggering a COLA, market maker Complex 
Orders are handled pursuant to Rule 1080.08(c)(i), which provides that 
Complex Orders may be executed against the Complex Order Book or placed 
on the Complex Order Book.\6\ Pursuant to Rule 1080.08(e), market 
makers can interact with a COLA-eligible order by submitting responsive 
interest during the COLA. Furthermore, Rule 1080.08(f) governs how 
Complex Orders are placed on the CBOOK and how they are executed.
---------------------------------------------------------------------------

    \4\ Market makers include SQTs, RSQTs, non-SQT ROTs, specialists 
and non-Phlx market makers on another exchange. See Rules 1014 and 
1080.08(b)(ii).
    \5\ The Exchange began permitting market maker orders to be 
entered as DAY orders recently. See Securities Exchange Act Release 
No. 63777 (January 26, 2011), 76 FR 5630 (February 1, 2011) (SR-
Phlx-2010-157). Previously, they could only be entered as IOC orders 
and did not trigger a COLA.
    \6\ Rule 1080.08(c)(iii)(D) provides that paragraph (c) applies 
to all Complex Order executions, whether executed in a COLA or not.
---------------------------------------------------------------------------

    The Exchange is amending Rule 1080.08(e)(i)(B)(1) to correct its 
rule text to state that market maker orders are not ``COLA-eligible'' 
such that they cannot trigger a COLA. The Exchange believes that it is 
appropriate for market maker Complex Orders not to trigger a COLA, 
because it results in a delay, during which markets can change and 
other orders can trade. The Exchange does not believe that this will 
disadvantage market makers and may in fact be more consistent with 
their trading goals and style. Specifically, market makers provide 
liquidity, making markets and submitting bids/offers/orders based on 
current market conditions, which can, of course, change rapidly; market 
makers are therefore concerned about the risks associated with the time 
delay of an auction more so than the potential benefit of price 
improvement for any one particular order. Moreover, market makers 
generally view auctions in terms of participating as responders. The 
Exchange notes that market makers have not expressed concern or 
dissatisfaction about their Complex Orders not triggering a COLA.
    If the Exchange's system had provided that market maker orders 
could trigger a COLA, market makers could nevertheless enter their 
orders as DNA orders \7\ to avoid a COLA, but DNA orders are cancelled 
if not immediately executed. Thus, DNA orders do not provide the 
opportunity for market makers to send an order that can both execute 
without delay and result in the remainder posting on the CBOOK.
---------------------------------------------------------------------------

    \7\ See Rule 1080.08(a)(viii).
---------------------------------------------------------------------------

    The Exchange notes that it is common for certain functionality not 
to be available to all origin types. For example, as noted above, 
Complex Orders with certain time-in-force instructions are available 
only to certain origin types; today, market makers cannot enter Good-
Til-Cancelled Complex Orders.\8\ In addition, other options exchanges 
have the flexibility in their rules to determine which participants can 
initiate a complex order auction and these exchanges can make this 
determination on a class-by-class basis.\9\ The Exchange believes that 
this is functionally equivalent to its proposal, because: (i) 
Implementation by class (puts versus calls) is merely an operational 
detail; (ii) the Exchange does not believe that there is any particular 
reason to differentiate among different classes; and (iii) the Exchange 
believes that CBOE, as a practical matter, implements this provision 
across all options and not class-by-class.\10\
---------------------------------------------------------------------------

    \8\ See Rule 1080.08(b)(ii).
    \9\ See CBOE Rule 6.53C(d)(i)(2), NYSE Arca Rule 6.91(c)(1) and 
NYSE MKT Rule 980NY(e)(1).
    \10\ See e.g., Regulatory Circular RG12-088 dated June 29, 2012 
at http://cchwallstreet.com/CBOETools/PlatformViewer.asp?searched=1&selectednode=chp%5F1%5F26&CiRestriction=COA%2Deligible&manual=%2Fcboe%2Fbulletins%2Fcboe%2Dreg%2Dbull%2D2012%2F and CBOE Regulatory Circular RG13-012 dated January 18, 2013 at 
http://cchwallstreet.com/CBOETools/PlatformViewer.asp?searched=1&selectednode=chp%5F1%5F49&CiRestriction=COA%2Deligible&manual=%2Fcboe%2Fbulletins%2Fcboe%2Dreg%2Dbull%2D2013%2F. These CBOE Regulatory Circulars do not differentiate among 
option classes respecting CBOE's COA.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\11\ in general, and with 
Section 6(b)(5) of the Act,\12\ in particular, which requires that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, and are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. 
Specifically, the Exchange believes that the proposal is designed to 
promote just and equitable principles of trade, because it affords to 
market makers an immediate execution over the benefits of an auction. 
As discussed above, in their role as liquidity providers, market makers 
generally prefer an immediate execution when entering an order, due to 
the potential market risk. In the complex orders marketplace, market 
makers generally respond to auctions rather than enter orders. 
Accordingly, from their particular perspective, avoiding an auction in 
the case where they do enter an order is consistent with just and 
equitable principles of trade because it helps them manage their 
trading and therefore their risk.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange does not believe that the proposal is unfairly 
discriminatory, because, although market makers are

[[Page 16085]]

being treated differently than other participants, the Exchange 
believes that market makers would themselves not regard this proposal 
negatively, because they do not necessarily find that a COLA is 
necessary or helpful. In addition, it is not unfairly discriminatory, 
because market makers, unlike other participants, generally only 
respond to auctions and prefer immediate execution, such that treating 
them differently than other participants is rooted in the way they 
trade and the way they function, to their benefit, rather than in an 
effort to exclude them or be unfair to them. Other options exchanges 
have the ability under their rules not to trigger an auction by 
participant type, such that the Commission has approved the ability to 
treat different participants differently respecting complex order 
auctions.

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. 
Specifically, the proposal does not impose an intra-market burden on 
competition, because, even though it would result in market maker 
orders not triggering a COLA, the ability of market makers to compete 
amongst each other and with other market participants would not be 
diminished. Whether or not market makers orders trigger a COLA has no 
bearing on how they compete with each other in the marketplace; market 
makers compete based on price and trading strategy as applied to 
particular market conditions, regardless of auctions. With respect to 
competition with other market participants, even if their orders do not 
trigger a COLA, market makers can continue to compete by responding to 
auctions triggered by other participant types.
    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, the proposal could result in 
the same outcome on three other exchanges that have the flexibility to 
determine which complex orders trigger an auction. To the extent that 
market makers disagree with the particular approach taken by the 
Exchange herein, market makers can easily and readily direct complex 
order flow to competing venues.

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 \13\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \14\ 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.
---------------------------------------------------------------------------

    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-2014-16 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2014-16. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2014-16 and should be 
submitted on or before April 14, 2014.
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06302 Filed 3-21-14; 8:45 am]
BILLING CODE 8011-01-P