Document ID: SEC-2016-2055-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX LLC
Posted Date: 2016-11-22T05:00Z

[Federal Register Volume 81, Number 225 (Tuesday, November 22, 2016)]
[Notices]
[Pages 83886-83888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28030]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79322; File No. SR-Phlx-2016-97)

Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Granting 
Approval of Proposed Rule Change To Delete Outdated or Unnecessary Rule 
Language in Phlx Rule 1020

November 16, 2016.

I. Introduction

    On September 27, 2016, NASDAQ PHLX LLC (``Exchange'' or ``Phlx'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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 delete or amend its rules relating to 
specialists. The proposed rule change was published for comment in the 
Federal Register on October 14, 2016.\3\ The Commission received no 
comment letters on the proposed rule change. 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. 79073 (October 11, 
2016), 81 FR 71153 (October 14, 2016) (``Notice'').
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II. Description of the Proposal

    Phlx Rule 1020 contains provisions relating to the registration and 
functions of options specialists.\4\ Section (b) provides that a member 
registered as a specialist in one or more options has an obligation to 
assist in the maintenance of a fair and orderly market, ``in addition 
to the execution of orders entrusted to him in such options.'' The 
Exchange proposes to delete the language in section (b) regarding 
execution of entrusted orders. The Exchange represents that today, 
specialists on the Exchange trade only for their own account and ``no 
longer handle any agency orders whatsoever in their role as 
specialists.'' \5\
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    \4\ A ``specialist'' is an Exchange member who is registered as 
an options specialist pursuant to Phlx Rule 1020(a). Specialists are 
subject to quoting and registration obligations set forth in Phlx 
Rules 1014(b), 1020 and 1080.02.
    \5\ See Notice, supra note 3, at 71154.

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[[Page 83887]]

    Commentary .01 of Phlx Rule 1020 provides that in ``effecting 
transactions'' for a specialist's own account for the purpose of 
establishing or increasing a position, a specialist is to effect such 
transactions in a reasonable and orderly manner in relation to the 
condition of the general market, the market in the particular option, 
and the adequacy of his position to the immediate and reasonably 
anticipated needs of the options market. Commentary .01 sections (a) 
through (d) provide that certain types of transactions to establish or 
increase a position are not to be effected except when they are 
reasonably necessary to render the specialist's position adequate to 
such needs.\6\ The Exchange proposes to delete the last sentence of 
Commentary .01 and sections (a) through (d). The Exchange represents 
that today, specialists do not ``effect transactions'' in the sense of 
matching bids and offers to cause a transaction execution, except in 
rare cases.\7\ Instead, specialists submit bids and offers to be 
matched by the PHLX XL trading system.\8\ Therefore, the Exchange 
believes that the specialist may be unable to determine the price of 
the last sale, which would be required for a specialist to comply with 
the language Phlx proposes to be deleted.
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    \6\ Specifically, Commentary .01 sections (a) through (d) 
provide that the following types of transactions to establish or 
increase a position are not to be effected except when they are 
reasonably necessary to render the specialist's position adequate to 
such needs: (a) A purchase at a price above the last sale in the 
same trading session; (b) the purchase of all or substantially all 
the options offered on the book at a price equal to the last sale, 
when the option so offered represents all or substantially all the 
options offered in the market; and when a substantial amount of an 
option is offered at a price equal to the last sale price, the 
purchase of more than 50% of all the options offered at the last 
sale price; (c) the supplying of all or substantially all the 
options bid for on the book at a price equal to the last sale, when 
the option so bid for represents all or substantially all the 
options bid for in the market; and when a substantial amount of the 
options bid for at a price equal to the last sale price, the 
supplying of more than 50% of all the options bid for at the last 
sale price; (d) failing to re-offer or re-bid where necessary after 
effecting transactions described in (a), (b), or (c). The rule 
permits transactions of these types to be effected, however, with 
the approval of an Options Exchange Official or in relatively 
inactive markets where they are an essential part of a proper course 
of dealings and where the amount of an option involved and the price 
change, if any, are normal in relation to the market.
    \7\ See Notice, supra note 3, at 71154. The Exchange represents 
that although a specialist may ``effect transactions'' with a market 
maker on the Exchange's trading floor, the vast majority of 
transactions are executed electronically by the trading system.
    \8\ See id.
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    Commentary .02 of Phlx Rule 1020 provides that, for transactions of 
a specialist for his own account that liquidate or decrease his 
position in an option in which he is registered, such transactions are 
to be ``effected'' in a reasonable and orderly manner in relation to 
the condition of the general market, the market in the particular 
option, and the adequacy of the specialist's positions to the immediate 
and reasonably anticipated needs of the options market. Commentary .02 
sections (a) through (c) describe certain restrictions on specialists 
when liquidating or decreasing such positions.\9\ The Exchange proposes 
to delete part of the last sentence of Commentary .02 and sections (a) 
through (c). The Exchange represents that, as discussed above, a 
specialist may be unable to determine the ``last different price'' as 
required to comply with sections (a) and (c).\10\ The Exchange believes 
also that section (b) is redundant to Rule 1020(b), which already 
contains the ``fair and orderly'' requirement.\11\
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    \9\ Commentary .02 sections (a) through (c) also provide that, 
unless he has the prior approval of an Options Exchange Official, he 
should avoid: (a) Liquidation of all or substantially all of a 
position by selling options at prices below the last different price 
or by purchasing options at prices above the last different price 
unless such transactions are reasonably necessary in relation to the 
specialist's overall position in the options in which he is 
registered; (b) failing to maintain a fair and orderly market during 
liquidations; or (c) failing to re-enter the market where necessary, 
after effecting transactions described in (a) above.
    \10\ See Notice, supra note 3, at 71155.
    \11\ See id.
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    Commentary .03 of Phlx Rule 1020 provides that a specialist's 
quotation, made for his own account, should be such that a transaction 
effected at his quoted price or within the quoted spread, whether 
having the effect of reducing or increasing the specialist's position, 
would bear a proper relation to preceding transactions and anticipated 
succeeding transactions. The Exchange proposes to delete Commentary 
.03. The Exchange represents that, due to the speed of trading that 
occurs today on the Phlx XL trading system, specialists may not have 
knowledge of preceding transactions and would not be able to adjust 
quotes as needed to comply with Commentary .03 before the quotes are 
accessed.\12\
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    \12\ See id.
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    Commentary .04 of Phlx Rule 1020 provides that a specialist should 
avoid participating as a dealer in opening or reopening an option in 
such a manner as to reverse the balance of public supply and demand as 
reflected by market and limited price orders at or near the price of 
the previous close or halt, unless the condition of the general market 
or the specialist's position in light of the reasonably anticipated 
needs of the market make it advisable to do so, or unless the 
specialist has obtained the prior approval of an Options Exchange 
Official to do so. The commentary provides that he may, however, buy or 
sell an option as a dealer to minimize the disparity between supply and 
demand at an opening or reopening. The Exchange proposes to delete 
Commentary .04. The Exchange represents that a specialist no longer 
manually opens options classes; the PHLX XL trading system handles the 
opening and reopening of options.\13\
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    \13\ See id.
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    Commentary .05 of Phlx Rule 1020 prohibits a member acting as a 
specialist from effecting transactions for the purpose of adjusting a 
LIFO inventory in an option in which he is acting except as is 
reasonably necessary to assist in the maintenance of a fair and orderly 
market. The Exchange believes that Commentary .05 is no longer 
necessary and proposes to delete it.\14\
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    \14\ See id.
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    Commentary .06 of Phlx Rule 1020 restricts a specialist from 
assigning options in which he is registered to an investment account. 
The Commentary states that a specialist may not add to a position in an 
investment account unless reasonably necessary to permit the specialist 
to assist in the maintenance of a fair and orderly market. Furthermore, 
a specialist may not effect a transfer of options in which he is 
registered from his dealer account to an investment account if the 
transfer would result in a short position in the dealer account. The 
Commentary also provides that in the maintenance of price continuity 
with reasonable depth, it is commonly desirable for a specialist to 
supply options to the market, even though he may have to sell short to 
do so, to the extent reasonably necessary to meet the needs of the 
market. The Exchange proposes to delete Commentary .06 because 
investment accounts are no longer used by specialists.\15\
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    \15\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and rules and 
regulations thereunder applicable to a national securities 
exchange.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section

[[Page 83888]]

6(b)(5) of the Act,\17\ which requires, among other things, that the 
rules of a national securities exchange be designed to promote just and 
equitable principles of trade, 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; and are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Commission believes that the deletion of Phlx 
Rules 1020(b), Commentary .01, Commentary .02 (a) and (c), Commentary 
.03, Commentary .04, and Commentary .06 should protect investors by 
helping to ensure that the Phlx rules accurately describe the current 
operations of the Exchange and obligations of its members. In addition, 
the Commission notes that the deletion of Commentary .02 (b) to remove 
redundant rule language should add clarity to Phlx's rules and that the 
deletion of Commentary .05 and Commentary .06 should provide more 
clarity regarding the obligations of specialists on the Exchange.
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    \16\ In approving the proposed rule changes, the Commission has 
considered their impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    Accordingly, for the reasons discussed above, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act.

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\18\ that the proposed rule change (SR-PHLX-2016-97) be and hereby is 
approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-28030 Filed 11-21-16; 8:45 am]
 BILLING CODE 8011-01-P