Document ID: SEC-2018-0546-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX LLC
Posted Date: 2018-04-05T04:00Z

[Federal Register Volume 83, Number 66 (Thursday, April 5, 2018)]
[Notices]
[Pages 14690-14696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06916]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82975; File No. SR-Phlx-2018-22]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change To Create a New Rule 1081, To Amend Electronic 
Market Maker Obligations and Quoting Requirements for Electronic ROTs, 
Which Will Be Defined To Include SQTs, RSQTs, Directed SQTs, Directed 
RSQTs, Specialists, and Remote Specialists

March 30, 2018.
    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 20, 2018, Nasdaq PHLX LLC (``Phlx'' or the ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to create a new Rule 1081, to amend 
electronic quoting for electronic ROTs, which will be defined to 
include SQTs, RSQTs, Directed SQTs, Directed RSQTs, Specialists and 
Remote Specialists.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.cchwallstreet.com/, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule change is to reserve the current quoting 
obligations in Phlx Rule 1014(b)(ii)(D) and adopt new Phlx Rule 1081, 
which is currently reserved, to amend the current obligations of 
electronic ROTs on Phlx. The Exchange proposes to entitle Phlx Rule 
1081, ``Electronic Market Maker Obligations and Quoting'' and adopt 
certain rule text similar to NASDAQ BX, Inc. (``BX'') Rules at Chapter 
VII, Section 5 and quoting obligations similar to BX Rules at Chapter 
VII, Section 6which [sic] describes the obligations of market makers. 
The Exchange notes that these obligations apply to quotations by of 
[sic] SQTs, RSQTs, Directed SQTs, Directed RSQTs, Specialists 
(hereinafter, ``electronic ROTs'') electronically through the 
Exchange's System.\3\ The Exchange notes that quotes submitted 
electronically by a Specialist, while on the trading floor, into the 
Exchange's System, would qualify toward the Specialist requirement. All 
Specialists are subject to the requirements of Phlx Rule 1081. 
Similarly all RSQTs are subject to the requirements of Phlx Rule 1081 
as RSQTs by definition have no physical trading floor presence. SQTs by 
definition may generate and submit option quotations electronically in 
options to which such SQT is assigned while such SQT is physically 
present on the floor of the Exchange. The SQTs quotations are subject 
to the obligations contained in Rule 1081. Non-SQT ROTs \4\ are not 
subject to the quoting requirements in proposed Rule 1081, rather they 
are subject to quarterly trading requirements which are specified in 
Commentary .01 to Phlx Rule 1014.
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    \3\ System is defined at Phlx Rule 1000(b)(45).
    \4\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT. 
See Rule 1014(b)(ii)(C). By definition, non-SQT ROTs do not 
``stream'' quotes, meaning send quotes electronically to the 
Exchange; instead, pursuant to Commentary .18 of Rule 1014, they 
submit limit orders electronically and respond to Floor Brokers 
verbally.
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    The Exchange proposes to adopt new sections (a) and (b) of Phlx 
Rule 1081 to specify the various obligations of electronic ROTs on 
Phlx. In registering as an electronic ROT, member organization [sic] 
commits to various obligations. Generally, the Exchange proposes to 
indicate that an electronic ROT's transactions, in its market making 
capacity,\5\ must constitute a course of dealings reasonably calculated 
to contribute to the maintenance of a fair and orderly market, and 
those member organizations should not make bids or offers or enter into 
transactions that are inconsistent with such course of dealings. The 
Exchange also proposes to note, similar to BX Rules at Chapter VII, 
Section 5(b) that electronic ROTs should not effect purchases or sales 
except in a reasonable and orderly manner. While this rule text is not 
explicitly noted in Phlx Rule 1014, the rule does today note at Phlx 
Rule 1014(a) 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.
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    \5\ Electronic ROTs are permitted to enter orders on Phlx as 
permitted in Rule 1080(b)(i)(B). Orders are not considered market 
making activity for purposes of fulfilling quoting or the other 
obligations of an electronic ROT which are proposed herein.
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    Proposed Phlx Rule 1081(a) provides, ordinarily during trading 
hours,\6\ an electronic ROT must: (i) Maintain a two-sided market in 
those options in which the electronic ROT is registered to trade, in a 
manner that enhances the depth, liquidity and competitiveness of the 
market; (ii) engage, to a reasonable degree under the existing 
circumstances, in dealings for its own account when there exists, or it 
is reasonably anticipated that there will exist, a lack of price 
continuity, a temporary disparity between the supply of (or demand for) 
a particular option contract, or a temporary distortion of price 
relationships between option contracts of the same class; (iii) compete

[[Page 14691]]

with other electronic ROTs in all options in all capacities \7\ in 
which the electronic ROT is registered to trade; (iv) make markets that 
will be honored for the number of contracts entered into Phlx's System 
in all options in which the electronic ROT is registered to trade; (v) 
update quotations in response to changed market conditions in all 
options in which the electronic ROT is registered to trade; (v) 
maintain active markets in all options in which the electronic ROT is 
registered; and (vi) honor all orders attributed to the electronic ROT 
that the System routes to away markets pursuant to Rule 1080(m).\8\
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    \6\ The Exchange notes that a trading halt may cause the 
obligations of electronic ROTs to be suspended because the market is 
not open for trading. The Exchange intends that the obligations of 
an electronic ROT will be in effect when the Exchange is open for 
trading as specified in the Exchange's Rules.
    \7\ For example, competing as a Specialist and as an SQT, 
depending on the various capacities of market marking in which the 
electronic ROT is engaged.
    \8\ Proposed Phlx Rule 1081(a)(i)-(vii) are similar to BX Rules 
at Chapter VII, Section 5(a).
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    Similar to BX Rules at Chapter VII, Section 5(c), Phlx proposes in 
Phlx Rule 1081(b) to provide, ``If Phlx Regulation finds any 
substantial or continued failure to engage in a course of dealings as 
specified in paragraph (a) of this section, the electronic ROT will be 
subject to disciplinary action or suspension or revocation of 
registration in one or more of the securities in which the electronic 
ROT is registered. Nothing in this rule will limit any other power of 
the Board under these Rules, or procedures of Phlx with respect to the 
registration of an ROT or in respect of any violation by an ROT 
pursuant to this rule.'' \9\ The Exchange believes that the addition of 
these obligations will provide additional context as to the obligations 
of electronic ROTs on Phlx.
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    \9\ The Exchange notes that an electronic ROT may be found to 
have violated other by-laws and rules of the Exchange which are 
separate and apart from these obligations. The Exchange has added 
this rule text to make clear that the obligations noted within this 
rule are not an exclusive list.
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Current Quoting Requirements
    The Exchange proposes to amend the current market making quoting 
obligations at Phlx Rule 1014(b)(ii)(D)(1). Currently, Phlx requires 
that in addition to the other requirements for ROTs set forth in Rule 
1014, with some exceptions (e.g., when an RSQT functions as a Remote 
Specialist in particular options) \10\ an SQT and an RSQT are 
responsible to quote two-sided markets in not less than 60% of the 
series in which such SQT or RSQT is assigned, provided that, on any 
given day, a Directed SQT (``DSQT'') or a Directed RSQT (``DRSQT'') are 
responsible to quote two-sided markets in the lesser of 99% of the 
series listed on the Exchange or 100% of the series listed on the 
Exchange minus one call-put pair,\11\ in each case in at least 60% of 
the options in which such DSQT or DRSQT is assigned. Further, whenever 
a DSQT or DRSQT enters a quotation in an option in which such DSQT or 
DRSQT is assigned, such DSQT or DRSQT must maintain until the close of 
that trading day quotations for the lesser of 99% of the series of the 
option listed on the Exchange or 100% of the series of the option 
listed on the Exchange minus one call-put pair. The rule also states 
that to satisfy the applicable quoting requirements with respect to 
quoting a series, an SQT, RSQT, DSQT, or DRSQT must quote such series 
90% of the trading day (as a percentage of the total number of minutes 
in such trading day) or such higher percentage as the Exchange may 
announce in advance.\12\ The rule notes that these obligations apply 
collectively to all appointed issues of an SQT, RSQT, DSQT, or DRSQT, 
rather than on an issue-by-issue basis. Compliance with this obligation 
is determined on a monthly basis. However, determining compliance with 
the continuous quoting requirement on a monthly basis does not relieve 
an SQT, RSQT, DSQT, or DRSQT of the obligation to provide continuous 
two-sided quotes on a daily basis, nor does it prohibit the Exchange 
from taking disciplinary action against an SQT, RSQT, DSQT, or DRSQT 
for failing to meet the continuous quoting obligation each trading day. 
Finally, the Exchange may consider exceptions to the requirement to 
quote 90% (or higher) of the trading day based on demonstrated legal or 
regulatory requirements or other mitigating circumstances.
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    \10\ Electronic Specialists have different quoting obligations 
currently in Phlx's rule which will be described in more detail in 
this proposal. Also, SQTs, DSQTs, RSQTs and DRSQTs are deemed not to 
be assigned in any Quarterly Option Series, any adjusted option 
series, and any option series until the time to expiration for such 
series is less than nine months.
    \11\ A ``call-put pair'' refers to one call and one put that 
cover the same underlying instrument and have the same expiration 
date and exercise price. See Rule 1014(b)(ii)(D)(6).
    \12\ See Phlx Rule 1014(b)(ii)(D)(1).
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    Currently, with respect to a Specialist, Phlx Rule 
1014(b)(ii)(D)(2) requires the Specialist (including the RSQT 
functioning as a Remote Specialist in particular options) quote two-
sided markets in the lesser of 99% of the series or 100% of the series 
minus one call-put pair in each option in which such Specialist is 
assigned. To satisfy the requirement of this subparagraph (D)(2) with 
respect to quoting a series, the Specialist must quote such series 90% 
of the trading day (as a percentage of the total number of minutes in 
such trading day) or such higher percentage as the Exchange may 
announce in advance. These obligations apply collectively to all 
appointed issues of the Specialist, rather than on an issue-by-issue 
basis. Compliance with this obligation is determined on a monthly 
basis. However, determining compliance with the continuous quoting 
requirement on a monthly basis does not relieve the Specialist 
(including the RSQT functioning as a Remote Specialist in particular 
options) of the obligation to provide continuous two-sided quotes on a 
daily basis, nor does it prohibit the Exchange from taking disciplinary 
action against the Specialist (including the RSQT functioning as a 
Remote Specialist in particular options) for failing to meet the 
continuous quoting obligation each trading day. Finally, the Exchange 
may consider exceptions to the requirement to quote 90% (or higher) of 
the trading day based on demonstrated legal or regulatory requirements 
or other mitigating circumstances.
    Currently, Phlx Rule 1014(b)(ii)(D)(3) provides that SQTs, RSQTs 
and the Specialist assigned in an option shall submit electronic 
quotations with a size of not less than the minimum number of contracts 
determined by the Exchange on a class by class basis, which minimum 
shall be at least one contract. Phlx Rule 1014(b)(ii)(D)(4) provides 
that notwithstanding the foregoing, SQTs, DSQTs, RSQTs \13\ and DRSQTs 
shall be deemed not to be assigned in any Quarterly Option Series, any 
adjusted option series,\14\ and any option series until the time to 
expiration for such series is less than nine months. Thus, the quoting 
obligations described above do not apply to SQTs, DSQTs, RSQTs and 
DRSQTs respecting Quarterly Option Series, Adjusted Option Series, and 
series with an expiration of nine months or greater. Phlx Rule 
1014(b)(ii)(D)(5) provides that if a technical failure or limitation of 
a System of the Exchange prevents a participant from maintaining, or 
prevents a participant from communicating to the Exchange, timely and 
accurate quotes, the duration of such failure or limitation shall not 
be included in any of the calculations under Rule 1014(b)(ii)(D) with 
respect to the affected quotes.
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    \13\ This provision does not apply to RSQTs when they are 
functioning as Remote Specialists in particular options.
    \14\ Phlx defines an adjusted option series as an option series 
wherein one option contract in the series represents the delivery of 
other than 100 shares of underlying stock or Exchange-Traded Fund 
Shares (``Adjusted Options Series'').

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[[Page 14692]]

Proposed Quoting Requirements
    The Exchange proposes to amend its electronic quoting requirements 
at proposed Phlx Rule 1081(c). The Exchange notes that electronic ROTs 
must enter bids and offers for the options to which it is registered, 
except in an assigned options series listed intra-day on the Exchange. 
The Exchange notes that intra-day [sic] add of a series would be 
counted the following trading day (next business day after the intra-
day add of a series was listed) when the option series would be 
available for a full trading day.\15\ Today, an electronic ROT is not 
held to quote an intra-day add of a series because the options series 
was not available for trading the entire day. The Exchange is adding 
this exception to the rule text to make clear that electronic ROTs 
would not be responsible for quoting an intra-day addition. The 
Exchange believes that not counting intra-day adds of a series that 
were not available for the entire day of trading is consistent with the 
Act because the electronic ROT would not have the opportunity to trade 
that particular options series for the entire trading day.
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    \15\ An intra-day add of a series shall be defined, for purposes 
of this Rule 1081, as an option series that is added manually on the 
same day the series begins trading.
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    Further, the proposed rule text notes, as is the case today, on a 
daily basis an SQT and RSQT would be obligated to meet certain quoting 
requirements. An SQT or RSQT who is also the Specialist will be held to 
the Specialist obligations in options series in which the Specialist is 
assigned and will be held to SQT and RSQT obligations in all other 
options series where assigned. An SQT or RSQT who receives a Directed 
Order shall be held to the standard of a Directed SQT or Directed RSQT, 
as appropriate. This is the case today, although the current rule text 
does not state specifically that each obligation is separate. The 
Exchange's proposed rule text at Phlx Rule 1081(c) is not contained in 
the current rule, but is the current practice on Phlx. This additional 
detail is being added to the text of the proposed rule to further 
clarify the manner in which the quoting obligations are applied.
    With respect to electronic ROTs, similar to the existing Phlx 
language at Phlx Rule 1014(b)(ii)(D)(3), the Exchange proposes to 
continue to require the best bid and best offer entered by an 
electronic ROT to have a size of not less than the minimum number of 
contracts determined by the Exchange on a class by class basis, which 
minimum shall be at least one (1) contract. Further, the rule text 
specifies at Phlx Rule 1081(c)(i) that an electronic ROT's bid and 
offer for a series of options contracts shall be accompanied by the 
number of contracts at that price the electronic ROT is willing to buy 
or sell.\16\ This language is similar to BX Rules at Chapter VII, 
Section 6(a). Today, Phlx Rule 1014(b)(ii)(D)(3) requires SQTs, RSQTs 
and the Specialist assigned in such option to submit electronic 
quotations with a size of not less than the minimum number of contracts 
determined by the Exchange on a class by class basis, which minimum 
shall be at least one contract. The Exchange is not introducing a new 
concept with this proposed language, rather the Exchange is retaining 
its current language regarding minimum size. The BX Rule differs from 
the Phlx Rule in this regard. BX's Rule Provides that a Participant 
``must have a size of at least one (1) contract'' without reference to 
BX setting a minimum number. Phlx's Rule is generally similar to BX, 
except Phlx is retaining its rule text which permits the Exchange to 
determine the minimum number of contracts. The proposed rule text 
states, ``The best bid and best offer submitted by an electronic ROT 
must have a size of not less than the minimum number of contracts 
determined by the Exchange on a class by class basis, which minimum 
shall be at least one (1) contract.'' Today, an electronic ROT's bid 
and offer for a series of options contracts is quoted at a price for 
the number of contracts the electronic ROT is willing to buy or sell.
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    \16\ See proposed Phlx Rule 1081(c)(i).
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    The Exchange proposes language at Phlx Rule 1081(c)(ii) that 
requires an electronic ROT that enters a bid (offer) in a series of an 
option in which he is registered on Phlx to enter an offer (bid).\17\ 
This requirement to maintain a two-sided quote is similar to what is 
required today on Phlx.\18\ The Exchange does not propose to amend the 
manner in which this provision is currently applied to an electronic 
ROT.
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    \17\ See proposed Phlx Rule 1081(c)(ii).
    \18\ See Phlx Rule 1014(b)(ii)(D)(1). This requirement is also 
similar to BX Rules at Chapter VII, Section 6(b).
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    Proposed Phlx Rule 1081(c)(ii)(A) provides that SQTs and RSQTs, 
associated with the same member organization, are collectively required 
to provide two-sided quotations in 60% of the cumulative number of 
seconds, or such higher percentage as Phlx may announce in advance, for 
which that member organization's assigned options series are open for 
trading. The Exchange includes proposed rule text at Phlx Rule 
1081(c)(ii)(D), which provides that the obligation at Phlx Rule 
1081(c)(ii)(A) would be calculated by (i) taking the total number of 
seconds the member organization disseminates quotes in each assigned 
options series, excluding Quarterly Option Series, any Adjusted Option 
Series, and any option series with an expiration of nine months or 
greater for SQTs, RSQTs, Directed SQTs and Directed RSQTs; and (ii) 
dividing that time by the eligible total number of seconds each 
assigned option series is open for trading that day. SQTs and RSQTs 
would not be required to quote Quarterly Option Series, any Adjusted 
Options Series, and any option series with an expiration of nine months 
or greater. Further, the rule text notes that quoting is not required 
in every assigned options series. Compliance with this requirement is 
determined by reviewing the aggregate of quoting in assigned options 
series for the member organization.\19\ Proposed Phlx Rule 
1081(c)(ii)(A) also provides, similar to today, that notwithstanding 
the foregoing, a member organization shall not be required to make two-
sided markets pursuant to 1081(c)(ii) in any Quarterly Option Series, 
any Adjusted Options Series, and any option series with an expiration 
of nine months or greater.\20\
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    \19\ See Phlx Rule 1081(c)(ii)(D).
    \20\ This is similar to Phlx Rule 1014(b)(ii)(D)(4). The 
Exchange is utilizing the phrase ``series with an expiration of nine 
months or greater'' in this version simply for clarity and to 
conform to the current BX language at BX Rules at Chapter VII at 
Section 6. Once the options series had less than nine months of 
expiration, the electronic ROT would be required to commence quoting 
the options series if appointed in that options series.
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    The current Phlx rule requires SQTs and RSQTs to quote 60% of the 
series 90% of the trading day.\21\ By comparison, the proposed rule 
change, which is similar to BX's Rule at Chapter VII, Section 
6(d)(i)(1) [sic].\22\ The SQTs and RSQTs may quote any combination of 
series, and does not necessarily have to quote every assigned options 
series. Similar to today, these quotations must continue to meet the 
legal quote width requirements specified in Phlx Rule 1014(c)(i)(A)(1) 
and (2). The proposal better accommodates the occasional issues that 
may arise in a particular series, whether technical or manual. The 
existing requirement may at times discourage liquidity in particular 
options series because an electronic ROT is forced to focus on a 
momentary lapse, rather than using the appropriate resources to focus 
on the options series that need and consume additional liquidity.
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    \21\ See Phlx Rule 1014(b)(ii)(D)(1).
    \22\ See proposed Phlx Rule 1081(c)(ii)(A) and (D).

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[[Page 14693]]

    The Exchange is defining an Adjusted Options Series as an option 
series wherein one option contract in the series represents the 
delivery of other than 100 shares of underlying stock or Exchange-
Traded Fund Shares. This definition at Proposed Phlx Rule 
1081(c)(ii)(A)(i) is the same definition that is currently in Phlx Rule 
1014(b)(ii)(D)(4).
    Proposed Phlx Rule 1081(c)(ii)(B) provides that Specialists 
(including Remote Specialists), associated with the same member 
organization, are collectively required to provide two-sided quotations 
in 90% of the cumulative number of seconds, or such higher percentage 
as Phlx may announce in advance, for which that member organization's 
assigned options series are open for trading. The Exchange includes 
proposed rule text at Phlx Rule 1081(c)(ii)(D), which provides that the 
obligation at Phlx Rule 1081(c)(ii)(B) would be calculated by (i) 
taking the total number of seconds the member organization disseminates 
quotes in each assigned options series; and (ii) dividing that time by 
the eligible total number of seconds each assigned option series is 
open for trading that day. Further, the rule text notes that quoting is 
not required in every assigned options series.\23\ Compliance with this 
requirement is determined by reviewing the aggregate of quoting in 
assigned options series for the member organization.\24\ The [sic] 
proposal to quote in aggregate all of assigned series 90% of the 
trading day would align Phlx's Rule to that of BX.
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    \23\ See proposed Phlx Rule 1081(c)(ii)(B) and (D).
    \24\ See Phlx Rule 1081(c)(ii)(D).
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    This is an amendment from the current Phlx requirement which 
requires a Specialist to quote two-sided markets in the lesser of 99% 
of the series or 100% of the series minus one call-put pair in each 
option in which the Specialist is assigned. Today, the Specialist must 
quote such series 90% of the trading day (as a percentage of the total 
number of minutes in such trading day) or such higher percentage as the 
Exchange may announce in advance.\25\ The Exchange desires to lower the 
requirement to conform to BX's requirement for Lead Market Makers, the 
equivalent of Phlx's Specialists, at BX Rules at Chapter VII, Section 
14(f). As is the case today, these quotations must meet the legal quote 
width requirements specified in Phlx Rule 1014(c)(i)(A)(1) and (2). The 
Exchange notes that Specialists continue to have heightened quoting 
requirements as compared to electronic ROTs, which heightened 
obligations allow for the Specialist to receive certain participation 
rights.\26\ The participation rights reward Specialists for making 
markets and providing other market participants an incentive to quote 
aggressively.
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    \25\ See Phlx Rule 1014(b)(ii)(D)(2).
    \26\ See Phlx Rule 1014(g)(vii)(B)(1)(c).
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    Today, Phlx Rule 1014(b)(ii)(D)(4) provides an exception from the 
quoting obligations in Quarterly Option Series, Adjusted Options 
Series, and any option series until the time for expiration for such 
series is less than nine months, for SQTs, DSQTs, RSQTs, and DRSQTs. 
This exception does not apply to Specialists or Remote Specialists 
because they are not listed as an excepted class. The Exchange's 
proposal continues to require Specialists and Remote Specialists to 
quote in Quarterly Option Series, Adjusted Options Series, and any 
option series until the time for expiration for such series is less 
than nine months where assigned.\27\ This rule text does not conform to 
BX Rules at Chapter VII, Section 14. A BX Lead Market Maker is not 
required to quote Quarterly Options Series, Adjusted Options Series, or 
any series with a time to expiration of nine months or greater.
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    \27\ See Phlx Rule 1081(c)(ii)(B).
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    Proposed Phlx Rule 1081(c)(ii)(C) provides Directed SQTs and 
Directed RSQTs, associated with the same member organization, are 
collectively required to provide two-sided quotations in 90% of the 
cumulative number of seconds, or such higher percentage as Phlx may 
announce in advance, for which that member organization's assigned 
options series are open for trading. The Exchange includes proposed 
rule text at Phlx Rule 1081(c)(ii)(D), which provides that the 
obligation at Phlx Rule 1081(c)(ii)(C) would be calculated by (i) 
taking the total number of seconds the member organization disseminates 
quotes in each assigned options series, excluding Quarterly Option 
Series, any Adjusted Options Series, and any option series with an 
expiration of nine months or greater for SQTs, RSQTs, Directed SQTs and 
Directed RSQTs; and (ii) dividing that time by the eligible total 
number of seconds each assigned option series is open for trading that 
day. Further, the rule text notes that quoting is not required in every 
assigned options series.\28\ Compliance with this requirement is 
determined by reviewing the aggregate of quoting in assigned options 
series for the member organization.\29\ Notwithstanding the foregoing, 
a member organization shall not be required to make two-sided markets 
pursuant to 1081(c)(ii) in any Quarterly Option Series, any Adjusted 
Options Series, and any option series with an expiration of nine months 
or greater.\30\ This provision is not being amended and is similar to 
the current Phlx rule and BX Rules at Chapter VII, Section 15(iv).\31\ 
These quotations must meet the legal quote width requirements specified 
in Phlx Rule 1014(c)(i)(A)(1) and (2).
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    \28\ See proposed Phlx Rule 1081(c)(ii)(C) and (D).
    \29\ See Phlx Rule 1081(c)(ii)(D).
    \30\ As noted herein, for purposes of this Rule, an adjusted 
option series is defined as an option series wherein one option 
contract in the series represents the delivery of other than 100 
shares of underlying stock or Exchange-Traded Fund Shares 
(``Adjusted Options Series''). Once the options series had less than 
nine months of expiration, the electronic ROT would be required to 
commence quoting the options series if appointed in that options 
series.
    \31\ This is similar to Phlx Rule 1014(b)(ii)(D)(4). The 
Exchange is utilizing the phrase ``series with an expiration of nine 
months or greater'' in this version simply for clarity. This 
provision, which refers to any series with an expiration of nine 
months or greater, is the same measure utilized today on Phlx, 
however, it is phrased different [sic].
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    The proposed provisions amend the current Phlx requirement which 
requires a Directed ROT to quote two-sided markets in the lesser of 99% 
of the series listed on the Exchange or 100% of the series listed on 
the Exchange minus one call-put pair, in each case in at least 60% of 
the options in which such DSQT or DRSQT is assigned. Whenever a DSQT or 
DRSQT enters a quotation in an option in which such DSQT or DRSQT is 
assigned, such DSQT or DRSQT must maintain until the close of that 
trading day quotations for the lesser of 99% of the series of the 
option listed on the Exchange or 100% of the series of the option 
listed on the Exchange minus one call-put pair. The Exchange desires to 
lower the requirement to conform to BX's requirement for Directed 
Market Makers in BX Rules at Chapter VII, Section 15(iii). The Exchange 
notes that Directed SQTs and Directed RSQTs continue to have heightened 
quoting requirements as compared to electronic ROTs, which heightened 
obligations allow for the Directed SQTs and Directed RSQTs to receive 
certain participation rights.\32\ The enhanced participation rights 
reward Directed SQTs and Directed RSQTs for making markets and 
providing other market participants an incentive to quote aggressively.
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    \32\ See Phlx Rule 1014(g)(viii)(B)(1) [sic].
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    For purposes of the quoting obligations specified in proposed Rule 
1081(c)(ii)(C) a member organization shall be considered directed in 
all assigned options once the member organization receives a Directed 
Order in any option in which they are

[[Page 14694]]

assigned and shall be considered a Directed SQT or Directed RSQT until 
such time as the member organization notifies the Exchange that they 
are no longer directed.\33\ The Exchange notes that if a member desired 
to become a Directed SQT that this obligation would commence when that 
Directed SQT executed an order directed to the Directed SQT. For 
example if on March 15, 2018 at 3:00 p.m. SQT A received its first 
directed order, the quoting obligations would begin at that time (3:00 
p.m.) and would continue until such time as SQT A informed Nasdaq [sic] 
Operations that it no longer desired to be directed. If a Directed SQT 
or Directed RSQT no longer desired to participate in the Directed Order 
program the Exchange would not permit the Directed SQT or Directed 
[sic] to receive an enhanced allocation pursuant to Rule 
1014(g)(viii).\34\ A Directed SQT's or Directed RSQT's quoting 
obligations would cease at such time as the member organization 
contacted Nasdaq [sic] Operations indicating the firm no longer desired 
to participate as a Directed SQT or a Directed RSQT.
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    \33\ A member organization that desires not to be directed would 
contact the Exchange's Operations desk.
    \34\ Once the Nasdaq [sic] Operations desk was contacted, Nasdaq 
[sic] staff would take steps to remove the ability of the member 
organization to be allocated as a Directed SQT or a Directed RSQT.
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    As is the case today, Phlx Regulation may consider exceptions to 
the above-referenced requirement to quote based on demonstrated legal 
or regulatory requirements or other mitigating circumstances. For 
purposes of the Exchange's surveillance of member organization 
compliance with this rule, the Exchange may determine compliance on a 
monthly basis. The Exchange's monthly compliance evaluation of the 
quoting requirement does not relieve a member organization of the 
obligation to provide two-sided quotes on a daily basis, nor will it 
prohibit the Exchange from taking disciplinary action against a member 
organization for failing to meet the quoting obligation each trading 
day.\35\ Further, as is the case today, if a technical failure or 
limitation of a System of Phlx prevents a member organization from 
maintaining, or prevents a member organization from communicating to 
Phlx timely and accurate quotes, the duration of such failure or 
limitation shall not be included in any of the calculations under 
subparagraph (c)(ii) of proposed Rule 1081 with respect to the affected 
quotes.\36\
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    \35\ See Phlx Rule 1014(b)(ii)(D)(1) and (2).
    \36\ See Phlx Rule 1014(b)(ii)(D)(5).
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    Example for calculating quoting for an electronic ROT:
    Market Maker firm A (``MM A'') has Badges 1, 2 and 3. MM A has 
permission to quote underlying U which has options U1, U2, U3, U4, and 
U5. MM A also has permission to quote underlyings V and W.

Option U1 opened at 09:30:30 and closed at 16:00:39
Badge 1 quoted U1 at 09:35:30 @13.00(10)-15.00(10)
Badge 1 updated quote in U1 at 09:50:31 @10.00(10)-15.00(20)
Badge 1 purged quote at 15:55:40
Total quoted time for U1 is: 15:55:40-09:35:30 = (15-9)*3600 + (55-
35)*60 + (40-30) = 22810 (seconds)
Total available quote time for U1 is: 16:00:39-09:30:30 = (15-9)*3600 + 
(60-30)*60 + (39-30) = 23409 (seconds)

Option U2 opened at 09:30:32 and closed at 16:00:29
Badge 2 quoted U2 at 10:05:30 @13.00(10)-15.00(10)
Badge 2 updated quote in U2 at 11:00:01 @11.00(10)-16.00(20)
Badge 2 purged quote at 15:05:40
Total quoted time for U2 is: 15:05:40-10:05:30 = (14-10)*3600 + (65-
05)*60 + (40-30)= 18010 (seconds)
Total available quote time for U2 is: 16:00:29-09:30:32 = (15-9)*3600 + 
(59-30)*60 + (89-32) = 23397 (seconds)

Option U3 opened at 09:40:02 and closed at 16:01:20
Badge 3 quoted U3 at 11:10:21 @21.00(10)-24.00(20)
Badge 3 purged quote at 15:00:05
Total quoted time for U3 is: 15:00:05-11:10:21 = (14-11)*3600 + (59-
10)*60 + (65-21) = 13784 (seconds)
Total available quote time for U3 is: 16:01:20-09:40:02 = (15-9)*3600 + 
(61-40)*60 + (20-2) = 22878 (seconds)

Option U4 opened at 9:30:01 and closed at 16:00:20
Badge 1, 2 and 3 all quoted option U4:
Badge 1 quoted U4 at 09:38:59 @35.00(10)-37.00(10)
Badge 1 updated quote in U4 at 10:30:21 @31.00(10)-37.00(20)
Badge1 purged quote in U4 at 15:45:00
Badge 2 quoted U4 at 09:34:29 @35.00(10)-37.00(10)
Badge 2 purged quote at 15:35:55
Badge 3 quoted U4 at 10:33:21 @36.00(10)-38.00(20)
Badge 3 purged quote at 15:59:34
Since Badge 2 began quoting U4 at the earliest time, this time is used 
for the total quote time determination. Similarly, MM A's Badge 3 was 
last to purge his quote in U4 so this purge time is used for the total 
quote time determination.
Total quoted time for U4 is: 15:59:34-09:34:29 = (15-09)*3600 + (59-
34)*60 + (34-29) = 23105 (seconds)
Total available quote time is: 16:00:20-09:30:01 = (15-9)*3600 + (60-
30)*60 + (20-1) = 23419 (seconds)

Option U5 opened at 9:30:11 and closed at 16:00:23
No MM A badges quoted U5 thus, the total quoted time for U5 will be: 0 
(seconds)
Total available quote time is: 16:00:23-09:30:11 = (15-9)*3600 + (60-
30)*60 + (23-11) = 23412 (seconds)

    The Total quote percentage for MM A is:

Total time for MM A quoted underlying U: 22810 + 18010 + 13784 + 23105 
+ 0 = 77709 (seconds)
Total eligible quoting time for MM A on underlying U: 23409 + 23397 + 
22878 + 23419 + 23412 = 116515 (seconds)

Similarly assume:

Total time for MM A quoted underlying V: 70983(seconds)
Total eligible quoting time for MM A on underlying V: 84515 (seconds)

Total time for MM A quoted underlying W: 0(seconds)
Total eligible quoting time for MM A on underlying W: 46513 (seconds)

Then the total quoting percentage for MM A is:

(77709 + 70983 + 0) / (116515 + 84515 + 46513) = 148692/247543 = 60.07%
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\37\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\38\ in particular, in that it is 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 for the reasons stated below.
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    \37\ 15 U.S.C. 78f(b).
    \38\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposed rule change provides 
further detail as to obligations of electronic ROTs on Phlx. The 
Exchange's proposed obligations, which are similar to BX Rules at 
Chapter VII, Section 5, delineate examples of the type of activity that 
constitutes a course of dealings reasonably calculated to contribute to 
the maintenance of a fair and orderly market. This proposal is 
consistent with the Act because it removes impediments to and perfects 
the mechanism of a free and open market and a national market system by

[[Page 14695]]

imposing obligations on market makers with respect to making markets on 
Phlx. While under the proposal there are quoting requirements changes, 
the Exchange does not believe that these changes reduce the overall 
obligations applicable to electronic ROTs.\39\ Moreover, the Exchange 
believes that the proposal may increase market making activity on the 
Exchange and the quality of the Exchange's market by establishing 
quoting compliance standards that are reasonable and already in place 
on other options exchanges.\40\
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    \39\ In this respect, the Exchange notes that electronic ROTs 
are subject to many obligations aside from quoting, including, for 
example, the obligation to maintain a fair and orderly market in 
their appointed classes, and the obligation to conduct the opening 
and enter continuous quotations in all of the series of their 
appointed options classes within maximum spread requirements.
    \40\ See BX Rules at Chapter VII at Section 6.
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    With respect to the quoting obligations, the Exchange's proposal 
seeks to conform the quoting obligations to that of BX's Rules.\41\ The 
Exchange is amending the quoting obligations for electronic ROTs to 
lower the obligations. Phlx's current quoting requirements are much 
more stringent than certain other exchanges. Quoting two-sided markets 
in not less than 60% of the series in which such SQT or RSQT is 
assigned and also for a Specialist (including Remote Specialist), 
Directed SQT or Directed SQT [sic] quoting two-sided markets in the 
lesser of 99% of the series or 100% of the series minus one call-put 
pair in each option in which such Specialist is assigned, 90% of the 
trading day (as a percentage of the total number of minutes in such 
trading day) or such higher percentage as the Exchange may announce, is 
much more stringent than looking at all options in which an electronic 
ROT is registered, because it [sic] allows for some number of series 
not to be quoted at all, as long as the overall standard is met. This 
better accommodates the occasional issues that may arise in a 
particular series, whether technical or manual. The existing 
requirement may at times discourage liquidity in particular options 
series because an electronic ROT is forced to focus on a momentary 
lapse rather than using the appropriate resources to focus on the 
options series that need and consume additional liquidity. Phlx 
believes that it can better attract electronic ROTs and grow its market 
if its quoting obligation is more in line with that of other exchanges.
---------------------------------------------------------------------------

    \41\ See BX Rules at Chapter VII at Sections 6, 14 and 15. The 
proposed rule text is different than the BX rule text with respect 
to quoting obligations, however the computation of the quoting 
obligations will be the same as BX's computations today.
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    The Exchange's proposal that SQTs and RSQTs, associated with the 
same member organization, are collectively required to provide two-
sided quotations in 60% of the cumulative number of seconds, or such 
higher percentage as Phlx may announce in advance, for which that 
member organization's assigned options series are open for trading 
seeks to promote just and equitable principles of trade, and to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities by aligning Phlx's Rules with quoting 
obligations on BX. The Exchange notes that electronic ROTs are required 
to abide by the Exchange's obligations in order to contribute to the 
maintenance of a fair and orderly market.
    The proposal supports the quality of the Exchange's market by 
helping to ensure that electronic ROTs will continue to be obligated to 
quote in a percentage of their assigned series. Ultimately, the benefit 
the proposed rule change confers upon electronic ROTs is offset by the 
continued responsibilities to provide significant liquidity to the 
market to the benefit of market participants. Despite the reduction, 
the Exchange believes that the proposed rule text is consistent with 
the Act because the quoting obligations are similar to quoting 
obligations on BX today.\42\ Determining compliance with the continuous 
quoting requirement on a monthly basis would not relieve an electronic 
ROT from the obligation to quote two-sided quotes for 60% of the 
cumulative number of seconds on a daily basis, nor would it prohibit 
the Exchange from taking disciplinary action against an electronic ROT 
for failing to meet the quoting obligation each trading day. For these 
reasons, the Exchange believes that the proposed changes to the quoting 
obligations are consistent with the Act. Further, the proposed changes 
to the quoting obligations for electronic ROTs are consistent with 
market maker obligations in place on BX as noted herein.\43\
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    \42\ See BX Rules at Chapter VII at Sections 6, 14 and 15.
    \43\ Id.
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    Further, the Exchange's proposal to amend the quoting obligations 
for Specialists and electronic Directed SQTs and Directed RSQTs is 
consistent with the Act because despite lowering the current 
obligations, the Exchange continues to impose higher quoting 
obligations on Specialists and electronic Directed SQTs and Directed 
RSQTs as compared to SQTs and RSQTs because they are entitled to 
certain allocation benefits that other ROTs are not entitled to today. 
Phlx Rule 1014(g)(vii) provides for the allocation method for 
electronic ROTs on Phlx after the Specialist Participation Entitlement 
has been applied and Phlx Rule 1014(g)(viii) provides for the 
allocation method in the case of directed orders to the electronic 
Directed SQT and Directed RSQT, and such allocation will depend on the 
number of electronic ROTs present. The Specialist receives an 
entitlement after all Customer orders have been fully executed provided 
the Specialist's bid/offer is at or improves on the Exchange's 
disseminated price and up to the Specialist's displayed size.\44\ A 
DSQT or a DRSQT shall be allocated a participation entitlement as 
specified in Phlx Rule 1014(g)(viii)(B)(1) and (2). The Exchange notes 
that Specialists and Directed SQTs and Directed RSQTs continue to have 
heightened quoting requirements as compared to electronic ROTs, which 
heightened obligations allow for the Specialist, Directed SQTs and 
Directed RSQTs to receive certain enhanced participation rights.\45\ 
The enhanced participation rights reward Specialists, Directed SQTs and 
Directed RSQTs for making markets and providing other market 
participants an incentive to quote aggressively. While electronic ROTs 
will be subject to lower quoting requirements as compared to 
Specialists and electronic Directed SQTs and Directed RSQTs, they will 
also be entitled to lower allocations. The Exchange believes that the 
proposed rule text is consistent with the Act because the obligations 
are commensurate with the ability to achieve certain allocations. The 
Exchange believes that its proposal will continue to align SQTS and 
RSQTs, Specialists and electronic Directed SQTs and Directed RSQTs 
accordingly. Also, the proposal will align with quoting requirements on 
BX today.\46\
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    \44\ The Specialist Participation Entitlement shall be 60% of 
remaining interest if there is one other ROT at that price. The 
Specialist Participation Entitlement shall be 40% of remaining 
interest if there are two ROTs at that price. Finally, the 
Specialist Participation Entitlement 30% of remaining interest if 
there are more than two other ROTs at that price. See Phlx Rule 
1014(g)(vii)(B)(1)(c) and 1014(g)(ii).
    \45\ See Phlx Rule 1014(g)(vii)(B)(1)(c) and (g)(viii)(B)(1) 
[sic].
    \46\ See BX Rules at Chapter VII at Sections 6, 14 and 15.
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    Finally the proposed rule text serves to provide more specificity 
to members regarding the manner in which quoting obligations are 
calculated.

[[Page 14696]]

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. Electronic ROTs will continue 
to be entitled to certain allocations, similar to today. Electronic 
ROTs, unlike other market participants, have obligations which the 
Exchange has memorialized within the proposed rule text. The Exchange 
believes that treating Electronic ROTs differently than other market 
participants does not impose an undue burden on competition because 
Electronic ROTs provide liquidity to the market which benefits market 
participants who interact with that liquidity. The Exchange requires 
Electronic ROTs today to maintain fair and orderly markets. The 
Exchange believes the allocation benefits are commensurate with the 
quoting obligations imposed on Electronic ROTs. Additionally, the 
Exchange believes that the varying quoting requirements as between 
electronic ROTs and Specialists and electronic Directed SQTs and 
Directed RSQTs does not impose an undue burden on competition because 
while electronic ROTs will be subject to lower quoting requirements as 
compared to Specialists and electronic Directed SQTs and Directed 
RSQTs, they will also be entitled to lower allocations.

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 [email protected]. Please include 
File Number SR-Phlx-2018-22 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-2018-22. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2018-22, and should be submitted on 
or before April 26, 2018.

    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).
---------------------------------------------------------------------------

Eduardo Aleman,
Assistant Secretary.
[FR Doc. 2018-06916 Filed 4-4-18; 8:45 am]
 BILLING CODE 8011-01-P