Document ID: SEC-2016-2059-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-11-23T05:00Z

[Federal Register Volume 81, Number 226 (Wednesday, November 23, 2016)]
[Notices]
[Pages 84629-84631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28189]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79345; File No. SR-Phlx-2016-82]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Adopt a New Exception in Exchange Rule 1000(f) for Sub-
MPV Split-Price Orders

November 17, 2016.

I. Introduction

    On August 3, 2016, NASDAQ PHLX LLC (``Exchange'' or ``Phlx'') filed 
with the Securities and Exchange Commission (``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 provide an 
additional exception to the mandatory use of the Exchange's Floor 
Broker Management System (``FBMS'') pursuant to Rule 1000(f)(iii) to 
permit Floor Brokers to execute certain sub-minimum price increment 
(``sub-MPV'') split-price orders in the trading crowd. The proposed 
rule change was published for comment in the Federal Register on August 
22, 2016.\3\ On October 3, 2016, the Commission extended the time 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change to November 20, 2016.\4\ 
The Commission received no comments on the proposal. This order 
institutes proceedings under Section 19(b)(2)(B) of the Act \5\ to 
determine whether to disapprove 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. 78593 (August 16, 
2016), 81 FR 56724 (``Notice'').
    \4\ See Securities Exchange Act Release No. 79023 (October 3, 
2016), 81 FR 69877 (October 7, 2016).
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    Currently, Phlx Rule 1000(f) requires that all Exchange options 
transactions be executed in one of the following three ways: ``(i) 
[a]utomatically by the Exchange Trading System pursuant to Rule 1080 
and other applicable options rules; (ii) by and among members in the 
Exchange's options trading crowd none of whom is a Floor Broker; or 
(iii) through the Options [FBMS] for trades involving at least one 
Floor Broker.'' \6\ Although a Floor Broker may represent orders in the 
trading crowd, a Floor Broker is not permitted to execute an order in 
the trading crowd unless one of three exceptions applies.\7\ The 
exceptions to the mandatory use of FBMS \8\ are set forth in Phlx Rule 
1000(f)(iii). These exceptions allow a Floor Broker to execute a 
transaction in the trading crowd (rather than through FBMS) if: (i) 
there is a problem with Exchange's systems; (ii) the Floor Broker is 
executing the trade pursuant to Phlx Rule 1059 (``Accommodation 
Transactions'') or Phlx Rule 1079 (``Flex Index, Equity and Currency 
Options''); or (iii) the transaction involves a multi-leg order with 
more than 15 legs.\9\
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    \6\ See Phlx Rule 1000(f).
    \7\ See Phlx Rule 1000(f)(iii).
    \8\ The original FBMS (``FBMS 1'') began operating in 2005. The 
Exchange retired FBMS 1 on March 31, 2016 after operating it 
concurrently with the Exchange's enhanced FBMS (``FBMS 2''), which 
was made available on March 7, 2014. As of March 31, 2016, FBMS 2 is 
available to all Floor Brokers in all options and is the only FBMS 
currently in use. The Exchange represents that it has contracted 
with a third-party to build an alternative system (``FBMS 3'') to 
replace FBMS 2, and anticipates that FBMS 3 will be ready by 
November 30, 2016. See Notice, supra note 3, at 56725.
    \9\ See Notice, supra note 3, at 56726; see also Phlx Rule 
1000(f)(iii)(A)-(C). According to the Exchange, each time a Floor 
Broker uses one the current exceptions to Phlx Rule 1000(f)(iii), 
the Floor Broker is required by Phlx Rule 1063(e)(ii), to record the 
information required by Phlx Rule 1063(e)(i) on paper trade tickets. 
The Exchange further represents that a Floor Broker may only 
represent an order for execution that has been time stamped with the 
time of entry on the trading floor. In addition, according to the 
Exchange, once an execution occurs, the trade ticket must be stamped 
with the time of execution of such order. See Notice, supra note 3, 
at 56726.
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    Phlx Rule 1014(g)(i)(B) provides a priority rule regarding open 
outcry split price transactions in equity options and options overlying 
ETFs to permit a member who is responding to an order for at least 100 
contracts who buys (sells) at least 50 contracts at a particular price 
to have priority over all other orders in purchasing (selling) up to an 
equivalent number of contracts of the same order at the next lower 
(higher) price without being required to yield to existing customer 
interest in the limit order book.\10\ Absent Phlx Rule 1014(g)(i)(B), 
such orders would be required to yield priority. The Exchange states 
that ``the purpose behind the split-price priority exception was `to 
bring about the execution of large orders, which by virtue of their 
size and the need to execute them at multiple prices may be difficult 
to execute

[[Page 84630]]

without a limited exception to the priority rules.' '' \11\
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    \10\ See Notice, supra note 3, at 56726 (citing Securities 
Exchange Act Release No. 51820 (June 10, 2005), 70 FR 35759 (June 
21, 2005) (SR-Phlx-2005-28)) (approving pilot). See also Securities 
Exchange Act Release No. 55993 (June 29, 2007), 72 FR 37301 (July 9, 
2007) (SR-Phlx-2007-44) (permanent approval).
    \11\ See Notice, supra note 3, at 56726.
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    According to the Exchange, split-price orders are currently 
processed using either FBMS 2 or paper tickets, depending on whether 
the split-price order can be evenly split using simple calculations or 
whether the transaction involves non-even integers and sub-MPV price 
points, thus requiring a more complicated computation to determine the 
number of contracts to trade at two different price points.\12\ The 
Exchange represents that FBMS 2 does not have the capability to 
calculate specific volumes at different prices for transactions 
resulting from split-price orders.\13\ To compensate for this system 
limitation, the Exchange is proposing to amend Phlx Rule 1000(f)(iii) 
to add a new exception from the mandatory use of FBMS that would 
expressly authorize Floor Brokers to execute certain split-price orders 
in the trading crowd. Accordingly, the Exchange is proposing in Phlx 
Rule 1000(f)(iii)(D) to allow the following split-price orders to be 
executed in the trading crowd: (1) simple orders not expressed in the 
applicable sub-MPV and that cannot be evenly split into two whole 
numbers to create a price at the midpoint of the MPV; and (2) complex 
and multi-leg orders with at least one option leg with an odd-numbered 
volume that must trade at a sub-MPV price or one leg that qualifies 
under (1) above.\14\
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    \12\ See Notice, supra note 3, at 56726. Today, when the 
computation is more complicated, surveillance staff allows a Floor 
Broker to execute split-price orders involving non-even integers and 
sub-MPV price points in open outcry using paper tickets pursuant to 
Phlx Rule 1000(f)(iii)(A). See id.
    \13\ See Notice, supra note 3, at 56726.
    \14\ See Notice, supra note 3, at 56724.
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    The Exchange also proposes that, in addition to split-price orders 
executed pursuant to proposed Phlx Rule 1000(f)(iii)(D), Phlx 
surveillance staff would approve all executions submitted under Phlx 
Rule 1000(f)(iii) to validate that such executions abide by applicable 
priority and trade-through rules.\15\ The Exchange also proposes to 
round prices if necessary to execute the trade at the MPV, but only to 
the benefit of a customer order, or, where multiple customer orders are 
involved, for the customer order that is earliest in time.\16\
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    \15\ See proposed Phlx Rule 1000(f)(iii).
    \16\ See proposed Phlx Rule 1000(f)(iii); see also Notice, supra 
note 3, at 56727.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-Phlx-
2016-82 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act,\17\ to determine whether the proposed rule 
change should be disapproved. Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, as described in greater detail 
below, the Commission seeks and encourages interested persons to 
comment on the proposed rule change to inform the Commission's analysis 
of whether to approve or disapprove the proposed rule change.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\18\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceeding to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposed rule change with Section 6(b)(5) of the Act,\19\ which 
requires that the rules of a national securities exchange be designed, 
among other things, to prevent fraudulent and manipulative acts and 
practices, 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 not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers,\20\ and with the Order 
Protection and Locked/Crossed Market Plan.\21\
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    \18\ Id. Section 19(b)(2)(B) of the Act also provides that 
proceedings to determine whether to disapprove a proposed rule 
change must be concluded within 180 days of the date of publication 
of the notice of the filing of the proposed rule change. The time 
for conclusion of the proceedings may be extended for up to 60 days 
if the Commission finds good cause for such extension and publishes 
its reasons for so finding. See id.
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ The Options Order Protection and Locked/Crossed Markets 
Plan is available at http://www.optionsclearing.com/components/docs/clearing/services/options_order_protection_plan.pdf.
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    Finally, under the Commission's rules of procedure, a self-
regulatory organization that proposes to amend its rules bears the 
burden of demonstrating that its proposal is consistent with the 
Act.\22\ In this regard:
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    \22\ Rule 700(b)(3), 17 CFR 201.700(b)(3).

the description of the proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
the applicable requirements must all be sufficiently detailed and 
specific to support an affirmative Commission finding. Any failure 
of the self-regulatory organization to provide the information 
elicited by Form 19b-4 may result in the Commission not having a 
sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations thereunder that are applicable to the self-regulation 
organization.\23\
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    \23\ Id.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with respect to the proposed rule change. In particular, the Commission 
invites written views of interested persons concerning whether the 
proposed rule change is consistent with Section 6(b)(5) or any other 
provision of the Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\24\
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    \24\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by December 14, 2016. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 28, 2016. The Commission asks that commenters address the 
sufficiency and merit of the Exchange's statements in support of the 
proposed rule change, in addition to any other comments they may wish 
to submit about the proposed rule change. The Commission notes that 
Phlx states that ``rounding of prices is used only where necessary to 
execute a trade at the MPV, and only to the benefit of a customer 
order. . . .'' \25\ The Commission seeks commenters' views on the 
Exchange's statements, which are set forth in the Notice,\26\ regarding 
how

[[Page 84631]]

the Exchange would round prices for split-price orders, particularly 
when no customer orders are involved, in addition to any other comments 
they may wish to submit about the proposed rule change. The Commission 
seeks comment on whether this aspect of the proposal is consistent with 
Section 6(b)(5), which requires, among other things, that a proposed 
rule change not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.\27\
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    \25\ See Notice, supra note 3, at 56724.
    \26\ See Notice, supra note 3.
    \27\ 15 U.S.C.78f(b)(5).
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    The Commission is concerned that the Exchange has not made clear 
what the time of execution would be for split-price orders executed 
manually by Floor Brokers pursuant to the exception proposed in Phlx 
Rule 1000(f)(iii)(D) or how Floor Brokers would use paper tickets to 
execute split-price orders under the proposed exception. The Commission 
seeks commenters' views on the sufficiency of the Exchange's statements 
regarding the execution of a split-price order by a Floor Broker 
pursuant to the proposed exception under Phlx Rule 1000(f)(iii)(D). In 
addition, the Commission seeks comment on whether the proposed rule 
change is consistent with the Options Order Protection and Locked/
Crossed Market Plan.
    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-2016-82 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-2016-82. The 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 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 publicly available. All 
submissions should refer to File Number SR-Phlx-2016-82 and should be 
submitted on or before December 14, 2016. Rebuttal comments should be 
submitted by December 28, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-28189 Filed 11-22-16; 8:45 am]
 BILLING CODE 8011-01-P