Document ID: SEC-2011-0282-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-03-04T05:00Z

[Federal Register Volume 76, Number 43 (Friday, March 4, 2011)]
[Notices]
[Pages 12206-12208]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-4885]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63967; File No. SR-Phlx-2011-27]

Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX LLC Relating 
to Amendments to Rules 200(g) and 201 of Regulation SHO Applicable to 
Complex Orders

February 25, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on February 23, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 1080.08 respecting complex 
orders to reflect the marking requirements of Regulation SHO and to 
address the handling of certain orders marked ``short'' in compliance 
with Rule 201 of Regulation SHO, as explained further below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    Recently, the Exchange received approval from the Commission to 
make various enhancements to its complex orders system, including to 
accept complex orders where one component is the underlying security of 
the options components.\3\ Specifically, the underlying stock or ETF 
can now be one component of a complex order.\4\ Nasdaq Options Services 
LLC (``NOS''), a registered broker-dealer and member of Financial 
Industry Regulatory Authority, is responsible for the execution of the 
stock or ETF component of a complex order as agent of the stock or ETF 
component.\5\ This is described in Rule 1080.08(h). A complex order 
with one component that is a stock or ETF is received by the Exchange 
with a net debit or credit price. The individual option leg(s) and 
stock/ETF component prices are not specified; rather, there is a single 
net debit or credit price on the order which is used by Phlx and NOS to 
determine the price of each component, including the stock/ETF. 
Specifically, although Phlx is calculating the price of the options 
components, a sophisticated algorithm is simultaneously causing NOS to 
calculate and execute the stock or ETF component of the Complex Order, 
which has been electronically communicated to NOS by the Exchange. 
Thus, because the execution of one component is contingent upon the 
execution of all others, the entire package is processed as a single 
transaction and both the option leg and stock/ETF components are 
simultaneously processed.
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    \3\ See Securities Exchange Act Release No. 63777 (January 26, 
2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-157) (``Complex 
Order rule filing'').
    \4\ A complex order is a an order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security or a stock-option order, priced as a net 
debit or credit, based on the relative prices of the individual 
components, for the same account, for the purpose of executing a 
particular investment strategy. See Rule 1080.08(a).
    \5\ The NASDAQ OMX Group, Inc. owns both the Exchange and NOS; 
therefore, the Exchange and NOS are affiliates.
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    In the Complex Order rule filing, the Exchange explained that with 
respect to short sale regulation, the proposed handling of the stock/
ETF component of a complex order did not raise any issues of compliance 
with the currently operative provisions of Regulation SHO.\6\ When a 
complex order has a

[[Page 12207]]

stock/ETF component, member organizations must mark, pursuant to 
Regulation SHO, whether that order involves a long or short sale.\7\ 
The Phlx trading System will accept complex orders with a stock/ETF 
component marked to reflect either a long or short position; 
specifically, orders not currently marked as ``long'' or ``short'' are 
rejected by the Phlx trading System.
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    \6\ 17 CFR 242.200 et seq.
    \7\ 17 CFR 242.200(g).
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    In 2010, the Commission amended Rule 201 and Rule 200(g) of 
Regulation SHO under the Act.\8\ The amendments to Rule 201 adopt a 
short sale-related circuit breaker that, if triggered, imposes a 
restriction on the prices at which covered securities may be sold short 
(``short sale price test restriction'').\9\ Specifically, Rule 201 
requires a trading center \10\ to establish, maintain, and enforce 
written policies and procedures reasonably designed to prevent the 
execution or display of a short sale order of a covered security \11\ 
at a price that is less than or equal to the current national best bid 
\12\ if the price of that covered security decreases by 10% or more 
from the covered security's closing price as determined by the listing 
market \13\ for the covered security as of the end of regular trading 
hours on the prior day; \14\ and impose these requirements for the 
remainder of the day and the following day when a national best bid for 
the covered security is calculated and disseminated on a current and 
continuing basis by a plan processor pursuant to an effective national 
market system plan.\15\ The amendments to Rule 200(g) provide that a 
broker-dealer may mark certain qualifying short sale orders ``short 
exempt.'' \16\ Thereafter, the Commission extended the compliance date 
for the amendments to Rule 201 and Rule 200(g) until February 28, 
2011.\17\ The Exchange is filing this proposed rule change to address 
the new amendments to Regulation SHO.
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    \8\ See Securities Exchange Act Release No. 61595 (February 26, 
2010), 75 FR 11232 (March 10, 2010). See also Division of Trading 
and Markets: Responses to Frequently Asked Questions Concerning Rule 
201 of Regulation SHO.
    \9\ 17 CFR 242.201.
    \10\ The term ``trading center'' is defined in Rule 201(a)(9) of 
Regulation SHO. 17 CFR 242.201(a)(9). Both the Exchange and NOS are 
``trading centers'' within the definition of Rule 201(a)(9).
    \11\ The term ``covered security'' is defined in Rule 201(a)(1) 
as any NMS stock as defined in Rule 600(b)(47) of Regulation NMS. 17 
CFR 242.201(a)(1). See also 17 CFR 242.600(b)(47).
    \12\ The term ``national best bid'' is defined in Rule 
201(a)(4). 17 CFR 242.201(a)(4).
    \13\ The term ``listing market'' is defined in Rule 201(a)(3). 
17 CFR 242.201(a)(3).
    \14\ 17 CFR 242.201(b)(1)(i).
    \15\ 17 CFR 242.201(b)(1)(ii).
    \16\ 17 CFR 242.200(g)(2).
    \17\ See Securities Exchange Act Release No. 63247 (November 4, 
2010), 75 FR 68702 (November 9, 2010) (extending the compliance date 
of the amendments to Rules 201 and 200(g) of Regulation SHO from 
November 10, 2010 until February 28, 2011).
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    Accordingly, the purpose of the proposed rule change is to explain 
the Exchange's handling of stock/ETF sell components entered as part of 
a complex order in accordance with the amendments to Regulation SHO. In 
particular, the Exchange is proposing to provide that, if the stock/ETF 
leg of a complex order submitted to the Phlx trading System is a sell 
order, then the stock/ETF leg must be marked ``long,'' ``short,'' or 
``short exempt'' in compliance with Rule 200(g) of Regulation SHO; if 
it is not so marked, the order will be rejected. Thus, the Exchange 
will now accept complex orders marked ``short exempt'' and Rule 
1080.08(b)(iv) is being adopted to reflect this.\18\ The Exchange and 
NOS, as trading centers, must comply with Rule 201(b)(1)(iii)(B), which 
provides that a trading center must establish, maintain, and enforce 
written policies and procedures reasonably designed to permit the 
execution or display of a short sale order of a covered security marked 
``short exempt'' without regard to whether the order is at a price that 
is less than or equal to the current national best bid.\19\
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    \18\ The Exchange notes that a broker or dealer may mark a sell 
order ``short exempt'' only if the provisions of Rule 201(c) or (d) 
are met. See 17 CFR 242.200(g)(2). Since NOS and the Exchange do not 
display the stock or ETF portion of a complex order, see infra note 
20, a broker-dealer should not mark the short sale order ``short 
exempt'' under Rule 201(c). See also Division of Trading and 
Markets: Responses to Frequently Asked Questions Concerning Rule 201 
of Regulation SHO, Q&A Nos. 4.2, 5.4 and 5.5.
    \19\ 17 CFR 242.201(b)(1)(iii)(B).
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    Furthermore, the Exchange proposes to amend Rule 1080.08(h) to 
describe the handling of short sales involving the stock/ETF leg of a 
complex order submitted to its Phlx trading System. When the short sale 
price test restriction is triggered for a covered security, NOS will 
not execute or display \20\ a short sale order in the underlying 
covered security component of a complex order if the price is equal to 
or below the current national best bid. However, NOS will execute a 
short sale order in the underlying covered security component of a 
complex order if such order is marked ``short exempt,'' regardless of 
whether it is at a price that is equal to or below the current national 
best bid. If NOS cannot execute the underlying covered security 
component of a complex order in accordance with Rule 201 of Regulation 
SHO, the Exchange will cancel back the complex order to the entering 
member organization. When a short sale price test restriction is 
triggered in a covered security, orders in that security marked 
``short'' may be executed by NOS if the order is at a price above the 
current national best bid at the time of execution. Thus, the proposal 
is narrowly tailored to address Rule 201 by only cancelling orders 
marked ``short'' when a short sale price test restriction is triggered 
in the covered security and the sell order is at a price equal to or 
below the current national best bid at the time of execution.
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    \20\ The stock or ETF portion of a complex order is not 
displayed as an order, because the complex order as a whole is 
handled as a single order with multiple contingencies.
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    The Exchange believes that this approach is consistent with Rule 
201. Under this proposal, the Exchange and NOS, as trading centers, 
will prevent the execution or display of a short sale of the stock/ETF 
component of a complex order priced at or below the current national 
best bid when the short sale price test restriction is triggered. 
Specifically, while the Exchange and NOS are determining, respectively, 
the prices of the options component and of the stock or ETF component 
of the complex order, as described above, NOS will check the current 
national best bid of the stock or ETF component at the time of 
execution. The execution of one component is contingent upon the 
execution of all other components and once a complex order is accepted 
and validated by the Phlx trading System, the entire package is 
processed as a single transaction and both the option leg and stock/ETF 
components are simultaneously processed.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \21\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \22\ in particular, in that it is designed to 
promote just and equitable principles of trade, and, in general to 
protect investors and the public interest, by providing clarity on the 
short sale order handling procedures of the stock/ETF component of a 
complex order when a short sale price test restriction is in effect for 
a covered security. Furthermore, the Exchange believes that the 
proposed rule change is consistent with Regulation SHO in that it 
provides for the handling of short exempt orders as well as short sale 
orders when the short sale price test restriction is triggered.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).

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[[Page 12208]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \23\ and Rule 19b-4(f)(6) \24\ 
thereunder. The Exchange has requested that the Commission waive the 
30-day pre-operative waiting period contained in Exchange Act Rule 19b-
4(f)(6)(iii) \25\ so that the Exchange may implement the change no 
later than February 28, 2011 to coincide with the compliance date for 
the amendments to Rules 200(g) and 201 of Regulation SHO. The 
Commission believes that waiver of the operative delay is consistent 
with the protection of investors and the public interest because the 
proposed rule change, among other things, implements the amendments to 
Rules 200(g) and 201 of Regulation SHO which have a February 28, 2011 
compliance date.\26\ For this reason, the Commission designates the 
proposed rule change to be operative upon filing with the 
Commission.\27\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 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.
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ See supra note 17.
    \27\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2011-27 on the subject line.

Paper Comments

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

    All submissions should refer to File Number SR-Phlx-2011-27. This 
file number should be included on the subject line if e-mail 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 a.m. and 3 
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-2011-27 
and should be submitted on or before March 25, 2011.

    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)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4885 Filed 3-3-11; 8:45 am]
BILLING CODE 8011-01-P