Document ID: SEC-2012-1410-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-08-27T04:00Z

[Federal Register Volume 77, Number 166 (Monday, August 27, 2012)]
[Notices]
[Pages 51835-51837]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20969]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67700; File No. SR-Phlx-2012-108]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Regarding 
Rule 1014

August 21, 2012.
    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 August 13, 2012, 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, 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 is filing with the Commission a proposal to amend Rule 
1014 (Obligations and Restrictions Applicable to Specialists and 
Registered Options Traders) to indicate that compliance with specified 
market making obligations pursuant to the rule will be determined on a 
monthly basis.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, 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
    The purpose of this proposed rule change is to amend Rule 1014 to 
indicate that compliance with specified market making obligations 
pursuant to the rule will be determined on a monthly basis.
Background
    Market makers on the Exchange include Registered Options Traders 
(``ROTs''),\3\ Streaming Quote Traders (``SQTs''),\4\ Remote Streaming 
Quote Traders (``RSQTs''),\5\ specialists,\6\ and Remote 
Specialists.\7\ As set forth in Rule 1014, market makers have an 
obligation to make two-sided markets in products listed on the 
Exchange. This rule change proposal does not negate any of the general 
market making obligations established in Rule 1014. These Rule 1014 
market making obligations continue in force. This proposal only 
clarifies one discreet part of Rule 1014 to make it identical to the 
rules of other options exchanges, as discussed below.
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    \3\ An ROT is a regular member or a foreign currency options 
participant of the Exchange located on the trading floor who has 
received permission from the Exchange to trade in options for his 
own account. See Rule 1014 (b)(i).
    \4\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically in 
options to which such SQT is assigned. An SQT may only submit such 
quotations while such SQT is physically present on the floor of the 
Exchange. See Rule 1014(b)(ii)(A).
    \5\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically in options to which such RSQT has been assigned. An 
RSQT may only submit such quotations electronically from off the 
floor of the Exchange. See Rule 1014(b)(ii)(B).
    Rule 1014 also discusses other market makers including Directed 
SQTs and Directed RSQTs, which receive Directed Orders as defined in 
Rule 1080(l)(i)(A). Specialists may likewise receive Directed 
Orders.
    \6\ A member may not act as an options specialist (to include a 
Remote Specialist as defined in Rule 1020(a)(ii)) in any option 
unless such member is registered as an options specialist in such 
option by the Exchange pursuant to Rule 501 and such registration 
may be revoked or suspended at any time by the Exchange. See Rule 
1020(a)(i).
    \7\ A Remote Specialist is an options specialist in one or more 
classes that does not have a physical presence on an Exchange floor 
and is approved by the Exchange pursuant to Rule 501. See Rule 
1020(a)(ii).
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Market Making Obligations
    Currently, Rule 1014 sets forth the market making obligations of 
all market makers. Sub-section (b)(ii)(D)(1) of Rule 1014 states that 
SQTs and RSQTs (when they do not function as Remote Specialists) shall 
be responsible to quote two-sided markets in not less than 60% of the 
series in which such SQTs or RSQTs are assigned; provided that, on any 
given day, a DRSQT or DSQT shall be 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. The 
sub-section states also that 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

[[Page 51836]]

option listed on the Exchange minus one call-put pair. Subsection 
(b)(ii)(D)(2) of Rule 1014 states that a specialist (including the RSQT 
functioning as a Remote Specialist in particular options) shall be 
responsible 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 such specialist is assigned. To satisfy the requirement of 
subsection (b)(ii)(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.\8\
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    \8\ For all market making obligations, see Rule 1014(b)(ii)(D).
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3. Determining Compliance on a Monthly Basis
    Rule 1014 does not currently indicate the timeframe within which 
the Exchange can review whether a member has met the quoting 
obligations in sub-section (b)(ii)(D).\9\ In contrast, NYSE Arca 
establishes a time period of a month to determine whether a market 
maker or lead market maker has met his quoting obligation, stating that 
compliance with the two-sided quoting obligation will be determined on 
a monthly basis.\10\ The Exchange now proposes to insert a similar 
monthly time frame into its quoting rules.
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    \9\ Sub-section (b)(ii)(D) currently states, in relevant part: 
``In addition to the other requirements for ROTs set forth in this 
Rule 1014, except as provided in sub-paragraph (4) below, and except 
as provided in subparagraph (2) below when an RSQT functions as a 
Remote Specialist in particular options, an SQT and an RSQT shall be 
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'') 
(as defined in Rule 1080(l)(i)(C)) shall be 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, 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. To satisfy the applicable 
requirements of this subparagraph (D)(1) 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. 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.''
    \10\ See NYSE Arca Rule 6.37B. See also NYSE MKT (NYSE Amex) 
Rule 925.1NY (establishing a time period of a month to determine 
compliance).
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    Specifically, the Exchange proposes to state in sub-sections 
(b)(ii)(D)(1) and (b)(ii)(D)(2) of Rule 1014 that compliance with the 
quoting obligation will be determined on a monthly basis. The proposed 
language is exactly the same language used by another options exchange, 
NYSE Arca.\11\ The proposed change puts the Exchange and its members on 
an equal footing with other options markets in terms of compliance with 
the noted quoting obligations.
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    \11\ Id.
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    The proposal ensures that compliance standards for two-sided 
quoting will be the same on the Exchange as on other options exchanges. 
The proposal does not, however, change the quoting requirements set 
forth in Rule 1014 or the Exchange's regulatory oversight (monitoring) 
of the requirements. To the contrary, subsequent to the approval of 
this proposal, the quoting requirements will remain and the Exchange 
will continue to monitor (surveil) market maker quoting behavior on a 
daily basis with an eye toward whether market makers meet Rule 1014 
quoting requirements.\12\
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    \12\ On the basis of the daily monitoring activity, the Exchange 
will continue to have the ability to let market makers know if they 
are failing to achieve their quoting requirements. Moreover, on the 
basis of the daily monitoring activity, the Exchange can determine 
whether market makers violated any other Exchange rules such as, for 
example, Rule 707 regarding just and equitable principles of trade. 
Such daily monitoring will allow the Exchange to investigate unusual 
activity and to take appropriate regulatory action (e.g., 
consideration of a Rule 707 violation proceeding based on market 
maker stoppage of quoting and total withdrawal from the market 
during market disturbances).
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    While quoting will continue to be monitored daily, the Exchange 
believes that it is appropriate, fair and generally more efficient for 
the Exchange and market participants to evaluate compliance on a 
monthly rather than daily basis. Thus, a market maker that may have 
quoted less on a single day of a month may meet his overall Rule 1014 
quoting obligations, and still be compliant with the Rule, by posting 
substantially more two-sided quotes on the other days of the month. The 
Exchange believes that the proposal will not diminish, and in fact may 
increase, market making activity on the Exchange, by establishing a 
quoting compliance standard that is reasonable and is already in use on 
other options exchanges.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \14\ 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. The Exchange would do this though a proposed rule change 
indicating that compliance with market making quoting obligations will 
be determined on a monthly basis. The specified one month review period 
clarifies how compliance will be monitored, which should enhance 
compliance efforts by market makers and the Exchange and is consistent 
with requirements currently in place on other exchanges.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The proposal ensures that compliance standards for two-sided 
quoting will be the same on the Exchange as on other options exchanges. 
The Exchange believes that the proposal will not diminish, and in fact 
may increase, market making activity on the Exchange, by establishing a 
quoting compliance standard that is reasonable and is already in use on 
other options exchanges, while continuing to monitor quoting activity 
on a daily basis.

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. To the contrary, the Exchange 
believes the proposal is pro-competitive. The proposal would enable the 
Exchange to provide members with rules that are similar to those of 
other options exchanges, and to add clarity to its rules. This should 
promote trading and hedging activity on the Exchange to the benefit of 
the Exchange, its members, and market participants.

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

    The Exchange believes that the foregoing proposed rule change may 
take effect upon filing with the Commission pursuant to Section 
19(b)(3)(A) \15\ of the Act and Rule 19b-

[[Page 51837]]

4(f)(6)(iii) thereunder \16\ because the foregoing proposed rule change 
does not: (i) Significantly affect the protection of investors or the 
public interest; (ii) impose any significant burden on competition; and 
(iii) become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
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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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2012-108 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-2012-108. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal offices 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-2012-108 and 
should be submitted on or before September 17, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20969 Filed 8-24-12; 8:45 am]
BILLING CODE 8011-01-P