Document ID: SEC-2011-0987-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-07-13T04:00Z

[Federal Register Volume 76, Number 134 (Wednesday, July 13, 2011)]
[Notices]
[Pages 41317-41320]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17522]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64833; File No. SR-Phlx-2011-95]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
the Extension of a Pilot Program Concerning Disseminated Quotations

July 7, 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 June 30, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``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 extend, through November 30, 2011, a pilot 
program (the ``pilot'') under which the Exchange's rules describe the 
manner in which the PHLX XL[supreg] automated options trading system 
\3\ disseminates quotations when (i) there is an opening imbalance in a 
particular series, and (ii) there is a Quote Exhaust (as described 
below) or a Market Exhaust (as described below) quote condition present 
in a particular series.
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    \3\ This proposal refers to ``PHLX XL'' as the Exchange's 
automated options trading system. In May 2009 the Exchange enhanced 
the system and adopted corresponding rules referring to the system 
as ``Phlx XL II.'' See Securities Exchange Act Release No. 59995 
(May 28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). The 
Exchange intends to submit a separate technical proposed rule change 
that would change all references to the system from ``Phlx XL II'' 
to ``PHLX XL'' for branding purposes.
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    The current pilot is scheduled to expire July 31, 2011.
    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.

[[Page 41318]]

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 the proposed rule change is to extend the pilot 
through November 30, 2011.
Background
    In June, 2009, the Exchange added several significant enhancements 
to its automated options trading platform (now known as PHLX XL), and 
adopted rules to reflect those enhancements.\4\ As part of the system 
enhancements, the Exchange proposed to disseminate a ``non-firm'' quote 
condition on a bid or offer whose size is exhausted in certain 
situations. The non-exhausted side of the Exchange's disseminated 
quotation would remain firm up to its disseminated size. At the time 
the Exchange proposed the ``one-sided non-firm'' quote condition, the 
Options Price Reporting Authority (``OPRA'') was only capable of 
disseminating option quotations for which both sides of the quotation 
are marked ``non-firm.'' OPRA did not disseminate a ``non-firm'' 
condition for one side of a quotation while the other side of the 
quotation remains firm.
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    \4\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
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    Accordingly, the Exchange proposed, for a pilot period scheduled to 
expire November 30, 2009, and later extended through September 30, 
2010,\5\ to disseminate quotations in such a circumstance with a (i) a 
bid price of $0.00, with a size of one contract if the remaining size 
is a seller, or (ii) an offer price of $200,000, with a size of one 
contract if the remaining size is a buyer.
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    \5\ See Securities Exchange Act Release No. 60951 (November 6, 
2009), 74 FR 59275 (November 17, 2009) (SR-Phlx-2009-95).
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    The Exchange subsequently modified the manner in which the PHLX XL 
system disseminates quotes when one side of the quote is exhausted but 
the opposite side still has marketable size at the disseminated price, 
by disseminating, on the opposite side of the market from remaining 
unexecuted contracts: (i) A bid price of $0.00, with a size of zero 
contracts if the remaining size is a seller, or (ii) an offer price of 
$0.00, with a size of zero contracts if the remaining size is a 
buyer.\6\ That modification was implemented on a pilot basis, scheduled 
to expire November 30, 2010,\7\ and that pilot was then extended 
through March 31, 2011.\8\ Subsequently, the pilot was extended through 
its current expiration date of July 31, 2011.\9\
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    \6\ See Securities Exchange Act Release No. 63024 (September 30, 
2010), 75 FR 61799 (October 6, 2010) (SR-Phlx-2010-134).
    \7\ Id.
    \8\ See Securities Exchange Act Release No. 63350 (November 19, 
2010), 75 FR 73150 (November 29, 2010) (SR-Phlx-2010-156).
    \9\ See Securities Exchange Act Release No. 64056 (March 8, 
2011), 76 FR 13678 (March 14, 2011) (SR-Phlx-2011-29).
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    On October 7, 2010, the U.S. options exchanges, as participants in 
the OPRA Plan, voted to make technological changes that would enable 
OPRA to support a one-sided non-firm quote condition. These 
technological changes provide the opportunity for OPRA and the 
participants to design, test, and deploy modifications to their 
systems, and to establish connectivity with quotation vendors, that 
will support the one-sided non-firm quote condition. Upon the 
conclusion of the proposed extended pilot (i.e., beginning December 1, 
2011), the Exchange intends to implement a system change (and prior to 
that date to file an appropriate proposed rule change) to disseminate a 
``non-firm'' condition for one side of a quotation while the other side 
of the quotation remains firm. The Exchange is proposing to extend the 
current pilot through November 30, 2011, in order to account for the 
time required to implement the technological changes.
Opening Imbalance
    An opening ``imbalance'' occurs when all opening marketable size 
cannot be completely executed at or within an established Opening Quote 
Range (``OQR'') for the affected series.\10\ Currently, pursuant to 
Exchange Rule 1017(l)(v)(C)(7), any unexecuted contracts from the 
opening imbalance not traded or routed are displayed in the Exchange 
quote at the opening price for a period not to exceed ten seconds, and 
subsequently, cancelled back to the entering participant if they remain 
unexecuted and priced through the opening price, unless the member that 
submitted the original order has instructed the Exchange in writing to 
re-enter the remaining size, in which case the remaining size will be 
automatically submitted as a new order. During this display time 
period, the PHLX XL system disseminates, if the imbalance is a buy 
imbalance, an offer of $0.00, with a size of zero contracts or, if the 
imbalance is a sell imbalance, a bid of $0.00, with a size of zero 
contracts, on the opposite side of the market from remaining unexecuted 
contracts.
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    \10\ Where there is an imbalance at the price at which the 
maximum number of contracts can trade that is also at or within the 
lowest quote bid and highest quote offer, the PHLX XL system will 
calculate an OQR for a particular series, outside of which the PHLX 
XL system will not execute. See Exchange Rule 1017(l)(iii) and (iv).
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    The purpose of this provision is to indicate that the Exchange has 
exhausted all marketable interest, at or within the OQR, on one side of 
the market during the opening process yet has remaining unexecuted 
contracts on the opposite side of the market that are firm at the 
disseminated price and size.
    Rule 1017(l)(v)(C)(7) is subject to the pilot, which is scheduled 
to expire July 31, 2011. The Exchange proposes to extend the pilot 
through November 30, 2011.
Quote Exhaust
    Quote Exhaust occurs when the market at a particular price level on 
the Exchange includes a quote, and such market is exhausted by an 
inbound contra-side quote or order (``initiating quote or order''), and 
following such exhaustion, contracts remain to be executed from the 
initiating quote or order.\11\
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    \11\ See Exchange Rule 1082(a)(ii)(B)(3).
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    Rather than immediately executing at the next available price, the 
PHLX XL system employs a timer (a ``Quote Exhaust Timer''), not to 
exceed one second, in order to allow market participants to refresh 
their quotes. During the Quote Exhaust Timer, PHLX XL currently 
disseminates the ``Reference Price'' (the most recent execution price) 
for the remaining size, provided that such price does not lock an away 
market, in which case, the Exchange currently disseminates a bid and 
offer that is one Minimum Price Variation (``MPV'') from the away 
market price. During the Quote Exhaust Timer, the Exchange 
disseminates: (i) A bid price of $0.00, with a size of zero contracts 
if the remaining size is a seller, or (ii) an offer price of $0.00, 
with a size of zero contracts if the remaining size is a buyer.
    Currently, Exchange Rules 1082(a)(ii)(B)(3)(g)(iv)(A)(3),

[[Page 41319]]

1082(a)(ii)(B)(3)(g)(iv)(A)(4), 1082(a)(ii)(B)(3)(g)(iv)(B)(2), and 
1082(a)(ii)(B)(3)(g)(iv)(C) describe various scenarios under which the 
PHLX XL system trades, routes, or posts unexecuted contracts after 
determining the ``Best Price'' following a Quote Exhaust. These rules 
permit an up to 10 second time period during which participants may 
revise their quotes prior to the PHLX XL system taking action. In all 
of these scenarios, during the up to 10 second time period, the PHLX XL 
system currently disseminates an offer of $0.00, with a size of zero 
contracts if the remaining size is a buyer or, if the remaining size is 
a seller, a bid of $0.00, with a size of zero contracts, on the 
opposite side of the market from remaining unexecuted contracts.
    Exchange Rules 1082(a)(ii)(B)(3)(g)(iv)(A)(3), 
1082(a)(ii)(B)(3)(g)(iv)(A)(4), 1082(a)(ii)(B)(3)(g)(iv)(B)(2), and 
1082(a)(ii)(B)(3)(g)(iv)(C) are subject to the pilot, which is 
scheduled to expire July 31, 2011. The Exchange proposes to extend the 
pilot through November 30, 2011.
    Current Rule 1082(a)(ii)(B)(3)(g)(vi) describes what the PHLX XL 
system does if, after trading at the PHLX and/or routing, there are 
unexecuted contracts from the initiating order that are still 
marketable. In this situation, remaining contracts are posted for a 
period of time not to exceed 10 seconds and then cancelled after such 
period of time has elapsed, unless the member that submitted the 
original order has instructed the Exchange in writing to re-enter the 
remaining size, in which case the remaining size will be automatically 
submitted as a new order. During the up to 10 second time period, the 
Exchange will disseminate, on the opposite side of the market from 
remaining unexecuted contracts: (i) A bid price of $0.00, with a size 
of zero contracts if the remaining size is a seller, or (ii) an offer 
price of $0.00, with a size of zero contracts if the remaining size is 
a buyer.
    Rule 1082(a)(ii)(B)(3)(g)(vi) is subject to the pilot. The Exchange 
proposes to extend the pilot through November 30, 2011.
Market Exhaust
    Market Exhaust occurs when there are no PHLX XL participant 
quotations in the Exchange's disseminated market for a particular 
series and an initiating order in the series is received. In such a 
circumstance, the PHLX XL system initiates a ``Market Exhaust Auction'' 
for the initiating order.\12\
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    \12\ See Exchange Rule 1082(a)(ii)(B)(4)(b).
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    In this situation, the PHLX XL system will first determine if the 
initiating order, or a portion thereof, can be executed on the PHLX. 
Thereafter, if there are unexecuted contracts remaining in the 
initiating order the PHLX XL system will initiate a Market Exhaust 
Timer. During the Market Exhaust Timer, the Exchange disseminates any 
unexecuted size of the initiating order at the ``Reference Price,'' 
which is the execution price of a portion of the initiating order, or 
one MPV from a better-priced away market price if the Reference Price 
would lock the away market. The PHLX XL system currently disseminates, 
on the opposite side of the market from the remaining unexecuted 
contracts: (i) A bid price of $0.00, with a size of zero contracts if 
the remaining size is a seller, or (ii) an offer price of $0.00, with a 
size of zero contracts if the remaining size is a buyer. This provision 
is subject to the pilot. The Exchange proposes to extend the pilot 
through November 30, 2011.
Provisional Auction
    Exchange Rule 1082(a)(ii)(B)(4)(d)(iv)(E) describes what PHLX XL 
does after it has explored all alternatives and there still remain 
unexecuted contracts. During the ``Provisional Auction,'' any 
unexecuted contracts from the initiating order are displayed in the 
Exchange quote for the remaining size for a brief period not to exceed 
ten seconds and subsequently cancelled back to the entering participant 
if they remain unexecuted, unless the member that submitted the 
original order has instructed the Exchange in writing to re-enter the 
remaining size, in which case the remaining size will be automatically 
submitted as a new order. The rule states that during the brief period, 
the PHLX XL system disseminates, on the opposite side of the market 
from remaining unexecuted contracts: (i) A bid price of $0.00, with a 
size of zero contracts if the remaining size is a seller, or (ii) an 
offer price of $0.00, with a size of zero contracts if the remaining 
size is a buyer.\13\
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    \13\ The Exchange notes that there is a discrepancy between the 
text of Rule 1014(a)(ii)(B)(4)(d)(iv)(E) and the actual 
functionality of PHLX XL regarding the Exchange's disseminated 
market. The Exchange reported this discrepancy to the Commission and 
advised membership by way of an Options Trader Alert (``OTA'') which 
was distributed on May 25, 2011. The Exchange will file a proposed 
rule change to correct this discrepancy. The OTA is available at 
http://www.nasdaqtrader.com/TraderNews.aspx?id=OTA2011-22.
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    Rule 1082(a)(ii)(B)(4)(d)(iv)(E) is subject to the pilot. The 
Exchange proposes to extend the pilot through November 30, 2011.
    The Exchange believes that the pilot benefits customers and the 
marketplace as a whole by enabling PHLX to effectively reflect the 
market interest the Exchange has that is firm and executable, while at 
the same time indicating the other side of the Exchange market is not 
firm and therefore not executable. This allows the Exchange to protect 
orders on its book and attempt to attract interest to execute against 
such order.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \15\ 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.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange further believes that the proposal is consistent with 
the SEC Quote Rule's provisions regarding non-firm quotations.\16\ 
Specifically, Rule 602(a)(3)(i) provides that if, at any time a 
national securities exchange is open for trading, the exchange 
determines, pursuant to rules approved by the Commission, that the 
level of trading activities or the existence of unusual market 
conditions is such that the exchange is incapable of collecting, 
processing, and making available to vendors the data for a subject 
security required to be made available in a manner that accurately 
reflects the current state of the market on such exchange, such 
exchange shall immediately notify all specified persons of that 
determination and, upon such notification, the exchange is relieved of 
its obligations under paragraphs (a)(1) and (2) of Rule 602 relating to 
collecting and disseminating quotations, subject to certain other 
provisions of Rule 602(a)(3).
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    \16\ See 17 CFR 242.602(a)(3)(i) and (ii).
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    By disseminating a bid of $0.00 for a size of zero contracts, or an 
offer of $0.00 for a size of zero contracts in certain situations 
delineated above in the Exchange's rules, the Exchange believes that it 
is adequately communicating that it is non-firm on that side of the 
market in compliance with the Quote Rule.

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

    The Exchange does not believe that the proposed rule change will 
impose

[[Page 41320]]

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 \17\ and Rule 19b-4(f)(6) \18\ 
thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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.
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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-2011-95 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-2011-95. 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 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 available publicly. All 
submissions should refer to File Number SR-Phlx-2011-95 and should be 
submitted on or before August 3, 2011.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-17522 Filed 7-12-11; 8:45 am]
BILLING CODE 8011-01-P