Document ID: SEC-2023-0709-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2023-07-07T04:00Z

[Federal Register Volume 88, Number 129 (Friday, July 7, 2023)]
[Notices]
[Pages 43405-43409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-14286]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97825; File No. SR-Phlx-2023-28]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Establish Purge 
Ports for Equities Trading

June 30, 2023.
    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 June 28, 2023, Nasdaq 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 establish Purge Ports for equities 
trading.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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 Exchange is proposing to establish a new port type, ``Purge 
Port,'' which is a function enabling PSX Participants (the 
``Participants'') to cancel all open orders or a subset of open orders 
(per MPID, buy or sell side of the order, or ticker symbol) across 
multiple protocols through a single cancel message.\3\ The Exchange 
also proposes to amend the Pricing Schedule in Equity 7, Section 3 to 
set fees for Purge Ports and to waive the fees for the Purge Ports in 
the Exchange's Test Facility for the first two months a Participant 
uses them in the Test Facility. Finally, the Exchange proposes to make 
functional enhancements to its Order entry protocols to include a 
function enabling Participants to cancel, through a single cancel 
message, all open orders or a subset of open orders

[[Page 43406]]

(per MPID, buy or sell side of the order, or ticker symbol) entered 
through that port (the ``purging functionality'').
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    \3\ Purge Ports will be available for RASH, FIX and OUCH 
protocols.
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    A logical port represents a port established by the Exchange within 
the Exchange's system for trading and billing purposes. Each logical 
port grants a Participant the ability to accomplish a specific 
function, such as order entry, order cancellation, access to execution 
reports, and other administrative information.
    The proposed Purge Ports are designed to assist Participants, 
including Market Makers \4\ in the management of, and risk control 
over, their orders, particularly if the firm is dealing with a large 
number of securities. For example, if a Participant detects market 
indications that may influence the execution potential of their orders, 
the Participant may use the proposed Purge Ports to reduce uncertainty 
and to manage risk by purging all orders in a number of securities. 
This would allow the Participant to seamlessly avoid unintended 
executions, while continuing to evaluate the market, their positions, 
and their risk levels. While Purge Ports will be available to all 
Participants, the Exchange anticipates they will be used primarily by 
firms that conduct business activity that exposes them to a large 
amount of risk across a number of securities. The proposed purging 
functionality will operate similar to a Purge Port, by allowing a 
Participant to purge all orders or a subset of open orders (per MPID, 
buy or sell side of the order, or ticker symbol) open on that port. The 
only material difference for a Participant, between relying on the 
purging functionality as opposed to using a Purge Port, is that Purge 
Port requires a Participant to send one message to accomplish desired 
cancellation of orders or a subset thereof as described above, while 
the purging functionality requires a Participant to send multiple 
messages (which could be sent simultaneously) to accomplish the same 
task.\5\
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    \4\ Member organizations seeking to become registered as a PSX 
Market Maker must comply with the applicable requirements of General 
3, Section 1. See Equity 2, Section 4.
    \5\ The Exchange expects the purging functionality to remain 
substantially similar to Purge Ports, as described above, and would 
offer the purging functionality as long as it offers Purge Ports.
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    Participants may currently cancel individual orders through the 
existing functionality of the RASH Order entry protocol,\6\ FIX Order 
entry protocol \7\ and the OUCH Order entry protocol.\8\ In addition to 
the current functionality, which is being retained, the Exchange now 
proposes to expand the ability of Participants to cancel orders through 
the new purge functionality, which would enable them to cancel all open 
orders or a subset of open orders (per MPID, buy or sell side of the 
order, or ticker symbol) entered through a single port; and through the 
proposed Purge Ports, which would enable them to cancel all open 
orders, or a subset of open orders (per MPID, buy or sell side of the 
order, or ticker symbol) across multiple protocols through a single 
cancel message.
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    \6\ The RASH Order entry protocol is a proprietary protocol that 
allows members to enter Orders, cancel existing Orders and receive 
executions. RASH allows participants to use advanced functionality, 
including discretion, random reserve, pegging and routing.
    \7\ Financial Information eXchange (FIX) is a vendor-neutral 
standard message protocol that defines an electronic message 
exchange for communicating securities transactions between two 
parties.
    \8\ The OUCH Order entry protocol is a proprietary protocol that 
allows subscribers to quickly enter orders into the System and 
receive executions. OUCH accepts limit Orders from members, and if 
there are matching Orders, they will execute. Non-matching Orders 
are added to the Limit Order Book, a database of available limit 
Orders, where they are matched in price-time priority. OUCH only 
provides a method for members to send Orders and receive status 
updates on those Orders.
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    The Exchange notes that dedicated Purge Ports are not a new 
functionality for equities exchanges, as other equity exchanges already 
offer similar functionality.\9\ The Exchange also notes that the 
proposed Purge Ports increase efficiency of already existing 
functionality enabling the cancellation of orders. Nasdaq operates 
highly performant systems with significant throughput and determinism 
which allows participants to enter, update and cancel orders at high 
rates. In that regard, Participants can cancel orders in rapid 
succession across their order entry ports.\10\ In addition, the 
Exchange provides a similar ability to mass cancel orders through the 
Nasdaq Kill Switch, which is an optional tool offered at no charge that 
enables Participants to establish pre-determined levels of risk 
exposure, which can be used to cancel all open orders. Similarly, 
Participants may use cancel-on-disconnect control when they experience 
a disruption in connection to the Exchange to immediately cancel all 
pending Exchange orders except for good-till-canceled orders. 
Accordingly, the Exchange believes that the purge functionality and 
Purge Ports provide an efficient option as an alternative to already 
available services and enhance the Participant's ability to manage 
their risk.
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    \9\ See Securities Exchange Act Release No. 84405 (October 11, 
2018), 83 FR 52598 (October 17, 2018) (SR-CboeEDGA-2018-016). 
Explaining its decision to waive the 30-day operative delay of this 
proposed rule change, the Commission stated that it believed that 
purge ports may be a helpful tool for managing the risk associated 
with trading equities, and that this can be important both for 
individual market participants and the market in general.
    \10\ Current Exchange port functionality supports cancelation 
rates that exceed one thousand messages per second and the 
Exchange's research indicates that certain Participants rely on such 
functionality and at times utilize such cancelation rates.
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    The Exchange proposes to provide the purging functionality without 
charging any additional fees. All existing ports will be enhanced with 
the purging functionality and will continue to be subject to the 
existing fee schedule without any changes.
    The Exchange proposes to adopt a fee for Purge Ports of $500 per 
port/per month. As stated above, the Exchange believes that 
Participants would benefit from a dedicated purge mechanism. Only firms 
that request Purge Ports would be subject to the proposed fees, and 
other firms can continue to operate in exactly the same manner as they 
do today without dedicated Purge Ports, but with the additional purging 
functionality.
    The Exchange proposes to waive the applicable $300 per Purge Port, 
per month fees for Participants that use their PSX access protocols 
connection through the Exchange's Testing Facility to test the new 
Purge Ports. The fees will be waived for the first two calendar months 
from the date the participant first receives access to Purge Ports in 
the Test Facility. A Participant may choose to conduct testing for 
OUCH, FIX and RASH protocols simultaneously or at different times. If a 
Participant chooses to conduct tests for their protocols separately, 
the fees will be waived each time.
    After the two months of service, a Participant will be expected to 
have fully tested the new Purge Ports and will be charged for any fees 
incurred for using the Exchange's Testing Facility ports thereafter.
Implementation
    The Exchange intends to implement the proposed rule changes on or 
before March 31, 2024. The Exchange will issue an Equity Trader Alert 
to members announcing the exact date the Exchange will implement the 
Purge Ports and the purging functionality, as described above.

[[Page 43407]]

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. The proposal is also 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes that the proposed rule change would promote 
just and equitable principles of trade and remove impediments to and 
perfect the mechanism of a free and open market because offering 
Participants a new optional service promotes choice, flexibility, 
efficiency, and competition. The Exchange believes the new features may 
enhance participants' ability to manage orders, which would, in turn, 
improve their risk controls to the benefit of all market participants. 
The Exchange believes that the purging functionality and the Purge 
Ports would foster cooperation and coordination with persons engaged in 
facilitating transactions in securities because designating Purge Ports 
for purge messages may encourage better use of such ports. This may, 
concurrent with the ports that carry quote and other information 
necessary for market making activities, enable more efficient, as well 
as fair and reasonable, use of Market Makers' resources. Although 
dedicated Purge Ports are a new functionality for Phlx equities 
exchange,\13\ similar connectivity and functionality is offered by 
options exchanges, including the Exchange's own affiliated options 
exchanges, and other equities exchanges.\14\ The Exchange believes that 
proper risk management, including the ability to efficiently cancel 
multiple orders quickly when necessary, is similarly valuable to firms 
that trade in the equities market, including Market Makers that have 
heightened quoting obligations that are not applicable to other market 
participants.
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    \13\ See footnote 6, above.
    \14\ See Securities Exchange Act Release No. 77613 (April 13, 
2016), 81 FR 23023 (April 19, 2016). See also Securities Exchange 
Act Release Nos. 79956 (February 3, 2017), 82 FR 10102 (February 9, 
2017) (SR-BatsBZX-2017-05); 79957 (February 3, 2017), 82 FR 10070 
(February 9, 2017) (SR-BatsEDGX-2017-07); 83201 (May 9, 2018), 83 FR 
22546 (May 15, 2018) (SR-C2-2018-006).
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    The proposed rule change will not relieve Market Makers of their 
quoting obligations or firm quote obligations under Regulation NMS Rule 
602.\15\ Specifically, any interest that is executable against a 
Participant's or Market Maker's quotes and orders that is received by 
the Exchange prior to the time of the removal of orders request will 
automatically execute. Market Makers that purge their orders will not 
be relieved of the obligation to provide continuous two-sided quotes on 
a daily basis, nor will it prohibit the Exchange from taking 
disciplinary action against a Market Maker for failing to meet their 
continuous quoting obligation each trading day.\16\
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    \15\ 17 CFR 242.602.
    \16\ See Equity 2, Section 5.
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    Dedicated Purge Ports, which were originally introduced for options 
trading, subsequently became a feature in the equities market. The 
Exchange, therefore, is not the first equities exchange to offer this 
functionality to Participants and to charge associated fees.\17\
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    \17\ Cboe charges $650 per port/per month for Purge Ports that 
have substantially similar functionality. This fee is also $100 more 
than the fee for a logical port on its exchange. See, Cboe EDGA U.S. 
Equities Exchange Fee Schedule.
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    The Exchange believes the proposed fee for Purge Ports is 
reasonable. The Exchange currently charges $400 per port/per month for 
logical ports. The Exchange believes it is reasonable to charge $500 
per month for the proposed Purge Ports, which is $100 more than the fee 
for a logical port, as such ports represent targeted enhancement of 
technology and were specially developed to allow for the sending of a 
single message to cancel multiple orders, thereby assisting firms in 
effectively managing risk. Nasdaq also believes that a Participant that 
chooses to utilize a Purge Port may, in the future, reduce their need 
for additional logical ports by consolidating cancel messages to the 
Purge Port and thus freeing up some capacity of the existing logical 
ports and, therefore, allowing for increased message traffic without 
paying for additional logical ports. In addition, the proposed purging 
functionality will allow Participants to achieve essentially the same 
outcome without paying for a dedicated Purge Port. Purge Ports provide 
the ability to cancel multiple orders across multiple ports with less 
messaging from the firms using the ports and therefore may create 
efficiencies for firms and provide a more economical solution to their 
risk management needs. In addition, Purge Port requests may cancel 
orders submitted over numerous ports and contain added functionality to 
purge only a subset of these orders (per MPID, buy or sell side of the 
order, or ticker symbol). Effective risk management is important both 
for individual market participants that choose to utilize risk features 
provided by the Exchange, as well as for the market in general. As a 
result, the Exchange believes that it is appropriate to charge fees for 
such functionality as doing so aids in the maintenance of a fair and 
orderly market.
    The Exchange also believes that its ability to set fees for Purge 
Ports is subject to significant substitution-based forces because 
Participants are able to rely on currently available services both free 
and those they receive when using existing trading protocols, which 
will include the proposed purging functionality. If the value of the 
efficiency introduced through the Purge Port functionality is not worth 
the proposed fees, Participants will simply continue to rely on the 
existing functionality and the proposed purging functionality and not 
pay for Purge Ports. In that regard, Participants already can cancel 
orders individually and by utilizing Nasdaq protocols that allow them 
to develop proprietary systems that can send cancel messages at a high 
rate.\18\ In addition, the Exchange already provides similar ability to 
mass cancel orders through the Nasdaq Kill Switch, which is an optional 
tool offered at no charge that enables Participants to establish pre-
determined levels of risk exposure, and can be used to cancel all open 
orders. Similarly, Participants may use cancel-on-disconnect control 
when they experience a disruption in connection to the Exchange to 
immediately cancel all pending Exchange orders except for good-till-
canceled orders. Finally, the proposed purging functionality will allow 
Participants to achieve essentially the same outcome in canceling 
orders as they would by utilizing the Purge Ports. Accordingly, the 
Exchange believes that the proposed Purge Ports fee is reasonable 
because it is related to the efficiency introduced by the Purge Port 
functionality related to other means and services already available 
which are either free or already a part of a fee assessed to the 
Participant's for existing

[[Page 43408]]

connectivity. Accordingly, because the proposed Purge Ports provide 
additional optional functionality, excessive fees would simply serve to 
reduce or eliminate demand for this optional product.
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    \18\ Current Exchange port functionality supports cancelation 
rates that exceed one thousand messages per second and the 
Exchange's research indicates that certain Participants rely on such 
functionality and at times utilize such cancelation rates.
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    The Exchange also believes that offering the purging functionality 
and the Purge Ports at the Exchange level promotes risk management 
across the industry, and thereby facilitates investor protection. Some 
market participants, in particular the larger firms, could and do build 
similar risk functionality (as described above) in their trading 
systems that permit the flexible cancellation of orders entered on the 
Exchange at a high rate. Offering Exchange level protections ensures 
that such functionality is widely available to all firms, including 
smaller firms that may otherwise not be willing to incur the costs and 
development work necessary to support their own customized mass cancel 
functionality.
    As noted above, the Exchange is not the first equities exchange to 
develop and offer dedicated Purge Ports for equities trading, and the 
proposed rate is lower than that charged by other equities exchanges 
for similar functionality. Generally speaking, restricting the 
Exchange's ability to offer new services and charge fees for these new 
services discourages innovation and competition. Specifically in this 
case, the Exchange's inability to introduce similar services to those 
offered by other exchanges, and charge reasonable and equitable fees 
for such services, would put the Exchange at a significant competitive 
disadvantage and therefore serves to restrict competition in the 
market--especially when other exchanges assess fees higher than those 
proposed by the Exchange.
    The Exchange believes that the proposed Purge Port fees are 
equitable because the proposed Purge Ports are completely voluntary as 
they relate solely to optional risk management functionality.
    The Exchange also believes that the proposed amendments to its fee 
schedule are not unfairly discriminatory because they will apply 
uniformly to all Participants that choose to use the optional Purge 
Ports. The proposed Purge Ports are completely voluntary and, as they 
relate solely to optional risk management functionality, no Participant 
is required or under any regulatory obligation to utilize them. All 
Participants that voluntarily select this service option will be 
charged the same amount for the same services. All Participants have 
the option to select any connectivity option, and there is no 
differentiation among Participants with regard to the fees charged for 
the services offered by the Exchange.
    The Exchange believes that the proposal to waive the applicable 
$300 per Purge Port, per month fees for Participants that conduct tests 
of their PSX access protocols connection through the Exchange's Testing 
Facility to test the new Purge Ports functionality is reasonable and 
not unfairly discriminatory. Importantly, the Exchange believes the 
two-month waiver of the fee will encourage testing of the new optional 
Purge Ports, which will allow participants to evaluate whether the new 
optional service is of value to them and if so will help them better 
implement them into their workflow. All Participants will be notified 
about the availability of the new Purge Port functionality and have 
access to test it but will not be required to use it. Moreover, the 
fees for the RASH, FIX and OUCH ports will remain the same and apply to 
all Participants in the same manner. Based on the Exchange's 
experience, we anticipate that Participants will complete testing the 
new Purge Ports within two months from initiating such tests and thus 
will not incur any fees related to testing the functionality of Purge 
Ports.

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 proposed rule change will enhance competition because it 
will enable the Exchange to innovate and offer similar equities Purge 
Port functionality to that offered by other equity exchanges and on 
options markets today. The proposed Purge Ports are completely 
voluntary and will be made available to all members on an equal basis 
at the same cost. While the Exchange believes that the proposed Purge 
Ports provide a valuable service, Participants can choose to purchase, 
or not purchase, these ports based on their own determination of the 
value and their business needs. No Participant is required or under any 
regulatory obligation to utilize Purge Ports. Accordingly, the Exchange 
believes that the proposed rule change is designed to offer appropriate 
risk management functionality to firms that trade on the Exchange 
without imposing an unnecessary or inappropriate burden on competition.
    The Exchange is also allowing the Participants to test this new 
functionality for free by providing a two-month waiver in the 
Exchange's Test Facility. Accordingly, the Exchange believes that the 
proposed rule change is designed to offer optional risk management 
functionality to firms that trade on the Exchange without imposing an 
unnecessary or inappropriate burden on competition.

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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \19\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \20\ 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-Phlx-2023-28 on the subject line.

[[Page 43409]]

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-2023-28. 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 (https://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 
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. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-Phlx-2023-28 and should be 
submitted on or before July 28, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2023-14286 Filed 7-6-23; 8:45 am]
BILLING CODE 8011-01-P