Document ID: SEC-2012-0462-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-03-21T04:00Z

[Federal Register Volume 77, Number 55 (Wednesday, March 21, 2012)]
[Notices]
[Pages 16579-16581]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-6764]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66602; File No. SR-Phlx-2012-31]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
the Acceptable Complex Execution (``ACE'') Parameter Order Protection 
Feature

 March 14, 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 March 8, 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 and II 
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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 1080, Commentary .08, 
Complex Orders on Phlx XL, by adopting new Rule 1080.08(i), which would 
establish an Acceptable Complex Execution Parameter (``ACE 
Parameter''), a price range outside of which a Complex Order (as 
defined below) will not be executed by the PHLX XL[supreg] automated 
options trading system \3\ following a Complex Order

[[Page 16580]]

Live Auction (``COLA''), as defined below.
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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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to establish the ACE 
Parameter in order to prevent Complex Orders \4\ from automatically 
executing at potentially erroneous prices. The ACE Parameter feature is 
designed to help maintain a fair and orderly market. The Exchange 
believes that the ACE Parameter feature will assist with the 
maintenance of fair and orderly markets by helping to mitigate the 
potential risk of executions at prices which are extreme and 
potentially erroneous.
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    \4\ For purposes of the electronic trading of Complex Orders on 
the Exchange, a Complex Order is an order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, 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.
     A Complex Order can also be a stock-option order, which is an 
order to buy or sell a stated number of units of an underlying 
security (stock or Exchange Traded Fund Share (``ETF'')) coupled 
with the purchase or sale of options contract(s). The underlying 
security must be the deliverable for the options component of that 
Complex Order and represent exactly 100 shares per option for 
regular way delivery. Stock-option orders can only be executed 
against other stock-option orders and cannot be executed by the 
System against orders for the individual components. Member 
organizations may only submit Complex Orders with a stock/ETF 
component if such orders comply with the Qualified Contingent Trade 
Exemption from Rule 611(a) of Regulation NMS. Member organizations 
submitting such Complex Orders with a stock/ETF component represent 
that such orders comply with the Qualified Contingent Trade 
Exemption. Members of FINRA or the NASDAQ Stock Market LLC 
(``NASDAQ'') are required to have a Uniform Service Bureau/Executing 
Broker Agreement (``AGU'') with Nasdaq Options Services LLC in order 
to trade Complex Orders containing a stock/ETF component; firms that 
are not members of FINRA or NASDAQ are required to have a Qualified 
Special Representative (``QSR'') arrangement with NOS in order to 
trade Complex Orders containing a stock/ETF component. The maximum 
number of components of a Complex Order is six. A stock-option order 
may include up to five options components (legs). See Exchange Rule 
1080.08(a)(i).
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    The ACE Parameter feature is used to define a price range outside 
of which a Complex Order will not be executed following a COLA.\5\ The 
ACE Parameter is a percentage defined by the Exchange on an issue-by-
issue basis. The ACE Parameter percentage shall not be less than 3 
percent. The ACE Parameter price range is based on the Complex National 
Best Bid or Offer (``cNBBO'') \6\ at the time an order would be 
executed. A Complex Order to sell will not be executed at a price that 
is lower than the cNBBO bid by more than the ACE Parameter percentage. 
A Complex Order to buy will not be executed at a price that is higher 
than the cNBBO offer by more than the ACE Parameter percentage. A 
Complex Order or a portion of a Complex Order that cannot be executed 
within the ACE Parameter pursuant to the proposed rule will be placed 
on [sic] Exchange's Complex Limit Order Book (``CBOOK'').\7\
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    \5\ COLA is the automated Complex Order Live Auction process. 
See Exchange Rule 1080.08(e).
    \6\ See Exchange Rule 1080.08(a)(vi).
    \7\ See Exchange Rule 1080.08(f).
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    For example, assume the ACE parameter is set at 10%, and a PHLX XL 
participant submits a Complex Order with a strategy to buy Series A and 
buy Series B.
    A complex order is received to buy 30 Series A and buy 30 Series B 
(30 units of the strategy) for a net debit of $8.40 and a COLA is 
initiated. At the end of the COLA, the market is:

    NBBO for Series A is $4.50-$4.60, size 10 x 10.
    NBBO for Series B is $2.90-$3.00, size 10 x 10.
    cNBBO for the strategy is $7.40-$7.60.
    Executions to buy the strategy (buy Series A and buy Series B) 
will occur up to $8.36 ($7.60 + [0.10 x $7.60]). Any remainder of 
the order will be placed on the CBOOK at $8.40.

    The Exchange believes a minimum 3 percent level \8\ is reasonable 
and appropriate because a marketable order that would deviate from the 
cNBBO by 3% or more may be indicative of an extreme or potentially 
erroneous price, and an Exchange participant would likely want to 
evaluate the affected Complex Order further following the COLA before 
receiving an automatic execution. The Exchange also believes that a 3 
percent minimum is reasonable and appropriate in comparison to other 
price check parameters currently in existence on at least one other 
U.S. options exchange.\9\
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    \8\ For simplicity of explanation, the above example uses a 10% 
ACE Parameter, which is consistent with the 3% minimum in the 
proposed rule.
    \9\ The Exchange notes that the Chicago Board Options Exchange, 
Incorporated (``CBOE'') currently applies a no less than 3 percent 
``acceptable percentage distance'' outside of which it will not 
execute complex orders. See Securities Exchange Act Release No. 
66207 (January 20, 2012), 77 FR 4073 (January 26, 2012) (SR-CBOE-
2012-004) (Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to Automatic Execution and Complex Order Price 
Check Parameter Features) (``CBOE Notice'').
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    The Exchange will issue an Options Trader Alert (``OTA'') to 
membership indicating the issue-by-issue ACE Parameter percentages. The 
Exchange will also maintain a list of ACE Parameter percentages on its 
Web site.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\10\ in general and with 
Section 6(b)(5) of the Act,\11\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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 is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purposes of the Act or the administration of 
the Exchange.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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    The ACE Parameter feature is designed to protect investors from 
extreme and potentially erroneous executions of their Complex Orders. 
The Exchange also believes the ACE Parameter feature should assist with 
the maintenance of fair and orderly markets by helping to mitigate the 
potential risks of receiving executions at prices that are extreme and 
potentially erroneous.
    Finally, the proposed rule change should also make it easier for 
users to read and understand the operation of PHLX XL as it relates to 
the execution of Complex Orders, and will fully describe the operation 
of the new ACE Parameter feature, all to the benefit of

[[Page 16581]]

PHLX XL participants, and to the options markets as a whole.

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 Section 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) 
\13\ thereunder.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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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    Phlx has asked the Commission to accelerate the 30-day operative 
delay.\14\ The Commission finds that accelerating the 30-day operative 
delay is consistent with the protection of investors and the public 
interest because the ACE Parameter is designed to prevent the automatic 
execution of Complex Orders at potentially extreme or erroneous 
prices.\15\ Accordingly, the Commission designates the proposal 
operative upon filing.\16\
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    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ The Commission notes that the ACE Parameter is 
substantially similar to a price check parameter adopted by another 
options exchange. See CBOE Rule 6.53C, Interpretation and Policy 
.08(e) and CBOE Notice, supra note 9.
    \16\ 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 email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2012-31 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-2012-31. 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 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-2012-31, and should be submitted on or before April 11, 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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6764 Filed 3-20-12; 8:45 am]
BILLING CODE 8011-01-P