Document ID: SEC-2013-1151-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2013-06-27T04:00Z

[Federal Register Volume 78, Number 124 (Thursday, June 27, 2013)]
[Notices]
[Pages 38750-38753]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15370]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69829; File No. SR-Phlx-2013-65]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Relating to Which Complex Orders Can 
Initiate a Complex Order Live Auction

June 21, 2012.
    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 11, 2013, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Rule 1080.08(e) to provide that the 
Exchange can determine, based on origin type, which Complex Orders can 
initiate a Complex Order Live Auction (``COLA''), as described further 
below.
    The text of the proposed rule change is below; proposed new 
language is italicized.
* * * * *

Rule 1080. Phlx XL and Phlx XL II

    (a)-(o) No change.
     Commentary: ------------
    .01-.07 No change.
    .08 Complex Orders on Phlx XL.

[[Page 38751]]

    (a)-(d) No change.
    (e) Process for Complex Order Live Auction (``COLA''). Complex 
Orders on the Complex Order Book (``CBOOK,'' as defined below) may be 
subject to an automated auction process.
    (i) For purposes of paragraph (e):
    (A) COLA is the automated Complex Order Live Auction process. A 
COLA may take place upon identification of the existence of a COLA-
eligible order either:
    (1) Following a COOP, or (2) during normal trading if the Phlx XL 
system receives a Complex Order that improves the cPBBO.
    (B)(1) A ``COLA-eligible order'' means a Complex Order (a) that is 
identified by way of a COOP, or (b) that, as determined by the 
Exchange, considering the Complex Order origin types (as defined in 
Rule 1080.08(b) above), upon receipt, improves the cPBBO respecting the 
specific Complex Order Strategy that is the subject of the Complex 
Order. If the Phlx XL system identifies the existence of a COLA-
eligible order following a COOP or by way of receipt during normal 
trading of a Complex Order that improves the cPBBO, such COLA-eligible 
order will initiate a COLA, during which Phlx XL participants may bid 
and offer against the COLA-eligible order pursuant to this rule. COLA-
eligible orders will be executed without consideration of any prices 
that might be available on other exchanges trading the same options 
contracts.
    (2) Notwithstanding the foregoing, a Complex Order that would 
otherwise be a COLA-eligible order that is received in the Phlx XL 
system during the final seconds of any trading session shall not be 
COLA-eligible. The Exchange shall establish the number of seconds, not 
to exceed 10 seconds, in an Options Trader Alert.
    (ii)-(ix) No change.
    (f)-(i) No change.

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 proposal is to adopt the same flexibility as 
three other options exchanges regarding which complex orders can 
trigger an auction.\3\ For example, CBOE's rule provides:
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    \3\ See CBOE Rule 6.53C(d)(i)(2), NYSE Arca Rule 6.91(c)(1) and 
NYSE MKT Rule 980NY(e)(1).

    (2) A ``COA-eligible order'' means a complex order that, as 
determined by the Exchange on a class-by-class basis, is eligible 
for a COA \4\ considering the order's marketability (defined as a 
number of ticks away from the current market), size, complex order 
type (as defined in paragraphs (a) and (b) above) and complex order 
origin types (as defined in subparagraph (c)(i) above).\5\ Complex 
orders processed through a COA may be executed without consideration 
to prices of the same complex orders that might be available on 
other exchanges . . . [emphasis added]
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    \4\ A COA is the automated complex order RFR auction process. 
See CBOE Rule 6.53C(d)(i)(1).
    \5\ This provision states that CBOE's complex order origin types 
are non-broker-dealer public customer, broker-dealers that are not 
Market-Makers or specialists on an options exchange, and/or Market-
Makers or specialists on an options exchange.

    Although this CBOE rule permits the CBOE to determine more than 
just which complex order origin types are eligible for its COA,\6\ the 
Exchange is only seeking this flexibility respecting complex order 
origin types.
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    \6\ Namely, the CBOE can determine which class, how many ticks 
away, size and complex order type trigger a COA.
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    The Exchange's Complex Order System is governed by Rule 1080.08 and 
offers a COLA for eligible orders. The COLA is an automated auction 
that is intended to seek additional liquidity and price improvement for 
Complex Orders.
    The Exchange now proposes to provide that the Exchange can 
determine, based on origin type, which Complex Orders can initiate a 
COLA. The origin type (also known as origin code) refers to the 
participant types listed in Rule 1080.08(b) and Rule 1000(b)(14), which 
include non-broker-dealer customers and non-market-maker off-floor 
broker-dealers,\7\ SQTs, RSQTs, non-SQT ROTs, specialists and non-Phlx 
market makers on another exchange (together, market makers),\8\ Floor 
Brokers \9\ and professional customers.\10\
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    \7\ Rule 1080.08(b)(i).
    \8\ Rules 1014 and 1080.08(b)(ii).
    \9\ Rule 1080.08(b)(iii).
    \10\ Rule 1000(b)(14). The term ``professional'' means any 
person or entity that (i) is not a broker or dealer in securities, 
and (ii) places more than 390 orders in listed options per day on 
average during a calendar month for its own beneficial account(s). A 
professional will be treated in the same manner as an off-floor 
broker-dealer for purposes of Rules 1014(g) (except with respect to 
all-or-none orders, which will be treated like customer orders, 
except that orders submitted pursuant to Rule 1080(n) for the 
beneficial account(s) of professionals with an all-or-none 
designation will be treated in the same manner as off-floor broker-
dealer orders), 1033(e), 1064.02 (except professional orders will be 
considered customer orders subject to facilitation), 1080(n) and 
1080.08 as well as Options Floor Procedure Advices B-6, B-11 and F-
5. Member organizations must indicate whether orders are for 
professionals.
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    The Exchange proposes to determine which origin type can trigger a 
COLA. If the Exchange determines that certain origin codes cannot 
trigger a COLA, those Complex Orders would continue to be handled 
pursuant to Rule 1080.08. For example, paragraph (f) governs how 
Complex Orders are placed on the CBOOK and how they are executed.
    The Exchange intends to permit some orders, based on origin type, 
to not trigger a COLA because it believes that some of its participants 
do not wish to have their Complex Orders subject to a COLA because it 
results in a delay, during which markets can change and other orders 
can trade. The Exchange has learned that the ability to provide, under 
this proposal, that certain orders do not trigger a COLA may attract 
more of those Complex Orders to the Exchange, which the Exchange seeks 
to do. For example, the Exchange believes that off-floor broker-dealers 
and professionals, which are treated like off-floor broker-dealer 
orders for purposes of Rule 1080.08, seek an immediate execution. The 
Exchange believes that such participants prefer the speed and certainty 
of execution over the possibility of price improvement for their 
Complex Orders. The Exchange seeks the ability to determine, for 
example, that off-floor broker-dealers and professionals will not 
trigger a COLA. The Exchange is not seeking to distinguish 
professionals from off-floor broker-dealers for purposes of who 
initiates a COLA, and, therefore, is referring to the participant 
origin codes in Rule 1080.08(b) only. The proposed text would therefore 
not permit the Exchange to determine that off-floor broker-dealers can 
initiate a COLA but not professionals, because, pursuant to Rule 
1000(b)14, professionals are treated the same as off-floor broker-
dealers for purposes of all of Rule 1080.08.\11\
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    \11\ Consistent with Rule 1000(b)(14), the Exchange is not 
proposing to treat professionals differently than off-floor broker-
dealers.
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    In addition to seeking flexibility, the Exchange is adopting this 
language partly to address the situation that, today, market maker 
orders do not

[[Page 38752]]

trigger a COLA. The Exchange began permitting market maker orders to be 
entered as DAY orders recently.\12\ Previously, they could only be 
entered as IOC orders and thereby never triggered a COLA. Accordingly, 
the Exchange determined not to permit market maker DAY orders to 
trigger a COLA, but did not change its rule to provide for this. 
Changing its rule to provide for flexibility as to which order triggers 
a COLA will address this situation. The Exchange continues to believe 
that, generally, market makers would prefer not to trigger a COLA, 
because it results in a delay. Of course, those market makers can enter 
their orders as DNA orders \13\ or IOC orders \14\ to avoid a COLA; 
however, both of these order types are cancelled if not immediately 
executed, thereby removing the opportunity for market makers to send an 
order that can both execute without delay and result in the remainder 
posting on the CBOOK.
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    \12\ See Securities Exchange Act Release No. 63777 (January 26, 
2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-157).
    \13\ See Rule 1080.08(a)(viii).
    \14\ See Rule 1080.08(b).
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    Accordingly, the Exchange seeks the flexibility that other options 
exchanges have to determine which Complex Orders trigger an auction. If 
this flexibility is applied to prevent certain origin types from 
triggering a COLA, the Exchange does not believe that this will 
disadvantage them and may in fact be more consistent with their trading 
goals and style, based on informal input the Exchange has received.
    The Exchange notes that it is common for certain functionality not 
to be available to all origin types. For example, as noted above, 
Complex Orders with certain time-in-force instructions are available 
only to certain origin types; today, market makers cannot enter Good-
Til-Cancelled Complex Orders.\15\ In addition, CBOE determines which 
participants can respond to its COA.\16\
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    \15\ See Rule 1080.08(b)(ii).
    \16\ See CBOE Rule 6.53C(d)(iii).
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    The Exchange intends to implement these changes in July or August, 
pending final technological readiness, and will issue an Options Trader 
Alert (``OTA'') indicating when the changes become operative and which 
origin codes in which options can trigger a COLA.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\17\ in general, and with 
Section 6(b)(5) of the Act,\18\ in particular, which requires that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, and, in general, protect investors and the public 
interest, and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. Specifically, the Exchange 
believes that adopting this provision, similar to other exchanges', 
should attract additional Complex Orders to the Exchange. The Exchange 
believes that some market participants prefer an immediate execution 
over the benefits of an auction, such that they may choose to send 
their complex orders to another options exchange that has the ability 
under its rules not to trigger an auction. Accordingly, the proposal 
should help the Exchange garner more Complex Order business, which, in 
turn, should benefit the various Exchange participants who are 
interested in trading using Complex Orders. The Exchange does not 
believe that the proposal is unfairly discriminatory, because Complex 
Orders of the same origin type would be treated the same by the 
Exchange; although a particular origin type may not, under this 
proposal, trigger a COLA, this should not result in unfair 
discrimination respecting such origin type, because such participants 
may not, as the Exchange has learned, believe that a COLA is necessary 
or helpful. Such participants have expressed their preference for speed 
and certainty of execution, over the possibility of price improvement 
for their Complex Orders. As stated above, the Exchange offers a Do Not 
Auction order type,\19\ which does not trigger an auction. However, 
that order type is cancelled if not immediately executed, so it is not 
necessarily useful to a participant who seeks to have a complex order 
go on the CBOOK. Of course, the Exchange could change that order type 
or develop a new one. Instead, the Exchange has determined for 
implementation reasons to seek the ability to determine which Complex 
Orders initiate a COLA, similar to other options exchanges.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ See Rule 1080.08(a)(viii).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the proposal does not impose an intra-market burden on 
competition; even though it would enable the Exchange to determine that 
certain participants' orders would not trigger a COLA, the ability of 
those participants to compete amongst each other and with other market 
participants would be enhanced and not diminished, because they have 
requested this functionality for the reasons stated above.
    Nor will the proposal impose a burden on competition among the 
options exchanges, because, in addition to the vigorous competition for 
order flow among the options exchanges, the proposal is the same as 
three other exchanges that determine, with flexibility, which complex 
orders trigger an auction. To the extent that market participants 
disagree with the particular approach taken by the Exchange herein, 
market participants can easily and readily direct complex order flow to 
competing venues. In fact, the proposal is pro-competitive because it 
permits the Exchange to better compete with those exchanges.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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-2013-65 on the subject line.

[[Page 38753]]

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-2013-65. 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 on official business 
days between the hours of 10:00 a.m. and 3:00 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-2013-65, and should be submitted on or before July 
18, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2013-15370 Filed 6-26-13; 8:45 am]
BILLING CODE 8011-01-P