Document ID: SEC-2014-0789-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2014-05-13T04:00Z

[Federal Register Volume 79, Number 92 (Tuesday, May 13, 2014)]
[Notices]
[Pages 27351-27354]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10900]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72119; File No. SR-Phlx-2014-23]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Related to the Priority Afforded to In-
Crowd Participants Respecting Crossing, Facilitation and Solicited 
Orders in Open Outcry Trading

May 7, 2014.
    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 April 23, 2014, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to revise the priority afforded to in-crowd 
participants respecting crossing, facilitation and solicited orders in 
open outcry trading.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com, 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

[[Page 27352]]

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 proposes to amend Rule 1014, Commentary .05(c)(ii), to 
afford priority in open outcry trading to in-crowd participants over 
out-of-crowd Streaming Quote Traders (``SQTs'') \3\, Remote Specialists 
\4\, and Remote Streaming Quote Traders (``RSQTs'') \5\ and over out-
of-crowd broker-dealer limit orders on the limit order book (but not 
over public customer orders) in crossing \6\, facilitation \7\ and 
solicited \8\ orders, regardless of order size.
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    \3\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as a 
Registered Options Trader (``ROT'') who has received permission from 
the Exchange to generate and submit option quotations electronically 
in options to which such SQT is assigned. A ROT includes a SQT, a 
RSQT and a Non-SQT [sic], which by definition is neither a SQT or a 
RSQT. A Registered Options Trader is defined in Exchange Rule 
1014(b) [sic] as a regular member of the Exchange located on the 
trading floor who has received permission from the Exchange to trade 
in options for his own account. See Exchange Rule 1014(b)(i) and 
(ii).
    \4\ A Remote Specialist is a qualified RSQT approved by the 
Exchange to function as a specialist in one or more options if the 
Exchange determines that it cannot allocate such options to a floor 
based specialist. A Remote Specialist has all the rights and 
obligations of a specialist, unless Exchange rules provide 
otherwise. See Exchange Rules 501 and 1020. See also, Securities 
Exchange Act Release No. 63717 (January 14, 2011), 76 FR 4141 
(January 24, 2011) (SR-Phlx-2010-145).
    \5\ A RSQT is defined in Exchange Rule 1014(b)(ii)(B) as an ROT 
that is a member affiliated with a Remote Streaming Quote Trader 
Organization (``RSQTO'') 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. A qualified RSQT may function as a Remote Specialist 
upon Exchange approval. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange. An RSQT may not 
submit option quotations in eligible options to which such RSQT is 
assigned to the extent that the RSQT is also approved as a Remote 
Specialist in the same options. An RSQT may only trade in a market 
making capacity in classes of options in which he is assigned or 
approved as a Remote Specialist. An RSQTO is a member organization 
in good standing that satisfies the RSQTO readiness requirements in 
Rule 507(a) [sic].
    \6\ A crossing order occurs when an options Floor Broker holds 
orders to buy and sell the same option series. Such a Floor Broker 
may cross such orders, provided that the trading crowd is given an 
opportunity to bid and offer for such option series in accordance 
with Exchange rules. See Phlx Rule 1064(a).
    \7\ A facilitation order occurs when an options Floor Broker 
holds an options order for a public customer and a contraside order. 
Such a Floor Broker may execute such orders as a facilitation order, 
provided that such Floor Broker proceeds in accordance with Exchange 
rules concerning facilitation orders. See Phlx Rule 1064(b).
    \8\ A solicitation occurs whenever an order, other than a cross, 
is presented for execution in the trading crowd resulting from an 
away-from-the-crowd expression of interests to trade by one broker 
dealer to another. See Phlx Rule 1064(c).
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Deletion of 500 Contract Minimum Size
    Currently, Commentary .05(c)(i) to Phlx Rule 1014 provides that, in 
the event that a Floor Broker or specialist \9\ presents a non-
electronic order in which an RSQT is assigned or which is allocated to 
a Remote Specialist, and/or in which an SQT assigned in such option is 
not a crowd participant (collectively, ``Non-Crowd Participants''), 
such Non-Crowd Participant may not participate in trades stemming from 
such a non-electronic order unless the non-electronic order is executed 
at the price quoted by the Non-Crowd Participant at the time of 
execution.
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    \9\ A ``Specialist'' is an Exchange member who is registered as 
an options specialist pursuant to Rule 1020(a).
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    However, if the non-electronic order is executed at the price 
quoted by the Non-Crowd Participant, the Non-Crowd Participant may 
participate in the trade unless the order was a crossing, facilitation 
or solicited order with a size of at least 500 contracts on each 
side.\10\ If the order is a crossing, facilitation or solicited order 
with a size of at least 500 contracts on each side, Commentary 
.05(c)(ii) gives priority to in-crowd participants (including, for 
purposes of Commentary .05(c)(ii) only, Floor Brokers) over Non-Crowd 
Participants and over out-of-crowd broker-dealer limit orders on the 
limit order book, but not over public customer orders.\11\ Such orders 
are allocated in accordance with Exchange rules. By affording priority 
to in-crowd participants over Non-Crowd Participants and out-of-crowd 
broker-dealer limit orders in crossing, facilitation and solicited 
orders with a size of at least 500 contracts represented and executed 
in open outcry, the Exchange encourages order flow providers to send 
such orders to the Exchange.
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    \10\ This in-crowd priority applies only to crossing, 
facilitation and solicited orders represented in open outcry, and 
does not apply to orders submitted electronically via the Exchange's 
electronic options trading platform, to which other priority rules 
apply. See, e.g., Phlx Rules 1014(g)(vii) and (viii).
    \11\ In keeping with current Exchange practices and rules, 
public customer limit orders represented in the trading crowd and 
resting on the limit order book have, and will continue to have, 
priority over all other participants and accordingly must be 
executed up to the aggregate size of such orders before any in-crowd 
participant is entitled to priority. Public customer orders on the 
limit order book that are eligible for execution are required to be 
executed before a Floor Broker may execute its order in the crowd 
and/or with a contra-side order it holds.
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    The Exchange now proposes to further encourage order flow providers 
to send such orders to the Exchange by eliminating the 500 contract 
minimum order size from Commentary .05(c)(ii). As amended, the rule 
would afford priority to in-crowd participants over Non-Crowd 
Participants and out-of-crowd broker-dealer limit orders in crossing, 
facilitation and solicited orders regardless of the size of those 
orders. The current 500 contract minimum size requirement presents the 
possibility that one of the two sides of a Floor Brokered cross will 
not be fully executed on the trading floor. The size requirement was 
initially adopted by the Exchange in 2006 to foster the new electronic 
trading of options, by limiting participation of in-crowd participants 
in order to permit Non-Crowd Participants to participate in smaller 
(under five hundred contracts) Floor Broker crosses.\12\ Today, 
electronic options trading is well-established and no longer requires 
such special rules and incentives to develop further.
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    \12\ See Securities Exchange Act Release No. 54267 (August 3, 
2006), 71 FR 45888 (August 10, 2006). See also Securities Exchange 
Act Release No. 64401 (May 4, 2011), 76 FR 27105 (May 10, 2011) 
(amending the rule to state that in-crowd participants in such 
orders also have priority over out-of-crowd broker-dealer limit 
orders on the limit order book).
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    The Exchange believes that by extending priority to in-crowd 
participants over Non-Crowd Participants and out-of-crowd broker-dealer 
limit orders in all crossing, facilitation and solicited orders 
represented and executed in open outcry, regardless of size, in-crowd 
participants such as Floor Brokers will be enabled to provide full 
service to their clients as they seek to execute such orders. By way of 
explanation, the size of orders given to Floor Brokers by member 
participants varies throughout the trading day, and generally those 
participants expect the same experience regardless of order size when 
evaluating priority of electronic quotes with respect to cross orders 
executed on the trading floor. Another options exchange does not have 
the same differentiation

[[Page 27353]]

of priority for orders of fewer than 500 contracts \13\, and the 
different priority for orders with a size under 500 contracts has 
become an impediment to Phlx members soliciting orders. By removing the 
500 contract minimum size distinction, the Exchange would permit Floor 
Brokers to access in-crowd liquidity for all order sizes, thereby 
providing full order execution service to their clients.
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    \13\ See Chicago Board Options Exchange (``CBOE'') Rule 6.74, 
Crossing Orders.
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    To illustrate the application of the revised rule, assume the 
following ranking of bids on Phlx:

RSQT market 1.00 bid x 1000
Out of crowd SQT market 1.00 bid x 200
In-crowd participants 1.00 bid x 100
Public customer order on the book 1.00 bid x 100
Broker-dealer order on the book 1.00 bid x 100
Assume a Floor Broker enters the trading crowd with a cross order. This 
cross order is an order to sell 10,000 contracts and a contra order to 
buy 10,000 contracts at 1.00. Under the current rule, after selling to 
all 1.00 public customer interest on the book (100 contracts) and to 
all 1.00 interest in the trading crowd (100 contracts), the Floor 
Broker is allowed to cross the remaining interest (9,800 contracts) at 
1.00, with priority over RSQTs, out-of-crowd SQTs and broker-dealer 
limit orders on the book.\14\
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    \14\ If the order in this paragraph's example were a 
facilitation order or a solicitation order, the resulting allocation 
of contracts would be no different.
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    If in this example, however, the Floor Broker's order to sell and 
contra order to buy at 1.00 were only for 400 contracts, the Floor 
Broker would be unable to cross the 200 contracts remaining interest 
after selling to all 1.00 public customer interest on the book (100) 
and to all 1.00 interest in the trading crowd (100 contracts) because 
the current rule gives the Floor Broker no priority over RSQTs, out-of-
crowd SQTs and broker-dealer orders on the book respecting orders less 
than 500 contracts. The rule as revised would remove the limitation of 
the 500 contract minimum. Thus, under the revised rule, the Floor 
Broker in the example could enter the trading crowd with an order to 
sell 400 contracts and a contra order to buy 400 contracts at 1.00. 
After selling to all 1.00 public customer interest on the book (100) 
and to all 1.00 interest in the trading crowd (100 contracts), the 
Floor Broker would be allowed to cross the remaining interest (200 
contracts) at 1.00, with priority over RSQTs, out-of-crowd SQTs and 
broker-dealer orders on the book.\15\
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    \15\ As above, if the crossing order in this paragraph's example 
were a facilitation order or a solicited order, the resulting 
allocation of contracts would be no different.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\16\ in general, and with 
Section 6(b)(5) of the Act,\17\ in particular, which requires that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest, 
because it would encourage order flow providers to send additional 
crossing, facilitation and solicited orders to the Exchange, free of 
concerns that the order may not be completely executed by the trading 
crowd. As noted above, the size of orders given to Floor Brokers by 
member participants varies throughout the trading day, and generally 
those participants expect the same experience regardless of order size 
when evaluating priority of electronic quotes with respect to cross 
orders executed on the trading floor. By removing the 500 contract 
minimum size distinction, the Exchange would permit Floor Brokers to 
access in-crowd liquidity for all order sizes thereby enabling them to 
provide full service to member participants no matter the order size.
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    \16\ 15 U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that treating crossing, facilitation and 
solicitation orders of under 500 contracts on each side no differently 
from such orders of greater size creates no unfair disadvantage to 
investors. Elimination of the 500 contract minimum threshold size is 
just and equitable, because Non-Crowd Participants are not required to 
respond to a Floor Broker entering the crowd and requesting a market, 
whereas in-crowd participants are required to verbalize a market in 
response to such a request. The Exchange also believes that the 
proposal promotes just and equitable principles of trade by retaining 
public customer priority in all cases. The instant proposal will not 
affect public customer priority and the Exchange will continue to 
execute public customer limit orders up to their aggregate size at a 
particular price point.

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. To 
the contrary, it should provide greater incentive for order flow 
providers to submit crossing, facilitation and solicited orders to the 
Exchange, thus enabling the Exchange to compete with another exchange 
that has similar rules in effect.\18\ Further, with respect to intra-
market competition between crowd participants and Non-Crowd 
Participants, the proposed rule change will not result in any burden on 
competition. The proposed rule change should actually bolster 
competition. For example, assume the following market:
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    \18\ See CBOE Rule 6.74 (which affords priority to in-crowd 
participants over out-of-crowd participants, including non-public 
customer orders on the limit order book, in all open outcry 
situations after public customers on the limit order book have been 
executed) and Securities Exchange Act Release No. 54726 (November 8, 
2006), 71 FR 66810 (November 16, 2006) (SR-CBOE-2006-89).

RSQT market 2.00 bid x 200
Out-of-crowd SQT market 2.00 bid x 200
In-crowd participants 1.70 bid x 100
Public customer order no bid on the book

Assume that a Floor Broker walks into the crowd with a cross order to 
buy 400 contracts at 2.00 and to sell 400 contracts at 2.00. Under the 
current rule, the Floor Broker would not have priority at 2.00 to allow 
the buy order of 400 contracts at 2.00 to participate. The seller would 
forego the liquidity of the 2.00 bid the Floor Broker was handling and 
would need to sell 400 to the RSQT and out-of-crowd SQT utilizing their 
posted liquidity, and likely moving the market of the 2.00 bid lower 
after the trade. The rule as proposed would, instead, permit 
utilization of the liquidity of the Floor Broker's 2.00 bid by giving 
the 2.00 bid priority over the RSQT and out of crowd SQT thus keeping 
the posted liquidity intact at the existing bid of 2.00. The Exchange 
believes the residual 2.00 bidders would have extra incentive to 
compete by either maintaining their bid hoping to trade with additional 
selling interest or to increase their bid in order to vie for 
participation in the next sell order. The Exchange also believes that 
affording priority in to in-crowd participants regardless of size will 
attract additional smaller cross orders to the Exchange, creating an 
opportunity

[[Page 27354]]

for in crowd market makers to compete for the smaller crosses as 
well.\19\
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    \19\ The Exchange notes that it is not proposing to eliminate 
the 500 contract minimum eligible order size in Rule 1064, 
Commentary .02. This provision entitles a Floor Broker to cross 
(after all public customer orders that were (1) on the limit order 
book and then (2) represented in the trading crowd at the time the 
market was established have been satisfied) 40% of the remaining 
contracts in an order of the eligible size, if the order traded at 
or between the best bid or offer given by the crowd in response to 
the Floor Broker's initial request for a market. See Rule 1064, 
Commentary .02(iii). This aspect of intra-market competition in the 
context of orders under 500 contracts is being maintained.
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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 up to 90 days (i) as the 
Commission may designate 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 will: (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. The Commission requests comments, in 
particular, on the following aspects of the proposed rule change:
    1. What are commenters' views on how, if at all, the proposed rule 
change would affect: (1) Incentives to submit limit orders; (2) quoted 
spreads and quoted depth; and/or (3) transaction costs for orders below 
500 contracts? Please elaborate.
    2. What are commenters' views on how, if at all, orders for more 
than 500 contracts differ from orders for less than 500 contracts? 
Please elaborate. Are the underlying investors/traders or the 
investing/trading strategies different? Please explain. What types of 
investor or market participant, if any, would likely be significantly 
affected by the proposed rule change? Please explain.
    3. Commenters are requested to provide empirical data and other 
factual support for their views.
    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-2014-23 on the subject line.

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-2014-23. 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 10:00 a.m. and 
3:00 p.m. Copies of the 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-2014-23 and 
should be submitted on or before June 3, 2014.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10900 Filed 5-12-14; 8:45 am]
BILLING CODE 8011-01-P