Document ID: SEC-2013-1919-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-11-13T05:00Z

[Federal Register Volume 78, Number 219 (Wednesday, November 13, 2013)]
[Notices]
[Pages 68126-68128]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27051]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70821; File No. SR-Phlx-2013-106]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Amend Rules 1064 and 1080 To More 
Specifically Address the Number and Size of Counterparties to a 
Qualified Contingent Cross Order

November 6, 2013.
    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 October 23, 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 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 is filing with the Commission a proposal to amend 
Rules 1064 and 1080 to more specifically address the number and size of 
counterparties to a Qualified Contingent Cross Order (``QCC Order''). 
The text of the proposed rule change is below. Proposed new language is 
italicized; deleted text is in brackets.
* * * * *

Rule 1064. Crossing, Facilitation and Solicited Orders

    (a)-(d) No change.
    (e) A Floor Qualified Contingent Cross Order is comprised of an 
order to buy or sell at least 1,000 contracts, or 10,000 contracts in 
the case of Mini Options, that is identified as being part of a 
qualified contingent trade, as that term is defined in subsection (3) 
below, coupled with a contra-side order or orders totaling [to buy or 
sell] an equal number of contracts.
    (1)-(3) No change.

Commentary

    01-04 No change.
* * * * *

Rule 1080. Phlx XL and Phlx XL II

    (a)-(n) No change.
    (o) Qualified Contingent Cross Order.
    A Qualified Contingent Cross Order is comprised of an order to buy 
or sell at least 1,000 contracts, or 10,000 contracts in the case of 
Mini Options, that is identified as being part of a qualified 
contingent trade, as that term is defined in subsection (3) below, 
coupled with a contra-side order or orders totaling [to buy or sell] an 
equal number of contracts.
    (1)-(3) 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposal is to expand the availability of QCC 
orders by permitting multiple counterparties on a QCC order, including 
permitting one individual counterparty to consist of an order for less 
than 1,000 contracts provided one side of the QCC order meets the 1,000 
contract minimum (as well as the other requirements of a QCC Order). 
This is intended to accommodate multiple counterparties, as explained 
further below.
    The Exchange currently permits two types of QCC Orders. Pursuant to 
Rule 1064(e), A Floor Qualified Contingent Cross Order (``Floor QCC 
Order'') is comprised of an order to buy or sell at least 1,000 
contracts \3\ that is identified as being part of a qualified 
contingent trade,\4\ coupled with a contra-side order

[[Page 68127]]

to buy or sell an equal number of contracts. Floor QCC Orders are 
immediately executed upon entry into the System by an Options Floor 
Broker provided that (i) no Customer Orders are at the same price on 
the Exchange's limit order book and (ii) the price is at or between the 
National Best Bid/Offer (``NBBO''). Floor QCC Orders are submitted into 
the System by Floor Brokers on the Floor via the Floor Broker 
Management System. Floor QCC Orders are automatically rejected if they 
cannot be executed.
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    \3\ In the case of Mini Options, the minimum size is 10,000 
contracts.
    \4\ A ``qualified contingent trade'' is a transaction consisting 
of two or more component orders, executed as agent or principal, 
where: (a) At least one component is an NMS Stock, as defined in 
Rule 600 of Regulation NMS under the Exchange Act; (b) all 
components are effected with a product or price contingency that 
either has been agreed to by all the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (c) the 
execution of one component is contingent upon the execution of all 
other components at or near the same time; (d) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) is determined by the time the 
contingent order is placed; (e) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (f) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade.
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    In addition to Floor QCC Orders, Phlx offers automated Qualified 
Contingent Orders (``Automated QCC Order''). Pursuant to Rule 1080(o), 
an Automated QCC Order is very similar to a Floor QCC Order, in that it 
must be comprised of an order to buy or sell at least 1,000 contracts 
that is identified as being part of a qualified contingent trade, 
coupled with a contra-side order to buy or sell an equal number of 
contracts. Automated QCC Orders shall only be submitted electronically 
from off the Floor to the Phlx System. Automated QCC Orders are 
immediately executed upon entry into the System by an Order Entry Firm 
provided that (i) no Customer Orders are at the same price on the 
Exchange's limit order book and (ii) the price is at or between the 
NBBO. Automated QCC Orders will be automatically rejected if they 
cannot be executed.
    Some Exchange members have requested the ability to submit both 
Floor and Automated QCC Orders involving multiple counterparties on one 
side of the trade where the contracts submitted total at least 1,000 
contracts. Accordingly, the Exchange is proposing to change the 
definition of both types of QCC Orders to accommodate multiple 
counterparties. Each definition of a QCC Order is currently framed in 
the singular (. . . coupled with a contra-side order . . .), therefore, 
the Exchange would like to make it clear to its members and other 
participants that a QCC Order must involve a single order for 1,000 
contracts on one side, but that it may consist of multiple orders on 
the opposite side.
    For instance, a 5,000 contract QCC Order to buy could, under this 
proposal, be coupled with two orders to sell 2,500 contracts each. 
Similarly, a 5,000 contract order to buy would, under this proposal, be 
coupled with an order to sell 4,500 contracts and an order to sell 500 
contracts. Each sell order need not be for a minimum of 1,000 
contracts, provided that the total of all sell orders equals the size 
of the buy order and is at least 1,000 contracts. Accordingly, the 
Exchange is proposing to amend the definition of QCC Order to permit a 
single order to buy or sell at least 1,000 contracts on one side 
coupled with an order or orders totaling an equal number of contracts.
    The Exchange understands that the International Securities Exchange 
(``ISE'') permits multiple counterparties on one side of a QCC to 
fulfill the 1,000 contract minimum.\5\ Although the ISE and Phlx rules 
governing QCC Orders are identically-worded in relevant respects, Phlx 
has taken the opposite approach and required that both sides of a QCC 
Order be a single order of at least 1,000 contracts.
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    \5\ But see CBOE RG13-041 at http://cchwallstreet.com/CBOEtools/PlatformViewer.asp?SelectedNode=chp_1_1&manual=/CBOE/bulletins/cboe-reg-bull-2013/.
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    While the current ISE and Phlx rule language may be ambiguous 
regarding the practice of permitting multiple counter-parties on one 
side of the QCC Order, there is support for the practice in prior 
Commission orders. In approving QCC orders on another exchange,\6\ the 
Commission noted that:
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    \6\ See Securities Exchange Act Release No. 63955 (February 24, 
2011), 76 FR 11533 (March 2, 2011) (SR-ISE-2010-73)(``QCC Approval 
Order'').

    QCC Orders must be for 1,000 or more contracts, in addition to 
meeting all of the requirements of the NMS QCT Exemption. The 
Commission believes that those customers participating in QCC Orders 
will likely be sophisticated investors who should understand that, 
without a requirement of exposure for QCC Orders, their order would 
not be given an opportunity for price improvement on the Exchange. 
These customers should be able to assess whether the net prices they 
are receiving for their QCC Order are competitive, and who will have 
the ability to choose among broker-dealers if they believe the net 
price one broker-dealer provides is not competitive. Further, 
broker-dealers are subject to a duty of best execution for their 
customers' orders, and that duty does not change for QCC Orders.\7\
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    \7\ QCC Approval Order at Section III.C.
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Accordingly, the 1,000 contract buy order, for example, reflects the 
buying interest of a sophisticated investor while the multiple sellers, 
as proposed, are accommodating that buying interest.
    Phlx notes that this potential ambiguity extends back to the 
original QCC Approval Order and to ISE's comment letter in support of 
it. In its discussion about the 1,000 contract requirement, the ISE 
stated:

    . . . CBOE questions how we calculate the 1,000 contract minimum 
for the QCC. Nothing could be clearer in our proposed rule: proposed 
ISE Rule 715(j) defines QCC as `an order to buy or sell at least 
1,000 contracts that is identified as being part of a qualified 
contingent trade. . . .' This means what it says, that there must be 
an order to buy or sell 1,000 contracts that is part of a QCC--not 
two 500 orders, not two 500 legs, not anything but an order to buy 
or sell at least 1,000 contracts.\8\
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    \8\ See letter from Michael J. Simon, Secretary, International 
Securities Exchange, to Elizabeth M. Murphy, Secretary, Commission, 
dated August 25, 2010 (Letter responding to CBOE comment on SR-ISE-
2010-73).

    Despite this seemingly clear statement requiring a single order of 
at least 1,000 contracts on each side of a QCC Order, ISE currently 
permits members to satisfy the 1,000-contract requirement through a 
combination of multiple orders.
    Rather than operate with ambiguity, the Exchange is filing this 
proposal to make clear that only one side (either the buy or the sell 
and not both) must meet the minimum 1,000 contract size requirement.
    The Exchange is not proposing to limit this proposal to a single 
participant type, such as a customer. Today, QCC Orders are not limited 
this way. Neither side must be on behalf of a customer. The original 
ISE proposal was not crafted to be limited either; there is little 
mention of the word ``customer.'' To the contrary, the QCC Approval 
Order specifically contemplated ``sophisticated investors'' in citing 
the benefits of qualified contingent trades,\9\ rather than ``public 
customers'' or ``retail.'' The Exchange believes that QCC Orders are 
used by and needed for all types of market participants, and this 
proposal to permit multiple counterparties would similarly be useful 
for all types of market participants.
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    \9\ See supra note 7 and accompanying text.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \11\

[[Page 68128]]

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, by making the QCC Order 
more palatable to counterparties, thereby encouraging trading in 
multiple instruments. Specifically, because the proposal seeks to 
permit multiple counterparties, it should therefore provide more 
opportunity to participate in QCC trades, consistent with the key 
principles behind the QCC Order.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    In approving QCC Orders, the Commission has stated that ``. . . 
qualified contingent trades are of benefit to the market as a whole and 
a contribution to the efficient functioning of the securities markets 
and the price discovery process.'' \12\ The Commission ``also has 
recognized that contingent trades can be useful trading tools for 
investors and other market participants, particularly those who trade 
the securities of issuers involved in mergers, different classes of 
shares of the same issuer, convertible securities, and equity 
derivatives such as options [emphasis added].'' \13\ In light of these 
benefits, the Exchange believes that the proposal should improve the 
usefulness of the QCC Order without raising novel regulatory issues, 
because the proposal does not impact the fundamental aspects of this 
order type--it merely permits multiple counterparties on one side, 
while preserving the 1,000 contract minimum.
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    \12\ QCC Approval Order at text accompanying footnote 115.
    \13\ QCC Approval Order at Section III.A. citing Securities 
Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829 
(September 7, 2006) (Original QCT Exemption).
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    Consistent with Section 6(b)(8) of the Act, the Exchange seeks to 
compete with other options exchanges for QCC Orders involving multiple 
parties, including where one side of the order is for less than 1,000 
contracts. The Exchange believes that this will be beneficial to 
participants because allowing multiple parties of any size on one side 
should foster competition for filling one side of a QCC Order and 
thereby result in potentially better prices.

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. In fact, the proposal is 
intended to relieve a burden on competition, which results from 
different exchanges interpreting their rules differently. Among the 
options exchanges, the Exchange believes that the proposal to allow 
multiple parties of any size on one side should foster competition for 
filling one side of a QCC order and thereby result in potentially 
better prices for such orders.

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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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-2013-106 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-2013-106. 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 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-2013-106 and should be 
submitted on or before December 4, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-27051 Filed 11-12-13; 8:45 am]
BILLING CODE 8011-01-P