Document ID: SEC-2010-0575-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-04-16T04:00Z

[Federal Register: April 16, 2010 (Volume 75, Number 73)]
[Notices]               
[Page 20016-20018]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16ap10-137]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61862; File No. SR-Phlx-2010-43]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX, Inc. Relating to Quote Spread Parameters and 
Batching of Violations

April 7, 2010.
    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 March 26, 2010, NASDAQ OMX PHLX, Inc. (``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 Substance 
of the Proposed Rule Change

    The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Options Floor Procedure Advice 
(``Advice'') F-6, Option Quote Parameters, to copy from Rule 
1014(c)(i)(A) a provision relating to $5 wide bid-ask differentials for 
electronic quotes in equity, index and foreign currency options after 
the opening, which was inadvertently omitted from Advice F-6. The 
Exchange also proposes to change the fine schedule to add three warning 
letters, implement the fine schedule on a one year running calendar 
basis, and permit the ``batching'' of violations of both Advice F-6 and 
the corresponding Rule 1014(c)(i)(A), pursuant to Rules 960 and 970, 
for purposes of determining what is an occurrence.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to correct Advice F-6 
and update it in order to reflect the current

[[Page 20017]]

trading environment, as well as to permit the batching of certain such 
violations, as described below. Currently, Rule 1014(c)(i)(A) and its 
corresponding Advice F-6, which is part of the Exchange's minor rule 
plan,\5\ govern bid/ask differentials, which are also known as 
quotation or quote spread parameters; quote spread parameters establish 
the maximum permissible width between the bid and an offer in a 
particular series.\6\ The Exchange proposes to update Advice F-6 to 
reflect language permitting options quoted electronically to be quoted 
with a $5 wide spread after the opening of an option. Those who are 
quoting verbally (in open outcry) must, throughout the trading day, 
comply with the regular quote spread parameters that apply on the 
opening; those quote spread parameters appear in a chart in Advice F-6 
and in the text of Rule 1014(c)(i)(A)(1)(a). The language permitting $5 
wide quote spreads after the opening for those quoting electronically 
was added to Rule 1014(c)(i)(A)(2) but, inadvertently, not to Advice F-
6.\7\ The Exchange proposes to correct this by inserting this language 
into Advice F-6.
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    \5\ The Exchange's minor rule plan consists of options floor 
procedure advices (``OFPAs'' or ``Advices'') with preset fines, 
pursuant to Rule 19d-1(c) under the Act. 17 CFR 240.19d-1(c). Most 
OFPAs have corresponding options rules.
    \6\ See Rule 1014(c)(i)(A)(1)(a).
    \7\ See Securities Exchange Act Release No. 50728 (November 23, 
2004), 69 FR 69982 (December 1, 2004) (SR-Phlx-2004-74).
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    The Exchange also proposes to change the fine schedule applicable 
to Advice F-6, which is administered pursuant to the Exchange's minor 
rule plan. The fine schedule would now consist of warning letters 
respecting the first three occurrences and three fines thereafter 
($250, $500 and $1,000), before the seventh occurrence would result in 
referral to the Business Conduct Committee (``BCC'') for disciplinary 
action. In addition, the fine schedule would be administered on a one 
year running calendar basis, such that violations within one year of 
the last occurrence would count as the next ``occurrence,'' rather than 
a two year running calendar basis.\8\
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    \8\ A running calendar basis means that violations within a one 
year period count as the next ``occurrence'' for purposes of the 
fine schedule, regardless of the calendar year. A ``one-year running 
calendar basis'' means that a violation of an Advice that occurs 
within one year of the first violation of that Advice will be 
treated as a second occurrence, and any violation of an Advice 
within one year of the previous violation of that Advice will be 
subject to the next highest fine specified in the Advice. See 
Securities Exchange Act Release No. 41201 (March 22, 1999), 64 FR 
15391 (March 31, 1999) (SR-Phlx-99-06). The terms ``running'' and 
``rolling'' calendar basis are often used interchangeably. See, 
e.g., Securities Exchange Act Release No. 33130 (November 2, 1993), 
58 FR 29502 (November 9, 1993) (SR-Phlx-93-28).
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    The Exchange believes that these changes are appropriate because 
quoting has become entirely electronic; most Streaming Quote Traders 
(``SQTs'') and Remote Streaming Quote Traders (``RSQTs'') \9\ quote 
electronically, relying on their firm's quoting technology and computer 
models to establish an option's price and generate the quote 
electronically to the Exchange. Historically, when Registered Options 
Traders (``ROTs'') \10\ quoting on the Exchange did so verbally (even 
though they relied on computer models to produce a price), the quote 
was subject to their own judgment and verbal delivery; sometimes an ROT 
stated a quote that did not comply with the maximum quote spread 
parameter, thus triggering a violation under Advice F-6 and a fine 
under the minor rule plan. In contrast, today, the Exchange believes 
that computer models do not make the sorts of individualized mistakes 
that Advice F-6 was intended to deal with; instead, when there is a 
quoting error today, electronically, it usually affects every series 
that RSQT or SQT is quoting on that particular technology, generating, 
potentially, hundreds of instances of quote spread parameter 
violations. Rather than taking each event to the BCC as a fourth 
occurrence under the current rule (because there may be hundreds), the 
Exchange proposes to treat these as a single occurrence by ``batching'' 
the violations. This way, the firm would receive a warning letter for 
the first three events, before being subject to a fine schedule. Of 
course, the Exchange could in any particular situation deem it to be 
egregious rather than ``minor'' and refer it directly to the BCC for 
disciplinary action. The Exchange believes that this is appropriate 
because the relevant warning letter or monetary fine should serve as a 
deterrent against future violations, while recognizing that a single 
programming error can have a widespread effect.
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    \9\ See Rule 1014(b)(ii).
    \10\ See Rule 1014(b)(i).
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    Currently, Rules 960.2(f)(ii) and 970.01 permit the Exchange to 
aggregate or ``batch'' multiple numbers of violations as one single 
offense, for purposes of initiating disciplinary action under Exchange 
rules, or imposing fines pursuant to fine schedules set forth in the 
relevant Options Floor Procedure Advices under the Exchange's minor 
rule plan.\11\ Violations that are currently eligible for batching are 
listed on the Exchange's internal Numerical Criteria for Bringing Cases 
for Violations of Phlx Order Handling Rules. At this time, the Exchange 
proposes to permit batching with respect to Advice F-6 and Rule 
1014(c)(i)(A), and proposes to amend Rules 960 and 970 accordingly. 
Currently, the language in both rules limits batching to certain 
Exchange order handling rules.
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    \11\ The Exchange may also refer the matter to the Business 
Conduct Committee (``BCC'') for possible disciplinary action when 
the Exchange determines that there exists a pattern or practice of 
violative conduct without exceptional circumstances or when any 
single instance of violative conduct without exceptional 
circumstances is deemed to be egregious. See Securities Exchange Act 
Release No. 45570 (March 15, 2002), 67 FR 13395 (March 22, 2002) 
(SR-Phlx-2001-114).
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    Pursuant to Rules 960.2(f)(ii) and 970.01, the batching program 
will continue to require that the violations be determined based on an 
exception-based surveillance program, with the specific surveillance 
guidelines (which are similar to compliance thresholds) maintained on 
the Numerical Criteria for Bringing Cases for Violations of Phlx Order 
Handling Rules.\12\ The Exchange believes that these changes should 
result in a fine schedule that better fits the current electronic 
trading environment. In addition, the Exchange believes that Advice F-6 
(and its corresponding rule) is appropriate for batching because the 
automated surveillance for quote spread parameter compliance,\13\ as 
well as the issuance of sanctions pursuant to the minor rule plan,\14\ 
will be conducted daily. The Exchange believes that its representation 
by regulatory staff that daily surveillance will be conducted and daily 
sanctions will be administered should serve as a strong deterrent 
against future violations.
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    \12\ Such criteria can be updated subject to the Exchange 
providing notice to the Commission's Office of Compliance 
Inspections and Examinations. See Securities Exchange Act Release 
No. 45570 (March 15, 2002), 67 FR 13395 (March 22, 2002) (SR-Phlx-
2001-114). Because neither is an ``order handling rule,'' the 
Exchange is proposing herein to expressly permit batching of 
violations of Advice F-6 and Rule 1014(c)(i)(A).
    \13\ See confidential letters from Stephen M. Pettibone, 
Managing Director Surveillance, Phlx, to Michael Gaw, Division of 
Trading and Markets, and Tina Barry, Office of Compliance 
Inspections and Examinations, Securities and Exchange Commission, 
dated October 6, 2009 and December 30, 2009.
    \14\ See letter from Charles Rogers, Chief Regulatory Officer, 
Phlx, to Tina Barry, Office of Compliance Inspections and 
Examinations and Michael Gaw, Division of Trading and Markets, 
Securities and Exchange Commission, dated February 18, 2010.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b)

[[Page 20018]]

of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ 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. The Exchange also believes that its proposal is consistent 
with Sections 6(b)(1) and (6) of the Act,\17\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of Commission and Exchange rules. In 
addition, because existing Rule 970 provides procedural rights to a 
person fined under the minor rule plan to contest the fine and permits 
a hearing on the matter, the Exchange believes that the proposal is 
consistent with Sections 6(b)(7) and 6(d)(1) of the Act,\18\ by 
providing a fair procedure for the disciplining of members and persons 
associated with members.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ 15 U.S.C. 78f(b)(1) and (6).
    \18\ 15 U.S.C. 78f(b)(7) and (d)(1).
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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 
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

    Within 35 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 
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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2010-43 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-2010-43. This file 
number should be included on the subject line if e-mail 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 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 
available publicly. All submissions should refer to File Number SR-
Phlx-2010-43 and should be submitted on or before May 7, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12) and 200.30-3(a)(44).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-8683 Filed 4-15-10; 8:45 am]
BILLING CODE 8011-01-P