Document ID: SEC-2012-0593-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-04-12T04:00Z

[Federal Register Volume 77, Number 71 (Thursday, April 12, 2012)]
[Notices]
[Pages 22040-22042]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8778]

[[Page 22040]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66754; File No. SR-Phlx-2012-41]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Routing of Non-Customer Orders

April 6, 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 March 27, 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, 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 proposes to amend Exchange Rule 1080(m), Order 
Routing, to expand the routing capabilities of certain options orders 
that are eligible for electronic routing to other market centers by the 
Exchange's fully automated options trading system, PHLX XL.[supreg]\3\ 
Under the proposal, non-customer FIND orders (as defined below) that 
are received during open trading will now be eligible for routing to 
other market centers for execution.
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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 expand the routing 
capabilities of option orders that are eligible for routing to other 
market centers when the Exchange cannot execute such orders at the 
National Best Bid or Offer (``NBBO''), by making non-customer FIND 
orders eligible for routing during open trading. In addition, the 
Exchange is revising the definition of the term ``SRCH order'' to be 
clear that only customer SRCH orders will continue to be eligible for 
routing.
Current Rule
    Currently, Rule 1080(m) states that the PHLX XL system will route 
only customer \4\ FIND \5\ and SRCH \6\ orders to away markets. For 
purposes of this rule, the term ``customer'' includes a 
``professional'' customer as defined in Exchange Rule 1000(b)(14).\7\ 
FIND and SRCH Orders designated as available for routing are first 
checked by the PHLX XL system for available contracts for potential 
execution on the Exchange. After checking the PHLX XL system for 
available contracts, orders are sent to other available market centers 
for potential execution. When checking the book, the PHLX XL system 
seeks to execute at the price at which it would send the order to a 
destination market center. In situations where the Exchange's 
disseminated bid or offer is inferior to the NBBO price, the PHLX XL 
system will contemporaneously route an order marked as an Intermarket 
Sweep Order (``ISO'') \8\ to each away market disseminating prices 
better than the Exchange's price, for the lesser of: (a) The 
disseminated size of such away markets, or (b) the order size and, if 
order size remains after such routing, trade at the Exchange's 
disseminated bid or offer up to its disseminated size. If contracts 
still remain unexecuted after routing, they are posted on the 
Exchange's limit order book. Whether and under what circumstances such 
unexecuted contracts are re-routed depends upon the order's status as a 
FIND or SRCH order, as defined above.\9\
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    \4\ For purposes of this proposal, the term ``customer'' means a 
person or entity that is neither a broker-dealer nor a direct or 
indirect affiliate of a broker-dealer.
    \5\ A FIND order is currently defined as an order that is 
routable upon receipt. A FIND order received during open trading 
that is not marketable against the PHLX best Bid/Offer ``PBBO'' or 
the Away Best Bid/Offer (``ABBO'') will be entered into the limit 
order book at its limit price. The FIND order will not be eligible 
for routing until the next time the option series is subject to a 
new Opening Process. See Exchange Rule 1080(m)(iv)(B).
    \6\ A SRCH order is an order that is routable at any time. A 
SRCH order received during open trading that is not marketable 
against the PBBO or the ABBO will be entered into the Phlx XLII 
book. Once on the book, the SRCH order is eligible for routing if it 
is locked or crossed by an away market. See Exchange Rule 
1080(m)(iv)(C).
    \7\ 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. See Exchange Rule 
1000(b)(14).
    \8\ An ISO is a limit order for an options series that is 
identified as an ISO when routed to an away market center and, 
simultaneously with the routing of the order, one or more additional 
ISOs, as necessary, are routed to execute against the full displayed 
size of any Protected Bid, in the case of a limit order to sell, or 
any Protected Offer, in the case of a limit order to buy, for the 
options series with a price that is superior to the limit price of 
the ISO, with such additional orders also marked as ISOs.
    \9\ See supra notes 5 and 6.
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The Proposal
    The Exchange is proposing to add non-customer FIND orders as a new 
category of orders that are eligible for routing. Non-customer FIND 
orders would be eligible for routing only during open trading, and not 
during the Opening Process.\10\ Customer FIND and SRCH orders received 
prior to the opening would continue to be treated as they are currently 
under the rule, i.e., both are eligible for routing during the Opening 
Process.
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    \10\ See Exchange Rule 1017(l)(iii).
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    Under the current rule and practice, a customer FIND order received 
during open trading that is not marketable against the PHLX Best Bid or 
Offer (``PBBO'') or the Away Best Bid or Offer (``ABBO'') is entered 
into the limit order book at its limit price. If the FIND order is 
marketable against the ABBO, it is routed to markets disseminating the 
ABBO. If the order still has remaining

[[Page 22041]]

size after routing, it will be entered into the limit order book. Such 
FIND order, or its remainder, is not eligible for routing again until 
the next time the affected option series is subject to a new Opening 
Process. Under the proposal, non-customer FIND orders would be treated 
in the same manner as customer FIND orders, except that non-customer 
FIND orders would not be eligible for routing during the Opening 
Process. The Exchange is proposing to route only customer FIND orders 
during the opening process to ensure that customers retain priority 
respecting all liquidity available as part of the Opening Process 
whether that liquidity is on PHLX or on another exchange. During open 
trading this is not an issue because two FIND orders will not be 
received at precisely the same time; generally, a customer FIND order 
would always have priority over a non-customer FIND order.
    Unlike the treatment of FIND orders, the treatment of SRCH orders 
is not subject to change under the proposal. Currently, Exchange Rule 
1080(m) states that the PHLX XL system will route only customer FIND 
and SRCH orders. While the proposed rule change would expand routable 
FIND orders to include non-customer FIND orders, the proposal would re-
define a SRCH order as a customer order that is routable at any time. 
The purpose of this change is to ensure that only customer SRCH orders 
continue to be eligible for routing. Just as today, non-customer SRCH 
orders will not be eligible for routing. Non-customer orders received 
that are designated as SRCH orders will be placed on the limit order 
book if not executed on the Exchange upon receipt.
    The Exchange notes that very few customers use the SRCH order type. 
Additionally, the Exchange has noted that there is no demand for the 
use of SRCH orders on the part of non-customers, as these participants 
tend to be sensitive to, and prefer to control, the charges incurred 
when their order is routed. The Exchange believes, however, that non-
customers submitting their orders to the Exchange will use FIND orders. 
FIND orders allow participants to access potential liquidity on away 
markets while enabling them to manage expectations of the number of 
times their orders are routed. This helps participants to plan for and 
ascertain the fees they would incur each time their order is routed. 
Thus, the Exchange believes that the expansion of the FIND order to 
non-customer participants is appropriate and useful in the processing 
of non-customer orders seeking the best execution in the marketplace as 
a whole.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\11\ in general and with 
Section 6(b)(5) of the Act,\12\ 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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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is also 
consistent with Section 6(b)(8) of the Act \13\ in that it does not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, the proposal 
would expand the routing capabilities of certain orders that are 
eligible for routing to other exchanges, despite the fact that such 
other exchanges are competitors of the Exchange. This benefits 
investors because the Exchange's system will route to away markets at 
better prices.
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    \13\ 15 U.S.C. 78f(b)(8).
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    The proposed rule change removes impediments to and perfects the 
mechanism of a free and open market and a national market system by 
enabling non-customer orders to have access to liquidity on other 
exchanges each time they submit a FIND order to the Exchange, providing 
for best executions in the national market system.
    The Exchange further believes that the proposed rule change does 
not permit unfair discrimination between customers, issuers, brokers, 
or dealers. FIND orders submitted after the Opening Process, by either 
customers or non-customers, will be handled by the PHLX XL system in 
the same manner and will be provided with equal access to liquidity on 
other exchanges. This treatment of customer and non-customer FIND 
orders ensures that there is no unfair discrimination between customers 
and non-customers submitting such orders to the Exchange after the 
Opening Process.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\14\ 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.
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    \14\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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 No. SR-Phlx-2012-41 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 No. SR-Phlx-2012-41. 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

[[Page 22042]]

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 available publicly. All submissions 
should refer to File No. SR-Phlx-2012-41 and should be submitted on or 
before May 3, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8778 Filed 4-11-12; 8:45 am]
BILLING CODE 8011-01-P