Document ID: SEC-2011-0648-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-05-10T04:00Z

[Federal Register Volume 76, Number 90 (Tuesday, May 10, 2011)]
[Notices]
[Pages 27105-27108]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11315]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64401; File No. SR-Phlx-2011-55]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
In-Crowd Priority

May 4, 2011.
    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 April 27, 2011, 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 amend Exchange Rule 1014, Commentary 
.05(c), Non-Electronic Orders, to state that, respecting crossing, 
facilitation and solicited orders with a size of at least 500 contracts 
on each side that are represented and executed in open

[[Page 27106]]

outcry, priority will continue to be afforded to in-crowd participants 
(including, for purposes of this rule only, Floor Brokers) over Remote 
Specialists,\3\ Remote Streaming Quote Traders (``RSQTs'') \4\ and out-
of crowd Streaming Quote Traders (``SQTs''),\5\ but not over public 
customer orders. The Exchange proposes to amend the rule to state that 
in-crowd participants in such orders would also have priority over out-
of-crowd broker-dealer limit orders on the limit order book.
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    \3\ 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 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).
    \4\ An RSQT is an ROT that is a member or member organization 
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. An 
RSQT may only submit such quotations electronically from off the 
floor of the Exchange. See Exchange Rule 1014(b)(ii)(B).
    \5\ An SQT is an Exchange 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. An SQT may only submit such quotations while such SQT is 
physically present on the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(A).
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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 amend Commentary .05 
of Rule 1014 to state that in-crowd participants will continue, as 
today, to have priority over Remote Specialists, RSQTs and out of crowd 
SQTs respecting crossing, facilitation and solicited orders with a size 
of at least 500 contracts on each side, and to state that, respecting 
such orders, in-crowd participants will now be afforded priority over 
out-of-crowd broker-dealer limit orders on the limit order book. The 
proposal is also intended to provide that the term ``in-crowd 
participants'' includes, for purposes of this rule only, Floor Brokers 
representing such orders in open outcry in the trading crowd. 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.
Current Rule
    Currently, Exchange Rule 1014, Commentary .05 states that 
respecting crossing, facilitation and solicited orders \6\ with a size 
of at least 500 contracts on each side that are represented and 
executed in open outcry, priority is afforded to in-crowd participants 
over Remote Specialists, RSQTs and out-of crowd SQTs. The current rule 
does not affirmatively afford priority to in-crowd participants over 
orders on the limit order book, whether such orders are for public 
customers or non-customers. Thus, Floor Brokers representing and 
executing crossing, facilitation and solicited orders in open outcry 
are required to execute against all marketable orders on the limit 
order book before executing against the crowd, because the marketable 
orders on the limit order book have time priority.
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    \6\ See Exchange Rule 1064.
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The Proposal
    The proposed amendment to the rule would state that the rule also 
affords priority to in-crowd participants over out-of out-of-crowd 
broker-dealer limit orders on the limit order book. Public customer 
orders on the limit order book that are eligible for execution would 
still be required to be executed before the Floor Broker could execute 
its order in the crowd and/or with a contra-side order it holds. The 
proposed rule would also provide that the term ``in-crowd 
participants'' includes, for purposes of this rule only, Floor Brokers 
representing orders in open outcry in the trading crowd.
    The Exchange believes that this should enable it to compete for 
order flow with other exchanges that have similar rules in place 
without limiting eligible order types.\7\ The instant proposal will not 
affect public customer priority. The Exchange will continue to execute 
public customer limit orders up to their aggregate size at a particular 
price point.
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    \7\ The Exchange notes that Chicago Board Options Exchange, Inc. 
(``CBOE'') Rule 6.74(d)(vi)) 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. See Securities Exchange Act Release No. 54726 (November 8, 
2006), 71 FR 66810 (November 16, 2006) (SR-CBOE-2006-89).
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    The proposed rule change is intended to replicate, in open outcry, 
the current electronic trade allocation algorithm applicable to trades 
executed and allocated electronically on the Exchange's electronic 
trading platform for options, PHLX XL.\8\ Specifically, the Exchange 
notes that Exchange Rules 1014(g)(vii) and (viii) both provide that, if 
any contracts remain to be allocated after public customers and PHLX XL 
participants (including the specialist, SQTs, RSQTs and non-SQT ROTs 
with limit orders on the limit order book) that are bidding or offering 
at the execution price have received their respective allocations, off-
floor broker-dealers that have placed limit orders on the limit order 
book which represent the Exchange's disseminated price are thereafter 
entitled to receive any remaining contracts. The instant proposal is 
intended to state that this is also the case respecting crossing, 
facilitation and solicited orders with a size of at least 500 contracts 
on each side that are represented in open outcry.
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    \8\ 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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Non-Affiliated Floor Brokers
    The Exchange represents that all of its Floor Brokers are currently 
independent business operations and are not affiliated with any other 
Exchange member. The Exchange recognizes that if a Floor Broker becomes 
affiliated with a member, an issue could arise under Section 11a of the 
Act \9\ concerning in-person trading on the Exchange floor. Floor 
brokers are able to achieve in-crowd priority in accordance with this 
proposal provided, however, that a Floor Broker who is affiliated with 
a

[[Page 27107]]

PHLX member, and represents an order on behalf of such member, must 
ensure that the PHLX member qualifies for an exemption from Section 
11(a)(1) of the Exchange Act or that the transaction satisfies the 
requirements of Exchange Act Rule 11a2-2(T), otherwise the Floor Broker 
must yield priority to orders for the accounts of non-members.
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    \9\ 15 U.S.C. 78k(11)(a).
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Conclusion
    The Exchange believes that the proposed rule should provide 
incentive and liquidity for order flow providers that submit larger 
size crossing, facilitation and solicited orders for execution in open 
outcry to the Exchange, thus enabling the Exchange to compete with 
exchanges that have similar priority rules in effect.\10\
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    \10\ See supra note 7.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ 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 adopting a rule that affords priority to in-crowd 
participants over out-of-crowd broker-dealer limit orders on the limit 
order book in certain crossing, facilitation and solicited orders 
represented and executed in open outcry.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposal promotes just and equitable 
principles of trade by retaining customer priority in all cases, and by 
affording priority to in-crowd participants who are required to meet 
minimum quoting requirements,\13\ and that the proposal removes 
impediments to and perfects the mechanism of a free and open market by 
improving Floor Brokers' ability to trade crossing, facilitation and 
solicited orders with at least 500 contracts on each side, all to the 
benefit of customers and the public interest.
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    \13\ See, e.g., Exchange Rule 1014(b)(ii)(D).
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    Exchange Rule 1014 currently affords priority to in-crowd 
participants over Remote Specialists. A Remote Specialist is first 
required to be an RSQT, and the instant proposal would continue to 
afford priority to Remote Specialists in the same manner as it provides 
such priority over RSQTs. In January 2011, the Commission approved the 
Exchange's proposal to amend Commentary .05(c)(i) of Rule 1014 to 
establish priority for Remote Specialists that is coextensive with the 
priority afforded in that rule to RSQTs and out-of-crowd SQTs.\14\ The 
Exchange believes this established priority that treats RSQTs and 
Remote Specialists equally is just and equitable, because neither a 
Remote Specialist nor an RSQT is 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.\15\
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    \14\ See Securities Exchange Act Release No. 63717 (January 14, 
2011), 76 FR 4141 (January 24, 2011) (SR-Phlx-2010-145).
    \15\ See Exchange Rules 1014(c) and (d).
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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

    Pursuant to Section 19(b)(3)(A) \16\ of the Act and Rule 19b-
4(f)(6) \17\ thereunder, the Exchange has designated this proposal as 
one that effects a change that: (i) Does not significantly affect the 
protection of investors or the public interest; (ii) does not impose 
any significant burden on competition; and (iii) by its terms, does not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    Rule 19b-4(f)(6) requires a self-regulatory organization to give 
the Commission written notice of its intent to file the proposed rule 
change at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission.\18\ The Exchange has satisfied this requirement.
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    \18\ 17 CFR 240.19b-4(f)(6).
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    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.

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-2011-55 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-2011-55. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 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

[[Page 27108]]

should refer to File Number SR-Phlx-2011-55 and should be submitted on 
or before May 31, 2011.

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).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-11315 Filed 5-9-11; 8:45 am]
BILLING CODE 8011-01-P