Document ID: SEC-2010-1525-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2010-10-06T04:00Z

[Federal Register: October 6, 2010 (Volume 75, Number 193)]
[Notices]               
[Page 61799-61802]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc10-150]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63024; File No. SR-Phlx-2010-134]

 
 Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX, LLC Relating 
to Exchange Disseminated Quotations

September 30, 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 September 29, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 Rules 1017, Openings in 
Options, and 1082, Firm Quotations, to reflect a system change to 
modify the manner in which the PHLX XL[supreg] automated options 
trading system \3\ disseminates quotations when (i) there is an opening 
imbalance in a particular series, and (ii) there is a Quote Exhaust (as 
described below) or a Market

[[Page 61800]]

Exhaust (as described below) quote condition present in a particular 
series.\4\
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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.
    \4\ The current rules relevant to this proposal are subject to a 
pilot that was originally scheduled to expire November 30, 2009. In 
November 2009, the Exchange extended the pilot period through 
September 30, 2010. See Securities Exchange Act Release No. 60951 
(November 6, 2009), 74 FR 59275 (November 17, 2009) (SR-Phlx-2009-
95). Due to an inadvertent omission, Rules 1017(l)(iv)(C)(7) and 
1082(a)(ii)(B)(3)(g)(vi) were not included in the proposed rule 
change relating to the pilot extension, and both rules currently 
reflect an incorrect pilot expiration date of November 30, 2009. The 
Exchange is proposing an alternative to the current pilot (the ``new 
pilot''). The new pilot is scheduled to expire November 30, 2010.
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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 change the manner in 
which the PHLX XL[supreg] automated options trading system disseminates 
quotations involving opening imbalances and during times when there are 
exhausted quotes or no quotes on the Exchange in a particular series.
    In June, 2009, the Exchange added several significant enhancements 
to its automated options trading platform (now known as PHLX XL), and 
adopted rules to reflect those enhancements.\5\ As part of the system 
enhancements, the Exchange proposed to disseminate a ``non-firm'' quote 
condition on a bid or offer whose size is exhausted in certain 
situations. The non-exhausted side of the Exchange's disseminated 
quotation would remain firm up to its disseminated size. Currently, 
however, the Options Price Reporting Authority (``OPRA'') only 
disseminates option quotations for which both sides of the quotation 
are marked ``non-firm.'' OPRA currently does not disseminate a ``non-
firm'' condition for one side of a quotation while the other side of 
the quotation remains firm.\6\
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    \5\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009)(SR-Phlx-2009-32).
    \6\ Currently, there is no mechanism for the Options Price 
Reporting Authority (``OPRA'') to identify only one side of a quote 
as non-firm. The Exchange has approached OPRA to attempt to develop 
the capability to identify and implement such functionality.
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    Accordingly, the Exchange proposed, for a pilot period scheduled to 
expire November 30, 2009, and later extended through September 30, 
2010,\7\ to disseminate quotations in such a circumstance with a (i) a 
bid price of $0.00, with a size of one contract if the remaining size 
is a seller, or (ii) an offer price of $200,000, with a size of one 
contract if the remaining size is a buyer.
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    \7\ See supra n.4.
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    This proposal is intended to modify the manner in which the 
Exchange's PHLX XL system disseminates quotes when one side of the 
quote is exhausted but the opposite side still has marketable size at 
the disseminated price.
Opening Imbalance
    An opening ``imbalance'' occurs when all opening marketable size 
cannot be completely executed at or within an established Opening Quote 
Range (``OQR'') for the affected series.\8\ Currently, pursuant to 
Exchange Rule 1017(l)(v)(C)(7), any unexecuted contracts from the 
opening imbalance not traded or routed are displayed in the Exchange 
quote at the opening price for a period not to exceed ten seconds, and 
subsequently, cancelled back to the entering participant if they remain 
unexecuted and priced through the opening price, unless the member that 
submitted the original order has instructed the Exchange in writing to 
re-enter the remaining size, in which case the remaining size will be 
automatically submitted as a new order. During this display time 
period, the PHLX XL system disseminates, if the imbalance is a buy 
imbalance, an offer that is $200,000, with a size of one contract or, 
if the imbalance is a sell imbalance, a bid that is $0.00, with a size 
of one contract, on the opposite side of the market from remaining 
unexecuted contracts.
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    \8\ Where there is an imbalance at the price at which the 
maximum number of contracts can trade that is also at or within the 
lowest quote bid and highest quote offer, the PHLX XL system will 
calculate an OQR for a particular series, outside of which the PHLX 
XL system will not execute. See Exchange Rule 1017(l)(iii) and (iv).
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    The proposed rule change would modify Rule 1017(l)(v)(C)(7) to 
reflect that, in this situation, the PHLX XL system will disseminate, 
if the imbalance is a buy imbalance, an offer of $0.00, with a size of 
zero contracts or, if the imbalance is a sell imbalance, a bid of 
$0.00, with a size of zero contracts, on the opposite side of the 
market from remaining unexecuted contracts.
    The purpose of this provision is to indicate that the Exchange has 
exhausted all marketable interest, at or within the OQR, on one side of 
the market during the opening process yet has remaining unexecuted 
contracts on the opposite side of the market that are firm at the 
disseminated price and size.
Quote Exhaust
    Quote Exhaust occurs when the market at a particular price level on 
the Exchange includes a quote, and such market is exhausted by an 
inbound contra-side quote or order (``initiating quote or order''), and 
following such exhaustion, contracts remain to be executed from the 
initiating quote or order.\9\
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    \9\ See Exchange Rule 1082(a)(ii)(B)(3).
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    Rather than immediately executing at the next available price, the 
PHLX XL system employs a timer (a ``Quote Exhaust Timer''), not to 
exceed one second, in order to allow market participants to refresh 
their quotes. During the Quote Exhaust Timer, PHLX XL currently 
disseminates the ``Reference Price'' (the most recent execution price) 
for the remaining size, provided that such price does not lock an away 
market, in which case, the Exchange currently disseminates a bid and 
offer that is one Minimum Price Variation (``MPV'') from the away 
market price. If the remaining size is a buyer, the Exchange 
disseminates an offer of $200,000, with a size of one contract or, if 
the remaining size is a seller, a bid of $0.00, with a size of one 
contract.
    The proposed rule change would modify the manner in which the 
system generates a quote during the Quote Exhaust Timer. Specifically, 
during the Quote Exhaust Timer, the Exchange will disseminate: (i) A 
bid price of $0.00, with a size of zero contracts if the remaining size 
is a seller, or (ii) an offer price of $0.00, with a size of zero 
contracts if the remaining size is a buyer.
    Currently, Exchange Rules 1082(a)(ii)(B)(3)(g)(iv)(A)(3), 
1082(a)(ii)(B)(3)(g)(iv)(A)(4), 1082(a)(ii)(B)(3)(g)(iv)(B)(2), and

[[Page 61801]]

1082(a)(ii)(B)(3)(g)(iv)(C) describe various scenarios under which the 
PHLX XL system trades, routes, or posts unexecuted contracts after 
determining the ``Best Price'' following a Quote Exhaust. These rules 
permit an up to 10 second time period during which participants may 
revise their quotes prior to the PHLX XL system taking action. In all 
of these scenarios, during the up to 10 second time period, the PHLX XL 
system currently disseminates an offer of $200,000, with a size of one 
contract if the remaining size is a buyer or, if the remaining size is 
a seller, a bid of $0.00, with a size of one contract, on the opposite 
side of the market from remaining unexecuted contracts.
    The Exchange proposes to modify Rules 
1082(a)(ii)(B)(3)(g)(iv)(A)(3), 1082(a)(ii)(B)(3)(g)(iv)(A)(4), 
1082(a)(ii)(B)(3)(g)(iv)(B)(2), and 1082(a)(ii)(B)(3)(g)(iv)(C) to 
reflect that, during the up to 10 second time period, the Exchange will 
disseminate: (i) A bid price of $0.00, with a size of zero contracts if 
the remaining size is a seller, or (ii) an offer price of $0.00, with a 
size of zero contracts if the remaining size is a buyer.
    The purpose of this provision is to indicate that a quote size at a 
price level in a particular series on the Exchange is exhausted, and 
there are unexecuted contra-side contracts remaining at the exhausted 
price level. Furthermore, this provision will enable the Exchange to 
indicate that it is in the process of allowing participants to refresh 
quotations on the exhausted side of the market, while the Exchange's 
quote is firm at the disseminated price and size for the remaining 
unexecuted contra-side contracts.
    Current Rule 1082(a)(ii)(B)(3)(g)(vi) describes what the PHLX XL 
system does if, after trading at the PHLX and/or routing, there are 
unexecuted contracts from the initiating order that are still 
marketable. In this situation, remaining contracts are posted for a 
period of time not to exceed 10 seconds and then cancelled after such 
period of time has elapsed, unless the member that submitted the 
original order has instructed the Exchange in writing to re-enter the 
remaining size, in which case the remaining size will be automatically 
submitted as a new order. During this up to 10 second period, the PHLX 
XL system currently disseminates, on the opposite side of the market 
from the unexecuted contracts: (i) A bid price of $0.00, with a size of 
one contract if the remaining size is a seller, or (ii) an offer price 
of $200,000, with a size of one contract if the remaining size is a 
buyer.
    The Exchange proposes to modify Rule 1082(a)(ii)(B)(3)(g)(vi) to 
reflect that, in this situation, during the up to 10 second time 
period, the Exchange will disseminate, on the opposite side of the 
market from remaining unexecuted contracts: (i) A bid price of $0.00, 
with a size of zero contracts if the remaining size is a seller, or 
(ii) an offer price of $0.00, with a size of zero contracts if the 
remaining size is a buyer.
    The purpose of this provision is to indicate that the exchange is 
in the process of allowing participants to submit quotations on the 
exhausted side of the market while the Exchange's quote is firm at the 
disseminated price and size for the remaining unexecuted contra-side 
contracts.
Market Exhaust
    Market Exhaust occurs when there are no PHLX XL participant 
quotations in the Exchange's disseminated market for a particular 
series and an initiating order in the series is received. In such a 
circumstance, the PHLX XL system initiates a ``Market Exhaust Auction'' 
for the initiating order.\10\
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    \10\ See Exchange Rule 1082(a)(ii)(B)(4)(b).
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    In this situation, the PHLX XL system will first determine if the 
initiating order, or a portion thereof, can be executed on the PHLX. 
Thereafter, if there are unexecuted contracts remaining in the 
initiating order the PHLX XL system will initiate a Market Exhaust 
Timer.\11\ During the Market Exhaust Timer, the Exchange disseminates 
any unexecuted size of the initiating order at the ``Reference Price,'' 
which is the execution price of a portion of the initiating order, or 
one MPV from a better-priced away market price if the Reference Price 
would lock the away market. The PHLX XL system currently disseminates, 
on the opposite side of the market from the remaining unexecuted 
contracts: (i) A bid price of $0.00, with a size of one 0 contracts if 
the remaining size is a seller, or (ii) an offer price of $200,000, 
with a size of one contract if the remaining size is a buyer.
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    \11\ The Exchange proposes a technical amendment to Rule 
1082(a)(ii)(B)(4)(b) to remove an incorrect reference to a ``Quote 
Exhaust Timer'' and refer instead to a ``Market Exhaust Timer.''
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    The Exchange proposes to modify Rules 1082(a)(ii)(B)(4)(a)and (b) 
to reflect that, during the Market Exhaust Timer, the PHLX XL system 
will disseminate, on the opposite side of the market from remaining 
unexecuted contracts: (i) A bid price of $0.00, with a size of zero 
contracts if the remaining size is a seller, or (ii) an offer price of 
$0.00, with a size of zero contracts if the remaining size is a buyer.
    The purpose of this provision is to indicate that the Exchange is 
in the process of allowing participants to submit quotations on the 
exhausted side of the market while the Exchange's quote is firm at the 
disseminated price and size for the remaining unexecuted contra-side 
contracts.
Provisional Auction
    Exchange Rule 1082(a)(ii)(B)(4)(d)(iv)(E) describes what PHLX XL 
does after it has explored all alternatives and there still remain 
unexecuted contracts. During the ``Provisional Auction,'' any 
unexecuted contracts from the initiating order are displayed in the 
Exchange quote for the remaining size for a brief period not to exceed 
ten seconds and subsequently cancelled back to the entering participant 
if they remain unexecuted, unless the member that submitted the 
original order has instructed the Exchange in writing to re-enter the 
remaining size, in which case the remaining size will be automatically 
submitted as a new order. During the brief period, the Phlx XL system 
currently disseminates an offer of $200,000 with a size of one contract 
if the remaining size is a buyer, or a bid of $0.00, with a size of one 
contract, if the remaining size is a seller, on the opposite side of 
the market from remaining unexecuted contracts.
    The Exchange proposes to modify Rule 1082(a)(ii)(B)(4)(d)(iv)(E) to 
reflect that, in this situation, during the brief period, the PHLX XL 
system will disseminate, on the opposite side of the market from 
remaining unexecuted contracts: (i) A bid price of $0.00, with a size 
of zero contracts if the remaining size is a seller, or (ii) an offer 
price of $0.00, with a size of zero contracts if the remaining size is 
a buyer.
    The purpose of this provision is to indicate that the Exchange is 
in the process of allowing participants to submit quotations on the 
exhausted side of the market while the Exchange's quote is firm at the 
disseminated price and size for the remaining unexecuted contra-side 
contracts.
    The Exchange believes that this proposed rule change benefits 
customers and the marketplace as a whole by enabling PHLX to 
effectively reflect the market interest the Exchange has that is firm 
and executable, while at the same time indicating the other side of the 
Exchange market is not firm and therefore not executable. This allows 
the Exchange to protect orders on its book and attempt to attract 
interest to execute against such order.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b)

[[Page 61802]]

of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ 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.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange further believes that the proposal is consistent with 
the SEC Quote Rule's provisions regarding non-firm quotations.\14\ 
Specifically, Rule 602(a)(3)(i) provides that if, at any time a 
national securities exchange is open for trading, the exchange 
determines, pursuant to rules approved by the Commission, that the 
level of trading activities or the existence of unusual market 
conditions is such that the exchange is incapable of collecting, 
processing, and making available to vendors the data for a subject 
security required to be made available in a manner that accurately 
reflects the current state of the market on such exchange, such 
exchange shall immediately notify all specified persons of that 
determination and, upon such notification, the exchange is relieved of 
its obligations under paragraphs (a)(1) and (2) of Rule 602 relating to 
collecting and disseminating quotations, subject to certain other 
provisions of Rule 602(a)(3).
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    \14\ See 17 CFR 242.602(a)(3)(i) and (ii).
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    By proposing to disseminate a bid of $0.00 for a size of zero 
contracts, or an offer of $0.00 for a size of zero contracts in certain 
situations delineated above in the Exchange's rules, the Exchange 
believes that it is adequately communicating that it is non-firm on 
that side of the market in compliance with the Quote Rule.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) \16\ 
thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, 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. 
The Exchange has satisfied this requirement.
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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-2010-134 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-2010-134. 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 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-2010-134 and should be submitted on or before 
October 27, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25138 Filed 10-5-10; 8:45 am]
BILLING CODE 8010-01-P