Document ID: SEC-2013-2191-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-12-23T05:00Z

[Federal Register Volume 78, Number 246 (Monday, December 23, 2013)]
[Notices]
[Pages 77514-77516]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30454]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71108; File No. SR-Phlx-2013-121]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend Two 
Features Relating to Complex Orders

December 17, 2013.
    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 December 9, 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, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend two features of the Exchange's 
Complex Orders functionality, as described below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/, 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 proposal is to enhance the Exchange's complex 
order functionality by enhancing two of the protections offered to 
complex order executions, as well as to correct Exchange rules in two 
areas to reflect the operation of the Exchange's system.
    First, the Exchange proposes to amend the Phlx XL Strategy Price 
Protection (``SPP'') in Rule 1080.08(g). SPP is a feature of Phlx XL 
that prevents certain Complex Order Strategies from trading at prices 
outside of pre-set standard limits. SPP applies only to Vertical 
Spreads \3\ and Time Spreads.\4\ Currently, Rule 1080.08(g)(iii) 
provides that if the execution of a Vertical Spread or a Time Spread 
would violate the SPP limits, the System would place the order on the 
CBOOK.
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    \3\ A Vertical Spread is a Complex Order Strategy consisting of 
the purchase of one call (put) option and the sale of another call 
(put) option overlying the same security that have the same 
expiration but different strike prices. See Rule 1080.08(g)(i).
    \4\ A Time Spread is a Complex Order Strategy consisting of the 
purchase of one call (put) option and the sale of another call (put) 
option overlying the same security that have different expirations 
but the same strike price. See Rule 1080.08(g)(ii).
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    Today, the System cancels a Vertical Spread or a Time Spread rather 
than placing it on the CBOOK where a sell (buy) order would execute at 
a price outside of the SPP limit on the sell (buy) side. The Exchange 
proposes to correct this language in the rule text. The Exchange 
believes that it is appropriate to cancel the order rather than place 
it on the CBOOK, because the order is priced such that it will never be 
executable. This is because, regardless of changes in the market for 
the components of the Complex Order, the SPP will always result in the 
same calculation and thereby prevent an execution.
    In addition, the Exchange proposes to add rule text to provide that 
the order will be cancelled even if it violates the SPP limit on the 
other side of the market from the order. Today, the System cancels a 
sell order that would execute at a price outside of the SPP limit on 
the offer side, and similarly cancels a buy order that would execute at 
a price outside of the SPP limit on the bid side. Under this proposal, 
the System would cancel a sell (buy) order from execution at a price 
outside of the SPP limit on the bid (offer) side as well. The purpose 
of this change is to offer additional protection to certain Complex 
Orders due to a price far away from existing markets on both sides of 
the market.
    For example, where there is a Complex Order to sell (A-B),\5\ the 
following would occur:
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    \5\ Assume it is a vertical spread.

PBBO
A Dec 50 $12.20-$14.90

[[Page 77515]]

B Dec 55 $ 9.00-$12.50
cPBBO is $.30 credit-$ 5.90
SPP calculates minimum possible value of 0 (always for a vertical 
spread)
SPP calculates maximum possible value of $5.00 by subtracting the 
value of the lower strike from the value of the higher strike (55 - 
50 = 5)
SPP limit will be applied to: $0-$5.00
If the SPP limit is set at $.10, the acceptable range is $.10 credit 
\6\-$5.10.
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    \6\ A $.10 credit bid means that the seller of the Complex Order 
would be paying $.10 to sell rather than receiving $.10, perhaps 
because the seller is seeking to close out the position for tax or 
margin reasons, regardless of the price.

    Today, if a Complex Order is received to sell at $5.50, the 
System cancels the order, because $5.50 is outside of the $5.10 SPP 
limit on the offer side and thus could never be executed. If a 
Complex Order is received to buy for $5.50, because that price does 
not violate the $.10 credit SPP on the bid side, the order will be 
protected by SPP and placed on the CBOOK.
    Under this proposal, if a Complex Order is received to buy for 
$5.50, the order will be protected by SPP and cancelled, because it 
is priced through the acceptable range on the offer side of $5.10.

    Accordingly, the SPP would be applied consistently to all Complex 
Orders, thereby affording more protection (in the form of cancellation) 
to aggressively priced Complex Orders.
    Second, the Exchange proposes to amend the Acceptable Complex 
Execution (``ACE'') Parameter in Rule 1080.08(i). The ACE Parameter 
defines a price range outside of which a Complex Order will not be 
executed. The ACE Parameter is either a percentage or number defined by 
the Exchange.\7\ The ACE Parameter price range is based on the cNBBO 
\8\ at the time an order would be executed. A Complex Order to sell 
will not be executed at a price that is lower than the cNBBO bid by 
more than the ACE Parameter. A Complex Order to buy will not be 
executed at a price that is higher than the cNBBO offer by more than 
the ACE Parameter. A Complex Order or a portion of a Complex Order that 
cannot be executed within the ACE Parameter pursuant to this rule will 
be placed on the CBOOK. The Exchange issues an Options Trader Alert 
(``OTA'') to its membership indicating the ACE Parameter. The Exchange 
also lists the ACE Parameter on its Web site.
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    \7\ See Securities Exchange Act Release No. 69921 (July 2, 
2013), 78 FR 41164 (July 9, 2013) (SR-Phlx-2013-72).
    \8\ See Rule 1080.08(a)(vi).
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    The Exchange now proposes to be able to set the ACE Parameter at a 
different percentage or number for Complex Orders where one of the 
components is the underlying security. This type of Complex Order, a 
stock-option order, is an order to buy or sell a stated number of units 
of an underlying security (stock or Exchange Traded Fund Share 
(``ETF'')) coupled with the purchase or sale of options contract(s).\9\ 
As such, a stock-option order is different than a Complex Order 
consisting of only option components. For example, if the market for 
Option A is $3.00-$3.50 and for the underlying stock is $50.00-$50.10 
and a Complex Order to buy Option A and sell the stock arrives, the 
cNBBO is $46.50-$47.10; thus, the regular ACE Parameter of 5% would 
result in an allowable execution range of $44.18-$49.45. Setting the 
ACE Parameter at 0.50% would result in a more narrow allowable 
execution range of $46.27-$47.34.
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    \9\ The underlying security must be the deliverable for the 
options component of that Complex Order and represent exactly 100 
shares per option for regular way delivery.
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    The ACE Parameter feature is designed to help maintain a fair and 
orderly market by helping to mitigate the potential risk of executions 
at prices which are extreme and potentially erroneous. The Exchange has 
determined that a different ACE Parameter limit should apply to stock-
option orders to offer a better degree of protection where needed. In 
the previous example, the regular ACE Parameter would allow execution 
prices of more than $2.30 away from the cNBBO. Allowing a different ACE 
Parameter for stock-option orders provides the ability for the Exchange 
to use a lower ACE Parameter, which in the example above, using 0.50% 
would have offered much more protection by narrowing the execution 
range to within roughly $0.23 of the cNBBO.
    The Exchange also proposes to correct the rule text to delete the 
reference to establishing the ACE Parameter on an issue-by-issue 
(meaning option-by-option) basis, because the Exchange cannot, at this 
time, do that. Today, the Exchange establishes the single ACE Parameter 
for all options, and, under this proposal, as explained above, is 
proposing to now establish a second ACE Parameter for stock-option 
orders respecting all options.
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\ in particular, in that it is designed to 
promote just and equitable principles of trade, and, in general to 
protect investors and the public interest, by enhancing the price 
protections available to Complex Orders on the Exchange. Specifically, 
the change to the SPP feature corrects the rule to indicate that an 
order will be cancelled, which is consistent with just and equitable 
principles of trade. The Exchange believes that cancelling orders under 
this proposal rather than placing them on the CBOOK is an improvement 
and results in additional protection from executions at far away 
prices. Price protections like SPP presume that an order was entered 
incorrectly or at an incorrect price if it is widely out of range of 
current prices. Accordingly, cancelling orders is an enhancement that 
should protect investors and the public interest and provide 
participants with consistent behavior on such orders.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    The change to the ACE Parameter should protect investors and the 
public interest by permitting a more specific and nuanced number to be 
set for Complex Orders that are stock-option orders. The price of a 
Complex Order that is a stock-option order may fluctuate differently 
and this proposal recognizes that they are different than option-only 
Complex Orders. This enhancement should also promote just and equitable 
principles of trade by better tailoring the ACE Parameter to these 
types of orders. With respect to the correction establishing an ACE 
Parameter for all options rather than option-by-option, the Exchange 
believes that this aspect of the proposal is consistent with just and 
equitable principles of trade and should protect investors and the 
public interest, because the Exchange believes that it can sufficiently 
protect Complex Orders by applying a single ACE Parameter to all 
options, along with a separate ACE Parameter for stock-option orders. 
The ACE Parameter has never been established option-by-option and 
market participants have not asked for that.

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. Specifically, various options 
exchanges offer complex order functionality along with a variety of 
price protections, such that the proposal will help the Exchange better 
compete with those options exchanges. With respect to intra-market 
competition, the proposal will be available to all eligible Complex 
Orders, regardless of participant type.

[[Page 77516]]

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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \13\ 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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    The proposal does not significantly affect the protection of 
investors or the public interest, because it provides enhanced price 
protection, which has the potential to benefit investors, as explained 
above. The proposal does not impose any significant burden on 
competition, as explained further above.
    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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 email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2013-121 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-2013-121. 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 offices 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-2013-121, 
and should be submitted on or before January 13, 2014.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30454 Filed 12-20-13; 8:45 am]
BILLING CODE 8011-01-P