Document ID: SEC-2016-1846-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-10-14T04:00Z

[Federal Register Volume 81, Number 199 (Friday, October 14, 2016)]
[Notices]
[Pages 71153-71156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24836]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79073; File No. SR-Phlx-2016-97]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Delete Outdated or Unnecessary Rule Language

October 7, 2016.
    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 27, 2016, NASDAQ 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    The Exchange proposes to delete outdated or unnecessary rule 
language contained in Rule 1020, Registration and Functions of Options 
Specialists, section (b) and Commentary .01 through .06.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.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
    Exchange Rule 1020 contains provisions relating to registration and 
functions of options specialists.\3\ Rule 1020's provisions were 
initially adopted in the 1970s, in the early days of exchange trading 
of options. As explained below, the rule reflects the trading context 
in which it was adopted. Various provisions of the rule are 
consequently very outdated.
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    \3\ A ``specialist'' is an Exchange member who is registered as 
an options specialist pursuant to Exchange Rule 1020(a). Specialists 
are subject to quoting and registration obligations set forth in 
Rules 1014(b), 1020, and 1080.02.
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    The Exchange is therefore proposing to delete obsolete and 
unnecessary language from section (b) and from Commentary .01 through 
Commentary

[[Page 71154]]

.06 of Rule 1020 pertaining to the obligations of specialists. The 
Exchange proposes to delete the language in question in order to 
prevent any confusion that may result from obsolete provisions, to 
eliminate unnecessary language, and to ensure that the rulebook 
accurately reflects specialists' obligations in the context of the 
manner in which trading is conducted today.
Section (b)
    Rule 1020 provides that, as a condition of being registered as a 
specialist in one or more options, a member has an obligation to assist 
in the maintenance of a fair and orderly market. The rule currently 
provides that this obligation exists for a specialist ``in addition to 
the execution of orders entrusted him in such options.'' The Exchange 
is deleting the language regarding execution of entrusted orders. 
Specialists no longer manually handle or execute others' orders due to 
the Exchange's migration to a new electronic trading system (``Phlx XL 
II'') in 2009.\4\ The Phlx XL II enhancements were designed to improve 
the execution quality for its Phlx users by improving a number of 
processes, including the opening process, the order handling process 
and the execution of orders process. As a consequence of this migration 
a manual book no longer exists and specialists no longer enter manual 
orders entrusted to them onto the electronic limit order book.\5\ 
Specialists no longer handle any agency orders whatsoever in their role 
as specialists. The Exchange proposes to delete the language in 
question in order to prevent any confusion that may result from this 
obsolete provision and to ensure that the rulebook accurately reflects 
member obligations.
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    \4\ In May 2009, the Exchange enhanced the options trading 
system and adopted corresponding rules referring to it as ``Phlx XL 
II.'' See Securities Exchange Act Release No. 59995 (May 28, 2009), 
74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). Thereafter, the 
Exchange submitted a number of filings updating various rules and 
deleting obsolete provisions. See Securities Exchange Act Release 
Nos. 61397 (January 22, 2010), 75 FR 4893 (January 29, 2010) (SR-
Phlx-2010-07); 63036 (October 4, 2010), 75 FR 62621 (October 12, 
2010) (SR-Phlx-2010-131); and 67469 (July 19, 2012), 77 FR 43633 
(July 25, 2012) (SR-Phlx-2012-92).
    \5\ Specifically, the Exchange has stated that no orders will be 
executed, and therefore handled, manually in Phlx XL II. See 
Securities Exchange Act Release No. 59721 (April 7, 2009), 74 FR 
17245 (April 14, 2009) (SR-Phlx-2009-32) (Notice of Filing of 
Proposed Rule Change Relating to the Exchange's Enhanced Electronic 
Trading Platform for Options, Phlx XL II at 17258). Rules governing 
the obligations of Specialists, such as quoting and registration 
obligations, still exist. See, e.g., Rules 1014(b) and 1020.
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Commentary .01
    Commentary .01 applies to transactions of a specialist for his own 
account that establish or increase a position. It provides that in 
``effecting transactions'' for his own account for the purpose of 
establishing or increasing a position, a specialist is to effect such 
transactions in a reasonable and orderly manner in relation to the 
condition of the general market, the market in the particular option 
and the adequacy of his position to the immediate and reasonably 
anticipated needs of the options market. It provides that the following 
types of transactions to establish or increase a position are not to be 
effected except when they are reasonably necessary to render the 
specialist's position adequate to such needs: (a) A purchase at a price 
above the last sale in the same trading session; (b) the purchase of 
all or substantially all the options offered on the book at a price 
equal to the last sale, when the option so offered represents all or 
substantially all the options offered in the market; and when a 
substantial amount of an option is offered at a price equal to the last 
sale price, the purchase of more than 50% of all the options offered at 
the last sale price; (c) the supplying of all or substantially all the 
options bid for on the book at a price equal to the last sale, when the 
option so bid for represents all or substantially all the options bid 
for in the market; and when a substantial amount of the options bid for 
at a price equal to the last sale price, the supplying of more than 50% 
of all the options bid for at the last sale price; (d) failing to re-
offer or re-bid where necessary after effecting transactions described 
in (a), (b), or (c). The rule permits transactions of these types to be 
effected, however, with the approval of an Options Exchange Official or 
in relatively inactive markets where they are an essential part of a 
proper course of dealings and where the amount of an option involved 
and the price change, if any, are normal in relation to the market.
    The Exchange proposes to delete the last sentence of Commentary 
.01, and sections (a) through (d) of Commentary .01, because a 
specialist is unable to comply with its requirements given the way 
trading is conducted today in the PHLX XL trading system. Specialists 
today only rarely ``effect transactions'' in the sense of matching bids 
and offers to cause an execution to occur. Rather, they submit bids and 
offers to be matched. Although a specialist may ``effect transactions'' 
with a market maker on the Exchange's trading floor, the vast majority 
of transactions are executed electronically by the trading system and 
the specialist may be unable to determine the price of the last sale 
which would be required to comply with the language being deleted. 
Thus, for example, given electronic quoting and the absence of 
specialist control over the book, there is no way a specialist can 
guarantee that a purchase is at a price above the last sale in the same 
trading session. Because he will not know the price at which trading 
will occur, he cannot comply with Commentary .01 (a)--(d).
    Although these tick-based rules may have been appropriate for and 
worked well in a market where substantially all trading was conducted 
manually, at a pace that enabled individuals to discern ``tick'' 
changes easily and which tolerated the time it took to call an Options 
Exchange Official into the crowd to approve a particular specialist's 
transaction, they are inappropriate now where trading is substantially 
electronic and the speed and frequency of executions and quote changes 
preclude individuals from being able to accurate track ``ticks'' or 
stop trading to allow for Options Exchange Official involvement.\6\ The 
rules of the NASDAQ Options Market (``NOM'') do not contain comparable 
provisions with respect to market makers.
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    \6\ See Securities Exchange Act Release No. 54860 (December 1, 
2006), 71 FR 71221 (December 8, 2006) (SR-NYSE-2006-76) in which the 
New York Stock Exchange advanced this explanation in support of 
proposed changes to its specialist stabilization rules.
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Commentary .02
    Commentary .02 applies to transactions of a specialist for his own 
account that liquidate or decrease his position in an option in which 
he is registered. It provides that such transactions are to be 
``effected'' in a reasonable and orderly manner in relation to the 
condition of the general market, the market in the particular option 
and the adequacy of the specialist's positions to the immediate and 
reasonably anticipated needs of the options market. It also provides 
that, in this connection, unless he has the prior approval of an 
Options Exchange Official, he should avoid: (a) Liquidation of all or 
substantially all of a position by selling options at prices below the 
last different price or by purchasing options at prices above the last 
different price unless such transactions are reasonably necessary in 
relation to the specialist's overall position in the options in which 
he is registered; (b) failing to maintain a fair and orderly market 
during liquidations;

[[Page 71155]]

or (c) failing to re-enter the market where necessary, after effecting 
transactions described in (a) above.
    The Exchange proposes to delete part of the last sentence of 
Commentary .02 as well as sections (a) through (c) of Commentary .02. 
The Exchange believes that while these rules may have made sense when 
they were adopted, changes in market structure and technology in the 
succeeding decades, such as the shift to trading in penny increments, 
dispersion of order flow to multiple competing market centers, 
consolidation and availability of market data, and enhancements in 
trading, communications and surveillance technology have made these 
rules anticompetitive anachronisms.
    As discussed above, given the way trading is conducted today in the 
PHLX XL trading system, a specialist may be unable to determine the 
``last different price'' as required to comply with section (a). 
Section (b) is being deleted as redundant of Rule 1020(b) which already 
contains the ``fair and orderly'' requirement. Section (c) is being 
deleted because it depends on Section (a) which is being deleted as 
discussed above. Finally, the NOM rules do not contain comparable 
provisions with respect to market makers.\7\ The language is therefore 
operationally obsolete, as explained above. Moreover, having clear and 
up-to-date rules should promote just and equitable principles of trade 
on the Exchange.
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    \7\ The Exchange believes that the fact that NOM does not have a 
trading floor is irrelevant.
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Commentary .03
    Commentary .03 provides that a specialist's quotation, made for his 
own account, should be such that a transaction effected at his quoted 
price or within the quoted spread, whether having the effect of 
reducing or increasing the specialist's position, would bear a proper 
relation to preceding transactions and anticipated succeeding 
transactions. The Exchange proposes to delete Commentary .03 because 
given the speed of trading that occurs today on the Phlx XL trading 
system, a specialist may not have knowledge of the preceding 
transactions to which his quotation would relate, much less any 
anticipated succeeding transactions. Without affecting his liquidity, 
the specialist cannot possibly look at every single transaction, nor 
can he know how the transactions relate to one another. Prior to the 
advent of electronic trading, a specialist would announce his quote 
verbally, which was a very slow process. Today, a specialist would not 
be able to adjust quotes as needed to comply with Commentary .03 before 
the quotes are accessed.
    The NOM rules do not contain comparable provisions with respect to 
market makers. The language is an unnecessary and anticompetitive 
burden on Phlx specialists, because market makers on NOM which fulfill 
a comparable role to Phlx specialists are not subject to a comparable 
requirement.
Commentary .04
    Commentary .04 applies to opening or reopening an option. It 
provides that a specialist should avoid participating as a dealer in 
opening or reopening an option in such a manner as to reverse the 
balance of public supply and demand as reflected by market and limited 
price orders at or near the price of the previous close or halt, unless 
the condition of the general market or the specialist's position in 
light of the reasonably anticipated needs of the market make it 
advisable to do so, or unless the specialist has obtained the prior 
approval of an Options Exchange Official to do so. The rule provides 
that he may, however, buy or sell an option as a dealer to minimize the 
disparity between supply and demand at an opening or reopening. The 
Exchange proposes to delete Commentary .04 in its entirety because the 
Specialist no longer manually opens options classes. Rather, the PHLX 
XL trading system handles the opening and re-opening of options in 
accordance with Phlx Rule 1017. While the Specialist is required to 
provide a quote, he or she is no more involved in resolving imbalances 
than any other market maker. All aspects of the opening are done 
automatically by the system.
Commentary .05
    Commentary .05 prohibits a member acting as a specialist from 
effecting transactions for the purpose of adjusting a LIFO inventory in 
an option in which he is so acting except as a part of a course of 
dealings reasonably necessary to assist in the maintenance of a fair 
and orderly market. This rule largely tracks former NYSE rule 104.13 
which was designed to prevent year-end purchases or sales for the 
purpose of obtaining tax advantages under the LIFO system of valuing 
inventory.\8\
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    \8\ See Securities Exchange Act Release No. 7432, 29 FR 13777 
(October 6, 1964).
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    The Exchange proposes to delete Commentary .05 in its entirety 
because the Exchange believes it is unnecessary. The NOM rules do not 
contain a comparable provision for market makers. Additionally, the 
Exchange was unable to locate a comparable Chicago Board Options 
Exchange (``CBOE'') rule. The language is an unnecessary and 
anticompetitive burden on Phlx specialists, because market makers on 
NOM which fulfill a comparable role to Phlx specialists are not subject 
to a comparable requirement.
Commentary .06
    Commentary .06 provides that under certain circumstances a 
specialist may assign options in which he is registered to an 
investment account. Purchases creating or adding to a position in an 
investment account may not be made unless reasonably necessary to 
permit the specialist to assist in the maintenance of a fair and 
orderly market. The Exchange is deleting this sentence because it 
believes it is not necessary. Specialists have their ``specialist 
account.'' Any executions on their quotes are placed into their 
specialist accounts. While an ``investment account'' may have played a 
role in early days of trading, the Exchange is unaware today of what 
such an account might consist of or its purpose--consequently, the 
Exchange perceives no need to regulate it or fashion rules around it.
    Commentary .06 states that in the maintenance of price continuity 
with reasonable depth, it is commonly desirable for a specialist to 
supply options to the market, even though he may have to sell short to 
do so, to the extent reasonably necessary to meet the needs of the 
market. This sentence is being deleted because the Exchange believes 
its rules should not include statements of ``desirable'' behavior.
    Finally, Commentary .06 provides that a specialist may not effect a 
transfer of options in which he is registered from his dealer account 
to an investment account if the transfer would result in creating a 
short position in the dealer account. This Exchange is deleting this 
sentence because it is unnecessary, for the reasons specified above 
relating to investment accounts.
    The NOM rules do not contain provisions comparable to the 
provisions of Commentary .06 with respect to its market makers. The 
language is an unnecessary and anticompetitive burden on Phlx 
specialists, because market makers on NOM which fulfill a comparable 
role to Phlx specialists are not subject to comparable requirements.

2. Statutory Basis

    The Exchange believes that its proposal is consistent with Section 
6(b)

[[Page 71156]]

of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ 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 deleting unnecessary and obsolete provisions and generally 
providing clarity to the rules.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    Specifically, the deletion of a portion of the Rule 1020 Section 
(b) and Commentary provisions discussed above is consistent with the 
Act because this rule language is operationally obsolete, as explained 
above; moreover, having clear and up to date rules should promote just 
and equitable principles of trade on the Exchange. The proposal should 
result in a more accurate and understandable rule book, particularly 
for Exchange specialists who no longer operate a book or handle orders 
manually. The Exchange's goal with respect to the deletion of language 
is to ensure that the rulebook accurate reflects member obligations in 
the context of how trading takes place on the Exchange today, which 
should protect investors and the public interest. The Exchange's 
proposal will also delete unnecessary provisions that, because they are 
not present in the NOM rulebook with respect to market makers, 
represent an anticompetitive burden on Phlx specialists as discussed 
above.

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. Removing unnecessary regulatory 
burdens should enhance a Phlx specialist's ability to compete with 
market makers on Phlx and on other exchanges who are not burdened with 
similar requirements.

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 45 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 
or disapprove 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 email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2016-97 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2016-97. 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 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-2016-97, and should be 
submitted on or before November 4, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24836 Filed 10-13-16; 8:45 am]
 BILLING CODE 8011-01-P