Document ID: SEC-2017-2058-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Proposed Rule Change To Amend the Exchange Rules To Make Permanent a Program That Allows Transactions To Take Place in Open Outcry Trading at Prices of at Least $0 But Less Than $1 per Option Contract ("Sub-Dollar Cabinet Trades")
Posted Date: 2017-12-14T05:00Z

[Federal Register Volume 82, Number 239 (Thursday, December 14, 2017)]
[Notices]
[Pages 58825-58827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-26912]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82245; File No. SR-Phlx-2017-99]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change To Amend the Exchange Rules To Make Permanent a 
Program That Allows Transactions To Take Place in Open Outcry Trading 
at Prices of at Least $0 But Less Than $1 per Option Contract (``Sub-
Dollar Cabinet Trades'')

December 8, 2017.
    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 November 29, 2017 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 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 a proposal[sic] to amend the Exchange's 
rules to make permanent a program that allows transactions to take 
place in open outcry trading at prices of at least $0 but less than $1 
per option contract (``sub-dollar cabinet trades'').
    The text of the proposed rule change is available on the Exchange's 
website 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
    The Exchange proposes to amend Rule 1059 to make permanent a 
program that allows transactions to take place at a price that is below 
$1 per option contract.\3\ The program is currently subject to a pilot 
that is scheduled to expire on January 5, 2018.\4\
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    \3\ See Commentary .02, Limit Orders Priced Below $1, to 
Exchange Rule 1059, Accommodation Transactions.
    \4\ See Securities Exchange Act Release No. 79782 (January 12, 
2017), 82 FR 6667 (January 19, 2017) (SR-Phlx-2017-01). The Exchange 
initially adopted the program in 2010. See Securities Exchange Act 
Release No. 63626 (December 30, 2010), 76 FR 812 (January 6, 2011) 
(SR-Phlx-2010-185).
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    An ``accommodation'' or ``cabinet'' trade refers to trades in 
listed options on the Exchange that are worthless or not actively 
traded. Trading is generally conducted in accordance with Exchange 
Rules, except as provided in Exchange Rule 1059, Accommodation 
Transactions (Cabinet Trades), which sets forth specific procedures for 
engaging in cabinet trades.
    Rule 1059 provides that a ``cabinet order'' is a closing limit 
order at a price of $1 per option contract for the account of a 
customer, firm, specialist or ROT. An opening order is not a ``cabinet 
order'' but may in certain cases be matched with a cabinet order. Prior 
to the pilot program, only closing limit orders at a price of $1 per 
option contract for the accounts of customer, firm, specialists and 
Registered Options Traders (``ROTs'') could be placed in the cabinet.
    Rule 1059 currently provides that cabinet transactions at a price 
of $1 per option contract may occur via open outcry in any options 
series open for trading on the Exchange. However, the $1 Cabinet 
Trading procedures are not available in Penny Pilot Program classes

[[Page 58826]]

because in those classes an option series can trade in a standard 
increment as low as $ 0.01 per share (or $1.00 per option contract with 
a 100 share multiplier).
    The Exchange amended the Cabinet Trading procedures to allow 
transactions to take place in open outcry at a price of at least $0 but 
less than $1 per option contract. This amendment expires on January 5, 
2018. These lower-priced transactions are permitted to be traded 
pursuant to the same procedures applicable to $1 Cabinet Trades, except 
that (i) bids and offers for opening transactions are only permitted to 
accommodate closing transactions, and (ii) transactions in option 
classes participating in the Penny Pilot Program are permitted. The 
Exchange believes that allowing a price of at least $0 but less than $1 
better accommodates the closing of options positions in series that are 
worthless or not actively traded, particularly when there has been a 
significant move in the price of the underlying security, resulting in 
a large number of series being out-of-the-money. For example, a market 
participant might have a long position in a put series with a strike 
price of $30 and the underlying stock might be trading at $100. In such 
an instance, there is likely no market to close-out the position, even 
at the $1 cabinet price.
    As with other accommodation liquidations under Rule 1059, 
transactions at prices less than $1 are not disseminated to the public 
on the consolidated tape. In addition, as with other accommodation 
liquidations under Rule 1059, the transactions are exempt from the 
Consolidated Options Audit Trail (``COATS'') requirements of Exchange 
Rule 1063(e)(i). However, Rule 1059 requires all transactions, 
including transaction for less than $1, to be reported to the Exchange 
following the close of each business day.
    The Exchange notes that while the level of liquidation trades is 
not meaningful, such trades serve an essential purpose in that they 
allow market participants to close out options positions that are 
worthless or not actively trading. To illustrate, in 2016, there were a 
total of 442 Cabinet Trades comprising 244,734 contracts. Each contract 
was executed at a trade price of $ 0.01. The Exchange believes this 
level of trading demonstrates the benefit of the current program to 
market participants.
    The current rule was adopted on a pilot basis to provide the 
Exchange time to evaluate the efficacy of the change and to address any 
operational issues that might arise in processing Cabinet trades. In 
support of making the program permanent, the Exchange represents that 
there are no operational issues in processing and clearing Cabinet 
Trades in penny and subpenny increments. The Exchange is also not aware 
of the Options Clearing Corporation (``OCC'') having operational issues 
with processing Cabinet trades submitted by the Exchange. Each Cabinet 
Trade is input manually into the clearing system, and then flows 
seamlessly for settlement at OCC. More specifically, upon receiving an 
order for a Cabinet Trade, a Floor Broker fills out a designated 
cabinet transaction form provided by the Exchange noting the order 
details. The Floor Broker subsequently calls for a market for the order 
by announcing the terms of the order to the trading crowd. The Floor 
Broker proceeds to execute the order and submits the designated cabinet 
transaction form to the Nasdaq Market Operations staff for clearance 
and reporting at the close of the business day. Nasdaq Market 
Operations staff then enter the transaction into the Phlx system, which 
transmits the trade to OCC for clearance and settlement.
    At the time of adoption of the pilot the Phlx system permitted 
reporting a cabinet trade at a price as small as $0.0001, as it does 
today. The Exchange system allows Cabinet trades to be processed in a 
manner similar to how all other trades are processed by the exchange.
    Additionally, the Exchange notes that members and member 
organizations have not raised any concerns with the processing of 
Cabinet Trades.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\5\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\6\ 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. 
The Exchange believes that liquidation trades promote competition and 
afford market participants the opportunity to close out their options 
positions. The Exchange believes that permanently approving the rules 
that allow for liquidations at a price less than $1 per option contract 
would better facilitate the closing of options positions that are 
worthless or not actively trading, especially in Penny Pilot issues 
where Cabinet Trades are not otherwise permitted. The Exchange believes 
that approving the program on a permanent basis is also consistent with 
the Act. With respect to the level of liquidation trades transacted on 
the Exchange, the Exchange believes that the data gathered provides 
meaningful support to make the program permanent.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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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. The Exchange believes that 
approving the program on a permanent basis will not impact competition, 
as it will continue to facilitate members' ability to close positions 
in worthless or not actively traded series.

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 up to 90 days (i) as the 
Commission may designate 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 [email protected]. Please include 
File Number SR-Phlx-2017-99 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.

[[Page 58827]]

All submissions should refer to File Number SR-Phlx-2017-99. 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 website (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 website 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 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2017-99 and should be submitted on 
or before December 29, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-26912 Filed 12-13-17; 8:45 am]
 BILLING CODE 8011-01-P