Document ID: SEC-2016-1101-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-06-28T04:00Z

[Federal Register Volume 81, Number 124 (Tuesday, June 28, 2016)]
[Notices]
[Pages 42024-42027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15177]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78129; File No. SR-Phlx-2016-67]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to the 
Risk Monitor Mechanism

June 22, 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 June 9, 2016, NASDAQ PHLX LLC (``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to proposal to amend Rule 1095, entitled 
``Automated Removal of Quotes.''
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 1095, entitled ``Automated 
Removal of Quotes'' to modify the minimum Specified Percentage (as 
described below) determined by a Market Maker \3\ to enable a Market

[[Page 42025]]

Maker to enhance their risk management for an underlying security as 
market conditions warrant, based on their own risk tolerance level and 
quoting behavior. The manner in which Rule 1095 operates is not being 
amended in this rule change. The Exchange proposes to permit the Market 
Maker to set the Specified Percentage more broadly, at not less than 1% 
with this rule change. The Exchange also proposes to memorialize the 
definition of disseminated size in the rule text.
---------------------------------------------------------------------------

    \3\ Market Makers include Specialists and Registered Options 
Traders or ``ROTs.'' An ROT is defined in Exchange Rule 1014(b) as a 
is a regular member or a foreign currency options participant of the 
Exchange located on the trading floor who has received permission 
from the Exchange to trade in options for his own account. A ROT 
includes Streaming Quote Traders or ``SQTs'' and Remote Streaming 
Quote Traders or ``RSQTs'' as well as on and off-floor ROTS. An SQT 
is defined in Exchange Rule 1014(b)(ii)(A) as an ROT who has 
received permission from the Exchange to generate and submit option 
quotations electronically in options to which such SQT is assigned. 
An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an ROT that 
is a member affiliated with an RSQTO 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. A Remote Streaming Quote Trader Organization 
or ``RSQTO,'' which may also be referred to as a Remote Market 
Making Organization (``RMO''), is a member organization in good 
standing that satisfies the RSQTO readiness requirements in Rule 
507(a). RSQTs may also be referred to as Remote Market Markers 
(``RMMs'').
---------------------------------------------------------------------------

Background
    Today, Rule 1095 permits Market Makers to monitor risk arising from 
multiple executions across multiple options series of a single 
underlying security. A Market Maker may provide a specified time period 
and a specified percentage by which the Exchange's Phlx XL System 
(``System'') will automatically remove a Market Maker's quotes in all 
series of an underlying security submitted through designated Phlx 
protocols, as specified by the Exchange, during a specified time period 
not to exceed 15 seconds (``Percentage-Based Specified Time 
Period'').\4\
---------------------------------------------------------------------------

    \4\ A specified time period commences for an option when a 
transaction occurs in any series in such option.
---------------------------------------------------------------------------

    For each series in an option, the System determines: (i) The 
percentage that the number of contracts executed in that series 
represents relative to the Market Maker's disseminated \5\ size of each 
side in that series (``Series Percentage''); and (ii) the sum of the 
Series Percentage in the option issue (``Issue Percentage''). The 
System tracks and calculates the net impact of positions in the same 
option issue during the Percentage-Based Specified Time Period. The 
System tracks transactions, i.e., the sum of buy-side put percentages, 
the sum of sell-side put percentages, the sum of buy-side call 
percentages, and the sum of sell-side call percentages, and then 
calculates the absolute value of the difference between the buy-side 
puts and the sell-side puts plus the absolute value of the difference 
between the buy-side calls and the sell-side calls. If the Issue 
Percentage, rounded to the nearest integer, equals or exceeds a 
percentage established by the Market Maker, not less than 100% 
(``Specified Percentage''), the System automatically removes a Market 
Maker's quotes in all series of an underlying security submitted 
through designated Phlx protocols, as specified by the Exchange, during 
the Percentage-Based Specified Time. The Exchange counts Specialized 
Quote Feed (``SQF'') \6\ quotes only in determining the number of 
contracts traded and removed by the System.
---------------------------------------------------------------------------

    \5\ The disseminated size is the original size quoted by the 
Market Maker.
    \6\ SQF permits the receipt of quotes. SQF Auction Responses and 
market sweeps are also not included.
---------------------------------------------------------------------------

    The Percentage-Based Specified Time Period commences for an option 
every time an execution occurs in any series in such option and 
continues until the System removes quotes as described in current Rule 
1095(iv) or (v) or the Percentage-Based Time Period expires. The 
Percentage-Based Specified Time Period operates on a rolling basis 
among all series in an option in that there may be multiple Percentage-
Based Specified Time Periods occurring simultaneously and such 
Percentage-Based Specified Time periods may overlap.
Proposal
    The Exchange proposes to lower the Specified Percentage from 100% 
to 1%. The proposal would provide that if the Issue Percentage, rounded 
to the nearest integer, equals or exceeds a percentage established by 
the Market Maker, not less than 1% (``Specified Percentage''), the 
System automatically removes a Market Maker's quotes in all series of 
an underlying security submitted through designated Phlx protocols, as 
specified by the Exchange, during the Percentage-Based Specified Time. 
This proposal would allow a Market Maker to establish a Specified 
Percentage at any percentage level no less than 1% for an option in 
which the Market Maker is appointed. Today, the Specified Percentage 
would be set at greater than or equal to 100%. This amendment will 
allow Market Makers to better manage their risk and assist them to 
avoid trading a number of contracts that exceeds the Marker Maker's 
risk tolerance level across multiple series of a single underlying when 
such series are executed in rapid succession.
    Market Makers will be able to more precisely customize their risk 
management within the System, taking into account such factors as 
present and anticipated market conditions, news in an option sudden 
change in volatility of an option without any limitation regarding the 
Specified Percentage. Market Makers will be able to adopt more precise 
controls based on the Market Maker's risk tolerance level.
    Market Makers must utilize either the Percentage-Based \7\ or 
Volume-Based risk controls. Market Makers must contact Market 
Operations to set their percentage and specified time period.
---------------------------------------------------------------------------

    \7\ Market Makers selecting the Percentage-Based risk control in 
Rule 1095(i) are required to provide a specified time period, up to 
15 seconds, and a specified percentage with a number of 1% or 
greater, as proposed herein, to the Market Operations staff to 
select this risk control. If a Market Maker does not desire to 
utilize the Percentage-Based risk control the Market Maker must 
utilize the Volume-Based risk control. Market Makers must set-up 
their risk control settings initially, when they become a Phlx 
Market Maker, and then subsequent changes by contacting Market 
Operations.
---------------------------------------------------------------------------

    By way of example, if a Market Maker has a rapid fire percentage 
setting of 50% and a Specified Time Period of 15 seconds and the Order 
Book reflects:

    MM1 has a displayed quote of 1.10 (100) x 1.20 (100) for IBM May 
20, 2016 70 puts and MM1 is the only displayed size on Phlx and an 
order is submitted to buy 75 IBM May 20, 2016 70 Puts for 1.20
    Rule 1095 would:
    (1) Provide MM1 with an execution--Sld 75 @ 1.20; and
    (2) Trigger the Percentage-Based Threshold and remove MM1's 
quotes in IBM.

    Another example is with multiple executions. Presume MM1 has a 
rapid fire percentage setting of 80% by 5 seconds and MM1 has a 
displayed quote of 2.00 (100) x 2.25 (100) for IBM May 20, 2016 70 puts 
and he is the only displayed size on the Phlx. Also, presume an order 
comes in to buy 50 IBM May 20, 2016 70 puts for 2.25. The following 
executions would result:

MM1 receives an execution Sold 50 @2.25
MM1 quote updates to 2.00 (100) x 2.25 (50)
Within 1 second an order comes in to buy 45 IBM May 20, 2016 70 puts 
for 2.25
MM1 receives an execution Sold 45 @2.25
MM1 receives rapid fire for IBM

    The Exchange also proposes to memorialize the definition of 
disseminated size, which is the original size quoted by the Market 
Maker, within Rule 1095.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \9\ 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Market Makers are obligated to submit continuous two-sided 
quotations in a

[[Page 42026]]

certain number of series in their appointed option classes for a 
certain percentage of each trading session,\10\ rendering them 
vulnerable to risk from unusual market condition, volatility in 
specific options, and other market events that may cause them to 
receive multiple, extremely rapid automatic executions before they can 
adjust their quotations and overall risk exposure in the market. 
Without adequate risk management tools in place on the Exchange, the 
incentive for Market Makers to quote aggressively, respecting both 
price and size could be diminished. Such a result may undermine the 
quality of the markets, which are enhanced by the depth and liquidity 
such Market Makers provide in the marketplace.
---------------------------------------------------------------------------

    \10\ See Rule 1014 titled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders.''
---------------------------------------------------------------------------

    By allowing the percentage to be reduced from 100% to 1%, the 
Exchange provides its Market Makers the desired flexibility to take 
into account such factors as present and anticipated market conditions, 
news in an option or sudden change in volatility of an option without 
any limitation regarding the Specified Percentage. This should 
encourage Market Makers to provide additional depth and liquidity to 
the Exchange's markets, thereby removing impediments to and perfecting 
the mechanisms of a free and open market and a national market system 
and, in general, protecting investors and the public interest.
    The proposal is consistent with the Act because the reduction of 
the Specified Percentage to not less than 1% provides more alternatives 
to Market Makers in setting their percentage without impacting their 
firm quote obligations. The System operates consistently with the firm 
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation 
NMS. Specifically, with respect to Market Makers, their obligation to 
provide continuous two-sided quotes on a daily basis is not diminished 
by the removal of such quotes by the Percentage-Based Threshold. Market 
Makers are required to provide continuous two-sided quotes on a daily 
basis.\11\ Market Makers that utilize the Percentage-Based Threshold 
will not be relieved of the obligation to provide continuous two-sided 
quotes on a daily basis, nor will it prohibit the Exchange from taking 
disciplinary action against a Market Maker for failing to meet the 
continuous quoting obligation each trading day. All quotes entered into 
the System are considered firm. Quotes will only be removed from the 
System once the Percentage-Based Threshold has been met if the quote 
was not otherwise executed by an incoming order.
---------------------------------------------------------------------------

    \11\ Id.
---------------------------------------------------------------------------

    This risk feature will continue to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system and protect investors and the public interest by allowing Market 
Makers to remove their quotes in the event that market conditions 
warrant, based on their own risk tolerance level. Market Makers provide 
liquidity to the market place and have obligations unlike other market 
participants.\12\ This risk feature is important because it will enable 
Market Makers to manage their exposure at the Exchange. Further, 
permitting a broader setting would continue to allow Market Makers to 
have flexibility in setting their risk exposure to prevent unintended 
triggers of the Percentage-Based Threshold and it continues to allow 
Market Makers to set a Specified Time Period. Each Market Maker has 
different levels of sensitivity and their own system safeguards as 
well. The proposed setting would permit each Market Maker to select a 
setting that is appropriate to capture the needs of that Market Maker.
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

    Further, it is important to note that any interest that is 
executable against a Market Maker's quotes that is received \13\ by the 
Exchange prior to the trigger of the Percentage-Based Threshold, which 
is processed by the System, automatically executes at the price up to 
the Market Maker's size. Further, the Purge Notification Message is 
accepted by the System in the order of receipt in the queue and is 
processed in that order so that interest that is already accepted into 
the System is processed prior to the message.
---------------------------------------------------------------------------

    \13\ The time of receipt for an order or quote is the time such 
message is processed by the Exchange book.
---------------------------------------------------------------------------

    The Exchange notes that Miami International Securities Exchange, 
LLC (``MIAX'') implemented a rule which changed its Allowable 
Engagement Percentage from 100% to any percentage established by the 
Market Maker.\14\ The Phlx rule is similar to MIAX in that a member is 
required to have a setting, although MIAX has a default setting in 
place in the instance that no percentage is provided. Market Makers 
that select the Percentage-Based risk tool must provide the Exchange 
with a specified time period and a percentage greater than or equal to 
1%.
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 77817 (May 12, 
2016), 81 FR 31286 (May 18, 2016) (SR-MIAX-2016-10).
---------------------------------------------------------------------------

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 Percentage-Based Threshold 
is meant to protect Market Makers from inadvertent exposure to 
excessive risk. This proposal will foster competition by providing 
Exchange Market Makers with the ability to enhance and customize their 
percentage in order to compete for executions and order flow. 
Specifically, the proposal does not impose a burden on intra-market or 
inter-market competition, rather, it provides Market Makers with the 
opportunity to avail themselves of similar risk tools which are 
currently available on other exchanges.\15\ Market Makers quote across 
many series in an option creating the possibility of ``rapid fire'' 
executions that can create large, unintended principal positions that 
expose Market Makers. The Percentage-Based Threshold permits Market 
Makers to monitor risk arising from multiple executions across multiple 
options series of a single underlying security.
---------------------------------------------------------------------------

    \15\ See Section 8 of the 19b-4.
---------------------------------------------------------------------------

    The Exchange is proposing this rule change to continue to permit 
Market Makers to reduce their risk in the event the Market Maker is 
suffering from a system issue or due to the occurrence of unusual or 
unexpected market activity. Reducing such risk will enable Market 
Makers to enter quotations without any fear of inadvertent exposure to 
excessive risk, which in turn will benefit investors through increased 
liquidity for the execution of their orders. Reducing risk by utilizing 
the proposed risk protections enables Market Makers, specifically, to 
enter quotations with larger size, which in turn will benefit investors 
through increased liquidity for the execution of their orders. Such 
increased liquidity benefits investors because they receive better 
prices and because it lowers volatility in the options market.

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.

[[Page 42027]]

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)(iii) of the Act \16\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\ The Exchange has 
requested that the Commission waive the thirty-day operative delay so 
that the proposal may become operative immediately. The Commission 
believes that waiving the thirty-day operative delay is consistent with 
the protection of investors and the public interest. The Exchange 
proposes to change a setting in an existing risk protection feature to 
enhance market makers' ability to protect against excessive risk 
arising from multiple executions across multiple options series of a 
single underlying security. The Commission notes that another options 
exchange currently has a similar setting for a like risk protection 
feature for market makers. Therefore, the Commission hereby waives the 
thirty-day operative delay and designates the proposal effective upon 
filing.\18\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \17\ 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.
    \18\ For purposes of waiving the 30-day operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    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-2016-67 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-2016-67. 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 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-2016-67, and should be 
submitted on or before July 19, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2016-15177 Filed 6-27-16; 8:45 am]
 BILLING CODE 8011-01-P