Document ID: SEC-2013-0480-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-03-13T04:00Z

[Federal Register Volume 78, Number 49 (Wednesday, March 13, 2013)]
[Notices]
[Pages 16001-16003]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05743]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69068; File No. SR-Phlx-2013-21]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Adopt New Exchange Rule 1047(f)(iv) 
Regarding Quoting Obligations

March 7, 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 March 5, 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 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 adopt a new Exchange Rule 1047(f)(iv) to 
provide for how the Exchange proposes to treat market-making quoting 
obligations, in response to the Regulation NMS Plan to Address 
Extraordinary Market Volatility.
    The text of the proposed rule change is below; proposed new 
language is italicized.
* * * * *

Rule 1047. Trading Rotations, Halts and Suspensions

    (a)-(e) No change.
    (f) This paragraph shall be in effect during a pilot period to 
coincide with the pilot period for the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS, as it may be 
amended from time to time (``LULD Plan''). Capitalized terms used in 
this paragraph shall have the same meaning as provided for in the LULD 
Plan. During a Limit State and Straddle State in the Underlying NMS 
stock:
    (i)-(iii) No change.
    (iv) When evaluating whether a specialist or Registered Options 
Trader has met the continuous quoting obligations of Rule 
1014(b)(ii)(D)(1) and (2) in options overlying NMS stocks, the Exchange 
will not consider as part of the trading day the time that an NMS stock 
underlying an option was in a Limit State or Straddle State.
    (g) No change.
    * * * Commentary:
    .01-.03 No change.
* * * * *

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 adopt Exchange Rule 1047(f)(iv) \3\ to 
provide for how the Exchange will treat market making quoting 
obligations in response to the Regulation NMS Plan to Address 
Extraordinary Market Volatility (the ``Plan''), which is applicable to 
all NMS stocks, as defined in Regulation NMS Rule 600(b)(47). The 
Exchange proposes to adopt new Rule 1047(f)(iv) for a pilot period that 
coincides with the pilot period for the Plan.
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    \3\ The provisions of Rule 1047(f)(i)-(iii) were filed and 
became effective on February 28, 2013, with a 30 day operative 
delay, on a pilot basis. See SR-Phlx-2013-20.
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Background
    Since May 6, 2010, when the markets experienced excessive 
volatility in an abbreviated time period, i.e., the ``flash crash,'' 
the equities exchanges and the Financial Industry Regulatory Authority 
(``FINRA'') have implemented market-wide measures designed to restore 
investor confidence by reducing the potential for excessive market 
volatility. Among the measures adopted include pilot plans for stock-
by-stock trading pauses,\4\ related changes to the equities market 
clearly erroneous execution rules,\5\ and more stringent equities 
market maker quoting requirements.\6\
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    \4\ See e.g., Exchange Rule 3100.
    \5\ See e.g., Exchange Rule 3312.
    \6\ See e.g., NASDAQ Rule 4613.
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    On May 31, 2012, the Commission approved the Plan, as amended, on a 
one-year pilot basis.\7\ In addition, the Commission approved changes 
to the equities market-wide circuit breaker rules on a pilot basis to 
coincide with the pilot period for the Plan.\8\
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    \7\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving 
the Plan on a Pilot Basis).
    \8\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
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    The Plan is designed to prevent trades in individual NMS stocks 
from occurring outside of specified Price Bands.\9\ As described more 
fully below, the requirements of the Plan are coupled with Trading 
Pauses to accommodate more fundamental price moves (as opposed to 
erroneous trades or momentary gaps in liquidity). All trading centers 
in NMS stocks, including both those operated by Participants and those 
operated by members of Participants, are required to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with the requirements specified in the 
Plan.
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    \9\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
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    As set forth in more detail in the Plan, Price Bands consisting of 
a Lower Price Band and an Upper Price Band for each NMS Stock are 
calculated by the Processors.\10\ When the National Best Bid (Offer) is 
below (above) the Lower (Upper) Price Band, the Processors shall 
disseminate such National Best Bid (Offer) with an appropriate flag 
identifying it as unexecutable. When the National Best Bid (Offer) is 
equal to the Upper (Lower) Price Band, the Processors shall distribute 
such National Best Bid (Offer) with an appropriate flag identifying it 
as a Limit State Quotation.\11\ All trading centers in

[[Page 16002]]

NMS stocks must maintain written policies and procedures that are 
reasonably designed to prevent the display of offers below the Lower 
Price Band and bids above the Upper Price Band for NMS stocks. 
Notwithstanding this requirement, the Processor shall display an offer 
below the Lower Price Band or a bid above the Upper Price Band, but 
with a flag that it is non-executable. Such bids or offers shall not be 
included in the National Best Bid or National Best Offer 
calculations.\12\ Trading in an NMS stock immediately enters a Limit 
State if the National Best Offer (Bid) equals but does not cross the 
Lower (Upper) Price Band.\13\ Trading for an NMS stock exits a Limit 
State if, within 15 seconds of entering the Limit State, all Limit 
State Quotations were executed or canceled in their entirety. If the 
market does not exit a Limit State within 15 seconds, then the Primary 
Listing Exchange would declare a five-minute trading pause pursuant to 
Section VII of the Plan, which would be applicable to all markets 
trading the security.\14\ In addition, the Plan defines a Straddle 
State as when the National Best Bid (Offer) is below (above) the Lower 
(Upper) Price Band and the NMS stock is not in a Limit State. For 
example, assume the Lower Price Band for an NMS Stock is $9.50 and the 
Upper Price Band is $10.50, such NMS stock would be in a Straddle State 
if the National Best Bid were below $9.50, and therefore unexecutable, 
and the National Best Offer were above $9.50 (including a National Best 
Offer that could be above $10.50). If an NMS stock is in a Straddle 
State and trading in that stock deviates from normal trading 
characteristics, the Primary Listing Exchange may declare a trading 
pause for that NMS stock if such Trading Pause would support the Plan's 
goal to address extraordinary market volatility.
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    \10\ See Section V(A) of the Plan.
    \11\ See Section VI(A) of the Plan.
    \12\ See Section VI(A)(3) of the Plan.
    \13\ See Section VI(B)(1) of the Plan.
    \14\ The primary listing market would declare a Trading Pause in 
an NMS stock; upon notification by the primary listing market, the 
Processor would disseminate this information to the public. No 
trades in that NMS stock could occur during the trading pause, but 
all bids and offers may be displayed. See Section VII(A) of the 
Plan.
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Proposal
    The Exchange proposes to adopt Rule 1047(f)(iv) to provide that the 
Exchange shall exclude the amount of time an NMS stock underlying a 
Phlx option is in a Limit State or Straddle State from the total amount 
of time in the trading day when calculating the percentage of the 
trading day specialists and Registered Options Traders (``ROTs'') are 
required to quote.
    Currently, the quoting requirements appear in Rule 
1014(b)(ii)(D)(1) and (2), which generally require that: (i) A 
Streaming Quote Trader (``SQT'') and a Remote Streaming Quote Trader 
(``RSQT'') shall be responsible to quote two-sided markets in not less 
than 60% of the series in which such SQT or RSQT is assigned; (ii) a 
Directed SQT (``DSQT'') or a Directed RSQT (``DRSQT'') shall be 
responsible to quote two-sided markets in the lesser of 99% of the 
series listed on the Exchange or 100% of the series listed on the 
Exchange minus one call-put pair, in each case in at least 60% of the 
options in which such DSQT or DRSQT is assigned; and (iii) the 
specialist (including the RSQT functioning as a Remote Specialist in 
particular options) shall be responsible to quote two-sided markets in 
the lesser of 99% of the series or 100% of the series minus one call-
put pair in each option in which such specialist is assigned. To 
satisfy these requirements, they must be quoting such series 90% of the 
trading day as a percentage of the total number of minutes in such 
trading day.
    The Exchange now proposes to subtract from the total number of 
minutes in a trading day the time period for an option when the 
underlying NMS stock was in a Limit State or Straddle State. The 
Exchange believes that this is appropriate for the same reasons 
discussed above, in light of the limited price discovery in the 
underlying stock and the direct relationship between an options price 
and the price of the underlying security. During a Limit State or 
Straddle State, the bid price or offer price of the underlying security 
will be unexecutable and the ability to hedge the purchase or sale of 
an option will be jeopardized. Recognizing that it may be impossible to 
hedge to offset the risk created by trading options, the Exchange 
expects that specialists and ROTs will, as a result, modify their 
quoting behavior. The Exchange believes it is reasonable and 
appropriate to exclude this time period, which the Exchange believes 
will generally be limited. Currently, the Exchange excludes the time 
period when an option is halted for the obvious reason that trades 
cannot occur and quotes are irrelevant during a halt.
    The Exchange has considered waiving its bid/ask differential 
requirement (also known as quote spread parameters), but ultimately 
determined that those requirements should be maintained in order to 
promote liquidity and the operation of a fair and orderly market. 
Accordingly, even when the quoting obligation is not in effect, 
specialists and ROTs who choose to quote must do so within the 
applicable bid-ask differentials. The Exchange believes that this 
should help ensure the quality of the quotes that are entered and 
preserves one of the obligations of being a market maker.\15\
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    \15\ Because they will continue to be subject to the market 
maker obligation of maintaining quotes within a certain bid/ask 
differentials, Specialists and ROTs will continue to be eligible for 
the various ``guarantees'' that are available to them including the 
Directed Order and size pro-rata allocations. See Rule 1080. The 
Exchange notes that it is technically complex, and therefore, 
impractical, to address this.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\16\ in general, and with 
Section 6(b)(5) of the Act,\17\ in particular, which requires that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest, 
because the Exchange believes that excluding the Limit and Straddle 
State from a specialist's and ROT's quoting obligation calculation 
should promote just and equitable principles of trade by recognizing 
the particular risk that arises for liquidity providers who cannot 
hedge. Whenever an NMS stock is in a Limit State or Straddle State, 
trading continues; however, there will not be a reliable price for a 
security to serve as a benchmark for the price of the option. 
Accordingly, the Exchange seeks to expressly remove these periods from 
consideration in order to enable specialists and ROTs to provide the 
necessary liquidity and facilitate transactions on the Exchange.
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    \16\ 15 U.S.C. 78f.
    \17\ 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 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the proposal does not impose an intra-market burden on 
competition, because it will apply to all members subject to those 
obligations in the same manner. Nor will the proposal impose a burden 
on competition among the options exchanges, because, in

[[Page 16003]]

addition to the vigorous competition for order flow among the options 
exchanges, the proposal addresses a regulatory situation common to all 
options exchanges. To the extent that market participants disagree with 
the particular approach taken by the Exchange herein, market 
participants can easily and readily operate on competing venues. The 
Exchange believes this proposal will not impose a burden on competition 
and will help provide liquidity during periods of extraordinary 
volatility in an NMS stock.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor 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 self-regulatory organization consents, the Commission will:
    (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 No. SR-Phlx-2013-21 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 No. SR-Phlx-2013-21. 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 No. SR-Phlx-2013-21 and should be 
submitted on or before March 28, 2013.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05743 Filed 3-12-13; 8:45 am]
BILLING CODE 8011-01-P