Document ID: SEC-2010-1581-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-10-18T04:00Z

[Federal Register: October 18, 2010 (Volume 75, Number 200)]
[Notices]               
[Page 63876-63878]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc10-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63071; File No. SR-Phlx-2010-139]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Floor Broker Responsibilities

October 8, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on October 5, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 1063, Responsibility 
of Floor Brokers, and Option Floor Procedure Advice (``OFPA'') C-2, 
Options Floor Broker Management System: to: (i) Require floor brokers 
to enter specific identifying information on their orders; and (ii) 
amend the current language applicable to the entry of clearing 
information by floor brokers.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
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 those 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 parts 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 proposed rule change is to require floor brokers 
to enter certain identifying information on their orders to enhance the 
Exchange's audit trail to provide more specificity in identifying a 
market participant's executing order. The Exchange is proposing to 
require floor brokers \3\ to

[[Page 63877]]

enter certain alpha/numeric identifying information in addition to 
their own account number.
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    \3\ An Options Floor Broker (``Floor Broker'') is an individual 
who is registered with the Exchange for the purpose, while on the 
Options Floor, of accepting and executing options orders received 
from members and member organizations. An Options Floor Broker shall 
not accept an order from any other source unless he is the nominee 
of a member organization qualified to transact business with the 
public in which event he may accept orders from public customers of 
the organization. See Exchange Rule 1060.
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    Currently, floor brokers enter their own alpha/numeric 
identification information,\4\ assigned by the Exchange, on the Options 
Floor Broker Management System,\5\ for each order they receive and 
represent in the trading crowd.\6\ Similarly, Advice F-1 requires ROTs 
to enter their complete alpha/numeric identification assigned by the 
Exchange on the FBMS for each order they receive in the trading crowd. 
The Exchange is proposing to amend Exchange Rule 1063 and Option Floor 
Procedure Advice C-2 to require Floor Brokers to enter alpha/numeric 
identification for all orders entered on behalf of ROTs,\7\ not just 
for orders they receive and represent themselves in a trading crowd.
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    \4\ This is an identifying letter that is assigned by the 
Exchange that follows the account number and identifies a Registered 
Options Trader (``ROT''). A Registered Options Trader may have more 
than one alpha/numeric.
    \5\ The Options Floor Broker Management System (``FBMS'') is a 
component of the Exchange's system designed to enable Floor Brokers 
and/or their employees to enter, route and report transactions 
stemming from options orders received on the Exchange. The FBMS also 
is designed to establish an electronic audit trail for options 
orders represented and executed by Floor Brokers on the Exchange, 
such that the audit trial provides an accurate, time-sequenced 
record of electronic and other orders, quotations and transactions 
on the Exchange, beginning with the receipt of an order by the 
Exchange, and further documenting the life of the order through the 
process of execution, partial execution, or cancellation of that 
order.
    \6\ See Option Floor Procedure Advice F-1 titled Use of 
Identification Letters and Numbers. Specialists and ROTs are also 
required to comply with F-1 in addition to Floor Brokers.
    \7\ A ROT includes a Streaming Quote Trader (``SQT''), a Remote 
Streaming Quote Trader (``RSQT'') and a Non-SQT, which by definition 
is neither a SQT or a RSQT. See Exchange Rule 1014 (b)(i) and (ii).
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    Additionally, the Exchange is proposing to amend the timeframe 
within which floor brokers enter certain clearing information into the 
FBMS. Currently, a floor broker is required to contemporaneously upon 
receipt of an order and prior to the representation of such an order 
record the following specific information with respect to orders 
represented by a floor broker into FBMS: (i) The order type (i.e., 
customer, firm, broker-dealer, professional); (ii) the option symbol; 
(iii) buy, sell, cross or cancel; (iv) call, put, complex (i.e., 
spread, straddle), or contingency order as described in Rule 1066; (v) 
number of contracts; (vi) limit price or market order or, in the case 
of a complex order, net debit or credit, if applicable; (vii) whether 
the transaction is to open or close a position; and (viii) The Options 
Clearing Corporation (``OCC'') clearing number of the broker-dealer 
that submitted the order (collectively, the ``required 
information'').\8\
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    \8\ The required information complies with the Consolidated 
Options Audit Trail System (``COATS'') requirements. COATS 
effectively enhances intermarket options surveillance by enabling 
the options exchanges to reconstruct the market promptly to 
effectively surveil certain rules. Through its participation in the 
Intermarket Surveillance Group (``ISG''), the Exchange shares 
information and coordinates inquiries and investigations with other 
exchanges designed to address potential intermarket manipulation and 
trading abuses. The Exchange's participation in ISG helps it to 
satisfy the Exchange Act requirement that it have coordinated 
surveillance with markets on which security futures are traded and 
markets on which any security underlying security futures are traded 
to detect manipulation and insider trading. ISG is an industry 
organization formed in 1983 to coordinate intermarket surveillance 
among the SROs by cooperatively sharing regulatory information 
pursuant to a written agreement between the parties. The goal of the 
ISG's information sharing is to coordinate regulatory efforts to 
address potential intermarket trading abuses and manipulations.
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    In addition, floor brokers or their employees are required to enter 
clearing information onto the FBMS no later than five minutes after the 
execution of the trade. The clearing information, which is the contra-
side clearing information, is not required to be entered pursuant to 
COATS.\9\ Rather, this information facilitates the identification of 
the trade for clearing.\10\ The Exchange proposes to amend the current 
language to state any additional information with respect to the order 
shall be inputted into the Exchange's systems contemporaneously upon 
receipt, which may occur after the representation and execution of the 
order.\11\
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    \9\ This COATS requirement is not to be confused with the 
requirement to submit the clearing information of the Broker-Dealer 
that submitted the order.
    \10\ Such clearing information includes the account number(s) of 
each contra-side participant to the floor broker's trade in the 
crowd and the number of contracts bought or sold. This information 
would be immediately reported to the clearing firm of each crowd 
participant involved in the trade.
    \11\ See Chicago Board Options Exchange, Inc. (``CBOE'') Rule 
6.24(a)(2) which contains similar language.
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    The Exchange believes this amendment to the time, from a five 
minute timer to a ``upon receipt'' requirement, is necessary to allow 
floor brokers to enter the requisite clearing information. Currently, 
certain types of trades that are handled in a trading crowd are being 
entered upon receipt and prior to the expiration of the five minute 
timer without incident. Other types of transactions which are received 
by a floor broker from an upstairs firm \12\ which may involve Prime 
Brokerage \13\ relationships may require additional time, beyond five 
minutes, because the clearing information may not be readily 
ascertainable. Likewise, complex orders with multiple legs can take 
longer than five minutes to input into the FBMS system simply because 
of the quantity of information that is required to be entered. The 
Exchange believes that upon receipt means as soon as that clearing 
information becomes available to a floor broker. That timeframe must be 
reasonable and will be monitored by the Exchange's surveillance staff 
to ensure such timing is not unreasonable.
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    \12\ An ``upstairs firm'' is a broker-dealer, not located on the 
trading floor that submits an order to a floor broker for execution. 
The floor brokers typically are not affiliated with the ``upstairs 
firms''.
    \13\ Prime Brokerage is a mechanism for centralized securities 
clearing at one facility which allows multiple execution 
arrangements. A customer who has a Prime Brokerage account may have 
accounts with multiple firms used for executing trades.
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    The Exchange believes that this modification to the rules will 
prevent a large number of change orders from floor brokers who are 
concerned with meeting the current five minute timer and enter 
information which is later found out to be inaccurate and a change 
order is required. With the more reasonable timeframe, a floor broker 
may properly enter the information the first time. Also, the additional 
flexibility will allow floor brokers with complex orders to comply with 
Exchange rules. Today, even if a floor broker begins to enter the 
clearing information for a complex order immediately after the trade 
was executed, they may run afoul of the five minute timer simply 
because the information is too large in volume to physically input 
within five minutes. This amendment would alleviate these concerns. The 
Exchange does not anticipate a change in behavior for the remainder of 
the floor brokers who are currently able to enter the clearing 
information promptly upon execution and do so today.
    The Exchange previously amended its rules to add the five minute 
timer because once the clearing information is reported crowd 
participants involved in the trade would receive a position update 
enabling them to know their respective positions on a real-time basis 
and to make appropriate informed and timely hedging transactional 
decisions. The Exchange believes that this language will continue to 
enable to allow Specialists and ROTs, in particular, to receive such 
position updates going forward. Additionally, FBMS technology provided 
to floor brokers offers them an efficient means to enter clearing 
information for trade participants contemporaneously upon

[[Page 63878]]

receipt. This technology was not previously available.
    The Exchange proposes this amendment to both Exchange Rule 1063 as 
well as OFPA C-2, which is part of the minor rule plan.\14\
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    \14\ The Exchange's minor rule plan consists of options floor 
procedure advices (``OFPAs'' or ``Advices'') with preset fines, 
pursuant to Rule 19d-1(c) under the Act. 17 CFR 240.19d-1(c). Most 
OFPAs have corresponding options rules.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ 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 requiring a floor broker to enter more specific 
information to identify trades. This proposal would enhance the 
Exchange's audit trail.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    Further, the Exchange believes that amending the language 
concerning clearing information related to the contra-side of the trade 
to require the information to be entered into FBMS contemporaneously 
upon receipt on the Exchange is consistent with the language of other 
exchanges and still allows for the timely entry of information for 
clearing purposes.

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.

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: (i) Does not 
significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) by its terms, does not become operative for 30 days from the 
date on which it was filed, or such shorter time as the Commission may 
designate, if consistent with the protection of investors and the 
public interest, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the self-regulatory organization to submit to the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of 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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    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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2010-139 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-2010-139. This file 
number should be included on the subject line if e-mail 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 
a.m. and 3 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-2010-139 and should be 
submitted on or before November 8, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-26130 Filed 10-15-10; 8:45 am]
BILLING CODE 8011-01-P