Document ID: SEC-2017-1872-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX LLC
Posted Date: 2017-11-16T05:00Z

[Federal Register Volume 82, Number 220 (Thursday, November 16, 2017)]
[Notices]
[Pages 53543-53545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24779]

[[Page 53543]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82045; File No. SR-Phlx-2017-87]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 1059, 
Accommodation Transactions

November 9, 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 October 26, 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, 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 Rule 1059, Accommodation 
Transactions.
    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
    The Exchange proposes to amend Rule 1059, Accommodation 
Transactions, which provides for cabinet trading \3\ and is sometimes 
referred to as the ``cabinet rule,'' to delete outdated language in 
Rule 1059(a) relating to the role of specialists in cabinet trading, 
and to add to Rule 1059(a) a description of procedures that are 
currently followed in cabinet trading on the Exchange's trading floor, 
to reflect actual practice.
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    \3\ An ``accommodation'' or ``cabinet'' trade refers to trades 
in listed options on the Exchange that are worthless or not actively 
traded, often times conducted to establish tax losses. Cabinet or 
accommodation trading of option contracts is intended to accommodate 
persons wishing to effect closing transactions in those series of 
options dealt in on the Exchange for which there is no auction 
market. A cabinet trade is a transaction in which the per-contract 
value of the cabinet trade is less than the per-contract value of a 
trade at the specified minimum increment for the option contract.
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    Exchange Rule 1059, Accommodation Transactions, sets forth specific 
procedures for engaging in cabinet trades. Rule 1059(a) currently 
provides that the specialist registered in each class of option 
contracts shall supervise the operation of the cabinet for that class, 
and that all orders placed in the cabinet are assigned priority based 
upon the sequence in which such orders are received by the specialist. 
It states that all closing bids and offers are to be submitted to the 
specialist in writing, and that the specialist effects all closing 
cabinet transactions by matching such orders placed with him. The rule 
provides that bids or offers on orders to open for the accounts of 
customer, firm, specialists and Registered Options Traders (``ROTs'') 
can be made at $1 per option contract, but that such orders cannot be 
placed in, and must yield to, all orders in the cabinet. Rule 1059(a) 
currently states that specialists shall effect all cabinet transactions 
by matching closing purchase or sale orders which are placed in the 
cabinet or, provided there is no matching closing purchase or sale 
order in the cabinet, by matching a closing purchase or sale order in 
the cabinet with an opening purchase or sale order. The rule states 
that all cabinet transactions are to be reported to the Exchange 
following the close of each business day.\4\
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    \4\ Rule 1059(b) provides that any (i) member, (ii) member 
organization, or (iii) other person who is a non-member broker or 
dealer and who directly or indirectly controlled, is controlled by, 
or is under common control with, a member or member organization 
(any such other person being referred to as an affiliated person) 
may effect any transaction as principal in the over-the-counter 
market in any class of option contracts listed on the Exchange for a 
premium not in excess of $1.00 per contract. The Exchange is 
proposing no changes to Rule 1059(b). The Commentary to Rule 1059 
describes an existing pilot program to allow transactions to take 
place in open outcry at a price of at least $0 but less than $1 per 
option contract. These lower priced transactions are traded pursuant 
to the same procedures applicable to $1 cabinet trades, except that 
pursuant to the pilot program (i) bids and offers for opening 
transactions are only permitted to accommodate closing transactions 
in order to limit use of the procedure to liquidations of existing 
positions, and (ii) the procedures are also made available for 
trading in options participating in the Penny Pilot Program. The 
pilot program is in effect until January 5, 2018, and the Exchange 
intends to file a proposed rule change to make the pilot program 
permanent before that date. The Exchange is proposing no changes to 
the Rule 1059 Commentary or the pilot program at this time.
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    Rule 1059(a), which prescribes the roles described above for the 
specialist in executing cabinet trades, is inconsistent with procedures 
currently followed in the execution of these trades. Because remote 
trading has become common in recent years, such that specialists are no 
longer present on the trading floor in all options, the procedures used 
to execute cabinet trades have evolved. Additionally, with the 
migration of the Exchange to a new electronic trading system (``Phlx XL 
II'') in 2009, the role of the Exchange specialist changed.\5\ 
Specialists no longer handle orders for other market participants in 
their capacity as specialists under the Exchange's rules for electronic 
trading.
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    \5\ 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).
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    Accordingly, the Exchange proposes to delete a number of provisions 
of Rule 1059(a) which presume the participation of a specialist in 
every cabinet trade. First, the Exchange proposes to delete Rule 
1059(a)(ii) which states that the specialist shall supervise the 
operation of the cabinet for that class, as well as the requirement in 
Rule 1059(a)(iii) that only closing limit orders at a price of $1 per 
option contract for the accounts of customer, firm, specialists and 
ROTs may be placed in the cabinet and that such orders be submitted to 
the specialist in writing. Next, it proposes to delete Rule 1059(a)(iv) 
dealing with the priority of orders received by the specialist and Rule 
1059(a)(v), which states that all closing bids and offers must be 
submitted to the specialist in writing, and that the specialist shall 
effect all closing cabinet transactions by matching such orders placed 
with him. The provision in Rule 1059(a)(v) stating that bids or offers 
on orders to open for the accounts of customer, firm, specialists and 
ROTs may be made at $1 per option

[[Page 53544]]

contract, but that such orders may not be placed in and must yield to 
all orders in the cabinet, is also proposed to be deleted. Finally, the 
Exchange proposes to delete Rule 1059(a)(vi) which states that 
specialists shall effect all cabinet transactions by matching closing 
purchase or sale orders which have been placed in the cabinet or, 
provided there is no matching closing purchase or sale order in the 
cabinet, by matching a closing purchase or sale order in the cabinet 
with an opening purchase or sale order.
    The Exchange proposes to reorganize the rule for clarity and to add 
new language setting forth procedures that are currently followed on 
the trading floor to execute cabinet orders under Rule 1059. Rule 
1059(a) would be revised to define the term ``cabinet order'' as a 
closing limit order at a price of $1 per option contract for the 
account of a customer, firm, specialist or ROT. This new definition is 
consistent with current Rule 1059(a)(iii) which, while not a 
definition, provides that only closing limit orders at a price of $1 
per option contract for the accounts of customer, firm, specialists and 
ROTs may be placed in the cabinet. Rule 1059(a) would also specify that 
an opening order is not a ``cabinet order'' but may in certain cases be 
matched with a cabinet order pursuant to subsection (a)(iii) (as 
proposed to be amended). The rule would specify that only Floor Brokers 
may represent cabinet orders.
    New Rule 1059(a)(ii) would be added, to provide that cabinet orders 
may be submitted to Floor Brokers and represented by them in the 
designated trading crowd of the option class and that Floor Brokers 
must use the designated cabinet transaction forms provided by the 
Exchange to document receipt of a cabinet order and the execution of a 
cabinet transaction. The new language would specify that Rule 
1063(e)(i) shall not apply to orders placed in the cabinet or executed 
in the cabinet.\6\
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    \6\ Rule 1063(e)(i) provides for the use on the trading floor of 
the Options Floor Broker Management System. The proposed new 
language is consistent with Rule 1000(f)(iii)(B), which currently 
states that Floor Brokers can execute cabinet trades in the options 
trading crowd pursuant to Rule 1059, rather than by using the Floor 
Broker Management System. See Securities Exchange Act Release No. 
69471 (April 29, 2013), 78 FR 26096 (May 3, 2013) (Order Approving 
Proposed Rule Change To Enhance the Functionality Offered on the 
Options Floor Broker Management System (``FBMS'') by, Among Other 
Things, Automating Functions Currently Performed by Floor Brokers), 
at footnote 9.
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    The Exchange proposes to add new Rule 1059(a)(iii), which specifies 
the procedures to be followed by the Floor Broker and other trading 
crowd participants to execute cabinet orders in three different 
scenarios. In each case, the Floor Broker would be required to act in 
the presence of at least one market-maker and NASDAQ Market Regulation 
Floor Surveillance.
    Rule 1059(a)(iii)(A) governs cases where a Floor Broker holds a 
cabinet order but does not also hold contra-side interest. In that 
case, the Floor Broker shall announce the terms of the cabinet order to 
the trading crowd to solicit interest to participate on the closing 
position. All matching cabinet orders shall be assigned priority based 
upon the sequence in which such orders are received by the Floor 
Broker. If there is no matching cabinet order, the Floor Broker may 
match the cabinet order with a matching opening buy or sell limit order 
priced at $1 per option contract. If there is no matching cabinet order 
or opening order, the Floor Broker may seek matching bids or offers for 
accounts of specialists and ROTs. Specialists and ROTs can only 
participate after all other orders have been matched.
    Rule 1059(a)(iii)(B) governs cases where a Floor Broker holds a 
cabinet order and also a contra-side cabinet order. In that situation, 
the rule would require the Floor Broker to announce the terms of the 
cabinet orders to the trading crowd. The cabinet orders shall then be 
immediately crossed by the Floor Broker.
    Finally, Rule 1059(a)(iii)(C) applies where a Floor Broker holds 
both a cabinet order and a contra-side opening order. In that 
situation, the Floor Broker is required to announce the terms of the 
cabinet order to the trading crowd. If there is a matching cabinet 
order, the Floor Broker shall match the two cabinet orders. If there is 
no matching cabinet order, the cabinet order shall then be immediately 
crossed by the Floor Broker with the opening order held by the Floor 
Broker.
    The proposed amendments describing the updated cabinet trading 
procedures will change the current cabinet priority rules in some 
respects. Currently, specialists match all orders represented by all 
floor brokers on the floor, based first on time, then on opening vs. 
closing. The specialist is required to assign priority to all orders 
placed in the cabinet based upon the sequence in which such orders are 
received by the specialist. The specialist is then to match cabinet 
orders first against matching cabinet orders, and second, if there is 
no matching cabinet order, against a matching opening order.
    The proposed priority rules focus on the cabinet order at the time 
it is represented by a floor broker in the trading crowd. Thus, as 
proposed, each floor broker holding a cabinet order only would be 
required to assign priority to cabinet orders he holds based upon the 
sequence in which he receives such orders, consistent with the current 
rule's requirement for specialists, but would not be required to cede 
priority to a cabinet order represented in the crowd at an earlier time 
by another Floor Broker.
    The floor broker is then to assign matching cabinet orders from the 
crowd based upon the sequence in which the orders are received by that 
floor broker representing such order. For example, the ``Floor Broker 
A'' receives a cabinet order to buy 500 contracts and represents to the 
trading crowd. At the time of representation to the crowd, ``Floor 
Broker B'' has a matching cabinet order for 250 contracts and ``Floor 
Broker C'' enters the trading crowd after ``Floor Broker B'' with a 
matching cabinet order for 500 contracts. ``Floor Broker A'' then 
proceeds to match his 500 contracts to buy cabinet order with the 
matching cabinet order from ``Floor Broker B'' for 250 contracts and 
matching the balance of 250 contracts with ``Floor Broker C''. The 
Floor Broker matched the cabinet orders based on the sequence in which 
the orders were received in the crowd at the time the cabinet order was 
represented. If there are no matching cabinet orders from the crowd, 
the floor broker may match the cabinet order with a matching opening 
order from the crowd. If however the floor broker holds both a cabinet 
order and a contra side cabinet order, the floor broker would be 
required to immediately cross those orders after announcing their terms 
in the crowd, regardless of cabinet orders held by other floor brokers. 
This represents a change to the priority scheme under the current 
cabinet rule.
    The Exchange is proposing a number of additional, minor changes to 
Rule 1059. New Rule 1059(a)(iv) would require the Floor Broker, once 
the cabinet order has been either crossed or matched, to submit the 
designated cabinet form to the Nasdaq Market Operations staff for 
clearance and reporting at the close of the business day. Current Rule 
1059(a)(viii), which provides that all cabinet transactions shall be 
reported to the Exchange following the close of each business day, 
would be deleted. Finally, Rule 1059(a)(vii) would be redesignated as 
Rule 1059(a)(v) and would be revised to delete an erroneous and 
outdated cross-

[[Page 53545]]

reference to Rule 1038, previously deleted from the rulebook.\7\
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    \7\ No changes are proposed to be made to Rule 1059(b) or to the 
Commentary.
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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, 
by providing detailed procedures for cabinet trades without the 
participation of specialists. As noted above, specialists are no longer 
common on the trading floor. By adopting the proposed amendments to the 
cabinet rules detailed above, the Exchange will maintain the ability 
for market participants to close out positions in which the value of 
the contract is less than the value of the contract at the minimum 
increment. The proposed rule change will conform the description of 
procedures in Rule 1059 to actual current practice. The proposed rule 
change permits market participants to continue to execute cabinet 
trades on the Exchange, even without the participation of specialists. 
The changes to the priority in which cabinet rules are executed are 
necessary in view of the new procedures for execution of cabinet trades 
without the participation of a specialist. The proposed amendments 
promote just and equitable principles of trade by setting forth 
priority rules for trade executions, and by requiring use of Exchange 
designated cabinet transaction forms to record information and the 
submission of the forms to Nasdaq Market Operations staff for the 
clearance and reporting of the cabinet trades.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The role of the specialist has changed on the Exchange, and 
specialists are no longer present in all options classes on the 
Exchange's trading floor. The proposed rule change would maintain 
market participants' ability to execute cabinet transactions on the 
Exchange's trading floor, in an open manner and in compliance with new 
procedures specified in the revised rule.

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 proposed rule change 
permits market participants to continue to execute cabinet trades on 
the Exchange, even without the participation of specialists. The 
proposed amendments will apply to all Floor Brokers equally and in the 
same way. Phlx notes that market participants may also execute cabinet 
transactions on other exchanges.

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 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 \10\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \11\ 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.
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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: (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 [email protected]. Please include 
File Number SR-Phlx-2017-87 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-2017-87. 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. 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-2017-87 and should be 
submitted on or before December 7, 2017.

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24779 Filed 11-15-17; 8:45 am]
BILLING CODE 8011-01-P