Document ID: SEC-2013-1181-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2013-07-01T04:00Z

[Federal Register Volume 78, Number 126 (Monday, July 1, 2013)]
[Notices]
[Pages 39346-39352]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15616]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69848; File No. SR-Phlx-2013-69]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Establish 
an Acceptable Trade Range for Orders and Quotes on PHLX XL

June 25, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 39347]]

notice is hereby given that on June 18, 2013, NASDAQ OMX PHLX LLC 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``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 establish an Acceptable Trade Range for 
orders and quotes on PHLX XL. The Acceptable Trade Range functionality 
is intended to dampen volatility when necessary in rare cases of 
unusual market conditions by allowing orders to execute within a 
succession of price-range steps. At the end of each price-range step, 
the process allows the market a brief time-period to refresh itself 
before moving on with the execution process, as described further 
below. Similar mechanisms operate on other options exchanges.
    The text of the proposed rule change is below; proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *

Rule 1080 Phlx XL and Phlx XL II

* * * * *
    (p) Acceptable Trade Range.
    (A) After the opening, the System will calculate an Acceptable 
Trade Range to limit the range of prices at which an order or quote 
(except an All-or-none order) will be allowed to execute. The 
Acceptable Trade Range is calculated by taking the Reference Price, 
plus or minus a value to be determined by the Exchange. (i.e., the 
Reference Price--(x) for sell orders/quotes and the Reference Price + 
(x) for buy orders/quotes). Upon receipt of a new order/quote, the 
Reference Price is the National Best Bid (``NBB'') for sell orders and 
the National Best Offer (``NBO'') for buy orders/quotes or the last 
price at which the order/quote is posted whichever is higher for a buy 
order/quote or lower for a sell order/quote.
    (B) If an order/quote reaches the outer limit of the Acceptable 
Trade Range (the ``Threshold Price'') without being fully executed, it 
will be posted at the Threshold Price for a brief period, not to exceed 
one second (``Posting Period''), to allow more liquidity to be 
collected, unless a Quote Exhaust has occurred, in which case the Quote 
Exhaust process in Rule 1082(a)(ii)(B)(3) will ensue, triggering a new 
Reference Price. Upon posting, either the current Threshold Price of 
the order or an updated NBB for buy orders or the NBO for sell orders 
(whichever is higher for a buy order/lower for a sell order) then 
becomes the Reference Price for calculating a new Acceptable Trade 
Range. If the order/quote remains unexecuted, a New Acceptable Trade 
Range will be calculated and the order/quote will execute, route, or 
post up to the new Acceptable Trade Range Threshold Price, unless a 
member organization has requested that their orders be returned if 
posted at the outer limit of the Acceptable Trade Range (in which case, 
the order will be returned). This process will repeat until either i) 
the order/quote is executed, cancelled, or posted at its limit price or 
ii) the order has been subject to a configurable number of instances of 
the Acceptable Trade Range as determined by the Exchange (in which case 
it will be returned).
    (C) During the Posting Period, the Exchange will disseminate as a 
quotation: (i) the Threshold Price for the remaining size of the order 
triggering the Acceptable Trade Range and (ii) on the opposite side of 
the market, the best price will be displayed using the ``non-firm'' 
indicator message in accordance with the specifications of the network 
processor. Following the Posting Period, the Exchange will return to a 
normal trading state and disseminate its best bid and offer.
* * * * *

Rule 1082 Firm Quotations

    (a)(i)-(ii)(B)(3)(g)(v) No change.
    (vi) If, after trading at the Phlx and/or routing, there is a 
remainder of the initiating order, and such remainder is still 
marketable, the entire process of evaluating the Best Phlx price and 
the ABBO will be repeated until: (A) the order size is exhausted, or 
(B) the order reaches its limit price. If there still remain unexecuted 
contracts after routing but the order has reached its limit price, the 
remainder will be posted at the order's limit price, except that, when 
the limit price crosses the Acceptable Range Price, the remainder will 
be posted at the Acceptable Range Price for a period of time not to 
exceed ten seconds [and then cancelled after such period of time has 
elapsed, unless the member that submitted the original order has 
instructed the Exchange in writing to re-enter the remaining size, in 
which case the remaining size will be automatically submitted as a new 
order]. During this up to ten second period, the Phlx XL II system will 
disseminate on the opposite side of the market from remaining 
unexecuted contracts: (i) a non-firm bid for the price and size of the 
next available bid(s) on the Exchange if the remaining size is a 
seller, or (ii) a non-firm offer for the price and size of the next 
available offer(s) on the Exchange if the remaining size is a buyer. 
After such time period, the Acceptable Range Price becomes the 
Reference Price and Acceptable Trade Range (pursuant to Rule 1080(p)) 
is applied to the remaining size of the order.
    (4) No change.
    (C) No change.
    (iii)-(iv) No change.
    (b)-(d) 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    PHLX is proposing to adopt a mechanism that will prevent the PHLX 
trading System, Phlx XL, (``System'') from experiencing dramatic price 
swings. This circumstance can exist if, for example, a market order or 
aggressively priced limit order/quote is entered that is larger than 
the total volume of contracts quoted at the top-of-book across all U.S. 
options exchanges. Currently, without any protections in place, this 
could result in options executing at prices that have little or no 
relation to the theoretical price of the option.
    For example, in a thinly traded option:
    Away Exchange Quotes:

[[Page 39348]]

----------------------------------------------------------------------------------------------------------------
                  Exchange                        Bid size        Bid price       Offer price       Offer size
----------------------------------------------------------------------------------------------------------------
NOM.........................................              10            $1.00            $1.05               10
NYSE Arca...................................              10             1.00             1.05               10
NYSE MKT....................................              10             1.00             1.10               10
BOX.........................................              10             1.00             1.15               10
----------------------------------------------------------------------------------------------------------------

    PHLX Price Levels:

----------------------------------------------------------------------------------------------------------------
                  Exchange                        Bid size        Bid price       Offer price       Offer size
----------------------------------------------------------------------------------------------------------------
PHLX orders.................................              10            $1.00            $1.05               10
PHLX orders.................................  ...............  ...............            1.10               10
PHLX orders.................................  ...............  ...............            1.40               10
PHLX orders.................................  ...............  ...............            5.00               10
----------------------------------------------------------------------------------------------------------------

    If PHLX receives a routable market order to buy 80 contracts, the 
System will respond as described below:

--10 contracts will be executed at $1.05 against NOM
--10 contracts will be executed at $1.05 against PHLX
--10 contracts will be executed at $1.05 against NYSE Arca
--10 contracts will be executed at $1.10 against PHLX
--10 contracts will be executed at $1.10 against NYSE MKT
--10 contracts will be executed at $1.15 against BOX

After these executions, there are no other known valid away exchange 
quotes. The National Best Bid/Offer (``NBBO'') is therefore comprised 
of the remaining interest on the PHLX book, specifically 10 contracts 
at $1.40 and 10 contracts at $5.00. In the absence of an Acceptable 
Trade Range mechanism, the order would execute against the remaining 
interest at $1.40 and $5.00, resulting in potential harm to investors.
    To bolster the normal resilience and market behavior that 
persistently produces robust reference prices, PHLX is proposing to 
create a level of protection that prevents the market from moving 
beyond set thresholds. The thresholds consist of a Reference Price plus 
(minus) set dollar amounts based on the nature of the option and the 
premium of the option. PHLX is not introducing a new concept. In fact, 
the NASDAQ Options Market and NASDAQ OMX BX, Inc.'s options market have 
an Acceptable Trade Range feature.\3\
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    \3\ See NOM Rules, Chapter VI, Section 10(7) and BX Options 
Rules, Chapter VI, Section 10(7).
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    System Operation. The proposed Acceptable Trade Range would work as 
follows: prior to executing orders received by PHLX, an Acceptable 
Trade Range is calculated to determine the range of prices at which 
orders may be executed.\4\ When an order is initially received, the 
threshold is calculated by adding (for buy orders) or subtracting (for 
sell orders) a value,\5\ as discussed below, to the National Best Offer 
for buy orders or the National Best Bid for sell orders to determine 
the range of prices that are valid for execution. A buy (sell) order 
will be allowed to execute up (down) to and including the maximum 
(minimum) price within the Acceptable Trade Range.
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    \4\ The Acceptable Trade Range will not be available for All-or-
none orders, as defined in Rule 1066(c)(4). The Exchange has 
determined that it would be difficult, from a technical standpoint, 
to apply this feature to those orders because their particular 
contingency makes it difficult to automate their handling. All-or-
none orders are often treated differently than other orders. See 
Options Floor Procedure Advice A-9.
    \5\ The value that is to be added to/subtracted from the 
Reference Price will be set by PHLX and posted on its Web site: 
http://www.nasdaqtrader.com.
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    If an order reaches the outer limit of the Acceptable Trade Range 
(the ``Threshold Price'') without being fully executed, it will be 
posted at the Threshold Price for a brief period, not to exceed one 
second (``Posting Period''), to allow the market to refresh and to 
determine whether or not more liquidity will become available (on PHLX 
or any other exchange if the order is designated as routable), unless a 
Quote Exhaust has occurred, in which case the Quote Exhaust process in 
Rule 1082(a)(ii)(B)(3) will ensue,\6\ triggering a new Reference Price.
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    \6\ The Quote Exhaust process occurs when the Exchange's 
disseminated market at a particular price level includes a quote, 
and such market is exhausted by an inbound contra-side quote or 
order, and following such exhaustion, contracts remain to be 
executed from such quote or order through the initial execution 
price.
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    Upon posting, either the current Threshold Price of the order or an 
updated NBB for buy orders or the NBO for sell orders (whichever is 
higher for a buy order/lower for a sell order) then becomes the 
Reference Price for calculating a new Acceptable Trade Range. If the 
order remains unexecuted, a new Acceptable Trade Range will be 
calculated and the order will execute, route, or post up to the new 
Acceptable Trade Range Threshold Price, unless a member organization 
has requested that their orders be returned if posted at the outer 
limit of the Acceptable Trade Range (in which case, the order will be 
returned). This process will repeat until either (i) the order/quote is 
executed, cancelled, or posted at its limit price or (ii) the order/
quote has been subject to a configurable number of instances of the 
Acceptable Trade Range as determined by the Exchange.\7\ Once the 
maximum number of instances has been reached, the order is returned.
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    \7\ Member organizations can request that the Acceptable Trade 
Range not apply to their orders, in which case, the order would be 
cancelled back to the member organization.
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    During the Posting Period, any eligible contra-side interest that 
is received can trade. If, however a more aggressively-priced same side 
order is received during the Posting Period, the Posting Period ends, 
because there is no need to wait for the market to refresh and attract 
interest to the original order. Such new same side order indicates that 
the market is moving in that direction so the original order will trade 
at the current Acceptable Trade Range, with the Acceptable Trade Range 
recalculated for both orders.
    During the Posting Period, PHLX will disseminate the Threshold 
Price on one side of the market and the best available price on the 
opposite side of the market using a ``non-firm'' indicator.\8\ This 
allows the order setting the Acceptable Trade Range Threshold Price to 
retain priority in the PHLX book and also prevents any later-entered 
order from accessing liquidity ahead of it. If PHLX were to display 
trading interest available on the opposite side of the

[[Page 39349]]

market, that trading interest would be automatically accessible to 
later-entered orders during the period when the order triggering the 
Acceptable Trade Range is paused. Following the Posting Period, the 
Exchange will return to a normal trading state and disseminate its best 
bid and offer.
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    \8\ Non-firm quote indication values are described on page 18 of 
the specifications disseminated by the Options Price Regulatory 
Authority (``OPRA''). See http://www.opradata.com/specs/participant_interface_specification.pdf. This will be disseminated 
both to OPRA and over the Exchange's own data feeds.
---------------------------------------------------------------------------

    PHLX believes that disseminating a non-firm quotation message as 
described above is consistent with its obligations under the SEC Quote 
Rule.\9\ The fact that PHLX is experiencing volatility that is strong 
enough to trigger the Acceptable Trade Range mechanism qualifies as an 
unusual market condition. PHLX expects such situations to be rare, and, 
as described below, PHLX will set the parameters of the mechanism at 
levels that will ensure that it is triggered quite infrequently. In 
addition, the Acceptable Trade Range mechanism will cause the market to 
pause for no more than one second, the same pause that currently exists 
on NOM and BX Options. Importantly, the brief pause only occurs after 
the Exchange has already executed transactions--potentially at multiple 
price levels--rather than pausing before executing any transactions in 
the hopes of attracting initial liquidity.
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    \9\ 17 CFR 242.602.
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    Importantly, the Acceptable Trade Range is neutral with respect to 
away markets. Consistent with the routing provisions in Rule 1080(m), 
an order may route to other destinations to access liquidity priced 
within the Acceptable Trade Range provided the order is designated as 
routable. If the order still remains unexecuted, this process will 
repeat \10\ until the order is executed, cancelled, or posted at its 
limit price, consistent with PHLX routing rules.\11\
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    \10\ PHLX will establish a maximum number of Acceptable Trade 
Range iterations, until the order is cancelled.
    \11\ See PHLX Rule 1080(m). If after an order is routed to the 
full size of an away exchange and additional size remains available, 
the remaining contracts will be posted on PHLX at a price that 
assumes the away market has executed the routed order. This practice 
of routing and then posting is consistent with the national market 
system plan governing trading and routing of options orders and the 
PHLX policies and procedures that implement that plan. See Options 
Order Protection and Locked/Crossed Markets Plan; Securities 
Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 
6, 2009); NOM Rules Chapter VI, Section 7(b)(3)(C).
---------------------------------------------------------------------------

    For example, assume that the Acceptable Trade Range is set for 
$0.05 and the following quotations are posted in all markets:
    Away Exchange Quotes:

----------------------------------------------------------------------------------------------------------------
                  Exchange                        Bid size        Bid price       Offer price       Offer size
----------------------------------------------------------------------------------------------------------------
ISE.........................................              10            $0.75            $0.90               10
NYSE MKT....................................              10             0.75             0.92               10
NOM.........................................              10             0.75             0.94               10
----------------------------------------------------------------------------------------------------------------

    PHLX Price Levels:

----------------------------------------------------------------------------------------------------------------
                  Exchange                        Bid size        Bid price       Offer price       Offer size
----------------------------------------------------------------------------------------------------------------
PHLX orders.................................              10            $0.75            $0.90               10
PHLX order..................................  ...............  ...............            0.95               10
PHLX order..................................  ...............  ...............            0.97               10
PHLX order..................................  ...............  ...............            1.00               20
----------------------------------------------------------------------------------------------------------------

PHLX receives a routable order to buy 70 contracts at $1.10. The 
Acceptable Trade Range is $0.05 and the Reference Price is the National 
Best Offer--$0.90. The Threshold Price is then $0.90 + $0.05 = $0.95. 
The order is allowed to execute up to and including $0.95. The System 
then pauses for a brief period not to exceed one second (the Posting 
Period) to allow the market (including other exchanges) to refresh and 
to determine whether additional liquidity will become available within 
the order's posted price. If additional liquidity becomes available on 
PHLX or any away market, that liquidity will be accessed and executed.

--10 contracts will be executed at $0.90 against PHLX
--10 contracts will be executed at $0.90 against ISE
--10 contracts will be executed at $0.92 against NYSE MKT
--10 contracts will be executed at $0.94 against NOM
--10 contracts will be executed at $0.95 against PHLX
--Then, after executing at multiple price levels, the order is posted 
at $0.95 for a brief period not to exceed one second to determine 
whether additional liquidity will become available.
--A new Acceptable Trade Range Threshold Price of $1.00 is determined 
(new Reference Price of $0.95 + $0.05 = $1.00)
--If, during the Posting Period, no liquidity becomes available within 
the order's posted price of $0.95, the System will then execute 10 
contracts at $0.97, and 10 contracts at $1.00 \12\
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    \12\ The brief pause described above will not disadvantage 
customers seeking the best price in any market. For example, if in 
the example above an NYSE ARCA quote of $0.75 x $0.96 with size of 
10 x 10 is received, a routable order would first route to NYSE ARCA 
at $0.96, then execute against PHLX at $0.97.

Similarly, if a new order is received when a previous order has reached 
the Acceptable Trade Range threshold, the Threshold Price will be used 
as the Reference Price for the new Acceptable Trade Range threshold. 
Both orders would then be allowed to execute up (down) to the new 
---------------------------------------------------------------------------
Threshold Price.

    For example:
    Away Exchange Quotes:

----------------------------------------------------------------------------------------------------------------
                  Exchange                        Bid size        Bid price       Offer price       Offer size
----------------------------------------------------------------------------------------------------------------
ISE.........................................              10            $0.75            $0.90               10
NYSE MKT....................................              10             0.75             0.92               10
NOM.........................................              10             0.75             0.94               10
----------------------------------------------------------------------------------------------------------------

[[Page 39350]]

    PHLX Price Levels:

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                  Exchange                        Bid size        Bid price       Offer price       Offer size
----------------------------------------------------------------------------------------------------------------
PHLX orders.................................              10            $0.75            $0.90               10
PHLX order..................................  ...............  ...............            0.95               10
PHLX order..................................  ...............  ...............            1.05               20
----------------------------------------------------------------------------------------------------------------

--PHLX receives a routable order to buy 60 contracts at $1.10. The 
Acceptable Trade Range is $0.05 and the Reference Price is the National 
Best Offer--$0.90. The Acceptable Trade Range threshold is then $0.90 + 
$0.05 = $0.95. The order is allowed to execute up to and including 
$0.95.
--10 contracts will be executed at $0.90 against PHLX
--10 contracts will be executed at $0.90 against ISE
--10 contracts will be executed at $0.92 against NYSE MKT
--10 contracts will be executed at $0.94 against NOM
--10 contracts will be executed at $0.95 against PHLX
--Then, after executing at multiple price levels, the order is posted 
at $0.95 for a brief period not to exceed one second to determine 
whether additional liquidity will become available.
--A new Acceptable Trade Range Threshold Price of $1.00 is determined 
(new Reference Price of $0.95 + $0.05 = $1.00)
--If, during the brief period not to exceed one second, a second order 
is received to buy 10 contracts at $1.25, the two orders would then 
post at the new Acceptable Trade Range Threshold price of $1.00 for a 
brief period not to exceed one second to determine whether additional 
liquidity will become available.
--A new Acceptable Trade Range threshold of $1.05 will be calculated.
--If no additional liquidity becomes available within the posted price 
of the orders ($1.00) during the brief period not to exceed one second, 
the orders would execute 10 contracts each against the order on the 
PHLX book at $1.05

In addition, an order/quote which triggers a Quote Exhaust process, as 
explained above, will also be protected by the Acceptable Trade Range. 
When an order/quote triggers Quote Exhaust, the price at which the 
order/quote is posted becomes the Reference Price and the order/quote 
would then be allowed to execute up (down) to the new Threshold Price.
    For example:
    Away Exchange Quotes:

----------------------------------------------------------------------------------------------------------------
                  Exchange                        Bid size        Bid price       Offer price       Offer size
----------------------------------------------------------------------------------------------------------------
ISE.........................................              10            $0.75            $0.90               10
NYSE MKT....................................              10             0.75             0.98               10
NOM.........................................              10             0.75             0.98               10
----------------------------------------------------------------------------------------------------------------

    PHLX Price Levels:

----------------------------------------------------------------------------------------------------------------
                  Exchange                        Bid size        Bid price       Offer price       Offer size
----------------------------------------------------------------------------------------------------------------
PHLX MM Quote...............................              10            $0.75            $0.92               10
PHLX order..................................  ...............  ...............            0.99               20
----------------------------------------------------------------------------------------------------------------

--PHLX receives a routable order to buy 60 contracts at $1.10. The 
Acceptable Trade Range is $0.05 and the Reference Price is the National 
Best Offer--$0.90. The Acceptable Trade Range threshold is then $0.90 + 
$0.05 = $0.95. The order is allowed to execute up to and including 
$0.95.
--10 contracts will be executed at $0.90 against ISE
--10 contracts will be executed at $0.92 against PHLX MM Quote, 
triggering Quote Exhaust. At the end of the Quote Exhaust Timer, based 
on the Quote Exhaust Acceptable Range table, the order will be posted 
at a price of $0.97 (assuming a $0.05 Acceptable Range). The Acceptable 
Trade Range threshold becomes $0.97 + $0.05 = $1.02. The order is 
allowed to execute up to and including $1.02.
--10 contracts will be executed at $0.98 against NYSE Amex
--10 contracts will be executed at $0.98 against NOM
--20 contracts will be executed at $0.99 against PHLX

    The Exchange is also proposing to amend Rule 1082, Firm Quotations 
to address that the Quote Exhaust process will culminate with the 
application of the Acceptable Trade Range under proposed Rule 1080(p), 
rather than either cancelling or re-entering the remaining size of the 
order. Specifically, the Exchange proposes to amend Rule 
1082(a)(ii)(B)(3)(g)(vi) to provide that the Acceptable Range Price 
becomes the Reference Price and the Acceptable Trade Range (pursuant to 
Rule 1080(p)) is applied to the remaining size of the order. This would 
occur after the brief time period (of no more than ten seconds) when 
the order is posted at the Acceptable Range Price, which is part of the 
Quote Exhaust process. Because the Acceptable Trade Range, under this 
proposal, will now protect the remainder of the order, the Exchange 
does not believe that it needs to cancel the order or offer the 
alternative that member organizations provide instructions if they 
would prefer the remainder to be re-entered. The Exchange is not 
otherwise changing the Quote Exhaust process.
    Setting Acceptable Trade Range Values. The options premium will be 
the dominant factor in determining the Acceptable Trade Range. 
Generally, options with lower premiums tend to be more liquid and have 
tighter bid/ask spreads; options with higher premiums have wider 
spreads and less liquidity. Accordingly, a table consisting of several 
steps based on the premium of the option will be used to determine how 
far the market for a given option will be allowed to move. This table 
or tables would be listed on the NASDAQTrader.com Web site and any 
periodic updates to the table would be announced via an Options Trader 
Alert.

[[Page 39351]]

    For example, looking at some SPY May 2013 Call options on May 1st 
of 2013:

Bid/Offer of SPY May 160 Call (at or near-the-money): $1.23 x $1.24 
(several hundred contracts on bid and offer)
Bid/Offer of SPY May 105 Call (deep in-the-money): $54.10 x $54.26 (11 
contracts on each side)

The deep in-the-money calls (May 105 calls) have a wider spread ($54.10 
- $54.26 = $0.16) compared to a spread of $0.01 for the at-the-money 
calls (May 160 calls). Therefore, it is appropriate to have different 
thresholds for the two options. For instance, it may make sense to have 
a $0.05 threshold for the at-the-money strikes (Premium < $2) and a 
$0.50 threshold for the deep in-the-money strikes (Premium > $10).

    To consider another example, the May 2013 ORCL put options on May 
1st of 2013:

Bid/Offer of ORCL 33 May Put (at or near-the-money): $0.33 x $0.34 (100 
x 500)
Bid/Offer of ORCL 44 May Put (deep in-the-money): $10.40 x $10.55 (50 x 
200)

Even though ORCL has a much lower share price than SPY, and is a 
different type of security (it is a common stock of a technology 
company whereas SPY is an ETF based on the S&P 500 Index), the pattern 
is the same. The option with the lower premium has a very narrow spread 
of $0.01 with significant size displayed whereas the higher premium 
option has a wide spread ($0.15) and less size displayed.

    The Acceptable Trade Range settings will be tied to the option 
premium. However, other factors will be considered when determining the 
exact settings. For example, Acceptable Ranges may change if market-
wide volatility is as high as it was during the financial crisis in 
2008 and 2009, or if overall liquidity is low based on historical 
trends. These different market conditions may present the need to 
adjust the threshold amounts from time to time to ensure a well-
functioning market. Without adjustments, the market may become too 
constrained or conversely, prone to wide price swings. As stated above, 
the Exchange would publish the Acceptable Trade Range table or tables 
on the NASDAQTrader.com Web site. The Exchange does not foresee 
updating the table(s) often or intraday, although the exchange may 
determine to do so in extreme circumstances. The Exchange will provide 
sufficient advanced notice of changes to the Acceptable Trade Range 
table, generally the prior day, to its membership via Options Trader 
Alerts.
    The Acceptable Trade Range settings would generally be the same 
across all options traded on PHLX, although PHLX proposes to maintain 
flexibility to set them separately based on characteristics of the 
underlying security. For instance, Google is a stock with a high share 
price ($824.57 closing price on April 30th). Google options therefore 
may require special settings due to the risk involved in actively 
quoting options on such a high-priced stock. Option spreads on Google 
are wider and the size available at the best bid and offer is smaller. 
Google could potentially need a wider threshold setting compared to 
other lower-priced stocks. There are other options that fit into this 
category (e.g. AAPL) which makes it necessary to have threshold 
settings that have flexibility based on the underlying security. 
Additionally, it is generally observed that options subject to the 
Penny Pilot program quote with tighter spreads than options not subject 
to the Penny Pilot. Currently, PHLX expects to set Acceptable Trade 
Ranges for three categories of options: Standard Penny Pilot, Special 
Penny Pilot (IWM, QQQQ, SPY), and Non-Penny Pilot.\13\
---------------------------------------------------------------------------

    \13\ The Acceptable Range Test in Rule 1082(a)(ii)(B)(3)(f) 
currently provides for this flexibility, in addition to the 
comparable provisions in NOM and BX Options rules. See NOM Rules, 
Chapter VI, Section 10(7) and BX Options Rules, Chapter VI, Section 
10(7).
---------------------------------------------------------------------------

2. Statutory Basis
    PHLX believes the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\14\ in general and with Section 
6(b)(5) of the Act,\15\ 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. The 
proposed rule change is consistent with these requirements in that it 
will reduce the negative impacts of sudden, unanticipated volatility in 
individual PHLX options, and serve to preserve an orderly market in a 
transparent and uniform manner, enhance the price-discovery process, 
increase overall market confidence, and promote fair and orderly 
markets and the protection of investors. Specifically, the Exchange 
believes that the NBBO is a fair representation of then-available 
prices and accordingly the proposal helps to avoid executions at prices 
that are significantly worse than the NBBO. Also, this proposal is 
consistent with existing rules that allow, when the underlying security 
is subject to a ``Limit State'' or ``Straddle State,'' as defined in 
the Limit Up-Limit Down Plan, for the breaking of options trades 
meeting the definition of an obvious error as well as rejecting market 
orders.\16\
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See PHLX Rule 1047(f).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    PHLX 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 the orders and quotes of all Options Participants. Nor 
will the proposal impose a burden on competition among the options 
exchanges, because of the vigorous competition for order flow among the 
options exchanges. PHLX competes with many other options exchanges, all 
of which offer electronic trading of options and certain routing 
services. In this highly competitive market, market participants can 
easily and readily direct order flow to competing venues.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6) \18\ thereunder 
because the proposal does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; and (iii) by its terms, 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

[[Page 39352]]

protection of investors and the public interest.\19\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to 
give the Commission written notice of the Exchange's 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.\20\
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    \20\ 15 U.S.C. 78s(b)(3)(C).
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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-2013-69 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-2013-69. 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 Number SR-Phlx-2013-69 and should be 
submitted on or before July 22, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15616 Filed 6-28-13; 8:45 am]
BILLING CODE 8011-01-P