Document ID: SEC-2012-1197-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-07-25T04:00Z

[Federal Register Volume 77, Number 143 (Wednesday, July 25, 2012)]
[Notices]
[Pages 43633-43636]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18165]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67469; File No. SR-Phlx-2012-92]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Exchange Rules 1014, 1051, and OFPA F-2

July 19, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on July 6, 2012, 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, 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.
---------------------------------------------------------------------------

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

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

    The Exchange is filing with the Commission a proposal to amend 
Exchange Rules 1014, Obligations and Restrictions Applicable to 
Specialists and Registered Options Traders, and 1051, General 
Comparison and Clearance Rule, and Options Floor Procedure Advice 
(``OFPA'') F-2, Allocation, Time Stamping, Matching and Access to 
Matched Trades, to delete obsolete and unnecessary provisions in the 
Rules and OFPA concerning ticket matching and trade reporting 
requirements for options trades executed in open outcry.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/ NASDAQOMXPHLX/
Filings/, 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 purpose of the proposed rule change is to modify unnecessary or 
obsolete provisions currently contained in Exchange Rules 1014(g)(vi), 
1051, and OFPA F-2 that set forth ticket matching and trade reporting 
requirements for members executing transactions on the Exchange. The 
proposed rule change is intended to adopt rules that reflect the 
current process for matching and reporting options trades executed in 
open outcry on the floor of the Exchange.
    The matching and trade reporting requirements in the current rules 
apply to trades that are executed in open outcry, which may require the 
participants to submit written paper trade tickets for reporting. 
Portions of the Rules and OFPA apply to electronically executed trades, 
which are matched and reported to the consolidated tape automatically 
by the Exchange's automated options trading system, PHLX XL[supreg] 
\3\. The vast majority of options trades that are executed on the 
Exchange are reported to the consolidated tape and to the participants 
in the trade automatically. In certain instances, however, trades are 
executed in open outcry in the trading crowd without the use of 
electronic connectivity to PHLX XL (such as a verbal trade between 
market makers). The Exchange proposes to modify the Rules and OFPA to 
reflect the current procedures for reporting such trades.
---------------------------------------------------------------------------

    \3\ PHLX XL, formerly known as ``AUTOM,'' is the Exchange's 
electronic order delivery and reporting system, which provides for 
the automatic entry and routing of Exchange-listed equity options, 
index options and U.S. dollar-settled foreign currency options 
orders to the Exchange trading floor. See Exchange Rule 1080(a). 
This proposal refers to ``PHLX XL'' as the Exchange's automated 
options trading and reporting system. In May 2009 the Exchange 
enhanced the system and adopted corresponding rules referring to the 
system as ``Phlx XL II.'' See Securities Exchange Act Release No. 
59995 (May 28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). 
The Exchange intends to submit a separate technical proposed rule 
change that would change all references to the system from ``AUTOM'' 
and ``Phlx XL II'' to ``PHLX XL'' for branding purposes.
---------------------------------------------------------------------------

Current Rules
    Rule 1051(b) currently requires that all Exchange options 
transactions be reported at the time of execution to the Exchange for 
comparison of trade information at the specialist's post. Currently, 
not ``all'' options trades are executed in open outcry. In fact, the 
majority of option trades executed on the Exchange are executed 
electronically via PHLX XL. Upon the electronic execution of an options 
trade, PHLX XL sends an immediate report of the trade to the Options 
Price Reporting Authority (``OPRA''), the Options Clearing Corporation 
(``OCC''), and to the participants in the trade. Therefore, trades 
executed electronically via PHLX XL require no trade reporting action 
by participants.
    Some trades still occur verbally in the trading crowd, such as when 
market makers trade with one another, or in very rare instances where 
there is a malfunction of the Exchange's system or the Options Floor 
Broker Management System (``FBMS,'' described below). In such 
instances, participants in the verbal trade are required to produce 
written trade tickets. Current Rule 1014(g)(vi) and OFPA F-2 require 
participants to allocate, match and time stamp executed trades as well 
as to submit the matched trade to the appropriate person at the 
respective specialist post. Once a trade has been matched and submitted 
for reporting at the post, current OFPA F-2(d) states that the 
respective Specialist Unit must preserve the matched tickets for a 
period of not less than three years.
    Current Rule 1051(a) and OFPA F-2(b) require a member or member 
organization initiating an options transaction, whether acting as 
principal or agent, to report or ensure that the transaction is 
reported within 90 seconds of the execution to the tape, except that, 
when an order represented by a Floor Broker is executed against a limit 
order on the book, the Specialist must report or ensure that the 
portion of

[[Page 43634]]

the transaction represented by such Specialist is reported to the tape.
The Proposal
    The Exchange proposes to: (i) Amend Rule 1014(g)(vi) to require 
matched tickets in manually executed trades to be submitted to an 
Exchange Data Entry Technician (``DET'') located on the options trading 
floor immediately upon execution; (ii) to delete from Rules 1014(g)(vi) 
and 1051(b), the provision that currently states that all Exchange 
options transactions shall be reported at the time of execution to the 
Exchange for comparison of trade information at the specialist's post; 
\4\ (iii) delete from Rule 1051(a) and OFPA-2(b) the provision stating 
that when an order represented by a Floor Broker is executed against a 
limit order on the book, the Specialist must report or ensure that the 
portion of the transaction represented by such Specialist is reported 
to the tape (the Floor Broker now has the capability of electronically 
executing limit orders on the limit order book using the FBMS; \5\ and 
(iv) delete from OFPA-2(d) the provision requiring specialists to keep 
matched tickets for a minimum of three years, and replace that 
provision with rule text requiring the respective parties to the 
manually executed trade to preserve the matched tickets for a three-
year period. If the specialist is a party to such a trade, the 
specialist would be included as a party required to preserve the 
matched tickets. The specialist would not be required to keep matched 
trade tickets from a manually executed trade to which the specialist is 
not a party.
---------------------------------------------------------------------------

    \4\ Manually executed trades are currently reported to DETs 
located on the Exchange floor; electronically executed trades are 
submitted to the Exchange through PHLX XL.
    \5\ The Options Floor Broker Management System 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 Options Floor Broker 
Management System 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. See Exchange Rule 1080, Commentary .06.
---------------------------------------------------------------------------

    The vast majority of trades on the Exchange are now executed and 
reported electronically via PHLX XL. The advent of electronic trading 
has in most cases obviated the need for trade tickets, except in the 
few instances where trades are executed in open outcry.\6\ As a result, 
Exchange DETs are no longer positioned behind the specialist's post. 
Instead, Exchange DETs are located at a specific location on the 
Exchange's Options Floor, and not behind any particular specialist's 
trading post. The Exchange therefore proposes to amend Rule 1014(a)(vi) 
and OFPA F-2(a) by requiring the responsible person to submit the 
matched trade tickets to an Exchange DET located on the trading floor 
immediately upon execution. Additionally, because reporting of trades 
executed in open outcry to the Exchange is not currently done at the 
specialist's post, the Exchange proposes to delete this requirement 
from Rule 1051(b).
---------------------------------------------------------------------------

    \6\ For example, an Exchange market maker trading directly with 
another market maker in open outcry would still require paper 
tickets, and trade tickets would be used in the event of a system 
malfunction.
---------------------------------------------------------------------------

    The Exchange also proposes to delete the provision from Rule 
1051(a) and OFPA F-2(b) stating that when an order represented by a 
Floor Broker is executed against a limit order on the book, the 
specialist must report or ensure that the portion of the transaction 
represented by such specialist is reported to the tape. Floor Brokers 
have the capability and the requirement to enter orders to trade 
against limit orders on the limit order book using the FBMS.\7\
---------------------------------------------------------------------------

    \7\ See Exchange Rules 1063(e) and (f).
---------------------------------------------------------------------------

    At the time of the initial deployment of the FBMS, when a floor 
broker initiated a transaction and executed all or a portion of the 
transaction against a contra-side limit order on the limit order book, 
the specialist executed the booked limit order on the system by 
matching the booked limit order against the order represented by the 
floor broker. The rule requires that when an order represented by a 
floor broker is executed against a limit order on the book, the 
specialist must report or ensure that the portion of the transaction 
represented by such specialist is reported to the tape. The purpose of 
this provision was to address the situation in which an order 
represented by a floor broker executes a booked limit order was 
executed by the specialist. The floor broker in this situation was not 
required to report that portion of the transaction on the system, 
despite the fact that the floor broker involved may have in fact 
``initiated'' the transaction.
    Subsequently, the Exchange made changes to the PHLX XL system and 
created PHLX XL II, which was rolled out over a 12-week period (the 
``rollout'').\8\ Upon completion of the rollout, specialists could no 
longer match orders in the trading crowd, including those submitted via 
FBMS, with orders on the book. The PHLX XL system now matches and 
reports all trades submitted electronically against limit orders on the 
book.\9\ The instant proposed rule change is intended to reflect that 
the specialist no longer has the capability to match or report such 
trades. If the specialist is a party to such a trade, the portion of 
the transaction represented by such specialist is reported to the tape 
automatically. Therefore, the Exchange is proposing to delete this 
requirement from Rule 1051 and OFPA F-2 because it is obsolete.
    Rule 1014(g)(vi) and OFPA F-2(a) currently require persons 
identified in the Rule and OFPA to allocate, match and time stamp 
manually executed trades as well as to submit the matched trade tickets 
to the appropriate person at the respective specialist post immediately 
upon execution.\10\ At the time of the adoption of this requirement, 
most trades on the Exchange were executed in open outcry and reported 
by the ``appropriate person at the respective specialist post,'' an 
Exchange DET, who was located behind the specialist post. The 
responsible person would submit the matched trade tickets to the DET 
through a chute that would dispense the tickets at the DET's terminal. 
The DET would then enter the trade ticket and clearing information onto 
the Exchange's system and report the trade to the consolidated tape. 
The matched trade tickets were kept by the

[[Page 43635]]

DET and given to the specialist at the end of the trading session. The 
Exchange proposes to delete this requirement because the DET is no 
longer located at the specialist's post.
---------------------------------------------------------------------------

    \8\ See supra note 3.
    \9\ The Exchange is a member of OPRA under the Limited Liability 
Company Agreement of Options Price Reporting Authority, LLC (``the 
OPRA Plan''). Section 5.2 of the OPRA Plan, entitled ``Collection 
and Dissemination of Options Last Sale Reports and Quotation 
Information,'' requires each of the Members to collect and promptly 
transmit to the OPRA System by means of its own facilities all Last 
Sale Reports relating to its respective market. For this purpose, 
each of the Members is required to use its best efforts to transmit 
such reports to the OPRA System, properly sequenced, within two 
minutes of the time of execution. Such reports shall be sequenced 
and transmitted in the appropriate format conforming to the 
specifications prescribed by OPRA (which may be reflected in 
contractual agreements between OPRA and persons providing data 
processing services to OPRA). Except as otherwise provided by OPRA, 
such reports shall identify: (i) The options series; (ii) The number 
of contracts in each transaction; (iii) The price at which the 
contracts were sold; (iv) The market of execution; and (v) Through 
appropriate codes and messages, late or out of sequence trades, 
cancels, spread transactions, opening ranges, trading halts and 
suspensions, and similar matters.
    PHLX XL performs these functions for automatically executed 
transactions. PHLX XL also provides Exchange members who participate 
in electronic trades with immediate electronic reports. Manually 
executed trades are transmitted by DETs.
    \10\ See Securities Exchange Act Release No. 33512 (January 24, 
1994), 59 FR 4739 (February 1, 1994) (SR-Phlx-93-08).
---------------------------------------------------------------------------

    Currently, OFPA F-2(d) currently requires specialists to keep all 
matched trade tickets in their possession for a period of three years, 
whether or not the specialist participated or acted as agent in any 
such trade. At the time this requirement was adopted, the Exchange 
relied primarily on matched trade tickets in carrying out its important 
surveillance and operations functions and stated, at the time,

    [O]nce a trade has been processed for trade dissemination and 
clearing, it is then left in the possession of the attendant 
specialist. Accordingly, the Phlx is proposing to not only limit 
access to these tickets, but also to require specialists to keep all 
matched trade tickets in their possession for a period of three 
years, whether or not the specialist participated or acted as agent 
in any such trade. \11\
---------------------------------------------------------------------------

    \11\ Id.

    Because the matched trade tickets are no longer left in the 
possession of the attendant specialist, the Exchange proposes to delete 
the requirement that specialists keep matched tickets for a minimum of 
three years, and replace that provision with text requiring the 
respective parties to the trade to preserve the matched tickets, or 
copies thereof, for that period.
    The Exchange represents that the instant proposed rule change will 
not require any changes in, or modifications to, its current system of 
surveillance for the submission of trade tickets, or for trade 
reporting in general.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ 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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the proposal modernizes the Exchange's rules to 
reflect current practices and systems on the Exchange and in the 
marketplace as a whole. The requirement that specialists retain trade 
tickets for trades that are executed manually in the specialist's crowd 
in situations where the specialist is not a participant in the trade is 
obviated due to the fact that the specialist does not match tickets 
for, or report, such trades. The Exchange believes the deletion of this 
requirement serves to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, updating on-
floor practices to reflect new technologies and procedures on the 
Exchange's options trading floor.
    Additionally, the proposed rule change takes into account the fact 
that there are no DETs located at the specialist's post; the mechanism 
by which manually executed trades are reported is more perfected by 
requiring in the rules that participants in manually executed trades 
submit matched tickets to a DET located on the options trading floor 
immediately upon execution. The proposed rule change clarifies and 
streamlines the current procedures in the rules respecting the 
submission of matched trade tickets, which the Exchange believes 
results in more efficient reporting of manually executed trades, to the 
benefit of investors and the public interest.

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

    The Exchange believes that the foregoing proposed rule change may 
take effect upon filing with the Commission pursuant to Section 
19(b)(3)(A) \14\ of the Act and Rule 19b-4(f)(6)(iii) thereunder \15\ 
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.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6)(iii). 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.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2012-92 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-2012-92. 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

[[Page 43636]]

submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Phlx-2012-92 and should be submitted on or before August 15, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18165 Filed 7-24-12; 8:45 am]
BILLING CODE 8011-01-P