Document ID: SEC-2017-1839-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2017-11-09T05:00Z

[Federal Register Volume 82, Number 216 (Thursday, November 9, 2017)]
[Notices]
[Pages 52082-52084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24370]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82012; File No. SR-Phlx-2017-93]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 
1080(p)(2) To Enhance Anti-Internalization Functionality

November 3, 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 November 2, 2017, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 1080(p)(2) to enhance anti-
internalization functionality.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/ 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 purpose of the proposed rule change is to enhance the anti-
internalization (``AIQ'') functionality

[[Page 52083]]

provided to Specialists and Registered Options Traders (``ROTs'') 
(collectively, ``market makers'') \3\ on the Exchange by giving members 
the flexibility to choose to have this protection apply at the badge 
level (i.e., existing functionality), at the Exchange account level, or 
at the member firm level. The Exchange believes that this enhancement 
will provide helpful flexibility for market making firms that wish to 
prevent trading against all quotes and orders entered by their firm, or 
Exchange account, instead of just quotes and orders that are entered 
under the same badge.
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    \3\ Specialists and ROTs are considered market makers on Phlx. 
See Rule 1014.
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    Currently, the Exchange provides mandatory AIQ functionality 
whereby quotes and orders entered by market makers using the same Phlx 
badge are not executed against quotes and orders entered on the 
opposite side of the market using the same badge.\4\ When a quote or 
order entered by a market maker would trade with other quotes or orders 
from the same badge, the trading system cancels the resting quote or 
order back to the entering party prior to execution.\5\ AIQ assists 
market makers in reducing trading costs from unwanted executions 
potentially resulting from the interaction of executable buy and sell 
trading interest from the same firm when performing the same market 
making function.
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    \4\ See Rule 1080(p).
    \5\ Id. A quote or order entered by a market maker only triggers 
AIQ when it would trade with other quotes or orders from the same 
market maker. Thus, an incoming quote or order entered by a market 
maker may interact with other interest with priority on the book 
prior to triggering AIQ. After AIQ is triggered, the incoming quote 
or order may continue to trade with resting interest from other 
participants.
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    Today, this protection prevents market makers from trading against 
their own quotes and orders at the badge level. The proposed 
enhancement to this functionality would allow members to choose to have 
this protection applied at the badge level as implemented today, at the 
Exchange account level, or at the member firm level. If members choose 
to have this protection applied at the Exchange account level, AIQ 
would prohibit quotes and orders from different badges associated with 
the same Exchange account from trading against one another. Similarly, 
if the members choose to have this protection applied at the member 
firm level, AIQ would prohibit quotes and orders from different badges 
within the member firm from trading against one another. Members that 
do not select to have this protection applied at the Exchange account 
level or member firm level will have their AIQ protection defaulted to 
the badge level protection applied today. The Exchange believes that 
the proposed AIQ enhancement will provide members with more tailored 
self-trade functionality that allows them to manage their trading as 
appropriate based on the members' business needs. While the Exchange 
believes that some firms will want to restrict AIQ to trading against 
interest from the same badge--i.e., as implemented today--the Exchange 
believes that other firms will find it helpful to be able to configure 
AIQ to apply at the Exchange account level or at the member firm level 
so that they are protected regardless of which badge the order or quote 
originated from. Similar flexibility is offered on the Exchange's 
affiliate, the Nasdaq Options Market (``NOM''),\6\ and also on the BATS 
BZX Exchange (``BZX''), which provides members the ability to apply 
Match Trade Prevention (``MTP'') modifiers--i.e., BZX's version of 
self-trade protection--based on MPID, Exchange Member, trading group, 
or Exchange Sponsored Participant identifiers.\7\
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    \6\ See NOM Chapter VI, Sec. 10. See also Securities Exchange 
Act Release No. 81171 (July 19, 2017), 82 FR 34557 (July 25, 2017) 
(SR-Nasdaq-2017-069).
    \7\ See BZX Rule 21.1(g).
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    The examples below illustrate how AIQ would operate based on the 
badge level protection, the Exchange account level, or for members that 
choose to apply AIQ at the member firm level:
Example 1
    1. Member ABC (badge 123A & 555B) with AIQ configured at the badge 
level.
    2. 123A Quote: $1.00 (5) x $1.10 (20).
    3. 555B Buy Order entered for 10 contracts at $1.10.
    4. 555B Buy Order executes 10 contracts against 123A Quote. 123A 
and 555B are permitted trade against one another because Member ABC has 
configured AIQ to apply at the badge level. This is the same as 
existing functionality.
Example 2
    1. Member ABC (Account 999 with badges 123A and 555B, and Account 
888 with badge 789A) with AIQ configured at the Exchange account level.
    2. 123A Quote: $1.00 (5) x $1.10 (20).
    3. 789A Quote: $1.05(10) x $1.10 (20).
    4. 555B Buy Order entered for 30 contracts at $1.10.
    5. 555B Buy Order executes against 789A Quote but 555B Buy Order 
does not execute against 123A Quote. AIQ purges the 123A Quote and the 
remaining contracts of the 555B Buy Order rests on the book at $1.10. 
123A and 555B are not permitted trade against one another because 
Member ABC has configured AIQ to apply at the Exchange account level. 
This is new functionality as the member has opted to have AIQ operate 
at the Exchange account level.
Example 3
    1. Same as Example 2 above but Member ABC has AIQ configured at the 
member level.
    2. AIQ purges the 123A Quote and the 789A Quote and the 555B Buy 
Order rests on the book at $1.10. This is new functionality as the 
member has opted to have AIQ operate at the member level.
Implementation
    The Exchange proposes to launch the AIQ functionality described in 
this proposed rule change in either Q4 2017 or Q1 2018. The Exchange 
will announce the implementation date of this functionality in an 
Options Trader Alert issued to members prior to the launch date.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b) of the Act.\8\ In 
particular, the proposal is consistent with Section 6(b)(5) of the 
Act,\9\ because it is designed to promote just and equitable principles 
of trade, remove impediments to and perfect the mechanisms of a free 
and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is consistent 
with the protection of investors and the public interest as it is 
designed to provide Phlx market makers with additional flexibility with 
respect to how to implement self-trade protections provided by AIQ. 
Currently, all market makers are provided functionality that prevents 
quotes and orders from one badge from trading with quotes and orders 
from the same badge. This allows market makers to better manage their 
order flow and prevent undesirable executions where the market maker, 
using the same badge, would be on both sides of the trade. While this 
functionality is helpful to our members, some members would prefer not 
to trade

[[Page 52084]]

with quotes and orders entered by different badges within the same 
Exchange account or member. Thus, the Exchange is proposing to provide 
members with flexibility with respect to how AIQ is implemented. While 
members that like the current functionality can continue to use it, 
members who would prefer to prevent self-trades across different badges 
within the same Exchange account or at the member level will now be 
provided with functionality that lets them do this. Similar flexibility 
is offered on both NOM and BZX.\10\ The Exchange believes that 
flexibility to apply AIQ at the Exchange account or member firm level 
would be useful for Phlx members too. The Exchange believes that the 
proposed rule change is designed to promote just and equitable 
principles of trade and will remove impediments to and perfect the 
mechanisms of a free and open market as it will further enhance self-
trade protections provided to market makers similar to those 
protections provided on other markets. This functionality does not 
relieve or otherwise modify the duty of best execution owed to orders 
received from public customers.
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    \10\ See supra notes 6-7.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\11\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule change is designed to enhance AIQ functionality provided to 
Exchange market makers, and will benefit members that wish to protect 
their quotes and orders against trading with other quotes and orders 
within the same Exchange account or member, rather than the more 
limited badge standard applied today. The new functionality, which 
provides similar flexibility to that offered on both NOM and BZX, is 
also completely voluntary, and members that wish to use the current 
functionality can also continue to do so. The Exchange does not believe 
that providing more flexibility to members will have any significant 
impact on competition. In fact, the Exchange believes that the proposed 
rule change is evidence of the competitive environment in the options 
industry where exchanges must continually improve their offerings to 
maintain competitive standing.
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    \11\ 15 U.S.C. 78f(b)(8).
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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 \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 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-2017-93 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2017-93. 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-2017-93 and should be 
submitted on or before November 30, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24370 Filed 11-8-17; 8:45 am]
BILLING CODE 8011-01-P