Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change Relating to Professional Customer Definition, 7166-7171 [2016-02606]
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Federal Register / Vol. 81, No. 27 / Wednesday, February 10, 2016 / Notices
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)(ii) of the Act.20
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.
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;
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–BX–
2016–007 and should be submitted on
or before March 2, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–02605 Filed 2–9–16; 8:45 am]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BX–2016–007 on the subject line.
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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:
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change
Relating to Professional Customer
Definition
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–BX–2016–007. 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 (https://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
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77054; File No. SR–Phlx–
2016–10]
February 4, 2016.
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 January
21, 2016, NASDAQ OMX PHLX LLC
(‘‘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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Exchange Rule 1000(b)(14)
(Applicability, Definitions and
References) to add specificity to the
definition of a Professional with respect
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
20 15
U.S.C. 78s(b)(3)(A)(ii).
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to the manner in which the volume
threshold will be calculated by the
Exchange.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqomxphlx.
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 the
definition of ‘‘Professional’’ in Rule
1000(b)(14) to specify the manner in
which the Exchange calculates orders to
determine if an order should be treated
as Professional.
Background
Exchange Rule 1000(b)(14) currently
states, the term Professional means any
person or entity that (i) is not a broker
or dealer in securities, and (ii) places
more than 390 orders in listed options
per day on average during a calendar
month for its own beneficial
account(s).3 In order to properly
represent orders entered on the
Exchange member organizations are
required to indicate whether Customer
orders are ‘‘Professional’’ orders.’’ 4 To
3 A Professional will be treated in the same
manner as an off-floor broker-dealer for purposes of
Rules 1014(g)(except with respect to all-or-none
orders, which will be treated like customer orders,
except that orders submitted pursuant to Rule
1080(n) for the beneficial account(s) of
Professionals with an all-or-none designation will
be treated in the same manner as off-floor brokerdealer orders), 1033(e), 1064.02 (except Professional
orders will be considered customer orders subject
to facilitation), 1080(n) and 1080.07 as well as
Options Floor Procedure Advices B–6 and F–5.
Member organizations must indicate whether orders
are for Professionals.
4 The Exchange utilizes a special order origin
code for Professional orders. The Exchange also
disseminates the Professional designator over its
new Top of Phlx Options Plus Orders (‘‘TOPO Plus
Orders’’), which includes disseminated Exchange
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comply with this requirement, member
organizations are required to review
their Customers’ activity on at least a
quarterly basis to determine whether
orders that are not for the account of a
broker-dealer should be represented as
Customer orders or Professional orders.5
The Exchange accepts orders routed
from other markets that are marked
Professional. The designation of
Professional or Professional order does
not result in any different treatment of
such orders for purposes of Exchange
rules concerning away market
protection. That is, all non-broker or
dealer orders, including those that meet
the definition of Professional orders, are
treated equally for purposes of Exchange
away market protection rules.6 The
Exchange continues to believe that
identifying Professional accounts based
upon the average number of orders
entered in qualified accounts is an
appropriately objective approach to
reasonably distinguish such persons and
entities from retail investors or market
participants.
Proposal
The Exchange proposes to count each
order entered by a Professional toward
the number of orders, regardless of the
options exchange to which the order
was routed in determining Professional
orders,7 except for FLEX orders.8
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FLEX Orders
FLEX orders will not be counted
toward the 390 threshold because these
types of orders are non-electronic
orders. Furthermore, FLEX orders are
typically not traded by a retail
Customer, but rather large institutional
investors and therefore are not relevant
to the type of analysis the Exchange is
top-of-market data (including orders, quotes and
trades) together with all of the data currently
available on the Specialized Order Feed (‘‘SOF’’).
5 Orders for any customer that had an average of
more than 390 orders per day during any month of
a calendar quarter must be represented as
Professional orders for the next calendar quarter.
Member organizations will be required to conduct
a quarterly review and make any appropriate
changes to the way in which they are representing
orders within five days after the end of each
calendar quarter. While member organizations will
only be required to review their accounts on a
quarterly basis, if during a quarter the Exchange
identifies a customer for which orders are being
represented as customer orders but that has
averaged more than 390 orders per day during a
month, the Exchange will notify the member
organization and the member organization will be
required to change the manner in which it is
representing the customer’s orders within five days.
6 See Exchange Rules 1080(m), 1083, 1084, and
1086.
7 All order types count toward the 390 orders on
average per day.
8 The term ‘‘FLEX option’’ means a FLEX option
contract that is traded subject to Exchange Rule
1079.
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trying to distinguish as between retail
investors and market Professionals.
Cancel and Replace
A cancel and replace order is a type
of order that replaces a prior order. The
Exchange believes that the second order
(the replacement order) should be
counted as a new order. Complex
Orders 9 consisting of four legs or fewer
will be counted as a single order, and
with Complex Orders of five options 10
legs or more, each leg will count as a
separate order. The exception to the
cancel and replace orders is with
‘‘single-strike algorithms,’’ which are a
series of cancel and replace orders in an
individual strike which track the NBBO.
Orders resulting from a single-strike
algorithm shall be counted as new
orders,11 because the Customer is
specifically instructing the executing
broker in the ‘‘single-strike algorithm’’
scenario to cancel and replace these
orders. This type of activity is akin to
market making in a Customer account
and should be counted, as a new order.
Parent/Child Orders
An order that converts into multiple
subordinate orders to achieve an
execution strategy shall be counted as
one order per side and series, even if the
order is routed away.12 All strategies
must comply with Rule 1080 at
Commentary .07(a)(ii). An order that
cancels and replaces a resulting
subordinate order and results in
multiple sides/series shall be counted as
a new order on each side and series. For
purposes of counting Customer orders,
the manner in which the Customer
submitted the order and whether the
order was on the same side and series
will determine if the order will count as
one order. If one Customer order on the
same side and series is subsequently
9 A Complex Order is any order involving the
simultaneous purchase and/or sale of two or more
different options series in the same underlying
security, priced at a net debit or credit based on the
relative prices of the individual components, for the
same account, for the purpose of executing a
particular investment strategy. Furthermore, a
Complex Order can also be a stock-option order,
which is an order to buy or sell a stated number
of units of an underlying stock or exchange-traded
fund (‘‘ETF’’) coupled with the purchase or sale of
options contract(s). See Exchange Rule 1080,
Commentary .08(a)(i). A Complex Order must meet
this definition to be transacted on the Exchange.
10 Orders that have five legs, where one leg is a
stock, will be considered one order. Stock orders
shall not count toward the number of legs.
11 Cancel messages do not count as an order.
12 An order which is placed for the beneficial
account(s) of a person or entity that is not a broker
or dealer in securities that is broken into multiple
parts by a broker or dealer or by an algorithm
housed at a broker or dealer or by an algorithm
licensed from a broker or dealer. Strategies include
Complex Orders and volatility orders, for example.
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7167
broken-up by a broker into multiple
orders for purposes of execution or
routed away, this order will count as
one order. The Exchange believes that
the proposed amendment will provide
more certainty to market participants in
determining the manner in which the
Exchange will compute the number of
orders in listed options per day on
average during a calendar month for its
own beneficial account(s) to determine
the Professional designation.
In order to make clear when orders
will count as new orders, the Exchange
offers the following scenarios as
examples.
• The Exchange proposes to count
multiple orders that were submitted by
the member as separate orders as
multiple orders.
• The Exchange proposes to count a
single order submitted by a member,
which was automatically executed in
multiple parts by the trading system, as
one order, because the member did not
intervene to create multiple orders.
Another example is where an order was
entered in the trading system and only
partially filled, the order would count as
one order. The subsequent fills, which
could be multiple executions, would not
count as additional orders in
determining the 390 limit. The manner
in which the order is ultimately
executed, as one order or multiple
orders, should not itself determine
whether the activity is that of a
Professional; also the member did not
intervene in that circumstance.
• The Exchange proposes to not count
an order which reprices, for example
because of a locked and crossed market,
as a new order because the member did
not intervene.
• The Exchange proposes to count
orders, which result in multiple Orders
due to cancel and replacement orders,
as new orders. This is because in this
situation the member did intervene to
create the subsequent orders.
• The Exchange proposes to count an
order submitted by the Customer as a
single order, on the same side and
series, as a single order despite the fact
that a broker broke-up the order into
multiple orders for purposes of
execution.
The Exchange notes that other options
exchanges have issued notices which
describe the manner in which those
Exchanges believe thresholds should be
computed for determining if an order
qualifies as a Professional order.13 The
13 See NYSE Arca, Inc.’s and NYSE MKT LLC’s
Joint Regulatory Bulletin (RBO–15–03 and RBO–
15–06, respectively) dated September 9, 2015;
CBOE’s Regulatory Circulator (RG10–126) dated
December 1, 2010; and the International Securities
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Exchange believes that there is industry
confusion as to which orders count
toward the 390 contract threshold. The
Exchange’s proposal is intended to
provide clarity and to continue to
promote consistency in the treatment of
orders as Professional orders.
Below are some examples of the
calculation of Professional orders.
Example #1:
A Customer has an order to buy 100 calls
at a volatility level of 35. The order then
generates a child order resulting in a 1.00 bid
for 100 options which is sent to exchange A.
After the underlying stock price ticks up 2
cents the child order is then adjusted to
reflect a 35 level volatility which in this case
(50 delta) results in a 1.01 bid sent to
Exchange A replacing the current 1.00 bid.
In determining the number of orders that
attribute to the 390 order count, in this case,
because the child order is being canceled and
replaced in the ‘‘same series’’ this would
only count as one (1) order for purposes of
Professional designation calculation.
Example #2:
A Customer has an order to buy 20k Vega
at a 35 volatility level in symbol XYZ. The
order then generates 50 child orders across
different strikes. Throughout the day those 50
orders are adjusted as the stock moves
resulting in the replacement of child orders
to the tune of 5 times per order (50 × 5
cancels) resulting in 250 total orders
generated to Exchange A.
In determining the number of orders that
attribute to the 390 order count, in this case,
because the child orders generated are across
multiple series it would be necessary to
count all 250 orders.
In addition to the above examples, the
Exchange provides the below chart to
demonstrate the manner in which it will
count orders.
Singular
Single Strike Activity:
Customer order posted to 1 SRO order Book .................................................................................................
Customer order posted to Multiple SRO order Books simultaneously ............................................................
Cancel/Replace Activity ....................................................................................................................................
Cancel/Replace Activity tracking NBBO ...........................................................................................................
Complex Order Activity (4 option strikes or fewer):
Customer order posted to 1 SRO order Book .................................................................................................
Customer order posted to Multiple SRO Complex order Books simultaneously .............................................
Cancel/Replace Activity ....................................................................................................................................
Cancel/Replace Activity tracking NBBO ...........................................................................................................
Complex Order Activity (5 option strikes or greater):
Customer order posted to 1 SRO order Book .................................................................................................
Customer order posted to Multiple SRO Complex Order Books simultaneously ............................................
Cancel/Replace Activity ....................................................................................................................................
Cancel/Replace Activity tracking NBBO ...........................................................................................................
Multiple
x
x
x
........................
........................
........................
........................
x
x
x
x
x
........................
........................
........................
........................
........................
........................
........................
........................
x
x
x
x
Singular—counts as a single order towards the 390 count.
Multiple—each order applies towards the 390 count.
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The Exchange proposes to implement
this rule on April 1, 2016 to provide
market participants with advance notice
for their quarterly calculations. The
Exchange will issue an Options Trader
Alert in advance to inform market
participants of such date.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 14 in general, and furthers the
objectives of Section 6(b)(5) of the Act 15
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
promoting the consistent application of
its rules by further defining the manner
in which the Exchange will compute the
number of orders in listed options per
day on average during a calendar month
for its own beneficial account(s) for
purposes of determining the
Professional designation. Furthermore,
the Exchange believes that specifying
the manner in which the 390 threshold
will be calculated within its Rules will
Exchange LLC’s Regulatory Information Circular
(2009–179) dated June 23, 2009.
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provide members with certainty and
provide them with insight as they
conduct their own quarterly reviews for
purposes of designating orders.
The Exchange believes that counting
all orders toward the number of orders,
regardless of the options exchange to
which the order was routed, will
promote the consistent application of its
rules by making clear that all order
types shall be counted as well as all
orders for the purpose of determining
whether the definition of Professional
has been met. The Exchange previously
noted in its filing which created
Professional orders that,
[t]he Exchange believes that identifying
Professional accounts based upon the average
number of orders entered for a beneficial
account is an appropriately objective
approach that will reasonably distinguish
such persons and entities from retail
investors. The Exchange proposes the
threshold of 390 orders per day on average
over a calendar month, because it believes
that this number far exceeds the number of
orders that are entered by retail investors in
a single day, while being a sufficiently low
number of orders to cover the Professional
account holders that are competing with
broker-dealers in the Phlx marketplace. In
addition, basing the standard on the number
14 15
15 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00105
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of orders that are entered in listed options for
a beneficial account(s) assures that
Professional account holders cannot
inappropriately avoid the purpose of the rule
by spreading their trading activity over
multiple exchanges, and using an average
number over a calendar month will prevent
gaming of the 390 order threshold.16
FLEX Orders
FLEX orders will not be counted
toward the 390 threshold because these
types of orders are non-electronic
orders. Furthermore, FLEX orders are
typically not traded by a retail
Customer, but by large institutional
investors and are not relevant to the
type of analysis the Exchange is trying
to distinguish between retail investors
and market Professionals. The Exchange
believes that not counting FLEX orders
toward the 390 threshold is consistent
with the Act because these types of
orders are not utilized by retail
Customer and the proposal should
assure that retail investors continue to
receive the appropriate marketplace
advantages in the Exchange
marketplace, while furthering fair
competition among marketplace
Professionals.
16 See Securities Exchange Act Release No. 61426
(January 26, 2010), 75 FR 5360 (February 2, 2010)
(SR–Phlx–2010–05).
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Cancel and Replace
With respect to determining the
Professional designation, a cancel and
replace order which replaces a prior
order shall be counted as a second
order. An order that is filled partially or
in its entirety or is a replacement order
that is automatically canceled or
reduced by the number of contracts that
were executed will not count as second
order because it was not replaced.17 The
Exchange believes that counting the
replacement order as a second order is
consistent with Exchange Rules because
the replacement order is viewed as a
new order with its own unique
identifier.
The Exchange believes that counting
cancel and replace orders with ‘‘singlestrike algorithms,’’ which are a series of
cancel and replace orders in an
individual strike which track the NBBO,
as new orders is consistent with the Act
because the Customer is specifically
instructing the executing broker in the
‘‘single-strike algorithm’’ scenario to
cancel and replace these orders.
Tracking the NBBO 18 is akin to market
making on the Exchange in a Customer
account and should be counted as new
orders. The Exchange believes that the
Customers order designation should be
reserved for retail Customer.
Further, the Exchange’s interpretation
that Complex Orders consisting of four
legs or fewer will be counted as a single
order, and respecting Complex Orders of
five options legs or more, each leg will
count as a separate order is consistent
with the Act, because the Exchange
believes that five or more options legs
is sufficient quantity to justify counting
these orders separately toward the
volume count. The initial purpose of the
rule change was to distinguish retail
investors over market Professionals. The
Exchange believes that typically
Customer orders will not be as complex
as to have five legs and therefore using
five as the threshold reasonably
differentiates Customer orders from
Professional orders. The Exchange
17 See Exchange Rule 1080. A cancel with
replacement order is a single message for the
immediate cancellation of a previously received
order and the replacement of that order with a new
order with new terms and conditions. If the
previously placed order is already filled partially or
in its entirety, the replacement order is
automatically canceled or reduced by the number
of contracts that were executed. The replacement
order will not retain the priority of the cancelled
order except when the replacement order reduces
the size of the order and all other terms and
conditions are retained.
18 Tracking the NBBO shall mean any parent
order that consumes any self-regulatory
organization order book data feed, or the OPRA
feed, to generate automated child orders, and move
with, or follow the Bid or Offer of the series in
question.
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believes that five or more options legs
evidences the distinction between the
trading behavior of a retail investors as
compared to a market Professional that
would engaged in Complex Orders with
five or more options legs.
Parent/Child Orders
The Exchange’s adoption of the
Professional order was to treat orders in
listed options per day on average during
a calendar month in his or her own
beneficial account differently from
Customer orders for purposes of priority
within the order Book and pricing.19 For
this reason, the Exchange is adopting
rules concerning the computation of
orders which convert into multiple
subordinate orders for the purpose of
determining the Professional
designation. The Exchange’s proposal to
count multiple subordinate orders that
achieve an execution strategy as one
order per side and series and count an
order that cancels and replaces a
resulting subordinate order and results
in multiple sides/series as a new order
is consistent with the Act, because the
Exchange is distinguishing where the
member is actively entering orders that
result in multiple orders and canceling
and replacing orders that result in
multiple orders versus where the
member had no control of the resulting
executions. Allowing orders on the
same side of the market to be counted
as a single order is consistent with the
original intent of the Professional order
designation. The same side of market
distinction protects retail Customers.
This practice is typically the type of
transaction Customers execute versus a
Professional trader. Multiple related
orders resulting from a large order filled
in part, or an order which is cancelled
and replaced several times are
considered part of a related order. The
Exchange does not desire to count large
orders filled in part as multiple orders
because the member did not intervene
in the outcome of the execution. An
order that results in several separate and
unrelated orders would be counted as
multiple orders because the member
intervened in this circumstance.
The Exchange believes that the
proposed amendment will provide more
certainty to market participants in
determining the computation of the
number of orders in listed options per
day on average during a calendar month
for its own beneficial account(s) to
determine the Professional designation.
The Exchange notes that other options
exchanges have issued notices
describing the manner in which they
19 See Exchange Rule 1080 and the Exchange’s
Pricing Schedule.
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7169
believe that Professional order should
be counted when determining if an
order qualifies as a Professional order.20
The Exchange believes that there is
confusion as to which orders count
toward the 390 contract threshold. The
Exchange proposes to provide clarity to
its Rules with specific guidance as to
the computation of Professional orders,
which it believes will promote
consistency in the treatment of orders as
Professional orders. The Exchange
believes that this proposed guidance
will promote consistency and permit the
proper calculation of options orders to
prevent members with high volume
from receiving benefits reserved for
Customer orders. The Professional
designation focuses specifically on the
number of orders generated.
Pursuant to Exchange Rule 1014(g), a
Customer account is an account other
than a controlled account; a controlled
account is an account controlled by or
under common control with a brokerdealer. Customer priority is one of the
marketplace advantages provided to
Customer orders on the Exchange;
Customer priority means that Customer
orders are given execution priority over
non-Customer orders and quotations of
specialists and Registered Options
Traders (‘‘ROTs’’) 21 at the same price.
Another marketplace advantage afforded
to Customer orders on the Exchange is
that member organizations are generally
not assessed transaction fees for the
execution of Customer orders. The
purpose of these marketplace
advantages is to attract retail order flow
to the Exchange by leveling the playing
field for retail investors over market
Professionals [sic].22 The Exchange
20 See NYSE Arca, Inc.’s and NYSE MKT LLC’s
Joint Regulatory Bulletin (RBO–15–03 and RBO–
15–06, respectively) dated September 9, 2015; The
Chicago Board Options Exchange, Incorporated’s
Regulatory Circulator (RG10–126) dated December
1, 2010; and the International Securities Exchange
LLC’s Regulatory Information Circular (2009–179)
dated June 23, 2009.
21 A ROT is a regular member or a foreign
currency options participant of the Exchange
located on the trading floor who has received
permission from the Exchange to trade in options
for his own account. The term ‘‘ROT’’ shall include
a Streaming Quote Trader (‘‘SQT’’), and a Remote
Streaming Quote Trader. An SQT is an ROT who
has received permission from the Exchange to
generate and submit option quotations
electronically in options to which such SQT is
assigned. An SQT may only submit such quotations
while such SQT is physically present on the floor
of the Exchange. An SQT may only trade in a
market making capacity in classes of options in
which the SQT is assigned.
22 Market Professionals [sic] have access to
sophisticated trading systems that contain
functionality not available to retail customers,
including things such as continuously updated
pricing models based upon real-time streaming
data, access to multiple markets simultaneously and
order and risk management tools.
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believes that permitting certain types of
orders to be counted as a single order
and other types of orders to be counted
as multiple orders is consistent with the
original intent of the Professional
designation which was to continue to
provide Customer accounts with
marketplace advantages and distinguish
those accounts non-Professional retail
investors from the Professionals
accounts some non-broker-dealer
individuals and entities have access to
information and technology that enables
them to Professionally trade listed
options in the same manner as a broker
or dealer in securities.23
Finally, the proposed guidance is
being issued to stem confusion as to the
manner in which options exchanges
compute the Professional order volume.
The Exchange’s Rules may be similar to
notices issued by NYSE Arca, Inc, NYSE
MKT LLC (‘‘NYSE MKT’’) and
International Securities Exchange LLC
(‘‘ISE’’).
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 because the
Exchange will uniformly apply the rules
to calculate volume on all member
organizations in determining
Professional orders. The designation of
Professional orders would not result in
any different treatment of such orders
for purposes of the Exchange’s Rules
concerning order protection or routing
to away exchanges. Also, SIFMA
supports the guidance issued by NYSE
Arca and NYSE MKT. The guidance is
being issued to stem confusion as to the
manner in which options exchanges
compute the Professional order volume.
The Exchange is adopting similar
counting methods the Exchange believes
is currently being utilized by NYSE
MKT, NYSE ARCA and ISE related to
designation of Professional orders.
asabaliauskas on DSK9F6TC42PROD with NOTICES2
Counting All Orders
The Exchange believes that counting
all orders entered by a Professional
toward the number of orders, regardless
of the options exchange to which the
order was routed, does not create an
undue burden on intra-market
competition because this proposed rule
23 For example, some broker-dealers provided
their Professional customers with multi-screened
trading stations equipped with trading technology
that allows the trader to monitor and place orders
on all six options exchanges simultaneously. These
trading stations also provide compliance filters,
order managements tools, the ability to place orders
in the underlying securities, and market data feeds.
VerDate Sep<11>2014
17:22 Feb 09, 2016
Jkt 238001
change will be consistently applied to
all members in determining Professional
orders. FLEX orders will not be counted
toward the 390 threshold because these
types of orders are non-electronic
orders.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Cancel and Replace
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange believes that its
application of cancel and replace orders
does not create an undue burden on
intra-market competition because this
application is consistent with Exchange
Rules, where the replacement order is
viewed as a new order. This treatment
is consistent with the manner in which
this order type is applied today within
the order Book.
The Exchange’s interpretation that
Complex Orders consisting of four legs
or fewer will be counted as a single
order, and respecting Complex Orders of
five legs or more, each leg will count as
a separate order does not create an
undue burden on intra-market
competition because the Exchange will
apply this method of calculation
uniformly among its member
organizations.
Parent/Child Orders
The Exchange’s treatment of
subordinate orders does not create an
undue burden on intra-market
competition because allowing orders on
the same side of the market to be
counted as a single order is consistent
with the original intent of the
Professional order designation which is
to count distinct orders and focus on the
number of orders generated.
The Exchange does not believe that
the proposed rule change will impose
an undue burden on inter-market
competition because other exchanges
have announced the intent to adopt
similar guidance.24 The Exchange
believes that disparate rules regarding
Professional order designation, and a
lack of uniform application of such
rules, does not promote the best
regulation and may, in fact, encourage
regulatory arbitrage. The Exchange
believes that it is therefore prudent and
necessary to conform its rules to that of
other options exchanges for purposes of
calculating the threshold volume of
orders to be designated as a
Professional. This is particularly true
where the Exchange’s third-party
routing broker-dealers are members of
several exchanges that have rules
requiring Professional order
designations.
24 See
PO 00000
supra note 13.
Frm 00107
Fmt 4703
Sfmt 4703
No written comments were either
solicited or received.
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be 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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–
Phlx–2016–10 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 No.
SR–Phlx–2016–10. 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 (https://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
E:\FR\FM\10FEN1.SGM
10FEN1
7171
Federal Register / Vol. 81, No. 27 / Wednesday, February 10, 2016 / Notices
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 will also 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 No. SR–Phlx–2016–
10 and should be submitted on or before
March 2, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–02606 Filed 2–9–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77055; File No. SR–BOX–
2016–02]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Amend
the Fee Schedule To Lower Certain
Fees for Non-Auction Transactions on
the BOX Market LLC (‘‘BOX’’) Options
Facility
February 4, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
27, 2016, BOX Options Exchange LLC
(the ‘‘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
Exchange filed the proposed rule change
pursuant to Section 19(b)(3)(A)(ii) of the
Act,3 and Rule 19b–4(f)(2) thereunder,4
which renders the proposal effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to amend the Fee Schedule to lower
certain fees for Non-Auction
transactions on the BOX Market LLC
(‘‘BOX’’) options facility. While changes
to the fee schedule pursuant to this
proposal will be effective upon filing,
the changes will become operative on
February 1, 2016. The text of the
proposed rule change is available from
the principal office of the Exchange, at
the Commission’s Public Reference
Room and also on the Exchange’s
Internet Web site at https://
boxexchange.com.
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 make
changes to Section I.A. of the BOX Fee
Schedule, Exchange Fees for NonAuction Transactions.
Specifically, the Exchange proposes to
amend certain fees in the pricing model
outlined in Section I.A. (Non-Auction
Transactions).5 In this section, fees and
credits are assessed depending on upon
three factors: (i) The account type of the
Participant submitting the order; (ii)
whether the Participant is a liquidity
provider or liquidity taker; and (iii) the
account type of the contra party. NonAuction Transactions in Penny Pilot
Classes are assessed different fees or
credits than Non-Auction Transactions
in Non-Penny Pilot Classes.
Specifically, the Exchange proposes to
reduce the Taker fees for Professional
Customers, Broker Dealers and Market
Makers interacting with Public
Customers in Penny Pilot Classes. The
fee for Professional Customers and
Broker Dealers taking liquidity against
Public Customers will be lowered to
$0.50 from $0.64 and the fee for Market
Makers taking liquidity against Public
Customers will be lowered to $0.50 from
$0.55.
These transactions will remain
exempt from the Liquidity Fees and
Credits outlined in Section II of the BOX
Fee Schedule. The revised fee structure
for Non-Auction Transactions will be as
follows:
Penny pilot classes
Account type
Maker fee
Public Customer ...............................
asabaliauskas on DSK9F6TC42PROD with NOTICES2
Professional Customer or Broker
Dealer.
Market Maker ....................................
Maker fee
Taker fee
$0.00
0.00
$0.00
0.00
$0.00
0.00
$0.00
0.00
0.00
0.60
0.00
0.50
0.00
0.95
0.00
1.07
Professional Customer/Broker Dealer.
Market Maker ...................................
Public Customer ...............................
Professional Customer/Broker Dealer.
Market Maker ...................................
0.25
0.40
0.35
0.40
0.25
0.51
0.00
0.44
0.50
0.05
0.35
0.85
0.00
0.44
1.03
0.10
0.00
0.29
0.00
0.29
2 17
1 15
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
3 15
17:22 Feb 09, 2016
Taker fee
Public Customer ...............................
Professional Customer/Broker Dealer.
Market Maker ...................................
Public Customer ...............................
25 17
VerDate Sep<11>2014
Non-penny pilot classes
Contra party
Jkt 238001
PO 00000
CFR 240.19b–4.
U.S.C. 78s(b)(3)(A)(ii).
Frm 00108
Fmt 4703
Sfmt 4703
4 17
CFR 240.19b–4(f)(2).
Transactions are those transactions
executed on the BOX Book.
5 Non-Auction
E:\FR\FM\10FEN1.SGM
10FEN1
]]>Agencies
[Federal Register Volume 81, Number 27 (Wednesday, February 10, 2016)]
[Notices]
[Pages 7166-7171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02606]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77054; File No. SR-Phlx-2016-10]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change Relating to Professional Customer
Definition
February 4, 2016.
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 January 21, 2016, NASDAQ OMX PHLX LLC (``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 proposes to amend Exchange Rule 1000(b)(14)
(Applicability, Definitions and References) to add specificity to the
definition of a Professional with respect to the manner in which the
volume threshold will be calculated by the Exchange.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxphlx.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 the definition of ``Professional''
in Rule 1000(b)(14) to specify the manner in which the Exchange
calculates orders to determine if an order should be treated as
Professional.
Background
Exchange Rule 1000(b)(14) currently states, the term Professional
means any person or entity that (i) is not a broker or dealer in
securities, and (ii) places more than 390 orders in listed options per
day on average during a calendar month for its own beneficial
account(s).\3\ In order to properly represent orders entered on the
Exchange member organizations are required to indicate whether Customer
orders are ``Professional'' orders.'' \4\ To
[[Page 7167]]
comply with this requirement, member organizations are required to
review their Customers' activity on at least a quarterly basis to
determine whether orders that are not for the account of a broker-
dealer should be represented as Customer orders or Professional
orders.\5\
---------------------------------------------------------------------------
\3\ A Professional will be treated in the same manner as an off-
floor broker-dealer for purposes of Rules 1014(g)(except with
respect to all-or-none orders, which will be treated like customer
orders, except that orders submitted pursuant to Rule 1080(n) for
the beneficial account(s) of Professionals with an all-or-none
designation will be treated in the same manner as off-floor broker-
dealer orders), 1033(e), 1064.02 (except Professional orders will be
considered customer orders subject to facilitation), 1080(n) and
1080.07 as well as Options Floor Procedure Advices B-6 and F-5.
Member organizations must indicate whether orders are for
Professionals.
\4\ The Exchange utilizes a special order origin code for
Professional orders. The Exchange also disseminates the Professional
designator over its new Top of Phlx Options Plus Orders (``TOPO Plus
Orders''), which includes disseminated Exchange top-of-market data
(including orders, quotes and trades) together with all of the data
currently available on the Specialized Order Feed (``SOF'').
\5\ Orders for any customer that had an average of more than 390
orders per day during any month of a calendar quarter must be
represented as Professional orders for the next calendar quarter.
Member organizations will be required to conduct a quarterly review
and make any appropriate changes to the way in which they are
representing orders within five days after the end of each calendar
quarter. While member organizations will only be required to review
their accounts on a quarterly basis, if during a quarter the
Exchange identifies a customer for which orders are being
represented as customer orders but that has averaged more than 390
orders per day during a month, the Exchange will notify the member
organization and the member organization will be required to change
the manner in which it is representing the customer's orders within
five days.
---------------------------------------------------------------------------
The Exchange accepts orders routed from other markets that are
marked Professional. The designation of Professional or Professional
order does not result in any different treatment of such orders for
purposes of Exchange rules concerning away market protection. That is,
all non-broker or dealer orders, including those that meet the
definition of Professional orders, are treated equally for purposes of
Exchange away market protection rules.\6\ The Exchange continues to
believe that identifying Professional accounts based upon the average
number of orders entered in qualified accounts is an appropriately
objective approach to reasonably distinguish such persons and entities
from retail investors or market participants.
---------------------------------------------------------------------------
\6\ See Exchange Rules 1080(m), 1083, 1084, and 1086.
---------------------------------------------------------------------------
Proposal
The Exchange proposes to count each order entered by a Professional
toward the number of orders, regardless of the options exchange to
which the order was routed in determining Professional orders,\7\
except for FLEX orders.\8\
---------------------------------------------------------------------------
\7\ All order types count toward the 390 orders on average per
day.
\8\ The term ``FLEX option'' means a FLEX option contract that
is traded subject to Exchange Rule 1079.
---------------------------------------------------------------------------
FLEX Orders
FLEX orders will not be counted toward the 390 threshold because
these types of orders are non-electronic orders. Furthermore, FLEX
orders are typically not traded by a retail Customer, but rather large
institutional investors and therefore are not relevant to the type of
analysis the Exchange is trying to distinguish as between retail
investors and market Professionals.
Cancel and Replace
A cancel and replace order is a type of order that replaces a prior
order. The Exchange believes that the second order (the replacement
order) should be counted as a new order. Complex Orders \9\ consisting
of four legs or fewer will be counted as a single order, and with
Complex Orders of five options \10\ legs or more, each leg will count
as a separate order. The exception to the cancel and replace orders is
with ``single-strike algorithms,'' which are a series of cancel and
replace orders in an individual strike which track the NBBO. Orders
resulting from a single-strike algorithm shall be counted as new
orders,\11\ because the Customer is specifically instructing the
executing broker in the ``single-strike algorithm'' scenario to cancel
and replace these orders. This type of activity is akin to market
making in a Customer account and should be counted, as a new order.
---------------------------------------------------------------------------
\9\ A Complex Order is any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, priced at a net debit or credit based on
the relative prices of the individual components, for the same
account, for the purpose of executing a particular investment
strategy. Furthermore, a Complex Order can also be a stock-option
order, which is an order to buy or sell a stated number of units of
an underlying stock or exchange-traded fund (``ETF'') coupled with
the purchase or sale of options contract(s). See Exchange Rule 1080,
Commentary .08(a)(i). A Complex Order must meet this definition to
be transacted on the Exchange.
\10\ Orders that have five legs, where one leg is a stock, will
be considered one order. Stock orders shall not count toward the
number of legs.
\11\ Cancel messages do not count as an order.
---------------------------------------------------------------------------
Parent/Child Orders
An order that converts into multiple subordinate orders to achieve
an execution strategy shall be counted as one order per side and
series, even if the order is routed away.\12\ All strategies must
comply with Rule 1080 at Commentary .07(a)(ii). An order that cancels
and replaces a resulting subordinate order and results in multiple
sides/series shall be counted as a new order on each side and series.
For purposes of counting Customer orders, the manner in which the
Customer submitted the order and whether the order was on the same side
and series will determine if the order will count as one order. If one
Customer order on the same side and series is subsequently broken-up by
a broker into multiple orders for purposes of execution or routed away,
this order will count as one order. The Exchange believes that the
proposed amendment will provide more certainty to market participants
in determining the manner in which the Exchange will compute the number
of orders in listed options per day on average during a calendar month
for its own beneficial account(s) to determine the Professional
designation.
---------------------------------------------------------------------------
\12\ An order which is placed for the beneficial account(s) of a
person or entity that is not a broker or dealer in securities that
is broken into multiple parts by a broker or dealer or by an
algorithm housed at a broker or dealer or by an algorithm licensed
from a broker or dealer. Strategies include Complex Orders and
volatility orders, for example.
---------------------------------------------------------------------------
In order to make clear when orders will count as new orders, the
Exchange offers the following scenarios as examples.
The Exchange proposes to count multiple orders that were
submitted by the member as separate orders as multiple orders.
The Exchange proposes to count a single order submitted by
a member, which was automatically executed in multiple parts by the
trading system, as one order, because the member did not intervene to
create multiple orders. Another example is where an order was entered
in the trading system and only partially filled, the order would count
as one order. The subsequent fills, which could be multiple executions,
would not count as additional orders in determining the 390 limit. The
manner in which the order is ultimately executed, as one order or
multiple orders, should not itself determine whether the activity is
that of a Professional; also the member did not intervene in that
circumstance.
The Exchange proposes to not count an order which
reprices, for example because of a locked and crossed market, as a new
order because the member did not intervene.
The Exchange proposes to count orders, which result in
multiple Orders due to cancel and replacement orders, as new orders.
This is because in this situation the member did intervene to create
the subsequent orders.
The Exchange proposes to count an order submitted by the
Customer as a single order, on the same side and series, as a single
order despite the fact that a broker broke-up the order into multiple
orders for purposes of execution.
The Exchange notes that other options exchanges have issued notices
which describe the manner in which those Exchanges believe thresholds
should be computed for determining if an order qualifies as a
Professional order.\13\ The
[[Page 7168]]
Exchange believes that there is industry confusion as to which orders
count toward the 390 contract threshold. The Exchange's proposal is
intended to provide clarity and to continue to promote consistency in
the treatment of orders as Professional orders.
---------------------------------------------------------------------------
\13\ See NYSE Arca, Inc.'s and NYSE MKT LLC's Joint Regulatory
Bulletin (RBO-15-03 and RBO-15-06, respectively) dated September 9,
2015; CBOE's Regulatory Circulator (RG10-126) dated December 1,
2010; and the International Securities Exchange LLC's Regulatory
Information Circular (2009-179) dated June 23, 2009.
---------------------------------------------------------------------------
Below are some examples of the calculation of Professional orders.
Example #1:
A Customer has an order to buy 100 calls at a volatility level
of 35. The order then generates a child order resulting in a 1.00
bid for 100 options which is sent to exchange A. After the
underlying stock price ticks up 2 cents the child order is then
adjusted to reflect a 35 level volatility which in this case (50
delta) results in a 1.01 bid sent to Exchange A replacing the
current 1.00 bid.
In determining the number of orders that attribute to the 390
order count, in this case, because the child order is being canceled
and replaced in the ``same series'' this would only count as one (1)
order for purposes of Professional designation calculation.
Example #2:
A Customer has an order to buy 20k Vega at a 35 volatility level
in symbol XYZ. The order then generates 50 child orders across
different strikes. Throughout the day those 50 orders are adjusted
as the stock moves resulting in the replacement of child orders to
the tune of 5 times per order (50 x 5 cancels) resulting in 250
total orders generated to Exchange A.
In determining the number of orders that attribute to the 390
order count, in this case, because the child orders generated are
across multiple series it would be necessary to count all 250
orders.
In addition to the above examples, the Exchange provides the
below chart to demonstrate the manner in which it will count orders.
------------------------------------------------------------------------
Singular Multiple
------------------------------------------------------------------------
Single Strike Activity:
Customer order posted to 1 SRO x ...............
order Book.......................
Customer order posted to Multiple x ...............
SRO order Books simultaneously...
Cancel/Replace Activity........... x ...............
Cancel/Replace Activity tracking ............... x
NBBO.............................
Complex Order Activity (4 option
strikes or fewer):
Customer order posted to 1 SRO x ...............
order Book.......................
Customer order posted to Multiple x ...............
SRO Complex order Books
simultaneously...................
Cancel/Replace Activity........... x ...............
Cancel/Replace Activity tracking x ...............
NBBO.............................
Complex Order Activity (5 option
strikes or greater):
Customer order posted to 1 SRO ............... x
order Book.......................
Customer order posted to Multiple ............... x
SRO Complex Order Books
simultaneously...................
Cancel/Replace Activity........... ............... x
Cancel/Replace Activity tracking ............... x
NBBO.............................
------------------------------------------------------------------------
Singular--counts as a single order towards the 390 count.
Multiple--each order applies towards the 390 count.
The Exchange proposes to implement this rule on April 1, 2016 to
provide market participants with advance notice for their quarterly
calculations. The Exchange will issue an Options Trader Alert in
advance to inform market participants of such date.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \14\ in general, and furthers the objectives of Section
6(b)(5) of the Act \15\ 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 promoting the consistent application of its rules by
further defining the manner in which the Exchange will compute the
number of orders in listed options per day on average during a calendar
month for its own beneficial account(s) for purposes of determining the
Professional designation. Furthermore, the Exchange believes that
specifying the manner in which the 390 threshold will be calculated
within its Rules will provide members with certainty and provide them
with insight as they conduct their own quarterly reviews for purposes
of designating orders.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that counting all orders toward the number of
orders, regardless of the options exchange to which the order was
routed, will promote the consistent application of its rules by making
clear that all order types shall be counted as well as all orders for
the purpose of determining whether the definition of Professional has
been met. The Exchange previously noted in its filing which created
Professional orders that,
[t]he Exchange believes that identifying Professional accounts based
upon the average number of orders entered for a beneficial account
is an appropriately objective approach that will reasonably
distinguish such persons and entities from retail investors. The
Exchange proposes the threshold of 390 orders per day on average
over a calendar month, because it believes that this number far
exceeds the number of orders that are entered by retail investors in
a single day, while being a sufficiently low number of orders to
cover the Professional account holders that are competing with
broker-dealers in the Phlx marketplace. In addition, basing the
standard on the number of orders that are entered in listed options
for a beneficial account(s) assures that Professional account
holders cannot inappropriately avoid the purpose of the rule by
spreading their trading activity over multiple exchanges, and using
an average number over a calendar month will prevent gaming of the
390 order threshold.\16\
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 61426 (January 26,
2010), 75 FR 5360 (February 2, 2010) (SR-Phlx-2010-05).
---------------------------------------------------------------------------
FLEX Orders
FLEX orders will not be counted toward the 390 threshold because
these types of orders are non-electronic orders. Furthermore, FLEX
orders are typically not traded by a retail Customer, but by large
institutional investors and are not relevant to the type of analysis
the Exchange is trying to distinguish between retail investors and
market Professionals. The Exchange believes that not counting FLEX
orders toward the 390 threshold is consistent with the Act because
these types of orders are not utilized by retail Customer and the
proposal should assure that retail investors continue to receive the
appropriate marketplace advantages in the Exchange marketplace, while
furthering fair competition among marketplace Professionals.
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Cancel and Replace
With respect to determining the Professional designation, a cancel
and replace order which replaces a prior order shall be counted as a
second order. An order that is filled partially or in its entirety or
is a replacement order that is automatically canceled or reduced by the
number of contracts that were executed will not count as second order
because it was not replaced.\17\ The Exchange believes that counting
the replacement order as a second order is consistent with Exchange
Rules because the replacement order is viewed as a new order with its
own unique identifier.
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\17\ See Exchange Rule 1080. A cancel with replacement order is
a single message for the immediate cancellation of a previously
received order and the replacement of that order with a new order
with new terms and conditions. If the previously placed order is
already filled partially or in its entirety, the replacement order
is automatically canceled or reduced by the number of contracts that
were executed. The replacement order will not retain the priority of
the cancelled order except when the replacement order reduces the
size of the order and all other terms and conditions are retained.
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The Exchange believes that counting cancel and replace orders with
``single-strike algorithms,'' which are a series of cancel and replace
orders in an individual strike which track the NBBO, as new orders is
consistent with the Act because the Customer is specifically
instructing the executing broker in the ``single-strike algorithm''
scenario to cancel and replace these orders. Tracking the NBBO \18\ is
akin to market making on the Exchange in a Customer account and should
be counted as new orders. The Exchange believes that the Customers
order designation should be reserved for retail Customer.
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\18\ Tracking the NBBO shall mean any parent order that consumes
any self-regulatory organization order book data feed, or the OPRA
feed, to generate automated child orders, and move with, or follow
the Bid or Offer of the series in question.
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Further, the Exchange's interpretation that Complex Orders
consisting of four legs or fewer will be counted as a single order, and
respecting Complex Orders of five options legs or more, each leg will
count as a separate order is consistent with the Act, because the
Exchange believes that five or more options legs is sufficient quantity
to justify counting these orders separately toward the volume count.
The initial purpose of the rule change was to distinguish retail
investors over market Professionals. The Exchange believes that
typically Customer orders will not be as complex as to have five legs
and therefore using five as the threshold reasonably differentiates
Customer orders from Professional orders. The Exchange believes that
five or more options legs evidences the distinction between the trading
behavior of a retail investors as compared to a market Professional
that would engaged in Complex Orders with five or more options legs.
Parent/Child Orders
The Exchange's adoption of the Professional order was to treat
orders in listed options per day on average during a calendar month in
his or her own beneficial account differently from Customer orders for
purposes of priority within the order Book and pricing.\19\ For this
reason, the Exchange is adopting rules concerning the computation of
orders which convert into multiple subordinate orders for the purpose
of determining the Professional designation. The Exchange's proposal to
count multiple subordinate orders that achieve an execution strategy as
one order per side and series and count an order that cancels and
replaces a resulting subordinate order and results in multiple sides/
series as a new order is consistent with the Act, because the Exchange
is distinguishing where the member is actively entering orders that
result in multiple orders and canceling and replacing orders that
result in multiple orders versus where the member had no control of the
resulting executions. Allowing orders on the same side of the market to
be counted as a single order is consistent with the original intent of
the Professional order designation. The same side of market distinction
protects retail Customers. This practice is typically the type of
transaction Customers execute versus a Professional trader. Multiple
related orders resulting from a large order filled in part, or an order
which is cancelled and replaced several times are considered part of a
related order. The Exchange does not desire to count large orders
filled in part as multiple orders because the member did not intervene
in the outcome of the execution. An order that results in several
separate and unrelated orders would be counted as multiple orders
because the member intervened in this circumstance.
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\19\ See Exchange Rule 1080 and the Exchange's Pricing Schedule.
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The Exchange believes that the proposed amendment will provide more
certainty to market participants in determining the computation of the
number of orders in listed options per day on average during a calendar
month for its own beneficial account(s) to determine the Professional
designation. The Exchange notes that other options exchanges have
issued notices describing the manner in which they believe that
Professional order should be counted when determining if an order
qualifies as a Professional order.\20\ The Exchange believes that there
is confusion as to which orders count toward the 390 contract
threshold. The Exchange proposes to provide clarity to its Rules with
specific guidance as to the computation of Professional orders, which
it believes will promote consistency in the treatment of orders as
Professional orders. The Exchange believes that this proposed guidance
will promote consistency and permit the proper calculation of options
orders to prevent members with high volume from receiving benefits
reserved for Customer orders. The Professional designation focuses
specifically on the number of orders generated.
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\20\ See NYSE Arca, Inc.'s and NYSE MKT LLC's Joint Regulatory
Bulletin (RBO-15-03 and RBO-15-06, respectively) dated September 9,
2015; The Chicago Board Options Exchange, Incorporated's Regulatory
Circulator (RG10-126) dated December 1, 2010; and the International
Securities Exchange LLC's Regulatory Information Circular (2009-179)
dated June 23, 2009.
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Pursuant to Exchange Rule 1014(g), a Customer account is an account
other than a controlled account; a controlled account is an account
controlled by or under common control with a broker-dealer. Customer
priority is one of the marketplace advantages provided to Customer
orders on the Exchange; Customer priority means that Customer orders
are given execution priority over non-Customer orders and quotations of
specialists and Registered Options Traders (``ROTs'') \21\ at the same
price. Another marketplace advantage afforded to Customer orders on the
Exchange is that member organizations are generally not assessed
transaction fees for the execution of Customer orders. The purpose of
these marketplace advantages is to attract retail order flow to the
Exchange by leveling the playing field for retail investors over market
Professionals [sic].\22\ The Exchange
[[Page 7170]]
believes that permitting certain types of orders to be counted as a
single order and other types of orders to be counted as multiple orders
is consistent with the original intent of the Professional designation
which was to continue to provide Customer accounts with marketplace
advantages and distinguish those accounts non-Professional retail
investors from the Professionals accounts some non-broker-dealer
individuals and entities have access to information and technology that
enables them to Professionally trade listed options in the same manner
as a broker or dealer in securities.\23\
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\21\ A ROT is a regular member or a foreign currency options
participant of the Exchange located on the trading floor who has
received permission from the Exchange to trade in options for his
own account. The term ``ROT'' shall include a Streaming Quote Trader
(``SQT''), and a Remote Streaming Quote Trader. An SQT is an ROT who
has received permission from the Exchange to generate and submit
option quotations electronically in options to which such SQT is
assigned. An SQT may only submit such quotations while such SQT is
physically present on the floor of the Exchange. An SQT may only
trade in a market making capacity in classes of options in which the
SQT is assigned.
\22\ Market Professionals [sic] have access to sophisticated
trading systems that contain functionality not available to retail
customers, including things such as continuously updated pricing
models based upon real-time streaming data, access to multiple
markets simultaneously and order and risk management tools.
\23\ For example, some broker-dealers provided their
Professional customers with multi-screened trading stations equipped
with trading technology that allows the trader to monitor and place
orders on all six options exchanges simultaneously. These trading
stations also provide compliance filters, order managements tools,
the ability to place orders in the underlying securities, and market
data feeds.
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Finally, the proposed guidance is being issued to stem confusion as
to the manner in which options exchanges compute the Professional order
volume. The Exchange's Rules may be similar to notices issued by NYSE
Arca, Inc, NYSE MKT LLC (``NYSE MKT'') and International Securities
Exchange LLC (``ISE'').
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 because the Exchange will
uniformly apply the rules to calculate volume on all member
organizations in determining Professional orders. The designation of
Professional orders would not result in any different treatment of such
orders for purposes of the Exchange's Rules concerning order protection
or routing to away exchanges. Also, SIFMA supports the guidance issued
by NYSE Arca and NYSE MKT. The guidance is being issued to stem
confusion as to the manner in which options exchanges compute the
Professional order volume.
The Exchange is adopting similar counting methods the Exchange
believes is currently being utilized by NYSE MKT, NYSE ARCA and ISE
related to designation of Professional orders.
Counting All Orders
The Exchange believes that counting all orders entered by a
Professional toward the number of orders, regardless of the options
exchange to which the order was routed, does not create an undue burden
on intra-market competition because this proposed rule change will be
consistently applied to all members in determining Professional orders.
FLEX orders will not be counted toward the 390 threshold because these
types of orders are non-electronic orders.
Cancel and Replace
The Exchange believes that its application of cancel and replace
orders does not create an undue burden on intra-market competition
because this application is consistent with Exchange Rules, where the
replacement order is viewed as a new order. This treatment is
consistent with the manner in which this order type is applied today
within the order Book.
The Exchange's interpretation that Complex Orders consisting of
four legs or fewer will be counted as a single order, and respecting
Complex Orders of five legs or more, each leg will count as a separate
order does not create an undue burden on intra-market competition
because the Exchange will apply this method of calculation uniformly
among its member organizations.
Parent/Child Orders
The Exchange's treatment of subordinate orders does not create an
undue burden on intra-market competition because allowing orders on the
same side of the market to be counted as a single order is consistent
with the original intent of the Professional order designation which is
to count distinct orders and focus on the number of orders generated.
The Exchange does not believe that the proposed rule change will
impose an undue burden on inter-market competition because other
exchanges have announced the intent to adopt similar guidance.\24\ The
Exchange believes that disparate rules regarding Professional order
designation, and a lack of uniform application of such rules, does not
promote the best regulation and may, in fact, encourage regulatory
arbitrage. The Exchange believes that it is therefore prudent and
necessary to conform its rules to that of other options exchanges for
purposes of calculating the threshold volume of orders to be designated
as a Professional. This is particularly true where the Exchange's
third-party routing broker-dealers are members of several exchanges
that have rules requiring Professional order designations.
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\24\ See supra note 13.
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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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File No. SR-Phlx-2016-10 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 No. SR-Phlx-2016-10. 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 (https://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
[[Page 7171]]
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 will also 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 No. SR-Phlx-2016-10 and should be
submitted on or before March 2, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02606 Filed 2-9-16; 8:45 am]
BILLING CODE 8011-01-P
