Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing of Proposed Rule Change To Amend Rules 501, 507, 508, 510, and 511, 2418-2425 [2017-00100]
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Federal Register / Vol. 82, No. 5 / Monday, January 9, 2017 / Notices
offering OTPs an additional way to send
QCC Orders to the Exchange for
execution. The Commission notes that
the use of OptX will be entirely
voluntary and OTPs will still be able to
submit QCC Orders as they do today,
either through the use of third-party
front end order management systems or
by telephone. For these reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act and the rules and regulations
thereunder applicable to a national
securities exchange.
IV. Conclusion
IT IS THEREFORE ORDERED,
pursuant to Section 19(b)(2) of the
Act,19 that the proposed rule change
(SR–NYSEArca–2016–143), as modified
by Amendment No. 1, be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–00097 Filed 1–6–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79724; File No. SR–Phlx–
2016–105]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing of
Proposed Rule Change To Amend
Rules 501, 507, 508, 510, and 511
January 3, 2017.
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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 December
21, 2016, NASDAQ PHLX LLC (‘‘Phlx’’
or the ‘‘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
Rule 501 (Specialist Appointment), Rule
507 (Application for Approval as an
19 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
20 17
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SQT, RSQT, or RSQTO and Assignment
in Options), Rule 508 (Transfer
Application), Rule 510 (SQT and RSQT
Performance Evaluation), and Rule 511
(Specialist Allocation and Performance
Evaluation).3 The proposed
amendments are described further
below.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqphlx.cchwallstreet
.com/, at the principal office of the
Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend: (1)
Rule 501 to delete a reference to a backup specialist; (2) Rule 507 to: Update
the reference to ‘‘Board’’ to permit the
Board to appoint a panel; update the
composition of the review committee;
and update the reference to Rule 510; (3)
Rule 508 to delete the reference to
‘‘lease’’ and the cross-reference to Rule
511; (4) Rule 510 to re-entitle the rule
‘‘Good Standing for Specialist, SQT, and
RSQT,’’ 4 and add relevant good
standing language, and appeal rights;
and (5) Rule 511 to delete the rule.
Rules 501, 507, 508, 510, and 511 are
part of the 500 series of rules in the
Rules of the Exchange (the ‘‘Series 500
Rules’’), which are entitled ‘‘Allocation,
SQT, RSQT, and Evaluation Rules (Rule
500–599).’’ 5 Many Series 500 Rules
3 References to rules are to Phlx rules unless
otherwise noted. The terms SQT, RSQT, RSQTO,
and Specialist are discussed below.
4 ‘‘Specialist’’ is an Exchange member who is
registered as an options specialist pursuant to Rule
1020(a). ‘‘Remote Specialist’’ is a specialist that
does not have a physical presence on the floor of
the Exchange. Streaming quote trader (‘‘SQT’’) and
remote streaming quote trader (‘‘RSQT’’) are
electronic traders on the Exchange pursuant to Rule
1014(b)(ii)(A) and Rule 1014(b)(ii)(B), respectively.
5 These Series 500 Rules apply to Exchange
members that trade options. The Exchange
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were established more than three
decades ago with the advent of options
trading on the Exchange,6 at which time
Exchange options trading was strictly
on-floor open outcry through specialists.
Exchange options trading has, since that
time, developed into a robust hybrid
system that is currently largely
electronic and off-floor 7 but continues
to have an on-floor specialist 8 and an
open outcry trading floor. The Exchange
is now updating and modernizing the
Series 500 Rules as discussed below.9
Updating Rule 501
The Exchange proposes in Rule 501 to
delete the reference to a back-up
specialist.
Currently, Rule 501 states that initial
application(s) to become a specialist
unit shall include information regarding
the specialist, back-up specialist unit
and a substitute specialist unit. With the
development of liquidity-enhancing
electronic market makers on the
Exchange such as RSQTs, which make
markets in the same options issues as
specialists, and the diminution of the
continues to have a hybrid options floor, but no
longer has an equities floor or a commodities floor.
6 For example, Rules 501, 505, and 506, were
adopted on a pilot basis in 1982. See Securities
Exchange Act Release No. 18975 (August 17, 1982),
47 FR 37019 (August 24, 1982) (approval order
regarding pilot in respect of Rules 501–506 and
authorizing the Phlx Allocation, Evaluation and
Securities Committee, which no longer exists). See
also Securities Exchange Act Release No. 18975
(August 17, 1982), 47 FR 37019 (August 24, 1982)
(SR–Phlx–81–1) (approval order regarding Rules
100, 201, 203 and 214 in combination with Rules
500 through 505). Rules 500, 501, 505, 506, 508,
511, 515, 520, 522, 523, 525, and 526 (of which
Rules 500, 515, 516, 520, 522, 523, 525, and 526
no longer exist) were permanently approved in
1991. See Securities Exchange Act Release No.
29369 (June 26, 1991), 56 FR 30604 (July 3, 1991)
(SR–Phlx–87–42) (order granting permanent
approval). Rule 507 was adopted in 2004. See
Securities Exchange Act Release No. 50100 (July 27,
2004), 69 FR 46612 (August 3, 2004) (SR–Phlx–
2003–59) (order granting approval). Rule 510 was
adopted in 2007. See Securities Exchange Act
Release No. 55080 (January 10, 2007), 72 FR 2324
(January 18, 2007) (SR–Phlx–2006–51) (order
granting approval). The Exchange has filed a
separate proposal regarding two of the rules in the
Series 500 Rules, namely Rules 505 and 506. See
Securities Exchange Act Release No. 77121
(February 11, 2016), 81 FR 8308 (February 18, 2016)
(SR–Phlx–2016–22) (notice of filing and immediate
effectiveness to delete Rule 505 and update Rule
506).
7 Electronic traders include Registered Options
Traders or ‘‘ROTs,’’ that are Streaming Quote
Traders or ‘‘SQTs’’, Remote Streaming Quote
Traders or ‘‘RSQTs,’’ as well as off-floor specialists
(Remote Specialists) (collectively ‘‘market makers’’).
See Rules 1014(b)(ii)(A), 1014(b)(ii)(B), and 1020.
8 Unlike specialists, Remote Specialists do not
have a physical presence on the floor of the
Exchange. Rule 1020.
9 While the vast majority of options-related rules
are found in Rule 1000 and higher (with option
index rules found in Rule 1000A and higher), some
of the older options-related rules are, as discussed,
in the Series 500 Rules.
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role that the specialist plays in
managing the order book on the
Exchange, both a back-up specialist and
substitute specialist are no longer
needed.10 Therefore, obsolete language
in Rule 501 in respect of back-up
specialists, which includes Commentary
.01 to Rule 501, is proposed to be
deleted from Rule 501. All of the other
initial application requirements of Rule
501, which include the following
information, remain unchanged: The
identity of the individual who will act
as head specialist and as assistant
specialist(s) in the unit; the identity of
the unit’s staff positions and who will
occupy those positions; the identity of
a substitute specialist unit not
associated with the specialist unit,
which shall serve as a substitute
specialist unit in the event that the
specialist unit is unable to perform the
duties of a specialist; the unit’s clearing
arrangements; and the unit’s capital
structure, including any lines of
credit.11
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Updating Rule 507
The Exchange proposes in Rule 507 to
update the reference to ‘‘Board,’’ update
the composition of the review
committee, and update the reference to
Rule 510.
First, Rule 507(a) currently states that
the Board has the ability to perform
functions such as deferring or limiting
approval of SQTs or RSQTs. The
Exchange proposes to replace the role of
the Board with Exchange staff. The
Exchange may therefore defer, for a
period to be determined in the
Exchange’s discretion, approval of
qualifying applications for SQT or
RSQT status pending any action
required to address the issue of concern
to the Exchange. The Exchange’s
Membership department 12 may not
defer a determination of the approval of
the application of any SQT or RSQT
applicant or place any limitation(s) on
access to the Exchange’s electronic
quoting and trading system on any SQT
or RSQT applicant unless the basis for
such limitation(s) or deferral have been
10 The function of a back-up specialist unit not
associated with the specialist unit, as in current
Rule 501(b), is for one specialist unit on the floor
to provide staffing when needed to another
specialist unit on the floor. Because multiple
specialist units are no longer present on the floor,
the back-up function is no longer feasible.
Moreover, as discussed below, the specialist unit
must clearly indicate its staffing to the Exchange,
and the substitute specialist requirement continues
unchanged.
11 Rule 501(a) and (b).
12 Applications for SQTs and RSQTs would be
reviewed by the Membership department. Today,
the Exchange’s Membership Department review
applications for membership to Phlx for both
equities and options members.
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objectively determined by the Exchange,
subject to Securities and Exchange
Commission approval or effectiveness
pursuant to a rule change filing under
Section 19(b) of the Securities Exchange
Act of 1934, as amended. The Exchange
shall provide written notification to any
SQT or RSQT applicant whose
application is the subject of such
limitation(s) or deferral, describing the
objective basis for such limitation(s) or
deferral. The Exchange believes that this
change will help with the
administration and application of Rule
507. Also, there is an appeal to the
Board from any action of Exchange staff
within Rule 507(e).
Second, Rule 507(e) currently states
that an appeal to the Board from a
decision of the Exchange regarding an
SQT, RSQT, or RSQTO 13 application
may be requested by a member or
member organization; and that such
appeal shall be heard by a special
committee of the Board composed of
three (3) Directors, at least one of whom
will be Independent. In light of and
commensurate with the first proposed
Rule 507 change regarding the Board,
the Exchange proposes to state that any
appeal from a decision pursuant to Rule
507 may be heard by the Board or a
panel appointed by the Board (‘‘Board
Panel’’) composed of three (3) members
not materially involved in the Exchange
decision appealed from; 14 and that, as
13 ‘‘RSQTO’’ is a Remote Streaming Quote Trader
Organization with up to five affiliated RSQTs. Rule
507(a).
14 The language stating that one of the Board
members shall be an Independent is proposed to be
deleted. The Exchange believes that this is proper
as the ‘‘Independent’’ label is now a distinction
with little, if any, effect. Whereas the vast majority
of Phlx Board members were not Independent when
Rule 507 was put into place and the Exchange was
a membership corporation, and application of the
Independent label may have made sense under
those circumstances, the composition of the Phlx
Board has radically changed since Phlx became a
subsidiary of a public company, Nasdaq, Inc., in
2008. The By-Laws of the Exchange now provide
that the Exchange may have Public Directors, NonIndustry Directors, and Industry Directors; and that
Industry Directors may include no more than two
officers of the Exchange, selected at the sole
discretion of the Board, which may serve in the role
of Staff Director (not Independent). Phlx By-Laws
Article I. See also Securities Exchange Act Release
No. 77165 (February 17, 2016), 81 FR 9041
(February 23, 2016) (SR–BSECC–2015–002; SR–
SCCP–2015–02; SR–BX–2015–085; SR–NASDAQ–
2015–160; SR–Phlx–2015–113) (order granting
approval). Now, all but one of the twelve members
on the Phlx Board are Independent (the only
exception being one Staff Board member who is an
officer of the Exchange). Thus, in light of the
composition of the Phlx Board, which has one Staff
Board member, only one of the three Directors on
the special committee discussed in current Rule 507
could even possibly be not Independent; and, by
Phlx By-Laws no more than two Directors could
ever be not Independent. The Exchange believes
that, distinct from the Independent criteria, the
ability of the Board to appoint a panel as proposed
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2419
now, there shall be no appeal to the
Board from a decision of the Board
Panel. If a Board Panel is appointed by
the Board, three persons shall be
selected to serve on the Board Panel and
in making such selections the Board
shall choose individuals whose
background, experience and training
qualify them to consider and make
determinations regarding the subject
matter to be presented to the Board
Panel. The Exchange notes that
references to ‘‘special committee’’ will
now refer to ‘‘Board’’ or ‘‘Board Panel’’
with this proposal. The Board Panel
shall consist of two members of the
Exchange, or general partners or officers
of member organizations and one other
person that would qualify as a public
member as defined in Article I of the
By-Laws, whom the Board considers to
be qualified.
Third, Rule 507(b) currently states
that, when making a decision
concerning an application for
assignment in an option, the Exchange
shall consider the applicant’s prior
performance as a specialist, SQT, or
RSQT based on evaluations conducted
pursuant to Exchange Rule 510.15 The
Exchange is, as discussed below,
proposing to update Rule 510 so that in
lieu of the current formulaic language in
the rule, there is new language that
accentuates the good standing of
members. In light of this, the Exchange
proposes to update the 507(b) reference
to state that the Exchange can consider
the applicant’s prior performance as a
specialist, SQT or RSQT based on ‘‘good
standing pursuant to Rule 510.’’ The
Exchange is not proposing any other
change to Rule 507. The Exchange notes
that the other aspects of Rule 507, such
as, for example, RSQTO eligibility
will serve to enhance the ability to quickly
assemble a panel in case of potential appeal, if one
occurs. The Exchange notes that a special
committee per Rule 507 has not been instituted
since, let alone before, Phlx became a subsidiary of
Nasdaq, Inc. The Exchange also notes that the
compositional requirements for the Boards that
oversee the three options markets under the
umbrella of Nasdaq, Inc. (Phlx, The NASDAQ
Options Market LLC (‘‘NOM’’), and NASDAQ BX,
Inc. (‘‘BX Options’’)) are similar. While there is no
requirement in this proposal for an Independent
panel member to be appointed to the Board Panel,
the Exchange notes that the public member has
some independent aspect. See Phlx By-Laws at
Article I (hh), ‘‘The term ‘public member’ means a
member of any committee appointed by the Board
of Directors who has no material business
relationship with a broker or dealer, the Exchange,
or its affiliates.’’
15 Other factors for consideration include: (A) The
financial and technical resources available to the
applicant; and (B) the applicant’s experience and
expertise in market making or options trading. Rule
507(b).
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criteria,16 SQT and RSQT eligibility
criteria,17 and technological ability for
RSQTOs, SQTs, or RSQTs,18 remain in
place.19
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Updating Rule 508
The Exchange proposes in Rule 508 to
delete the reference to ‘‘lease’’ and to
Rule 511.
First, Rule 508 currently refers to
‘‘lease.’’ Leasing is no longer practiced
on the Exchange, and for this reason the
Exchange is proposing to delete this
obsolete term from Rule 508. This is
similar to a recent proposal wherein the
Exchange noted that leasing is an
obsolete term that should be deleted.20
Second, Rule 508 currently refers to
Rule 511, regarding specialists. The
Exchange proposes to delete the Rule
508 reference to Rule 511. This is
because, as discussed below, Rule 511 is
proposed to be deleted as the language
of Rule 510 is proposed to be modified
to include specialists.21
16 These RSQTO criteria include: (A) Significant
market-making and/or specialist experience in a
broad array of securities; (B) Superior resources,
including capital, technology and personnel; (C)
Demonstrated history of stability, superior
electronic capacity, and superior operational
capacity; (D) Proven ability to interact with order
flow in all types of markets; (E) Existence of order
flow commitments; (F) Willingness to accept
allocations as an RSQT in options overlying 400 or
more securities; and (G) Willingness and ability to
make competitive markets on the Exchange and
otherwise to promote the Exchange in a manner that
is likely to enhance the ability of the Exchange to
compete successfully for order flow in the options
it trades. Rule 507(a)(i).
17 These SQT and RSQT criteria include: (A)
Significant market-making and/or specialist
experience in a broad array of securities; (B)
Superior resources, including capital, technology
and personnel; (C) Demonstrated history of
stability, superior electronic capacity, and superior
operational capacity; (D) Proven ability to interact
with order flow in all types of markets; (E)
Willingness and ability to make competitive
markets on the Exchange and otherwise to promote
the Exchange in a manner that is likely to enhance
the ability of the Exchange to compete successfully
for order flow in the options it trades; (F) A current
affiliation with an Exchange-approved RSQTO
(RSQT applicants only). Rule 507(a)(ii).
18 No application for initial assignment in an
option shall be approved without verification that
(A) the RSQTO, SQT or RSQT applicant has
sufficient technological ability to support his/her
continuous quoting requirements as set forth in
Rule 1014(b)(ii), and (B) the RSQTO, SQT or RSQT
applicant has successfully completed, or is
scheduled to complete, testing of its quoting system
with the Exchange. Rule 507(b)(ii).
19 Specialist (and Remote Specialist) eligibility
and qualification requirements are discussed in
Rules 501, 506, 1014, and 1020.
20 See Securities Exchange Act Release No. 77121
(February 11, 2016), 81 FR 8308 (February 18, 2016)
(SR–Phlx–2016–22) (notice of filing and immediate
effectiveness to delete Rule 505 and update Rule
506).
21 Rule 508 will continue to indicate, without
reference to Rule 511, that failure to provide the
Exchange prior notice of a transfer in accordance
with Rule 508, or failure to obtain Exchange
approval of a transfer, permits the Exchange to
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Updating Rule 510
The Exchange proposes to entitle Rule
510 ‘‘Good Standing for Specialist, SQT,
and RSQT’’ and to add relevant good
standing language.
First, Rule 510 currently applies only
to SQTs and RSQTs. The Exchange
proposes to change the language of Rule
510 to indicate that this rule will also
be applicable to specialists. Thus, the
Exchange proposes to entitle Rule 510
as ‘‘Good Standing for Specialist, SQT,
and RSQT.’’ The good standing
requirement, which is discussed below,
is a continuous requirement rather than
a periodic evaluation requirement as in
current Rules 510 and 511.22 The
requirements to remain in good standing
are discussed in the new language in
Rule 510(a). These obligations will be
continuous and not periodic. The
Exchange will provide written notice to
a specialist (including Remote
Specialist), SQT, or RSQT of a
contemplated action regarding good
standing pursuant to Rule 510, as noted
below. A specialist (including Remote
Specialist), SQT, or RSQT may request
and the Exchange may hold an informal
meeting to discuss the alleged failure to
remain in good standing and to explore
possible appropriate remedies. Written
notice of the date and time of the
meeting will be given to the specialist
(including Remote Specialist), SQT, or
RSQT and no verbatim record will be
kept. If the Exchange believes there are
no mitigating circumstances that would
demonstrate substantial improvement of
or reasonable justification for the failure
to meet the good standing requirements
of this Rule 510, the Exchange may take
appropriate action pursuant to
subsection (b) of this Rule 510. This
process is described in further detail
below. Exchange staff will evaluate good
standing which entails continuous
compliance with, among other things,
Exchange options rules and procedures
as well as market making requirements
(market making requirements are found
in Rule 1014).
Second, Rule 510 currently is written
in terms of doing performance
evaluations for SQTs and RSQTs.
Currently, Rule 507 has a very detailed
recover the allocated securities and reallocate them
pursuant to Rule 506.
22 Proposed Rule 510, which applies to specialists
(including Remote Specialists), SQTs, and RSQTs,
discusses that good standing on the Exchange
means continuous compliance with, among other
things, Exchange options rules and procedures as
well as market making requirements (market
making requirements are found in Rule 1014). In
light of the proposed continuous and extensive
good standing requirements per Rule 510 as well as
other rule requirements, the old evaluations
applicable to SQTs, RSQTs, and specialists are not
needed.
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process for applying for and approving
SQTs and RSQTs, and for assigning
options to SQTs and RSQTs. In
addition, today Rule 501 defines the
application and approval process for
specialists.23 To more closely align the
Exchange with another options
exchange, namely BX Options, the
Exchange is adopting language similar
to BX Options Rule at Chapter VII,
Section 4 (the ‘‘BX Options rule’’).24
Similar to Phlx, BX Options has market
makers (‘‘BX Options Market Makers’’,
which are also known as lead market
makers (‘‘LMMs’’)). All BX Options
Market Makers are designated as
specialists on BX for all purposes under
the Act or rules thereunder.25 The
Exchange is adopting the BX Options
rule and proposing, in lieu of the
current formulaic language in Rule 510,
to insert new language indicating how a
member of the Exchange can remain in
good standing on the Exchange. The
Exchange believes that this new
proposal will obligate market
participants that conduct market making
activities with continuous requirements
to remain in good standing as compared
to periodic requirements. The
continuous requirements will serve to
accentuate the good standing of
members who have remained in
compliance. The Exchange believes that
it is important for market structure for
these participants to have continuous
23 Rules 506, 508, and 513 discuss other aspects
of the process.
24 See Securities Exchange Act Release No. 67256
(June 26, 2012), 77 FR 39277 (July 2, 2012) (order
approving establishment of BX Options and
marketplace rules) (SR–BX–2012–030).
25 See BX Options Chapter VII, Section 2.
For obligations of BX Options Market Makers, see
BX Options Chapter VII, Section 5, entitled
‘‘Obligations of Market Makers.’’ This section
indicates that BX Options Markets Maker
obligations include, but are not limited to: Maintain
a course of dealings reasonably calculated to
contribute to the maintenance of a fair and orderly
market in transactions where acting in a market
making capacity; not make bids or offers or enter
into transactions that are inconsistent with such
course of dealings; maintain a two-sided market,
during trading hours, in those options in which the
Market Maker is registered to trade, in a manner
that enhances the depth, liquidity and
competitiveness of the market; compete with other
Market Makers in all options in which the Market
Maker is registered to trade; update quotations in
response to changed market conditions in all
options in which the Market Maker is registered to
trade; and maintain active markets in all options in
which the Market Maker is registered.
The BX Options Market Maker obligations are
similar in nature to those of Phlx specialists, which
can be found in Phlx Rule 1014, entitled
‘‘Obligations and Restrictions Applicable to
Specialists and Registered Options Traders,’’ and
include: Maintain a fair and orderly market; not
enter into transactions or make bids or offers that
are inconsistent with such a course of dealings;
quote a two-sided market; and maintain a two-sided
market.
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sradovich on DSK3GMQ082PROD with NOTICES
requirements to remain in good standing
rather than only periodic evaluations.
The proposed new language is
similar, in all material respects,26 to BX
Options rule at Chapter VII, Section 4.
Specifically, the Exchange proposes to
adopt new language in Rule 510(a) to
state that to remain in good standing as
a specialist (including Remote
Specialist), SQT, or RSQT, the
specialist, SQT, or RSQT must:
(i) Continue to meet the requirements
established in SEC Rule 15c3–
1(a)(6)(i),27 and the requirements set
forth in the Series 500 Rules in the
Rules of the Exchange;
(ii) continue to satisfy the specialist,
SQT or RSQT qualification and market
making requirements specified by the
Exchange, as amended from time to
time;
(iii) comply with the Rules of the
Exchange and the Options Rules 28 as
well as the rules of The Options
Clearing Corporation (‘‘OCC’’) and the
rules of the Federal Reserve Board [sic]
‘‘FRB’’); and
(iv) pay on a timely basis such
member, transaction and other fees as
the Exchange shall prescribe.29
These proposed requirements to
remain in good standing on the
Exchange are not periodic, as are the
evaluation and performance concepts in
current Rules 510 and 511, but rather
are continuous in nature.
Third, the Exchange notes that with
the proposed new good standing
requirements, specialist and other
market maker (e.g., RSQT) obligations,
such as market making, will continue to
apply.30 For specialists (and RSQTs
functioning as Remote Specialists) the
Rule 1014 market making obligations
are applicable throughout the trading
day. Thus, a specialist (or Remote
Specialist) shall continue to be
responsible to quote two-sided markets
in the lesser of 99% of the series or
100% of the series minus one call-put
pair in each option in which such
specialist is assigned. To satisfy this
requirement with respect to quoting a
series, the specialist must quote such
26 As with virtually all rules text copied from
another exchange, changes are made to the
proposed rule text to better fit the structure of the
existing rules of the Exchange.
27 SEC Rule 15c–3, 240 CFR 15c3–1, is the net
capital requirement for brokers or dealers.
28 As discussed, while the vast majority of
options-related rules are found in Rule 1000 and
higher (with option index rules in Rule 1000A and
higher), some of the older options-related rules are
found in rules below 1000, such as, for example, the
Series 500 Rules.
29 Member assessments are generally reflected in
the Phlx Pricing Schedule.
30 Other obligations include, for example: Order
exposure, order handling, and best execution.
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series 90% of the trading day (as a
percentage of the total number of
minutes in such trading day) or such
higher percentage as the Exchange may
announce in advance. These obligations
will apply collectively to all appointed
issues of the specialist, rather than on
an issue-by-issue basis. Compliance
with this obligation will be determined
on a monthly basis. However,
determining compliance with the
continuous quoting requirement on a
monthly basis does not relieve the
specialist (including the Remote
Specialist) of the obligation to provide
continuous two-sided quotes on a daily
basis, nor will it prohibit the Exchange
from taking disciplinary action against
the specialist (including the Remote
Specialist) for failing to meet the
continuous quoting obligation each
trading day.31
Fourth, the proposed new language in
Rule 510(b) states that the good standing
of a specialist (including Remote
Specialist), SQT, or RSQT may be
suspended, terminated or otherwise
withdrawn, as provided in the
Exchange’s rules, if any of these
conditions for approval cease to be
maintained or the specialist, SQT, or
RSQT violates any of its agreements
with the Exchange or any of the
provisions of the Rules of the Exchange
or of the Options Rules. The Exchange
is proposing to add an Informal Meeting
process and appeal rights, which do not
exist in Rule 510 for specialists at this
time.
The Informal Meeting process
proposed in Rule 510 is based on the
Informal Meeting process in current
Rules 510 (for SQTs and RSQTs) and
511 (for specialists), which is in respect
of performance evaluations. The
Informal Meeting process proposed in
Rule 510 is, however, in respect of good
standing. Specifically, the Exchange
proposes to amend Rule 510 to adopt
the following language in Rule 510(b)(i):
The Exchange will provide written
notice to a specialist (including Remote
Specialist), SQT, or RSQT of a
contemplated action regarding good
standing pursuant to this Rule 510. A
31 See
Rule 1014(b)(ii)(D)(2).
For the market making obligations of SQTs and
RSQTs (including Directed SQT or DRSQTs [sic],
and Directed RSQTs or DRSQTs), which remain
unchanged, see Rule 1014(b)(ii)(D)(1). This rule
states that, like for specialists, compliance for SQTs
and RSQTs will be determined on a monthly basis.
However, determining compliance with the
continuous quoting requirement on a monthly basis
does not relieve an SQT, RSQT, DSQT, or DRSQT
of the obligation to provide continuous two-sided
quotes on a daily basis, nor will it prohibit the
Exchange from taking disciplinary action against an
SQT, RSQT, DSQT, or DRSQT for failing to meet
the continuous quoting obligation each trading day.
Rule 1014(b)(ii)(D)(1).
PO 00000
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2421
specialist (including Remote Specialist),
SQT, or RSQT may request and the
Exchange may hold an informal meeting
to discuss the alleged failure to remain
in good standing and to explore possible
appropriate remedies. Written notice of
the date and time of the meeting will be
given to the specialist (including
Remote Specialist), SQT, or RSQT and
no verbatim record will be kept. If the
Exchange believes there are no
mitigating circumstances that would
demonstrate substantial improvement of
or reasonable justification for the failure
to meet the good standing requirements
of this Rule 510, the Exchange may take
appropriate action pursuant to
subsection (b) of this Rule 510. Nothing
in this Informal Meeting process limits
the Exchange from enforcing the rules of
the Exchange, which may include a
disciplinary action pursuant to such
rules. The Regulatory staff may, for
example, initiate a disciplinary action
pursuant to Rule 960.3 against a
member for failure to meet continuous
quoting obligations in Rule 1014.32 The
proposed appeal rights in Rule 510(c)
are taken from current Rule 511, but
expanded to cover specialists (including
Remote Specialists), SQTs, and
RSQTs.33 Specifically, the Exchange
proposes to amend Rule 510 to adopt
the following language in Rule 510(c):
An appeal by a specialist (including
Remote Specialist), SQT, or RSQT to the
Board of Directors from a decision of the
Exchange may be requested by a
member or member organization
interested therein by filing with the
Secretary of the Exchange written notice
of appeal within ten (10) days after the
decision has been rendered. Any appeal
from a decision pursuant to Rule 510
may be heard by the Board or a Board
Panel composed of three (3) members
not materially involved in the Exchange
decision appealed from.34 If a Board
32 Specifically, the Exchange may pursue
disciplinary process against a member that commits
an egregious market making violation evidenced by
a pattern of repeated failure to make a two-sided
market in assigned options.
33 The SQT and RSQT appeal rights to the Board
currently in Rule 510 are limited to apply only in
respect of performance evaluations. The Exchange
believes that the appeal rights afforded SQTs and
RSQTs in proposed Rule 510, which will be to the
Board or a Board Panel, are appropriate in that they
are expanded to cover any decision of the Exchange
regarding Rule 510; and, an informal meeting
process is also afforded prior to appeal. The Board
or a Board Panel would serve as a secondary appeal
to a group of individuals that were not involved in
the primary decision making. The Exchange is
seeking to afford its members due process when
seeking an appeal.
34 Rule 511(f) now states, in relevant part, that
any appeal from a decision pursuant to Rule 511
regarding evaluation or review shall be heard by a
special committee of the Board of Directors
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Panel is appointed by the Board, three
persons shall be selected to serve on the
Board Panel and in making such
selections the Board shall, to the extent
practicable, choose individuals whose
background, experience and training
qualify them to consider and make
determinations regarding the subject
matter to be presented to the Board
Panel. The Board Panel shall consist of
two members of the Exchange, or
general partners or officers of member
organizations and one other person who
would qualify as a public member as
defined in Article I of the By-Laws,
whom the Board considers to be
qualified. The person requesting review
shall be permitted to submit a written
statement to and/or appear before the
Board or Board Panel. The Secretary of
the Exchange shall certify the record of
the proceeding, if any, and the written
decision, and shall submit these
documents to the Board or Board Panel.
The Board’s or Board Panel’s review of
the action shall be based solely on the
record, the written decision and any
statement submitted by the person
requesting the review. The Board or
Board Panel shall prepare and deliver to
such person a written decision and
reasons therefore. If the Board or Board
Panel affirms the action, the action shall
become effective ten (10) days from the
date of the Board Panel’s decision.
There shall be no appeal to the Board
from any decision of the Board Panel.35
The memorialization of appeal rights
in proposed Rule 510(c) is done to
ensure that if the good standing of a
specialist, SQT, or RSQT is suspended,
terminated or otherwise withdrawn then
they have a clear way to initiate and
prosecute an appeal regarding such
decision. The proposed due process
methodology is similar to other rules of
the Exchange. By proposing new
language in Rule 510(a) and (b)
regarding specialists, SQTs, and RSQTs
regarding good standing, which is
similar to that of BX Options, the
continuous good standing rules of the
Exchange and BX Options will be more
aligned and easier to apply. Proposed
Rule 510 describes an Informal Meeting
process and appeal rights applicable to
specialists (including Remote
Specialists), SQTs, and RSQTs. The
Exchange is replacing the current
composed of three (3) Directors, of whom at least
one (1) shall be an Independent. The Exchange
believes that, as discussed, the old independence
requirement is no longer needed when Rule 510 is
restructured. Commensurate with other proposed
changes discussed herein, Rule 510 appeals can be
heard by the Board or a Board Panel.
35 The appeal process in proposed Rule 507(e) is
amended to reflect an appeal to the Board or a
Board Panel.
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periodic evaluation or performance
requirements in Rule 510 (e.g., monthly
for SQTs and RSQTs), as also in Rule
511 (e.g., annually for specialists) as
discussed, with the proposed Rule 510
continuous requirements for specialists
(including Remote Specialists), SQTs,
and RSQTs to meet Exchange,
Commission, OCC and FRB rules and
requirements to remain in good
standing. Compliance with good
standing requirements is monitored
across the Exchange.36
Deleting Rule 511
The Exchange has concluded that,
with the placement of the good standing
concepts into proposed Rule 510 in
such a way that they include specialist
(and Remote Specialist), Rule 511 is no
longer needed. In Rule 510, as
discussed, in lieu of the current
language, the Exchange is proposing to
adopt new language indicating how a
member of the Exchange can remain in
good standing.
The proposed new language in Rule
510 is, in all material respects, similar
to the BX Options rule at Chapter VII,
Section 4. Because of this proposed new
language in Rule 510, which addresses
specialists (as also Remote Specialists,
RSQTs, and SQTs), the Exchange
proposes to delete Rule 511 in its
entirety. The Exchange believes that,
within the effort to update and
consolidate the Series 500 Rules as
discussed, it is reasonable and proper to
delete Rule 511. This rule was
established decades ago for the purpose
of dealing with the extensive on-floor
open outcry specialist system, with
multiple competing specialist units.
Since the implementation of Rule 511,
the open outcry options floor has
evolved into a robust and competitive
principally electronic system, and the
36 Thus, in Rule 510 the Exchange is proposing
an Informal Meeting process and appeal rights
applicable to specialists (including Remote
Specialists), SQTs, and RSQTs. And, the Exchange
is replacing the current periodic evaluation or
performance requirements in Rule 510 (e.g.,
monthly for SQTs and RSQTs), as also in Rule 511
(e.g., annually for specialists) as discussed, with the
proposed Rule 510 continuous requirements for
specialists (including Remote Specialists), SQTs,
and RSQTs to meet Exchange, Commission, OCC
and FRB rules and requirements to remain in good
standing. Compliance with good standing
requirements is monitored across the Exchange.
Thus, for example, units that monitor the
application, allocation, and fees requirements and
processes include membership, listing, and finance
groups. And the surveillance group will continue to
use its current processes to monitor compliance
with Exchange rules and where appropriate will
pursue disciplinary action against members for rule
violations(s) (e.g., failure to make two-sided
market(s) per Phlx Rule 1014). Moreover, while
proposed Rule 510 is being changed the market
making and other obligations for specialists, SQTs,
and RSQTs continue as discussed.
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remaining hybrid options floor does not
have numerous competing specialists as
was the case when Rule 511 was
instituted.
The Exchange believes that under the
circumstances, and because specialists
are proposed to be covered in Rule 510
in terms of good standing, and continue
to be covered in the Series 500 Rules
and other rules of the Exchange,37
deletion of Rule 511 is proper.
As discussed, the Exchange is
deleting the performance evaluation
structure of Rule 511 and is proposing
to relocate the concept within Rule 510
with the proposed good standing
requirement and appeal rights
applicable to specialists, SQTs, and
RSQTs. The Exchange believes that the
proposed good standing approach,
which is applicable to specialists, SQTs,
and RSQTs, enhances the current rule
because unlike the periodic nature of
the performance evaluation structure
the proposed good standing approach
would have continuous requirements
that must be maintained in order to
remain in good standing on the
Exchange (e.g., compliance with the
equity and options rules of the
Exchange, OCC, and FRB).
As discussed, options trading on the
Exchange has developed into a robust
hybrid system that is currently largely
electronic and off-floor. The Exchange
continues to have an open outcry
trading floor, however, rather than a
proliferation of competitive specialists
on the options floor as was the case
when Rule 511 was instituted: There is
currently one specialist unit on the
options floor and therefore Rule 511 is
not needed. In the past, when so many
specialists conducted business on the
options floor, Rule 511 served a
purpose. Today, Rule 511, with its
specialist evaluation process and
allocation process constructed for
multiple competitive specialists on the
floor, is no longer needed with one
specialist unit on the floor.38 As such,
in light of the current realities of the
options floor Rule 511 is obsolete,
particularly in light of numerous rules
37 See, e.g., Rule 501 (Specialist Appointment);
Rule 506 (Allocation Application, Allocation,
Reallocation, and Transfer); Rule 508 (Transfer
Application); and Rule 513 (Voluntary Resignation
of Options Privileges). See also, e.g., Rule 1022
(Securities Accounts and Orders of Specialists and
Registered Options Traders; and Rule 1020
(Registration and Functions of Options Specialists),
which discusses on-floor options specialists and
electronic Remote Specialists.
38 The Exchange believes that even if additional
floor specialists begin to conduct business on the
options floor, Rule 511 was designed for a very
different competitive floor environment and is not
needed, particularly in light of proposed Rule 510
and the numerous other Exchange rules applicable
to options specialists.
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in the Phlx rulebook that apply to
specialists.
The many rules that continue to apply
to specialists discuss topics such as
application, approval, allocation, reallocation, market making, and
obligations of specialists. For example,
Rule 501 as proposed discusses the
specialist allocation process and
specialist approval process. To be an
approved specialist unit and retain the
privilege of such status, for example, a
specialist unit must maintain the
approved clearing arrangements and
capital structure stated on their
application and changes regarding
certain requirements must be submitted
and approved by the Exchange. In
addition, each unit must consist of at
least one head specialist and one
assistant specialist that must be
associated with the specialist unit; the
Exchange, in its discretion, may require
a unit to obtain additional staff
depending upon the number of assigned
options classes and associated order
flow. Rule 506 discusses allocation
application, reallocation of a previously
allocated options, and transfer of
allocated options.39 Rule 506 also
discusses that, in addition to a
minimum allocation period of one year,
the Exchange may establish an
‘‘alternate specialist period’’ period of
less than one year to act as a specialist
in an options class. Rule 508 as
proposed discusses the Exchange
approval process if there is agreement
between or among specialist units to
transfer one or more options classes
already allocated to a specified
specialist unit. Rule 513, which is not
proposed to be amended with this filing,
discusses the process if an option
specialist unit voluntarily resigns from
allocation in a particular option and
there is a future allocation regarding
such option.40 In addition, Rule 1014
discusses the obligations and
restrictions applicable to specialists and
registered options traders during each
trading day; these obligations and
restrictions include, as discussed above,
very specific market making
requirements. Finally, Rule 1022
discusses securities accounts and orders
of specialists and registered options
traders and proper identification of
39 See Securities Exchange Act Release No. 77121
(February 11, 2016), 81 FR 8308 (February 18, 2016)
(SR–Phlx–2016–22) (notice of filing and immediate
effectiveness to delete Rule 505 and update Rule
506).
40 One rule in the Series 500 Rules does not
specifically deal with specialists. This is Rule 507,
which was discussed above. This rule deals with
the application and approval process for SQTs,
RSQTs, or RSQTOs, and the assignment of options.
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accounts, reporting of options, and
orders of underlyings.41
The Exchange believes that the
changes to the noted rules in the Series
500 Rules will make remaining Rules
501, 507, 508, and 510 easier to apply,
clearer and better.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,42 in general, and furthers the
objectives of Section 6(b)(5) of the Act,43
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, in general, to protect
investors and the public interest by
proposing to make changes to five rules
in the Series 500 Rules as discussed.
The proposed rule change is designed to
promote just and equitable principles of
trade by updating and modernizing the
Series 500 Rules and making them
clearer and easier to use while
continuing to protect investors and the
public interest.
In particular, the Exchange is
proposing to change Rule 501 to delete
reference to a back-up specialist. With
the development of liquidity-enhancing
electronic market makers on the
Exchange such as RSQTs, which make
markets in the same options issues as
specialists, and the diminution of the
role that the specialist plays in
managing the order book on the
Exchange, both a back-up specialist and
substitute specialist are no longer
needed. The Exchange believes that this
proposal amendment is consistent with
the Act because the advent of streaming
quote traders on the Exchange served to
perfect the mechanism of a free and
open market because of the liquidity
that such participants brought to Phlx.
These participants are obligated to
continuously quote in the market and
have filled a role which was previously
reliant on a back-up specialist and a
substitute specialist.
Obsolete language in Rule 501 in
respect of back-up specialists, which
includes Commentary .01 to Rule 501, is
proposed to be deleted from Rule 501.
Similarly, the Exchange is proposing to
change Rule 508 to delete the cross
reference to Rule 511 and references to
‘‘lease.’’ As discussed, with the change
in Rule 510 to the good standing
41 The Exchange has previously discussed that the
allocation and evaluation process in Rule 511
proposed to be deleted made sense when the rule
was established with multiple competitive
specialists on the floor, but is no longer needed in
light of the current composition of the floor.
42 15 U.S.C. 78f(b).
43 15 U.S.C. 78f(b)(5).
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2423
standard that applies to specialists as
well as SQTs and RSQTs, Rule 511 is
proposed to be deleted and therefore the
reference is no longer needed.
Moreover, leasing is no longer permitted
on the Exchange, and for this reason the
Exchange is proposing to delete this
obsolete term from Rule 508. The
Exchange believes it is consistent with
the Act to delete obsolete references
which serve to confuse members within
the Rulebook.
The Exchange is proposing to amend
Rule 507(a) to permit the Exchange,
instead of the Board to defer approval of
qualifying applications for SQT or
RSQT status pending any action
required to address the issue of concern
to the Exchange. The applicant would
have a right of appeal to the Board or
a Board Panel of any action of Exchange
staff pursuant to Rule 507(e). The
Exchange believes that the application
process should be handled by staff
initially with appellate rights to the
Board or a Board Panel. Currently Rule
507 states that the Board has the ability
to perform functions such as deferring
or limiting approval of SQTs or RSQTs.
The Exchange believes that this
amendment is consistent with the Act
because it will change [sic] will promote
just and equitable principles of trade by
serving the administration and
application of Rule 507 and permitting
a right of appeal as provided in Rule
507(e).
With respect to Rule 507(e), the
Exchange proposes to expand the appeal
to either the Board or a Board Panel.
Currently, Rule 507(e) states that an
appeal shall be heard by a special
committee of the Directors composed of
three Directors, of whom at least one (1)
shall be an Independent. The Exchange
proposes to state that the appeal may be
heard by a panel appointed by the Board
composed of three (3) members not
materially involved in the Exchange
decision appealed from. If a panel is
appointed by the Board, three persons
shall be selected to serve on the panel
and in making such selections the Board
shall, to the extent practicable, choose
individuals whose background,
experience and training qualify them to
consider and make determinations
regarding the subject matter to be
presented to the panel. The panel shall
consist of two members of the Exchange,
or general partners or officers of member
organizations and one other person who
would qualify as a public member as
defined in Article I of the By-Laws,
whom the Board considers to be
qualified. The Exchange believes that
this amendment is consistent with the
Act because the Board or a Board Panel
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would allow a path of impartial appeal
for the applicant.
Also, currently Rule 507(b) states that
when making a decision concerning an
application for assignment in an option
the Exchange shall consider the
applicant’s prior performance as a
specialist, SQT or RSQT based on
evaluations conducted pursuant to
Exchange Rule 510. The Exchange
proposes to update Rule 510 so that in
lieu of the current formulaic language in
the rule, there is new language that
accentuates the good standing of
members. In light of this, the Exchange
proposes to update the 507(b) reference
to state that the Exchange can consider
the applicant’s prior performance as a
specialist, SQT or RSQT based on ‘‘good
standing pursuant to Rule 510.’’ The
Exchange believes that this amendment
is consistent with the Act because it will
consider a more holistic approach in
evaluating members that engage in
market making activities. The Exchange
believes that this approach is broader
and will take new factors into account
which would serve to promote just and
equitable principles of trade in
evaluating market participants that
engage in market making activities by
considering their obligations and past
performance.
The Exchange is proposing to update
Rule 510 to give it a new title, ‘‘Good
Standing for Specialist, SQT, and
RSQT,’’ to add relevant good standing
language, and appeal rights. The
Exchange proposes to amend the
language of Rule 510 to indicate that,
with the deletion of Rule 511, Rule 510
will also be applicable to specialists.
The Exchange proposes to change the
language of Rule 510 to more closely
align the Exchange with BX Options by
adopting language from the BX Options
rule at Chapter VII, Section 4. BX
Options Market Makers are held to good
standing standards per the BX Options
rule. Specialists on Phlx are another
type of market maker. The Exchange
believes that these amendments are
consistent with the Act because these
changes serve to add clarity and
transparency to the rule text.
The Exchange is adopting language
from BX Options at Chapter VII, Section
4. Specifically, the Exchange proposes
new language in Rule 510(a) to state that
to remain in good standing on the
Exchange as a specialist (including
Remote Specialist), SQT, or RSQT, the
specialist, SQT, or RSQT must meet
specific requirements set forth in the
rule.44 As discussed, the proposed new
44 The specific good standing requirements are: (i)
Continue to meet the requirements established in
SEC Rule 15c3–1(a)(6)(i), and the requirements set
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good standing language in Rule 510 will
be, in all material respects, similar to BX
Options rules at Chapter VII, Section 4.
This makes particular sense because all
BX Options Market Makers are
designated as specialists on BX for all
purposes under the Act or rules
thereunder and, like Phlx specialists,
have market making obligations.45 The
Exchange believes that the good
standing rule text is consistent with the
Act because as described above the
Exchange believes that this approach is
broader and will take new factors into
account which would serve to promote
just and equitable principles of trade in
evaluating market participants that
engage in market making activities by
considering their obligations and past
performance.
The Exchange is proposing to add an
Informal Meeting process and appeal
rights, which do not exist in Rule 510
for specialists; as discussed, the appeal
rights now in Rule 510 are regarding
SQTs and RSQTs only in respect of
performance evaluations. These
proposed appeal rights for a specialist
(including Remote Specialist), SQT, or
RSQT, which are set forth in Rule 510(c)
for, are adopted from Rule 511. The
memorialization in Rule 510 of Informal
Meeting process and appeal rights is
done to affirm that if the good standing
of a specialist, SQT, or RSQT is
suspended, terminated or otherwise
withdrawn then they have a clear way
to meet with the Exchange to discuss
the issue and initiate and prosecute an
appeal regarding such decision. The
Exchange’s proposal to expand the role
of the Board to permit an appeal to be
heard by a Board Panel appointed by the
Board composed of three (3) members
not materially involved in the Exchange
decision appealed from is consistent
with the Act because the Board or a
Board Panel would allow a path of
impartial appeal for the applicant.46
forth in the Series 500 Rules in the Rules of the
Exchange; (ii) continue to satisfy the specialist, SQT
or RSQT qualification requirements specified by the
Exchange, as amended from time to time; (iii)
comply with the Rules of the Exchange and the
Options Rules as well as the rules of the Options
Clearing Corporation and the rules of the Federal
Reserve Board; and (iv) pay on a timely basis such
member, transaction and other fees as the Exchange
shall prescribe. Proposed Rule 510(a).
45 See, e.g., supra note 24 [sic] and accompanying
discussion.
46 If a Board Panel is appointed by the Board,
three persons shall be selected to serve on the Board
Panel and in making such selections the Board
shall, to the extent practicable, choose individuals
whose background, experience and training qualify
them to consider and make determinations
regarding the subject matter to be presented to the
Board Panel. The Board panel shall consist of two
members of the Exchange, or general partners or
officers of member organizations and one other
person that would qualify as a public member as
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The Exchange has concluded that,
with the placement of the good standing
concepts into proposed Rule 510 in
such a way that they include a specialist
(and Remote Specialist), Rule 511 is no
longer needed and is therefore proposed
to be deleted in its entirety (with
transfer of specialist appeal rights from
Rule 511 to Rule 510).
The Exchange is proposing to delete
Rule 511. This rule was established
decades ago for the purpose of dealing
with the extensive on-floor open outcry
specialist system, with multiple
competing specialist units. Since the
implementation of Rule 511, the open
outcry options floor has evolved into a
robust and competitive system that is
principally electronic, and the
remaining hybrid options floor does not
have numerous competing specialists as
was the case when Rule 511 was
instituted. The Exchange believes that
because of the extensive changes on the
option floor (from having numerous
competitive specialist units on the old
options floor to having a specialist unit
on the current options floor), and
because specialists are proposed to be
covered in Rule 510 in terms of good
standing and continue to be covered in
the Series 500 Rules and other rules of
the Exchange, it is consistent with the
Act and promotes just and equitable
principles of trade to delete Rule 511.
Furthermore, numerous rules in the
Phlx Rulebook continue to apply to
specialists (as well as to other registered
options traders). For example, Rule 501
as proposed discusses the specialist
allocation process and specialist
approval process. Rule 506 discusses
allocation application, reallocation of
previously allocated options, and
transfer of allocated options. Rule 508 as
proposed discusses the Exchange
approval process if there is agreement
between or among specialist units to
transfer one or more options classes
already allocated to a specified
specialist unit. Rule 513, which is not
proposed to be amended with this filing,
discusses the process if an option
specialist unit voluntarily resigns from
allocation in a particular option and
there is a future allocation regarding
that option. Rule 1014 discusses the
obligations and restrictions, including
specific market making requirements,
that are applicable to specialists each
trading day. Finally, Rule 1022
discusses proper identification of
accounts, reporting of options, and
orders of underlyings in respect of
securities accounts and orders of
specialists and ROTs.
defined in Article I of the By-Laws, whom the
Board considers to be qualified.
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The Exchange believes that the
changes to the noted rules in the Series
500 Rules will make remaining Rules
501, 507, 508, and 510 easier to apply,
clearer and more transparent. Such
proposed changes are in consistent with
the Act, the public interest, and
continue to serve to protect investors.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
While the Exchange does not believe
that the proposed change is a burden on
competition, or is competitive in nature,
the Exchange believes that clearer,
updated, modernized, and betterconforming rules that do not refer to
obsolete concepts are always beneficial
to market participants, are in the public
interest, and serve to protect investors.
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
sradovich on DSK3GMQ082PROD with NOTICES
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:
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–2016–105. 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
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2016–105, and should be submitted on
or before January 30, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–00100 Filed 1–6–17; 8:45 am]
BILLING CODE 8011–01–P
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–
Phlx–2016–105 on the subject line.
VerDate Sep<11>2014
21:14 Jan 06, 2017
Jkt 241001
47 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00117
Fmt 4703
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2425
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79725; File No. SR–
BatsBZX–2016–30]
Self-Regulatory Organizations; Bats
BZX Exchange, Inc.; Notice of
Designation of a Longer Period for
Commission Action on Proceedings to
Determine Whether to Approve or
Disapprove a Proposed Rule Change,
as Modified by Amendment No. 1, to
BZX Rule 14.11(e)(4), CommodityBased Trust Shares, to List and Trade
Winklevoss Bitcoin Shares Issued by
the Winklevoss Bitcoin Trust
January 4, 2017.
On June 30, 2016, Bats BZX Exchange,
Inc. filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to list and trade
Winklevoss Bitcoin Shares issued by the
Winklevoss Bitcoin Trust under BZX
Rule 14.11(e)(4). The proposed rule
change was published for comment in
the Federal Register on July 14, 2016.3
On August 23, 2016, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On October 12,
2016, the Commission instituted
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
approve or disapprove the proposed
rule change.7 On October 20, 2016, the
Exchange filed Amendment No. 1 to the
proposed rule change, and Amendment
No. 1 was published for comment in the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 78262
(Jul. 8, 2016), 81 FR 45554.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 78653,
81 FR 59256 (Aug. 29, 2016). The Commission
designated October 12, 2016, as the date by which
it should approve, disapprove, or institute
proceedings to determine whether to disapprove the
proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 79084,
81 FR 71778 (Oct. 18, 2016). Specifically, the
Commission instituted proceedings to allow for
additional analysis of the proposed rule change’s
consistency with Section 6(b)(5) of the Act, which
requires, among other things, that the rules of a
national securities exchange be ‘‘designed to
prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles
of trade,’’ and ‘‘to protect investors and the public
interest.’’ See id., 81 FR at 71781.
2 17
E:\FR\FM\09JAN1.SGM
09JAN1
]]>Agencies
[Federal Register Volume 82, Number 5 (Monday, January 9, 2017)]
[Notices]
[Pages 2418-2425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00100]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79724; File No. SR-Phlx-2016-105]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
of Proposed Rule Change To Amend Rules 501, 507, 508, 510, and 511
January 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 December 21, 2016, NASDAQ PHLX LLC (``Phlx'' or the ``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 Rule 501 (Specialist Appointment),
Rule 507 (Application for Approval as an SQT, RSQT, or RSQTO and
Assignment in Options), Rule 508 (Transfer Application), Rule 510 (SQT
and RSQT Performance Evaluation), and Rule 511 (Specialist Allocation
and Performance Evaluation).\3\ The proposed amendments are described
further below.
---------------------------------------------------------------------------
\3\ References to rules are to Phlx rules unless otherwise
noted. The terms SQT, RSQT, RSQTO, and Specialist are discussed
below.
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend: (1) Rule 501 to delete a reference
to a back-up specialist; (2) Rule 507 to: Update the reference to
``Board'' to permit the Board to appoint a panel; update the
composition of the review committee; and update the reference to Rule
510; (3) Rule 508 to delete the reference to ``lease'' and the cross-
reference to Rule 511; (4) Rule 510 to re-entitle the rule ``Good
Standing for Specialist, SQT, and RSQT,'' \4\ and add relevant good
standing language, and appeal rights; and (5) Rule 511 to delete the
rule.
---------------------------------------------------------------------------
\4\ ``Specialist'' is an Exchange member who is registered as an
options specialist pursuant to Rule 1020(a). ``Remote Specialist''
is a specialist that does not have a physical presence on the floor
of the Exchange. Streaming quote trader (``SQT'') and remote
streaming quote trader (``RSQT'') are electronic traders on the
Exchange pursuant to Rule 1014(b)(ii)(A) and Rule 1014(b)(ii)(B),
respectively.
---------------------------------------------------------------------------
Rules 501, 507, 508, 510, and 511 are part of the 500 series of
rules in the Rules of the Exchange (the ``Series 500 Rules''), which
are entitled ``Allocation, SQT, RSQT, and Evaluation Rules (Rule 500-
599).'' \5\ Many Series 500 Rules were established more than three
decades ago with the advent of options trading on the Exchange,\6\ at
which time Exchange options trading was strictly on-floor open outcry
through specialists. Exchange options trading has, since that time,
developed into a robust hybrid system that is currently largely
electronic and off-floor \7\ but continues to have an on-floor
specialist \8\ and an open outcry trading floor. The Exchange is now
updating and modernizing the Series 500 Rules as discussed below.\9\
---------------------------------------------------------------------------
\5\ These Series 500 Rules apply to Exchange members that trade
options. The Exchange continues to have a hybrid options floor, but
no longer has an equities floor or a commodities floor.
\6\ For example, Rules 501, 505, and 506, were adopted on a
pilot basis in 1982. See Securities Exchange Act Release No. 18975
(August 17, 1982), 47 FR 37019 (August 24, 1982) (approval order
regarding pilot in respect of Rules 501-506 and authorizing the Phlx
Allocation, Evaluation and Securities Committee, which no longer
exists). See also Securities Exchange Act Release No. 18975 (August
17, 1982), 47 FR 37019 (August 24, 1982) (SR-Phlx-81-1) (approval
order regarding Rules 100, 201, 203 and 214 in combination with
Rules 500 through 505). Rules 500, 501, 505, 506, 508, 511, 515,
520, 522, 523, 525, and 526 (of which Rules 500, 515, 516, 520, 522,
523, 525, and 526 no longer exist) were permanently approved in
1991. See Securities Exchange Act Release No. 29369 (June 26, 1991),
56 FR 30604 (July 3, 1991) (SR-Phlx-87-42) (order granting permanent
approval). Rule 507 was adopted in 2004. See Securities Exchange Act
Release No. 50100 (July 27, 2004), 69 FR 46612 (August 3, 2004) (SR-
Phlx-2003-59) (order granting approval). Rule 510 was adopted in
2007. See Securities Exchange Act Release No. 55080 (January 10,
2007), 72 FR 2324 (January 18, 2007) (SR-Phlx-2006-51) (order
granting approval). The Exchange has filed a separate proposal
regarding two of the rules in the Series 500 Rules, namely Rules 505
and 506. See Securities Exchange Act Release No. 77121 (February 11,
2016), 81 FR 8308 (February 18, 2016) (SR-Phlx-2016-22) (notice of
filing and immediate effectiveness to delete Rule 505 and update
Rule 506).
\7\ Electronic traders include Registered Options Traders or
``ROTs,'' that are Streaming Quote Traders or ``SQTs'', Remote
Streaming Quote Traders or ``RSQTs,'' as well as off-floor
specialists (Remote Specialists) (collectively ``market makers'').
See Rules 1014(b)(ii)(A), 1014(b)(ii)(B), and 1020.
\8\ Unlike specialists, Remote Specialists do not have a
physical presence on the floor of the Exchange. Rule 1020.
\9\ While the vast majority of options-related rules are found
in Rule 1000 and higher (with option index rules found in Rule 1000A
and higher), some of the older options-related rules are, as
discussed, in the Series 500 Rules.
---------------------------------------------------------------------------
Updating Rule 501
The Exchange proposes in Rule 501 to delete the reference to a
back-up specialist.
Currently, Rule 501 states that initial application(s) to become a
specialist unit shall include information regarding the specialist,
back-up specialist unit and a substitute specialist unit. With the
development of liquidity-enhancing electronic market makers on the
Exchange such as RSQTs, which make markets in the same options issues
as specialists, and the diminution of the
[[Page 2419]]
role that the specialist plays in managing the order book on the
Exchange, both a back-up specialist and substitute specialist are no
longer needed.\10\ Therefore, obsolete language in Rule 501 in respect
of back-up specialists, which includes Commentary .01 to Rule 501, is
proposed to be deleted from Rule 501. All of the other initial
application requirements of Rule 501, which include the following
information, remain unchanged: The identity of the individual who will
act as head specialist and as assistant specialist(s) in the unit; the
identity of the unit's staff positions and who will occupy those
positions; the identity of a substitute specialist unit not associated
with the specialist unit, which shall serve as a substitute specialist
unit in the event that the specialist unit is unable to perform the
duties of a specialist; the unit's clearing arrangements; and the
unit's capital structure, including any lines of credit.\11\
---------------------------------------------------------------------------
\10\ The function of a back-up specialist unit not associated
with the specialist unit, as in current Rule 501(b), is for one
specialist unit on the floor to provide staffing when needed to
another specialist unit on the floor. Because multiple specialist
units are no longer present on the floor, the back-up function is no
longer feasible. Moreover, as discussed below, the specialist unit
must clearly indicate its staffing to the Exchange, and the
substitute specialist requirement continues unchanged.
\11\ Rule 501(a) and (b).
---------------------------------------------------------------------------
Updating Rule 507
The Exchange proposes in Rule 507 to update the reference to
``Board,'' update the composition of the review committee, and update
the reference to Rule 510.
First, Rule 507(a) currently states that the Board has the ability
to perform functions such as deferring or limiting approval of SQTs or
RSQTs. The Exchange proposes to replace the role of the Board with
Exchange staff. The Exchange may therefore defer, for a period to be
determined in the Exchange's discretion, approval of qualifying
applications for SQT or RSQT status pending any action required to
address the issue of concern to the Exchange. The Exchange's Membership
department \12\ may not defer a determination of the approval of the
application of any SQT or RSQT applicant or place any limitation(s) on
access to the Exchange's electronic quoting and trading system on any
SQT or RSQT applicant unless the basis for such limitation(s) or
deferral have been objectively determined by the Exchange, subject to
Securities and Exchange Commission approval or effectiveness pursuant
to a rule change filing under Section 19(b) of the Securities Exchange
Act of 1934, as amended. The Exchange shall provide written
notification to any SQT or RSQT applicant whose application is the
subject of such limitation(s) or deferral, describing the objective
basis for such limitation(s) or deferral. The Exchange believes that
this change will help with the administration and application of Rule
507. Also, there is an appeal to the Board from any action of Exchange
staff within Rule 507(e).
---------------------------------------------------------------------------
\12\ Applications for SQTs and RSQTs would be reviewed by the
Membership department. Today, the Exchange's Membership Department
review applications for membership to Phlx for both equities and
options members.
---------------------------------------------------------------------------
Second, Rule 507(e) currently states that an appeal to the Board
from a decision of the Exchange regarding an SQT, RSQT, or RSQTO \13\
application may be requested by a member or member organization; and
that such appeal shall be heard by a special committee of the Board
composed of three (3) Directors, at least one of whom will be
Independent. In light of and commensurate with the first proposed Rule
507 change regarding the Board, the Exchange proposes to state that any
appeal from a decision pursuant to Rule 507 may be heard by the Board
or a panel appointed by the Board (``Board Panel'') composed of three
(3) members not materially involved in the Exchange decision appealed
from; \14\ and that, as now, there shall be no appeal to the Board from
a decision of the Board Panel. If a Board Panel is appointed by the
Board, three persons shall be selected to serve on the Board Panel and
in making such selections the Board shall choose individuals whose
background, experience and training qualify them to consider and make
determinations regarding the subject matter to be presented to the
Board Panel. The Exchange notes that references to ``special
committee'' will now refer to ``Board'' or ``Board Panel'' with this
proposal. The Board Panel shall consist of two members of the Exchange,
or general partners or officers of member organizations and one other
person that would qualify as a public member as defined in Article I of
the By-Laws, whom the Board considers to be qualified.
---------------------------------------------------------------------------
\13\ ``RSQTO'' is a Remote Streaming Quote Trader Organization
with up to five affiliated RSQTs. Rule 507(a).
\14\ The language stating that one of the Board members shall be
an Independent is proposed to be deleted. The Exchange believes that
this is proper as the ``Independent'' label is now a distinction
with little, if any, effect. Whereas the vast majority of Phlx Board
members were not Independent when Rule 507 was put into place and
the Exchange was a membership corporation, and application of the
Independent label may have made sense under those circumstances, the
composition of the Phlx Board has radically changed since Phlx
became a subsidiary of a public company, Nasdaq, Inc., in 2008. The
By-Laws of the Exchange now provide that the Exchange may have
Public Directors, Non-Industry Directors, and Industry Directors;
and that Industry Directors may include no more than two officers of
the Exchange, selected at the sole discretion of the Board, which
may serve in the role of Staff Director (not Independent). Phlx By-
Laws Article I. See also Securities Exchange Act Release No. 77165
(February 17, 2016), 81 FR 9041 (February 23, 2016) (SR-BSECC-2015-
002; SR-SCCP-2015-02; SR-BX-2015-085; SR-NASDAQ-2015-160; SR-Phlx-
2015-113) (order granting approval). Now, all but one of the twelve
members on the Phlx Board are Independent (the only exception being
one Staff Board member who is an officer of the Exchange). Thus, in
light of the composition of the Phlx Board, which has one Staff
Board member, only one of the three Directors on the special
committee discussed in current Rule 507 could even possibly be not
Independent; and, by Phlx By-Laws no more than two Directors could
ever be not Independent. The Exchange believes that, distinct from
the Independent criteria, the ability of the Board to appoint a
panel as proposed will serve to enhance the ability to quickly
assemble a panel in case of potential appeal, if one occurs. The
Exchange notes that a special committee per Rule 507 has not been
instituted since, let alone before, Phlx became a subsidiary of
Nasdaq, Inc. The Exchange also notes that the compositional
requirements for the Boards that oversee the three options markets
under the umbrella of Nasdaq, Inc. (Phlx, The NASDAQ Options Market
LLC (``NOM''), and NASDAQ BX, Inc. (``BX Options'')) are similar.
While there is no requirement in this proposal for an Independent
panel member to be appointed to the Board Panel, the Exchange notes
that the public member has some independent aspect. See Phlx By-Laws
at Article I (hh), ``The term `public member' means a member of any
committee appointed by the Board of Directors who has no material
business relationship with a broker or dealer, the Exchange, or its
affiliates.''
---------------------------------------------------------------------------
Third, Rule 507(b) currently states that, when making a decision
concerning an application for assignment in an option, the Exchange
shall consider the applicant's prior performance as a specialist, SQT,
or RSQT based on evaluations conducted pursuant to Exchange Rule
510.\15\ The Exchange is, as discussed below, proposing to update Rule
510 so that in lieu of the current formulaic language in the rule,
there is new language that accentuates the good standing of members. In
light of this, the Exchange proposes to update the 507(b) reference to
state that the Exchange can consider the applicant's prior performance
as a specialist, SQT or RSQT based on ``good standing pursuant to Rule
510.'' The Exchange is not proposing any other change to Rule 507. The
Exchange notes that the other aspects of Rule 507, such as, for
example, RSQTO eligibility
[[Page 2420]]
criteria,\16\ SQT and RSQT eligibility criteria,\17\ and technological
ability for RSQTOs, SQTs, or RSQTs,\18\ remain in place.\19\
---------------------------------------------------------------------------
\15\ Other factors for consideration include: (A) The financial
and technical resources available to the applicant; and (B) the
applicant's experience and expertise in market making or options
trading. Rule 507(b).
\16\ These RSQTO criteria include: (A) Significant market-making
and/or specialist experience in a broad array of securities; (B)
Superior resources, including capital, technology and personnel; (C)
Demonstrated history of stability, superior electronic capacity, and
superior operational capacity; (D) Proven ability to interact with
order flow in all types of markets; (E) Existence of order flow
commitments; (F) Willingness to accept allocations as an RSQT in
options overlying 400 or more securities; and (G) Willingness and
ability to make competitive markets on the Exchange and otherwise to
promote the Exchange in a manner that is likely to enhance the
ability of the Exchange to compete successfully for order flow in
the options it trades. Rule 507(a)(i).
\17\ These SQT and RSQT criteria include: (A) Significant
market-making and/or specialist experience in a broad array of
securities; (B) Superior resources, including capital, technology
and personnel; (C) Demonstrated history of stability, superior
electronic capacity, and superior operational capacity; (D) Proven
ability to interact with order flow in all types of markets; (E)
Willingness and ability to make competitive markets on the Exchange
and otherwise to promote the Exchange in a manner that is likely to
enhance the ability of the Exchange to compete successfully for
order flow in the options it trades; (F) A current affiliation with
an Exchange-approved RSQTO (RSQT applicants only). Rule 507(a)(ii).
\18\ No application for initial assignment in an option shall be
approved without verification that (A) the RSQTO, SQT or RSQT
applicant has sufficient technological ability to support his/her
continuous quoting requirements as set forth in Rule 1014(b)(ii),
and (B) the RSQTO, SQT or RSQT applicant has successfully completed,
or is scheduled to complete, testing of its quoting system with the
Exchange. Rule 507(b)(ii).
\19\ Specialist (and Remote Specialist) eligibility and
qualification requirements are discussed in Rules 501, 506, 1014,
and 1020.
---------------------------------------------------------------------------
Updating Rule 508
The Exchange proposes in Rule 508 to delete the reference to
``lease'' and to Rule 511.
First, Rule 508 currently refers to ``lease.'' Leasing is no longer
practiced on the Exchange, and for this reason the Exchange is
proposing to delete this obsolete term from Rule 508. This is similar
to a recent proposal wherein the Exchange noted that leasing is an
obsolete term that should be deleted.\20\
---------------------------------------------------------------------------
\20\ See Securities Exchange Act Release No. 77121 (February 11,
2016), 81 FR 8308 (February 18, 2016) (SR-Phlx-2016-22) (notice of
filing and immediate effectiveness to delete Rule 505 and update
Rule 506).
---------------------------------------------------------------------------
Second, Rule 508 currently refers to Rule 511, regarding
specialists. The Exchange proposes to delete the Rule 508 reference to
Rule 511. This is because, as discussed below, Rule 511 is proposed to
be deleted as the language of Rule 510 is proposed to be modified to
include specialists.\21\
---------------------------------------------------------------------------
\21\ Rule 508 will continue to indicate, without reference to
Rule 511, that failure to provide the Exchange prior notice of a
transfer in accordance with Rule 508, or failure to obtain Exchange
approval of a transfer, permits the Exchange to recover the
allocated securities and reallocate them pursuant to Rule 506.
---------------------------------------------------------------------------
Updating Rule 510
The Exchange proposes to entitle Rule 510 ``Good Standing for
Specialist, SQT, and RSQT'' and to add relevant good standing language.
First, Rule 510 currently applies only to SQTs and RSQTs. The
Exchange proposes to change the language of Rule 510 to indicate that
this rule will also be applicable to specialists. Thus, the Exchange
proposes to entitle Rule 510 as ``Good Standing for Specialist, SQT,
and RSQT.'' The good standing requirement, which is discussed below, is
a continuous requirement rather than a periodic evaluation requirement
as in current Rules 510 and 511.\22\ The requirements to remain in good
standing are discussed in the new language in Rule 510(a). These
obligations will be continuous and not periodic. The Exchange will
provide written notice to a specialist (including Remote Specialist),
SQT, or RSQT of a contemplated action regarding good standing pursuant
to Rule 510, as noted below. A specialist (including Remote
Specialist), SQT, or RSQT may request and the Exchange may hold an
informal meeting to discuss the alleged failure to remain in good
standing and to explore possible appropriate remedies. Written notice
of the date and time of the meeting will be given to the specialist
(including Remote Specialist), SQT, or RSQT and no verbatim record will
be kept. If the Exchange believes there are no mitigating circumstances
that would demonstrate substantial improvement of or reasonable
justification for the failure to meet the good standing requirements of
this Rule 510, the Exchange may take appropriate action pursuant to
subsection (b) of this Rule 510. This process is described in further
detail below. Exchange staff will evaluate good standing which entails
continuous compliance with, among other things, Exchange options rules
and procedures as well as market making requirements (market making
requirements are found in Rule 1014).
---------------------------------------------------------------------------
\22\ Proposed Rule 510, which applies to specialists (including
Remote Specialists), SQTs, and RSQTs, discusses that good standing
on the Exchange means continuous compliance with, among other
things, Exchange options rules and procedures as well as market
making requirements (market making requirements are found in Rule
1014). In light of the proposed continuous and extensive good
standing requirements per Rule 510 as well as other rule
requirements, the old evaluations applicable to SQTs, RSQTs, and
specialists are not needed.
---------------------------------------------------------------------------
Second, Rule 510 currently is written in terms of doing performance
evaluations for SQTs and RSQTs. Currently, Rule 507 has a very detailed
process for applying for and approving SQTs and RSQTs, and for
assigning options to SQTs and RSQTs. In addition, today Rule 501
defines the application and approval process for specialists.\23\ To
more closely align the Exchange with another options exchange, namely
BX Options, the Exchange is adopting language similar to BX Options
Rule at Chapter VII, Section 4 (the ``BX Options rule'').\24\ Similar
to Phlx, BX Options has market makers (``BX Options Market Makers'',
which are also known as lead market makers (``LMMs'')). All BX Options
Market Makers are designated as specialists on BX for all purposes
under the Act or rules thereunder.\25\ The Exchange is adopting the BX
Options rule and proposing, in lieu of the current formulaic language
in Rule 510, to insert new language indicating how a member of the
Exchange can remain in good standing on the Exchange. The Exchange
believes that this new proposal will obligate market participants that
conduct market making activities with continuous requirements to remain
in good standing as compared to periodic requirements. The continuous
requirements will serve to accentuate the good standing of members who
have remained in compliance. The Exchange believes that it is important
for market structure for these participants to have continuous
[[Page 2421]]
requirements to remain in good standing rather than only periodic
evaluations.
---------------------------------------------------------------------------
\23\ Rules 506, 508, and 513 discuss other aspects of the
process.
\24\ See Securities Exchange Act Release No. 67256 (June 26,
2012), 77 FR 39277 (July 2, 2012) (order approving establishment of
BX Options and marketplace rules) (SR-BX-2012-030).
\25\ See BX Options Chapter VII, Section 2.
For obligations of BX Options Market Makers, see BX Options
Chapter VII, Section 5, entitled ``Obligations of Market Makers.''
This section indicates that BX Options Markets Maker obligations
include, but are not limited to: Maintain a course of dealings
reasonably calculated to contribute to the maintenance of a fair and
orderly market in transactions where acting in a market making
capacity; not make bids or offers or enter into transactions that
are inconsistent with such course of dealings; maintain a two-sided
market, during trading hours, in those options in which the Market
Maker is registered to trade, in a manner that enhances the depth,
liquidity and competitiveness of the market; compete with other
Market Makers in all options in which the Market Maker is registered
to trade; update quotations in response to changed market conditions
in all options in which the Market Maker is registered to trade; and
maintain active markets in all options in which the Market Maker is
registered.
The BX Options Market Maker obligations are similar in nature to
those of Phlx specialists, which can be found in Phlx Rule 1014,
entitled ``Obligations and Restrictions Applicable to Specialists
and Registered Options Traders,'' and include: Maintain a fair and
orderly market; not enter into transactions or make bids or offers
that are inconsistent with such a course of dealings; quote a two-
sided market; and maintain a two-sided market.
---------------------------------------------------------------------------
The proposed new language is similar, in all material respects,\26\
to BX Options rule at Chapter VII, Section 4. Specifically, the
Exchange proposes to adopt new language in Rule 510(a) to state that to
remain in good standing as a specialist (including Remote Specialist),
SQT, or RSQT, the specialist, SQT, or RSQT must:
---------------------------------------------------------------------------
\26\ As with virtually all rules text copied from another
exchange, changes are made to the proposed rule text to better fit
the structure of the existing rules of the Exchange.
---------------------------------------------------------------------------
(i) Continue to meet the requirements established in SEC Rule 15c3-
1(a)(6)(i),\27\ and the requirements set forth in the Series 500 Rules
in the Rules of the Exchange;
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\27\ SEC Rule 15c-3, 240 CFR 15c3-1, is the net capital
requirement for brokers or dealers.
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(ii) continue to satisfy the specialist, SQT or RSQT qualification
and market making requirements specified by the Exchange, as amended
from time to time;
(iii) comply with the Rules of the Exchange and the Options Rules
\28\ as well as the rules of The Options Clearing Corporation (``OCC'')
and the rules of the Federal Reserve Board [sic] ``FRB''); and
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\28\ As discussed, while the vast majority of options-related
rules are found in Rule 1000 and higher (with option index rules in
Rule 1000A and higher), some of the older options-related rules are
found in rules below 1000, such as, for example, the Series 500
Rules.
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(iv) pay on a timely basis such member, transaction and other fees
as the Exchange shall prescribe.\29\
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\29\ Member assessments are generally reflected in the Phlx
Pricing Schedule.
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These proposed requirements to remain in good standing on the
Exchange are not periodic, as are the evaluation and performance
concepts in current Rules 510 and 511, but rather are continuous in
nature.
Third, the Exchange notes that with the proposed new good standing
requirements, specialist and other market maker (e.g., RSQT)
obligations, such as market making, will continue to apply.\30\ For
specialists (and RSQTs functioning as Remote Specialists) the Rule 1014
market making obligations are applicable throughout the trading day.
Thus, a specialist (or Remote Specialist) shall continue to be
responsible to quote two-sided markets in the lesser of 99% of the
series or 100% of the series minus one call-put pair in each option in
which such specialist is assigned. To satisfy this requirement with
respect to quoting a series, the specialist must quote such series 90%
of the trading day (as a percentage of the total number of minutes in
such trading day) or such higher percentage as the Exchange may
announce in advance. These obligations will apply collectively to all
appointed issues of the specialist, rather than on an issue-by-issue
basis. Compliance with this obligation will be determined on a monthly
basis. However, determining compliance with the continuous quoting
requirement on a monthly basis does not relieve the specialist
(including the Remote Specialist) of the obligation to provide
continuous two-sided quotes on a daily basis, nor will it prohibit the
Exchange from taking disciplinary action against the specialist
(including the Remote Specialist) for failing to meet the continuous
quoting obligation each trading day.\31\
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\30\ Other obligations include, for example: Order exposure,
order handling, and best execution.
\31\ See Rule 1014(b)(ii)(D)(2).
For the market making obligations of SQTs and RSQTs (including
Directed SQT or DRSQTs [sic], and Directed RSQTs or DRSQTs), which
remain unchanged, see Rule 1014(b)(ii)(D)(1). This rule states that,
like for specialists, compliance for SQTs and RSQTs will be
determined on a monthly basis. However, determining compliance with
the continuous quoting requirement on a monthly basis does not
relieve an SQT, RSQT, DSQT, or DRSQT of the obligation to provide
continuous two-sided quotes on a daily basis, nor will it prohibit
the Exchange from taking disciplinary action against an SQT, RSQT,
DSQT, or DRSQT for failing to meet the continuous quoting obligation
each trading day. Rule 1014(b)(ii)(D)(1).
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Fourth, the proposed new language in Rule 510(b) states that the
good standing of a specialist (including Remote Specialist), SQT, or
RSQT may be suspended, terminated or otherwise withdrawn, as provided
in the Exchange's rules, if any of these conditions for approval cease
to be maintained or the specialist, SQT, or RSQT violates any of its
agreements with the Exchange or any of the provisions of the Rules of
the Exchange or of the Options Rules. The Exchange is proposing to add
an Informal Meeting process and appeal rights, which do not exist in
Rule 510 for specialists at this time.
The Informal Meeting process proposed in Rule 510 is based on the
Informal Meeting process in current Rules 510 (for SQTs and RSQTs) and
511 (for specialists), which is in respect of performance evaluations.
The Informal Meeting process proposed in Rule 510 is, however, in
respect of good standing. Specifically, the Exchange proposes to amend
Rule 510 to adopt the following language in Rule 510(b)(i): The
Exchange will provide written notice to a specialist (including Remote
Specialist), SQT, or RSQT of a contemplated action regarding good
standing pursuant to this Rule 510. A specialist (including Remote
Specialist), SQT, or RSQT may request and the Exchange may hold an
informal meeting to discuss the alleged failure to remain in good
standing and to explore possible appropriate remedies. Written notice
of the date and time of the meeting will be given to the specialist
(including Remote Specialist), SQT, or RSQT and no verbatim record will
be kept. If the Exchange believes there are no mitigating circumstances
that would demonstrate substantial improvement of or reasonable
justification for the failure to meet the good standing requirements of
this Rule 510, the Exchange may take appropriate action pursuant to
subsection (b) of this Rule 510. Nothing in this Informal Meeting
process limits the Exchange from enforcing the rules of the Exchange,
which may include a disciplinary action pursuant to such rules. The
Regulatory staff may, for example, initiate a disciplinary action
pursuant to Rule 960.3 against a member for failure to meet continuous
quoting obligations in Rule 1014.\32\ The proposed appeal rights in
Rule 510(c) are taken from current Rule 511, but expanded to cover
specialists (including Remote Specialists), SQTs, and RSQTs.\33\
Specifically, the Exchange proposes to amend Rule 510 to adopt the
following language in Rule 510(c): An appeal by a specialist (including
Remote Specialist), SQT, or RSQT to the Board of Directors from a
decision of the Exchange may be requested by a member or member
organization interested therein by filing with the Secretary of the
Exchange written notice of appeal within ten (10) days after the
decision has been rendered. Any appeal from a decision pursuant to Rule
510 may be heard by the Board or a Board Panel composed of three (3)
members not materially involved in the Exchange decision appealed
from.\34\ If a Board
[[Page 2422]]
Panel is appointed by the Board, three persons shall be selected to
serve on the Board Panel and in making such selections the Board shall,
to the extent practicable, choose individuals whose background,
experience and training qualify them to consider and make
determinations regarding the subject matter to be presented to the
Board Panel. The Board Panel shall consist of two members of the
Exchange, or general partners or officers of member organizations and
one other person who would qualify as a public member as defined in
Article I of the By-Laws, whom the Board considers to be qualified. The
person requesting review shall be permitted to submit a written
statement to and/or appear before the Board or Board Panel. The
Secretary of the Exchange shall certify the record of the proceeding,
if any, and the written decision, and shall submit these documents to
the Board or Board Panel. The Board's or Board Panel's review of the
action shall be based solely on the record, the written decision and
any statement submitted by the person requesting the review. The Board
or Board Panel shall prepare and deliver to such person a written
decision and reasons therefore. If the Board or Board Panel affirms the
action, the action shall become effective ten (10) days from the date
of the Board Panel's decision. There shall be no appeal to the Board
from any decision of the Board Panel.\35\
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\32\ Specifically, the Exchange may pursue disciplinary process
against a member that commits an egregious market making violation
evidenced by a pattern of repeated failure to make a two-sided
market in assigned options.
\33\ The SQT and RSQT appeal rights to the Board currently in
Rule 510 are limited to apply only in respect of performance
evaluations. The Exchange believes that the appeal rights afforded
SQTs and RSQTs in proposed Rule 510, which will be to the Board or a
Board Panel, are appropriate in that they are expanded to cover any
decision of the Exchange regarding Rule 510; and, an informal
meeting process is also afforded prior to appeal. The Board or a
Board Panel would serve as a secondary appeal to a group of
individuals that were not involved in the primary decision making.
The Exchange is seeking to afford its members due process when
seeking an appeal.
\34\ Rule 511(f) now states, in relevant part, that any appeal
from a decision pursuant to Rule 511 regarding evaluation or review
shall be heard by a special committee of the Board of Directors
composed of three (3) Directors, of whom at least one (1) shall be
an Independent. The Exchange believes that, as discussed, the old
independence requirement is no longer needed when Rule 510 is
restructured. Commensurate with other proposed changes discussed
herein, Rule 510 appeals can be heard by the Board or a Board Panel.
\35\ The appeal process in proposed Rule 507(e) is amended to
reflect an appeal to the Board or a Board Panel.
---------------------------------------------------------------------------
The memorialization of appeal rights in proposed Rule 510(c) is
done to ensure that if the good standing of a specialist, SQT, or RSQT
is suspended, terminated or otherwise withdrawn then they have a clear
way to initiate and prosecute an appeal regarding such decision. The
proposed due process methodology is similar to other rules of the
Exchange. By proposing new language in Rule 510(a) and (b) regarding
specialists, SQTs, and RSQTs regarding good standing, which is similar
to that of BX Options, the continuous good standing rules of the
Exchange and BX Options will be more aligned and easier to apply.
Proposed Rule 510 describes an Informal Meeting process and appeal
rights applicable to specialists (including Remote Specialists), SQTs,
and RSQTs. The Exchange is replacing the current periodic evaluation or
performance requirements in Rule 510 (e.g., monthly for SQTs and
RSQTs), as also in Rule 511 (e.g., annually for specialists) as
discussed, with the proposed Rule 510 continuous requirements for
specialists (including Remote Specialists), SQTs, and RSQTs to meet
Exchange, Commission, OCC and FRB rules and requirements to remain in
good standing. Compliance with good standing requirements is monitored
across the Exchange.\36\
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\36\ Thus, in Rule 510 the Exchange is proposing an Informal
Meeting process and appeal rights applicable to specialists
(including Remote Specialists), SQTs, and RSQTs. And, the Exchange
is replacing the current periodic evaluation or performance
requirements in Rule 510 (e.g., monthly for SQTs and RSQTs), as also
in Rule 511 (e.g., annually for specialists) as discussed, with the
proposed Rule 510 continuous requirements for specialists (including
Remote Specialists), SQTs, and RSQTs to meet Exchange, Commission,
OCC and FRB rules and requirements to remain in good standing.
Compliance with good standing requirements is monitored across the
Exchange. Thus, for example, units that monitor the application,
allocation, and fees requirements and processes include membership,
listing, and finance groups. And the surveillance group will
continue to use its current processes to monitor compliance with
Exchange rules and where appropriate will pursue disciplinary action
against members for rule violations(s) (e.g., failure to make two-
sided market(s) per Phlx Rule 1014). Moreover, while proposed Rule
510 is being changed the market making and other obligations for
specialists, SQTs, and RSQTs continue as discussed.
---------------------------------------------------------------------------
Deleting Rule 511
The Exchange has concluded that, with the placement of the good
standing concepts into proposed Rule 510 in such a way that they
include specialist (and Remote Specialist), Rule 511 is no longer
needed. In Rule 510, as discussed, in lieu of the current language, the
Exchange is proposing to adopt new language indicating how a member of
the Exchange can remain in good standing.
The proposed new language in Rule 510 is, in all material respects,
similar to the BX Options rule at Chapter VII, Section 4. Because of
this proposed new language in Rule 510, which addresses specialists (as
also Remote Specialists, RSQTs, and SQTs), the Exchange proposes to
delete Rule 511 in its entirety. The Exchange believes that, within the
effort to update and consolidate the Series 500 Rules as discussed, it
is reasonable and proper to delete Rule 511. This rule was established
decades ago for the purpose of dealing with the extensive on-floor open
outcry specialist system, with multiple competing specialist units.
Since the implementation of Rule 511, the open outcry options floor has
evolved into a robust and competitive principally electronic system,
and the remaining hybrid options floor does not have numerous competing
specialists as was the case when Rule 511 was instituted.
The Exchange believes that under the circumstances, and because
specialists are proposed to be covered in Rule 510 in terms of good
standing, and continue to be covered in the Series 500 Rules and other
rules of the Exchange,\37\ deletion of Rule 511 is proper.
---------------------------------------------------------------------------
\37\ See, e.g., Rule 501 (Specialist Appointment); Rule 506
(Allocation Application, Allocation, Reallocation, and Transfer);
Rule 508 (Transfer Application); and Rule 513 (Voluntary Resignation
of Options Privileges). See also, e.g., Rule 1022 (Securities
Accounts and Orders of Specialists and Registered Options Traders;
and Rule 1020 (Registration and Functions of Options Specialists),
which discusses on-floor options specialists and electronic Remote
Specialists.
---------------------------------------------------------------------------
As discussed, the Exchange is deleting the performance evaluation
structure of Rule 511 and is proposing to relocate the concept within
Rule 510 with the proposed good standing requirement and appeal rights
applicable to specialists, SQTs, and RSQTs. The Exchange believes that
the proposed good standing approach, which is applicable to
specialists, SQTs, and RSQTs, enhances the current rule because unlike
the periodic nature of the performance evaluation structure the
proposed good standing approach would have continuous requirements that
must be maintained in order to remain in good standing on the Exchange
(e.g., compliance with the equity and options rules of the Exchange,
OCC, and FRB).
As discussed, options trading on the Exchange has developed into a
robust hybrid system that is currently largely electronic and off-
floor. The Exchange continues to have an open outcry trading floor,
however, rather than a proliferation of competitive specialists on the
options floor as was the case when Rule 511 was instituted: There is
currently one specialist unit on the options floor and therefore Rule
511 is not needed. In the past, when so many specialists conducted
business on the options floor, Rule 511 served a purpose. Today, Rule
511, with its specialist evaluation process and allocation process
constructed for multiple competitive specialists on the floor, is no
longer needed with one specialist unit on the floor.\38\ As such, in
light of the current realities of the options floor Rule 511 is
obsolete, particularly in light of numerous rules
[[Page 2423]]
in the Phlx rulebook that apply to specialists.
---------------------------------------------------------------------------
\38\ The Exchange believes that even if additional floor
specialists begin to conduct business on the options floor, Rule 511
was designed for a very different competitive floor environment and
is not needed, particularly in light of proposed Rule 510 and the
numerous other Exchange rules applicable to options specialists.
---------------------------------------------------------------------------
The many rules that continue to apply to specialists discuss topics
such as application, approval, allocation, re-allocation, market
making, and obligations of specialists. For example, Rule 501 as
proposed discusses the specialist allocation process and specialist
approval process. To be an approved specialist unit and retain the
privilege of such status, for example, a specialist unit must maintain
the approved clearing arrangements and capital structure stated on
their application and changes regarding certain requirements must be
submitted and approved by the Exchange. In addition, each unit must
consist of at least one head specialist and one assistant specialist
that must be associated with the specialist unit; the Exchange, in its
discretion, may require a unit to obtain additional staff depending
upon the number of assigned options classes and associated order flow.
Rule 506 discusses allocation application, reallocation of a previously
allocated options, and transfer of allocated options.\39\ Rule 506 also
discusses that, in addition to a minimum allocation period of one year,
the Exchange may establish an ``alternate specialist period'' period of
less than one year to act as a specialist in an options class. Rule 508
as proposed discusses the Exchange approval process if there is
agreement between or among specialist units to transfer one or more
options classes already allocated to a specified specialist unit. Rule
513, which is not proposed to be amended with this filing, discusses
the process if an option specialist unit voluntarily resigns from
allocation in a particular option and there is a future allocation
regarding such option.\40\ In addition, Rule 1014 discusses the
obligations and restrictions applicable to specialists and registered
options traders during each trading day; these obligations and
restrictions include, as discussed above, very specific market making
requirements. Finally, Rule 1022 discusses securities accounts and
orders of specialists and registered options traders and proper
identification of accounts, reporting of options, and orders of
underlyings.\41\
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\39\ See Securities Exchange Act Release No. 77121 (February 11,
2016), 81 FR 8308 (February 18, 2016) (SR-Phlx-2016-22) (notice of
filing and immediate effectiveness to delete Rule 505 and update
Rule 506).
\40\ One rule in the Series 500 Rules does not specifically deal
with specialists. This is Rule 507, which was discussed above. This
rule deals with the application and approval process for SQTs,
RSQTs, or RSQTOs, and the assignment of options.
\41\ The Exchange has previously discussed that the allocation
and evaluation process in Rule 511 proposed to be deleted made sense
when the rule was established with multiple competitive specialists
on the floor, but is no longer needed in light of the current
composition of the floor.
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The Exchange believes that the changes to the noted rules in the
Series 500 Rules will make remaining Rules 501, 507, 508, and 510
easier to apply, clearer and better.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\42\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\43\ 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, in
general, to protect investors and the public interest by proposing to
make changes to five rules in the Series 500 Rules as discussed. The
proposed rule change is designed to promote just and equitable
principles of trade by updating and modernizing the Series 500 Rules
and making them clearer and easier to use while continuing to protect
investors and the public interest.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78f(b).
\43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In particular, the Exchange is proposing to change Rule 501 to
delete reference to a back-up specialist. With the development of
liquidity-enhancing electronic market makers on the Exchange such as
RSQTs, which make markets in the same options issues as specialists,
and the diminution of the role that the specialist plays in managing
the order book on the Exchange, both a back-up specialist and
substitute specialist are no longer needed. The Exchange believes that
this proposal amendment is consistent with the Act because the advent
of streaming quote traders on the Exchange served to perfect the
mechanism of a free and open market because of the liquidity that such
participants brought to Phlx. These participants are obligated to
continuously quote in the market and have filled a role which was
previously reliant on a back-up specialist and a substitute specialist.
Obsolete language in Rule 501 in respect of back-up specialists,
which includes Commentary .01 to Rule 501, is proposed to be deleted
from Rule 501. Similarly, the Exchange is proposing to change Rule 508
to delete the cross reference to Rule 511 and references to ``lease.''
As discussed, with the change in Rule 510 to the good standing standard
that applies to specialists as well as SQTs and RSQTs, Rule 511 is
proposed to be deleted and therefore the reference is no longer needed.
Moreover, leasing is no longer permitted on the Exchange, and for this
reason the Exchange is proposing to delete this obsolete term from Rule
508. The Exchange believes it is consistent with the Act to delete
obsolete references which serve to confuse members within the Rulebook.
The Exchange is proposing to amend Rule 507(a) to permit the
Exchange, instead of the Board to defer approval of qualifying
applications for SQT or RSQT status pending any action required to
address the issue of concern to the Exchange. The applicant would have
a right of appeal to the Board or a Board Panel of any action of
Exchange staff pursuant to Rule 507(e). The Exchange believes that the
application process should be handled by staff initially with appellate
rights to the Board or a Board Panel. Currently Rule 507 states that
the Board has the ability to perform functions such as deferring or
limiting approval of SQTs or RSQTs. The Exchange believes that this
amendment is consistent with the Act because it will change [sic] will
promote just and equitable principles of trade by serving the
administration and application of Rule 507 and permitting a right of
appeal as provided in Rule 507(e).
With respect to Rule 507(e), the Exchange proposes to expand the
appeal to either the Board or a Board Panel. Currently, Rule 507(e)
states that an appeal shall be heard by a special committee of the
Directors composed of three Directors, of whom at least one (1) shall
be an Independent. The Exchange proposes to state that the appeal may
be heard by a panel appointed by the Board composed of three (3)
members not materially involved in the Exchange decision appealed from.
If a panel is appointed by the Board, three persons shall be selected
to serve on the panel and in making such selections the Board shall, to
the extent practicable, choose individuals whose background, experience
and training qualify them to consider and make determinations regarding
the subject matter to be presented to the panel. The panel shall
consist of two members of the Exchange, or general partners or officers
of member organizations and one other person who would qualify as a
public member as defined in Article I of the By-Laws, whom the Board
considers to be qualified. The Exchange believes that this amendment is
consistent with the Act because the Board or a Board Panel
[[Page 2424]]
would allow a path of impartial appeal for the applicant.
Also, currently Rule 507(b) states that when making a decision
concerning an application for assignment in an option the Exchange
shall consider the applicant's prior performance as a specialist, SQT
or RSQT based on evaluations conducted pursuant to Exchange Rule 510.
The Exchange proposes to update Rule 510 so that in lieu of the current
formulaic language in the rule, there is new language that accentuates
the good standing of members. In light of this, the Exchange proposes
to update the 507(b) reference to state that the Exchange can consider
the applicant's prior performance as a specialist, SQT or RSQT based on
``good standing pursuant to Rule 510.'' The Exchange believes that this
amendment is consistent with the Act because it will consider a more
holistic approach in evaluating members that engage in market making
activities. The Exchange believes that this approach is broader and
will take new factors into account which would serve to promote just
and equitable principles of trade in evaluating market participants
that engage in market making activities by considering their
obligations and past performance.
The Exchange is proposing to update Rule 510 to give it a new
title, ``Good Standing for Specialist, SQT, and RSQT,'' to add relevant
good standing language, and appeal rights. The Exchange proposes to
amend the language of Rule 510 to indicate that, with the deletion of
Rule 511, Rule 510 will also be applicable to specialists. The Exchange
proposes to change the language of Rule 510 to more closely align the
Exchange with BX Options by adopting language from the BX Options rule
at Chapter VII, Section 4. BX Options Market Makers are held to good
standing standards per the BX Options rule. Specialists on Phlx are
another type of market maker. The Exchange believes that these
amendments are consistent with the Act because these changes serve to
add clarity and transparency to the rule text.
The Exchange is adopting language from BX Options at Chapter VII,
Section 4. Specifically, the Exchange proposes new language in Rule
510(a) to state that to remain in good standing on the Exchange as a
specialist (including Remote Specialist), SQT, or RSQT, the specialist,
SQT, or RSQT must meet specific requirements set forth in the rule.\44\
As discussed, the proposed new good standing language in Rule 510 will
be, in all material respects, similar to BX Options rules at Chapter
VII, Section 4. This makes particular sense because all BX Options
Market Makers are designated as specialists on BX for all purposes
under the Act or rules thereunder and, like Phlx specialists, have
market making obligations.\45\ The Exchange believes that the good
standing rule text is consistent with the Act because as described
above the Exchange believes that this approach is broader and will take
new factors into account which would serve to promote just and
equitable principles of trade in evaluating market participants that
engage in market making activities by considering their obligations and
past performance.
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\44\ The specific good standing requirements are: (i) Continue
to meet the requirements established in SEC Rule 15c3-1(a)(6)(i),
and the requirements set forth in the Series 500 Rules in the Rules
of the Exchange; (ii) continue to satisfy the specialist, SQT or
RSQT qualification requirements specified by the Exchange, as
amended from time to time; (iii) comply with the Rules of the
Exchange and the Options Rules as well as the rules of the Options
Clearing Corporation and the rules of the Federal Reserve Board; and
(iv) pay on a timely basis such member, transaction and other fees
as the Exchange shall prescribe. Proposed Rule 510(a).
\45\ See, e.g., supra note 24 [sic] and accompanying discussion.
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The Exchange is proposing to add an Informal Meeting process and
appeal rights, which do not exist in Rule 510 for specialists; as
discussed, the appeal rights now in Rule 510 are regarding SQTs and
RSQTs only in respect of performance evaluations. These proposed appeal
rights for a specialist (including Remote Specialist), SQT, or RSQT,
which are set forth in Rule 510(c) for, are adopted from Rule 511. The
memorialization in Rule 510 of Informal Meeting process and appeal
rights is done to affirm that if the good standing of a specialist,
SQT, or RSQT is suspended, terminated or otherwise withdrawn then they
have a clear way to meet with the Exchange to discuss the issue and
initiate and prosecute an appeal regarding such decision. The
Exchange's proposal to expand the role of the Board to permit an appeal
to be heard by a Board Panel appointed by the Board composed of three
(3) members not materially involved in the Exchange decision appealed
from is consistent with the Act because the Board or a Board Panel
would allow a path of impartial appeal for the applicant.\46\
---------------------------------------------------------------------------
\46\ If a Board Panel is appointed by the Board, three persons
shall be selected to serve on the Board Panel and in making such
selections the Board shall, to the extent practicable, choose
individuals whose background, experience and training qualify them
to consider and make determinations regarding the subject matter to
be presented to the Board Panel. The Board panel shall consist of
two members of the Exchange, or general partners or officers of
member organizations and one other person that would qualify as a
public member as defined in Article I of the By-Laws, whom the Board
considers to be qualified.
---------------------------------------------------------------------------
The Exchange has concluded that, with the placement of the good
standing concepts into proposed Rule 510 in such a way that they
include a specialist (and Remote Specialist), Rule 511 is no longer
needed and is therefore proposed to be deleted in its entirety (with
transfer of specialist appeal rights from Rule 511 to Rule 510).
The Exchange is proposing to delete Rule 511. This rule was
established decades ago for the purpose of dealing with the extensive
on-floor open outcry specialist system, with multiple competing
specialist units. Since the implementation of Rule 511, the open outcry
options floor has evolved into a robust and competitive system that is
principally electronic, and the remaining hybrid options floor does not
have numerous competing specialists as was the case when Rule 511 was
instituted. The Exchange believes that because of the extensive changes
on the option floor (from having numerous competitive specialist units
on the old options floor to having a specialist unit on the current
options floor), and because specialists are proposed to be covered in
Rule 510 in terms of good standing and continue to be covered in the
Series 500 Rules and other rules of the Exchange, it is consistent with
the Act and promotes just and equitable principles of trade to delete
Rule 511.
Furthermore, numerous rules in the Phlx Rulebook continue to apply
to specialists (as well as to other registered options traders). For
example, Rule 501 as proposed discusses the specialist allocation
process and specialist approval process. Rule 506 discusses allocation
application, reallocation of previously allocated options, and transfer
of allocated options. Rule 508 as proposed discusses the Exchange
approval process if there is agreement between or among specialist
units to transfer one or more options classes already allocated to a
specified specialist unit. Rule 513, which is not proposed to be
amended with this filing, discusses the process if an option specialist
unit voluntarily resigns from allocation in a particular option and
there is a future allocation regarding that option. Rule 1014 discusses
the obligations and restrictions, including specific market making
requirements, that are applicable to specialists each trading day.
Finally, Rule 1022 discusses proper identification of accounts,
reporting of options, and orders of underlyings in respect of
securities accounts and orders of specialists and ROTs.
[[Page 2425]]
The Exchange believes that the changes to the noted rules in the
Series 500 Rules will make remaining Rules 501, 507, 508, and 510
easier to apply, clearer and more transparent. Such proposed changes
are in consistent with the Act, the public interest, and continue to
serve to protect investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
While the Exchange does not believe that the proposed change is a
burden on competition, or is competitive in nature, the Exchange
believes that clearer, updated, modernized, and better-conforming rules
that do not refer to obsolete concepts are always beneficial to market
participants, are in the public interest, and serve to protect
investors.
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 Number SR-Phlx-2016-105 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-2016-105. 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
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2016-105, and should be
submitted on or before January 30, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-00100 Filed 1-6-17; 8:45 am]
BILLING CODE 8011-01-P
