Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by NASDAQ OMX PHLX, Inc. Relating to a Proposed Price Improvement System, Price Improvement XL (PIXLSM, 50021-50029 [2010-20100]
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Federal Register / Vol. 75, No. 157 / Monday, August 16, 2010 / Notices
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,12 that the
proposed rule change (SR–EDGA–2010–
06) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–20102 Filed 8–13–10; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62678; File No. SR–Phlx–
2010–108]
Self-Regulatory Organizations; Notice
of Filing of Proposed Rule Change by
NASDAQ OMX PHLX, Inc. Relating to a
Proposed Price Improvement System,
Price Improvement XL (PIXLSM)
August 10, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1, and Rule 19b–4 2 thereunder,
notice is hereby given that on July 30,
2010, NASDAQ OMX PHLX, Inc.
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange, pursuant to Section
19(b)(1) of the Act 3 and Rule 19b–4
thereunder,4 proposes to adopt new
Rule 1080(n), Price Improvement XL
(PIXLSM), to establish a priceimprovement mechanism on the
Exchange.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://www.nasdaqtrader.com/
micro.aspx?id=PHLXRulefilings, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
12 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.
3 15 U.S.C. 78s(b)(1).
4 17 CFR 240.19b–4.
13 17
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to establish a priceimprovement mechanism, PIXL, on the
Exchange, which includes auto-match
functionality in which a member (an
‘‘Initiating Member’’) may electronically
submit for execution an order it
represents as agent on behalf of a public
customer, broker dealer, or any other
entity (‘‘PIXL Order’’) against principal
interest or against any other order it
represents as agent (an ‘‘Initiating
Order’’) provided it submits the PIXL
Order for electronic execution into the
PIXL Auction (‘‘Auction’’) pursuant to
the proposed Rule.
Auction Eligibility Requirements
All options traded on the Exchange
are eligible for PIXL. Proposed Rule
1080(n)(i) describes the circumstances
under which an Initiating Member may
initiate an Auction.
If the PIXL Order is for the account of
a public customer and is for a size of 50
contracts or more, the Initiating Member
must stop the entire PIXL Order at a
price that is equal to or better than the
National Best Bid/Offer (‘‘NBBO’’) on the
opposite side of the market from the
PIXL Order, provided that such price
must be at least one minimum price
improvement increment (as determined
by the Exchange but not smaller than
one cent) better than any limit order on
the limit order book on the same side of
the market as the PIXL Order. The
purpose of this provision is to ensure
that public customer PIXL Orders for 50
contracts or more are guaranteed at least
the NBBO but do not trade ahead of
other limit orders already on the
Exchange’s limit order book at the
existing limit order’s limit price.
For example, assume the Exchange’s
disseminated market (the ‘‘PBBO’’) in
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50021
the affected series is the NBBO and is
1.00 bid for 10 contracts, 1.01 offered for
20 contracts and the existing
disseminated 1.00 bid is a public
customer limit order. If an initiating
Member submits a public customer
PIXL Order to buy 100 contracts @ the
market together with a contra-side
Initiating Order to sell 100 contracts, the
entire PIXL Order must be stopped at a
price of 1.01 because the public
customer limit order on the limit order
book has time priority at 1.00 over the
public customer PIXL order.
If the PIXL Order is for the account of
a public customer and is for a size of
less than 50 contracts, the Initiating
Member must stop the entire PIXL
Order at a price that is the better of: (i)
The PBBO price on the opposite side of
the market from the PIXL Order
improved by at least one minimum
price improvement increment, or (ii) the
PIXL Order’s limit price (if the order is
a limit order), provided in either case
that such price is at or better than the
NBBO, and at least one minimum price
improvement increment better than any
limit order on the book on the same side
of the market as the PIXL Order. The
purpose of this provision is to ensure
that smaller PIXL Orders will be
guaranteed price improvement by
establishing a size under which a PIXL
Order must be submitted at a price
better than the PBBO. The Exchange
believes this should especially benefit
public customers.5 The provision
concerning PIXL Orders for a size of less
than 50 contracts will be effective for a
pilot period scheduled to expire August
31, 2011.6
For example, assume the PBBO in the
affected series is 1.00 bid—1.03 offer
and the NBBO is 1.00—1.03. If an
initiating Member submits a public
customer PIXL Order to buy 25
contracts @ the market together with a
contra-side Initiating Order to sell 25
contracts, the public customer PIXL
Order must be stopped at least one
minimum improvement increment
better than the PBBO offer of 1.03 to
guarantee price improvement.
Therefore, in this example, the PIXL
5 The Exchange notes that Chicago Board Options
Exchange, Inc. (‘‘CBOE’’) Rule 6.74A(a)(3) provides
that any AIM Agency Order (the equivalent of a
PIXL Order) for less than 50 contracts that is
entered into the CBOE’s Automated Improvement
Mechanism (‘‘AIM’’) is guaranteed an execution at
the NBBO price improved by one minimum price
improvement increment or at the AIM Agency
Order’s limit price (if the order is a limit order). See
Securities Exchange Act Release No. 53222
(February 3, 2006), 71 FR 7089 (February 10, 2006)
(SR–CBOE–2005–60).
6 The Exchange proposes the one-year pilot in
order to ascertain the level of price improvement
attained for such smaller-sized orders during the
pilot period.
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Order could be stopped at 1.00, 1.01 or
1.02, but not at 1.03. If, however, the
1.00 bid price on PHLX represents a
limit order resting on the book, the PIXL
Order must be stopped at a price that is
at least one minimum price
improvement increment better than any
limit order on the limit order book on
the same side of the market as the PIXL
Order. Therefore, in this circumstance
the PIXL Order could be stopped at 1.01
or 1.02, but not at 1.00 and not at 1.03.
If the PIXL Order is for the account of
a broker dealer or any other person or
entity that is not a public customer, and
is for a size of 50 contracts or more, the
Initiating Member must stop the entire
PIXL Order at a price that is the better
of: (i) the PBBO price improved by at
least one minimum price improvement
increment on the same side of the
market as the PIXL Order, or (ii) the
PIXL Order’s limit price (if the order is
a limit order), provided in either case
that such price is at or better than the
NBBO.
If the PIXL Order is for the account of
a broker dealer or any other person or
entity that is not a public customer and
is for a size of less than 50 contracts, the
Initiating Member must stop the entire
PIXL Order at a price that is the better
of: (i) the PBBO price improved by at
least one minimum price improvement
increment on the same side of the
market as the PIXL Order, or (ii) the
PIXL Order’s limit price (if the order is
a limit order), provided in either case
that such price is at or better than the
NBBO and at least one minimum
improvement increment better than the
PBBO on the opposite side of the market
from the PIXL Order. The provision
concerning PIXL Orders for a size of less
than 50 contracts will be effective for a
pilot period scheduled to expire August
31, 2011.
Broker dealers generally do not have
priority over market maker quotes or
orders and the Exchange believes that
they should not be afforded such
priority in the PIXL mechanism. The
Exchange proposes to adopt proposed
Rule 1080(n)(i)(B)(2), concerning such
orders that are submitted with a size of
less than 50 contracts, on a pilot basis
scheduled to expire August 31, 2011, in
order to ascertain the level of price
improvement attained for such smallersized orders during the pilot period.
For example, if the PBBO and the
NBBO are both .97–1.03 with no public
customer orders on the book, the
proposed rule would permit stop prices
for a PIXL Order as follows:
A public customer PIXL Order to buy
50 contracts or more may be stopped at
prices equal to or within a range of .97–
1.03. A public customer PIXL Order of
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less than 50 contracts may be stopped
at prices equal to or within a range of
.97–1.02.7 A PIXL order of 50 contracts
or more for the account of a broker
dealer may be stopped at prices equal to
or within a range of .98–1.03. A PIXL
order of less than 50 contracts for the
account of a broker dealer may be
stopped equal to or within a price range
of .98–1.02.8
PIXL Orders submitted at or before
the opening of trading are not eligible to
initiate an Auction and will be rejected.
Because a PIXL Auction must last for
one second, PIXL Orders submitted
during the final second of the trading
session in the affected series are not
eligible to initiate an Auction and will
be rejected.
Finally, an Initiating Order may not
be a solicited order for the account of
any Exchange specialist, SQT, RSQT or
non-streaming ROT assigned in the
affected series. The Exchange believes
that in order to maintain fair and
orderly markets, a market maker
assigned in an option should not be
solicited for participation in an Auction
by an Initiating Member. The Exchange
believes that market makers interested
in participating in transactions on the
Exchange should do so by way of his/
her quotations, and is able to respond to
PIXL Auction Notifications, not create
them by having an Initiating Member
submitting Initiating Orders on his/her
behalf.
Auction Process
An Initiating Member may initiate a
PIXL Auction by submitting a PIXL
Order in one of three ways. First, the
Initiating Member could submit a PIXL
Order specifying a single price at which
it seeks to execute the PIXL Order (a
‘‘stop price’’).
Second, an Initiating Member could
submit a PIXL Order specifying that it
is willing to automatically match as
principal or as agent on behalf of an
Initiating Order the price and size of all
trading interest 9 and responses to the
PIXL Auction Notification (‘‘PAN,’’ as
described below) (‘‘auto-match’’), in
which case the PIXL Order will be
stopped at the NBBO on the Initiating
Order side of the market (if 50 contracts
or greater) or, if less than 50 contracts,
7 This example assumes that there is no limit
order on the book at a price of .97. If there were,
the rule requires that the order must be stopped at
a price of .98 or better (at least one minimum price
improvement increment better than the PBBO).
8 This is at least one minimum price
improvement increment better than the PBBO.
9 ‘‘Trading interest’’ refers to unrelated orders
received during the Auction, booked orders, and
quotes that are considered for execution and
allocation against the PIXL Order following the
Auction.
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the better of: (i) the PBBO price on the
opposite side of the market from the
PIXL Order improved by at least one
minimum price improvement
increment, or (ii) the PIXL Order’s limit
price (if the order is a limit order),
provided in either case that such price
is at or better than the NBBO and at least
one increment better than the limit of an
order on the book on the same side as
the PIXL Order.
Third, an Initiating Member could
submit a PIXL Order specifying that it
is willing to either: (i) Stop the entire
order at a single stop price and automatch PAN responses, as described
below, together with trading interest, at
a price or prices that improve the stop
price to a specified price above or below
which the Initiating Member will not
trade (a ‘‘Not Worse Than’’ or ‘‘NWT’’
price); (ii) stop the entire order at a
single stop price and auto-match all
PAN responses and trading interest at or
better than the stop price; or (iii) stop
the entire order at the NBBO on the
Initiating Order side (if 50 contracts or
greater) or the better of: (A) the PBBO
price on the opposite side of the market
from the PIXL Order improved by one
minimum price improvement
increment, or (B) the PIXL Order’s limit
price (if the order is a limit order) on the
Initiating Order side (if for less than 50
contracts), and auto-match PAN
responses and trading interest at a price
or prices that improve the stop price up
to the NWT price. In all cases, if the
PBBO on the same side of the market as
the PIXL Order represents a limit order
on the book, the stop price must be at
least one minimum price improvement
increment better than the booked limit
order’s limit price.
For example, assume the PBBO and
the NBBO are .97 bid–1.03 offer. An
Initiating Member may submit a PIXL
Order to buy 100 contracts for 1.01
together with a contra-side Initiating
Order to sell 100 contracts at 1.01 with
a NWT price of .99. In this example the
Initiating Member has stopped the PIXL
Order at 1.01 (two increments better
than the NBBO) and will auto-match
responses and trading interest down to
the NWT price of .99.
Once the Initiating Member has
submitted a PIXL Order for processing,
such PIXL Order may not be modified
or cancelled. Under any of these
circumstances, the stop price or NWT
price may be improved to the benefit of
the PIXL Order during the Auction, but
may not be cancelled. The purpose of
this provision is to ensure that an
Initiating Member guarantees the stop or
NWT price or better (by way of
improvement of the stop and/or NWT
price to the PIXL Order’s benefit during
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the Auction), without ‘‘backing away’’
from that guarantee.10
PIXL Auction Notification (‘‘PAN’’)
When the Exchange receives a PIXL
Order for Auction processing, a PAN
detailing the side, size and the stop
price of the PIXL Order will be sent over
the Exchange’s TOPO Plus Orders data
feed.11 An updated PAN will also be
sent over the Exchange’s TOPO Plus
Orders data feed when the Initiating
Member improves the stop price of the
PIXL Order. The updated PAN will
include the side, size, and improved
stop price of the PIXL Order. This
information would be used by PAN
respondents wishing to participate at
better price levels to improve their price
when they are alerted that a stop price
has been improved.
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PIXL Auction
The PIXL Auction will last for one
second,12 unless it is concluded as the
result of any of the circumstances
described below. Any person or entity
may submit PAN responses provided
such response is properly marked
specifying price, size and side of the
market. The Exchange believes that
permitting any person or entity to
submit responses to the PAN should
attract PAN responses from all sources,
maximizing the potential for liquidity in
the Auction and thus affording the PIXL
Order the best opportunity for price
improvement.13 PAN responses will not
10 The Exchange notes that Boston Options
Exchange Group LLC (‘‘BOX’’) Rules prohibit a BOX
‘‘Initiating Participant’’ from cancelling or
modifying the BOX ‘‘Max Improvement Primary
Improvement Order,’’ the equivalent of the
proposed NWT price, during the BOX PIP. See BOX
Rules, Chapter V, Section 18(e)(ii). The Exchange
believes that permitting the Initiating Member to
improve the NWT price during the Auction adds
another opportunity for price improvement for the
PIXL Order, and that this proposed treatment of the
NWT price simply expands upon the BOX’s
existing treatment of the Max Improvement Primary
Improvement Order to the benefit of the PIXL
Order. In this regard, the Exchange believes that
there are no new regulatory concerns that are raised
by its proposed treatment of the NWT price.
11 For a description of TOPO Plus Orders, see
Securities Exchange Act Release No. 60877 (October
26, 2009), 74 FR 56255 (October 30, 2009) (SR–
Phlx–2009–92). See also, Securities Exchange Act
Release No. 62194 (May 28, 2010), 75 FR 31830
(June 4, 2010) (SR–Phlx–2010–48) (Order
Approving Market Data Fees for TOPO Plus
Orders). Members who are ‘‘Professional
Subscribers’’ to the TOPO Plus Orders data feed are
subject to lower fees than the ‘‘External Distributors’’
from whom they receive TOPO Plus Orders.
12 The Exchange notes that the one-second
Auction period is currently in place on other
options exchanges. See CBOE Rule 7.74A(b)(1)(C).
See also, BOX Rules, Chapter V, Section 18(e)(i).
13 While the CBOE permits members appointed in
the affected series to respond (CBOE Rule
6.74A(b)(1)(D)) and also permits members
representing limit orders at the top of the CBOE
limit order book opposite the Agency Order to
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be visible to Auction participants, and
will not be disseminated to the Options
Price Reporting Authority (‘‘OPRA’’).14
The minimum price increment for PAN
responses and for an Initiating
Member’s stop price and/or NWT price
will be the minimum price
improvement increment as set forth
above.15 A PAN response size at any
given price point may not exceed the
size of the PIXL Order.16 A PAN
response with a size greater than the
size of the PIXL Order will be rejected.
A PAN response must be equal to or
better than the NBBO at the time of
receipt of the PAN response. A PAN
response with a price that is outside the
NBBO will be rejected. This is because
the Exchange does not want to
encourage a large number of PAN
responses that are outside of the NBBO
that will be unexecuted (and
subsequently cancelled) unless the
NBBO moves to make them eligible.
PAN responses may be modified or
cancelled during the Auction.17 The
Exchange believes that any PAN
response on the same side of the market
as the PIXL Order would be the result
of an error, and therefore such a
response will be rejected. Multiple PAN
responses from the same member may
be submitted during the Auction.
Multiple orders at a particular price
level submitted by a member in
response to a PAN may not exceed, in
the aggregate, the size of the PIXL Order.
Conclusion of the PIXL Auction
There are a number of circumstances
that will cause the Auction to conclude.
The Auction will conclude at the end of
the one-second Auction period,18 except
that it may conclude before the
expiration of one second: (i) any time
the PBBO crosses the PIXL Order stop
price on the same side of the market as
the PIXL Order (since further price
improvement will be unlikely and any
responses offering improvement are
likely to be cancelled), or (ii) any time
there is a trading halt on the Exchange
in the affected series. The proposed
rules concerning the early conclusion of
respond (CBOE Rule 6.74A(b)(1)(E)), the instant
proposal would permit PAN responses from any
person or entity. The Exchange believes that this
deviation from other exchanges’ practices is not
substantial, and does not raise any new regulatory
concerns. In fact, it should afford greater
opportunities for price improvement for the PIXL
Order.
14 This is consistent with CBOE Rule
6.74A(b)(1)(F).
15 This is consistent with CBOE Rule
6.74A(b)(1)(G).
16 This is consistent with CBOE Rule
6.74A(b)(1)(H).
17 This is consistent with CBOE Rule
6.74A(b)(1)(I).
18 This is consistent with CBOE Rule
6.74A(b)(2)(A).
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50023
the Auction will be effective for a pilot
period scheduled to expire August 31,
2011.
If the Auction concludes before the
expiration of one second as the result of
the PBBO crossing the stop price, the
entire PIXL Order will be executed at
the best response price(s) or, if the stop
price is the best price in the Auction, at
the stop price, unless the best response
price is equal to the price of a limit
order resting on the PHLX book on the
same side of the market as the PIXL
Order, in which case the PIXL Order
will be executed against that response,
but at a price that is at least one
minimum price improvement increment
better than the price of such limit order
at the time of the conclusion of the
Auction.
For example, assume the PBBO and
NBBO are both .97–1.03, and the .97 bid
represents an order on the limit order
book. A PIXL Order to buy 100 contracts
is submitted with a contra-side
Initiating Order to stop the PIXL Order
at 1.00. Assume a PAN response is
submitted to sell 10 contracts at .97 and
another to sell 10 contracts at .99. Due
to a change in the price of the
underlying security, a PHLX specialist
or market maker submits a bid price of
1.02, crossing the 1.00 stop price and
concluding the Auction prior to the
expiration of one second. 10 contracts
from the PIXL Order will be executed at
.98 (representing the .97 response price
re-priced to .98, which is one minimum
price improvement increment better
than the .97 bid represented by the limit
order on the book). 10 contracts will be
executed at .99 (the next best response
price after the execution at .98) and the
remaining 80 contracts will be executed
at 1.00 (the stop price) against the
Initiating Order.
If the Auction concludes before the
expiration of one second as the result of
a trading halt on the Exchange in the
affected series, the entire PIXL Order
will be executed at the stop price
against the Initiating Order. Since the
Initiating Member has guaranteed that
an execution will occur at the stop price
(or better) prior to the trading halt, and
PAN responses offer no such guarantee,
the stop price is the only valid price at
which to execute the PIXL Order, and
the Initiating Member is the appropriate
contra-side.19
19 The Exchange notes that trading on the
Exchange in any option contract will be halted
whenever trading in the underlying security has
been paused or halted by the primary listing
market. See Exchange Rule 1047(e). See also,
Securities Exchange Act Release No. 62269 (June
10, 2010), 75 FR 34491 (June 17, 2010) (SR–Phlx–
2010–82). Any executions that occur during any
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An unrelated market or marketable
limit order on the opposite side of the
market from the PIXL Order received
during the Auction will not cause the
Auction to end early and will execute
against interest outside of the Auction.
If contracts remain from such unrelated
order at the time the Auction ends, they
will be considered for participation in
the order allocation process described
below. The Exchange believes that this
should increase the number of contracts
against which a PIXL Order could be
executed, and should create more
opportunities for the PIXL Order to be
executed at each price level. This
provision will be effective for a pilot
period scheduled to expire on August
31, 2011.
For example, assume the PBBO is .97
(size of 10)–1.03 (size of 50), and the
NBBO is 97–1.03. If an Initiating
Member submits a PIXL Order to buy
100 contracts @1.00 together with an
Initiating Order to sell 100 @1.00, the
PIXL Order will be stopped @ 1.00.
During the Auction, a PAN response
arrives to sell 20 @.99 and the PBBO
moves to .97 (size of 10)—1.00 (size of
50–the offer is 2 market makers @1.00
with 25 each). While the Auction is
taking place, an unrelated order to sell
50 contracts @ .98 is submitted. The
PBBO is now .97 (size of 10)–.98 (size
of 50) (the offer is the result of the
unrelated order to sell 50 contracts at
.98). Once the Auction ends after one
second, even though the unrelated order
is not part of the Auction, 50 contracts
from the PIXL Order will be executed at
.98 against the unrelated order.
Thereafter, 20 contracts from the PIXL
Order will be executed at .99 (PIXL
order buys from PAN responder), and 30
contracts from the PIXL Order will be
executed at 1.00 (the PIXL order buys 12
contracts from the Initiating Order (40%
of the 30) and 18 from market makers
quoting at 1.00). The Exchange believes
that this functionality provides
maximum price improvement to the
PIXL order by including limit orders
and quotes in the execution price of the
PIXL Order that are priced better than
PAN responses.
may be allocated up to 50% of the
contracts executed at such price.
Remaining contracts will be allocated
pursuant to the algorithm set forth in
Exchange Rules 1014(g)(vii)(B)(1)(b) and
(d) among remaining quotes, orders and
PAN responses at the stop price.20
Thereafter, remaining contracts, if any,
shall be allocated to the Initiating
Member. The Exchange respectfully
submits that this is identical to
functionality currently in place on
CBOE.
Order Allocation
Auto-Match Option
At the conclusion of the Auction, the
PIXL Order will be allocated at the best
price(s). As stated above, in order to
maximize liquidity available to be
executed against the PIXL Order, such
best prices may include non-Auction
quotes and orders that may be present
at each price level. Public customer
orders will have priority at each price
level. After public customer interest at
a particular price level has been
satisfied, contracts will be allocated
among all Exchange quotes, orders and
PAN responses.
If the Initiating Member selected the
auto-match option of the PIXL Auction,
the Initiating Member will be allocated
an equal number of contracts as the
aggregate size of all other quotes, orders
and PAN responses at each price point
until a price point is reached where the
balance of the order can be fully
executed, except that the Initiating
Member shall be entitled to receive up
to 40% of the contracts remaining at the
final price point (including situations
where the final price point is the stop
price). If there are other quotes, orders
and PAN responses at the final price
point, the contracts will be allocated to
such interest pursuant to the algorithm
set forth in Exchange Rules
1014(g)(vii)(B)(1)(b) and (d). Any
remaining contracts will be allocated to
the Initiating Member.
For example, if the PIXL Order is to
buy 1,000 contracts and there are three
price points to be allocated, and quotes,
orders and PAN responses with an
aggregate size at each price point as
follows:
Single Price Submission Option
If the Initiating Member selected the
single stop price option of the PIXL
Auction, PIXL executions will occur at
prices that improve the stop price, and
then at the stop price with up to 40%
of the remaining contracts after public
customer interest is satisfied being
allocated to the Initiating Member at the
stop price. However, if only one
specialist, SQT or RSQT matches the
stop price, then the Initiating Member
Total size of
quotes, orders, and
auction responses
Price
Responses
1.01 ..............................
1.02 ..............................
MM 1 = 100 ................
MM 1 = 100 ................
MM 2 = 50 ..................
Customer = 100 ..........
MM 1 = 150 ................
MM 2 = 150 ................
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1.03 ..............................
Initiating member entitlement
Total contracts initiating member is allocated
Total contracts quotes,
orders, and responses
allocated
100
150
Auto-match size ..........
Auto-match size ..........
100
150
100 ..............................
150 ..............................
200
300
400
40% after customer
filled + residual after
all participants are
satisfied.
160
Customer = 100 ..........
MM 1 = 120 ................
MM 2 = 120 ................
500
Total
contracts
trading
In this example, the Initiating Member
is entitled to receive 100 contracts at
1.01 (matching the 100 contracts that are
allocated among quotes, orders and PAN
responses at 1.01), and the Initiating
Member is entitled to receive 150
contracts at 1.02 (matching the 150
contracts allocated among quotes, orders
and PAN responses at 1.02). Because
1.03 is the final price point, the
customer is allocated 100 contracts and
the Initiating Member is entitled to
receive 160 contracts at 1.03 (40% of the
remaining 400 contracts), with the
remaining 240 contracts allocated
among quotes, orders and PAN
responses at 1.03. The residual PAN
responses at 1.03 are cancelled.
latency between the pause or halt in the underlying
security and the processing of the halt on the
Exchange will be nullified pursuant to Exchange
Rule 1092(c)(iv)(B).
20 Under the proposed Rule, the specialist will
not be entitled to receive orders for 5 contracts or
fewer. If a price point has a size of 5 contracts or
fewer and the specialist has submitted a quote,
order or PAN response at that price point, contracts
at that price point will nonetheless be allocated
pursuant to Exchange Rules 1014(g)(vii)(B)(1)(b)
and (d).
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Stop and NWT Option
If the Initiating Member selected the
‘‘stop and NWT’’ option of the PIXL
Auction, after public customer interest
is satisfied, contracts will be allocated
first to quotes, orders and PAN
responses at prices better than the NWT
price (if any), beginning with the best
price, pursuant to the algorithm set forth
in Exchange Rules 1014(g)(vii)(B)(1)(b)
and (d) at each price point.
Next, contracts will be allocated
among quotes, orders and PAN
responses at prices equal to the
Initiating Member’s NWT price and
better than the Initiating Member’s stop
price, beginning with the NWT price.
The Initiating Member shall be allocated
an equal number of contracts as the
aggregate size of all other quotes, orders
and PAN responses at each price point,
except that the Initiating Member will
be entitled to receive up to 40% of the
contracts remaining at the final price
point (including situations where the
final price point is the stop price). In the
case of an Initiating Order with a NWT
price at the market, the Initiating
Member shall be allocated an equal
number of contracts as the aggregate size
of all other quotes, orders and PAN
responses at all price points, except that
the Initiating Member shall be entitled
to receive up to 40% of the contracts
remaining at the final price point
Total size of
quotes, orders, and
auction responses
Price
Responses
1.01 ..............................
MM 1 = 100 ................
100
1.02 ..............................
MM 1 = 100 ................
MM 2 = 50 ..................
Customer = 100 ..........
MM 1 = 150 ................
MM 2 = 150 ................
150
1.03 ..............................
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In this example, the Initiating Member
is not entitled to receive any contracts
at 1.01. All 100 contracts at 1.01 will be
allocated among quotes, orders and PAN
responses at 1.01 in accordance with
Rule 1014(g)(vii)(B)(1 )(b) and (d). The
Initiating Member will receive 150
contracts at 1.02, with 150 contracts
allocated among quotes, orders and PAN
responses at 1.02. Because 1.03, the stop
price, is the final price point, the
customer interest will be allocated 100
contracts with the Initiating Member
entitled to receive 200 contracts at 1.03
(40% of 500), with the remaining 300
contracts allocated among quotes, orders
and PAN responses at 1.03.
A ‘‘stop and NWT’’ submission with a
NWT price at the market will be treated
in the same manner as a submission
under the ‘‘auto-match’’ option except
that the order may be stopped at any
price level provided such level meets
the criterion set forth above for a single
stop price.
Professionals
In March, 2010, the Exchange
amended its priority rules to give
certain non-broker-dealer orders the
same priority as broker-dealer orders.21
In so doing, the Exchange adopted a
21 See Securities Exchange Act Release No. 61802
(March 30, 2010), 75 FR 17193 (April 5, 2010) (SR–
Phlx–2010–05).
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400
Initiating member entitlement
Frm 00140
Total contracts quotes,
orders, and responses
allocated
0
100 ..............................
100
150
150 ..............................
300
200
Customer = 100 ..........
MM 1 = 150 ................
MM 2 = 150 ................
600
Zero—Price is below
NWT level.
Auto-match size ..........
40% after customer
filled + residual after
all participants are
satisfied.
Fmt 4703
Sfmt 4703
(including situations where the final
price is the stop price).
If there are other quotes, orders and
PAN responses at the final price point
the contracts will be allocated to such
interest pursuant to the algorithm set
forth in Exchange Rules
1014(g)(vii)(B)(1)(b) and (d). Any
remaining contracts shall be allocated to
the Initiating Member.
Assume, for example, that the PIXL
Order is to buy 1,000 contracts. The
Initiating Member submits a stop price
of 1.03, and a NWT price of 1.02. There
are quotes, orders and PAN responses
with an aggregate size at each price
point as follows:
Total contracts initiating member is allocated
new term for certain persons or entities,
the ‘‘professional.’’ A professional is
defined in Rule 1000(b)14 as a person or
entity that (i) is not a broker or dealer
in securities, and (ii) places more than
390 orders in listed options per day on
average during a calendar month for its
own beneficial account(s). A
professional account is treated in the
same manner as an off-floor brokerdealer for purposes of Phlx Rule
1014(g), to which the trade allocation
algorithms described in proposed Rule
1080(n)(ii)(E) refer.
Additionally, Rule 1000(b)14 states
that all-or-none orders will be treated
like customer orders. PIXL Orders are
inherently all-or-none orders because
the Initiating Member guarantees that
the PIXL Order will be filled in its
entirety. If a PIXL Order happens to be
submitted for the beneficial account of
a professional with the redundant
designation of all-or-none, such PIXL
Order will not be rejected, but will be
treated as any other PIXL Order,
including for trade allocation purposes,
under proposed Rule 1080(n)(ii)(E).
Accordingly, the Exchange proposes
to amend Rule 1000(b)14 by: (i)
clarifying that orders submitted
pursuant to Rule 1080(n) for the
beneficial accounts of professionals
with an all-or-none designation will be
treated in the same manner as off-floor
PO 00000
50025
Total contracts trading
broker-dealer orders, and (ii) adding
proposed Rule 1080(n) to the list of
rules to which the term ‘‘professional’’
applies. The effect of this is that
professionals will not receive the same
priority that is afforded to public
customers, and instead will be treated as
broker-dealers in this regard.
Miscellaneous Provisions
Proposed Rules 1080(n)(ii)(F) through
(H) address the handling of the PIXL
Order and other orders, quotes and PAN
responses when certain conditions are
present.
Specifically, if there are PAN
responses that cross the then-existing
NBBO (provided such NBBO is not
crossed) at the time of the conclusion of
the Auction, such PAN responses will
be executed, if possible, at their limit
price(s).
If the final PIXL Auction price is the
same as an order on the limit order book
on the same side of the market as the
PIXL Order, the PIXL Order may only be
executed at a price that is at least one
minimum price improvement increment
better than the resting order’s limit price
or, if such resting order’s limit price
crosses the stop price, then the entire
PIXL Order will trade at the stop price
with all better priced interest being
considered for execution at the stop
price.
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For example, assume the PBBO is .97–
1.03, and the Exchange receives a PIXL
Order to buy with a stop price of 1.00.
During the Auction a PAN response to
sell @ .98 is received, and an unrelated
order to buy 10 contracts @ .99 is
received, crossing the PAN response
price. In this situation, the PAN
response to sell @.98 will be considered
for execution at a price that is .01 better
than the order on the PHLX book to buy
at .99 so that it does not trade through
the unrelated order to buy @.99.
Therefore in this case the PAN response
to sell at .98 will be executed and
included for allocation at 1.00.
Finally, any unexecuted PAN
responses will be cancelled.
Regulatory Issues
The proposed rule change contains
several paragraphs that describe
prohibited practices when participants
use PIXL. Proposed Rule 1080(n)(iii)
states that the PIXL Auction may be
used only where there is a genuine
intention to execute a bona fide
transaction. It will be considered a
violation of Rule 1080(n) and will be
deemed conduct inconsistent with just
and equitable principles of trade and a
violation of Exchange Rule 707 if an
Initiating Member submits a PIXL Order
(initiating an Auction) and also submits
its own PAN response in the same
Auction. The purpose of this provision
is to prevent Initiating Members from
submitting an inaccurate or misleading
stop price or trying to improve their
allocation entitlement by participating
with multiple expressions of interest.
Proposed Rule 1080(n)(iv) states that
a pattern or practice of submitting
multiple orders in response to a PAN at
a particular price point that exceed, in
the aggregate, the size of the PIXL Order,
will be deemed conduct inconsistent
with just and equitable principles of
trade and a violation of Rule 707. This
is to prevent a member submitting
orders in response to a PAN from
artificially inflating its response size in
order to gain a higher allocation than
the percentage the member would have
otherwise received.
Proposed Rule 1080(n)(v) states that a
pattern or practice of submitting
unrelated orders or quotes that cross the
stop price, causing a PIXL Auction to
conclude before the end of the PIXL
Auction period will be deemed conduct
inconsistent with just and equitable
principles of trade and a violation of
Rule 707. It will also be deemed
conduct inconsistent with just and
equitable principles of trade and a
violation of Rule 707 to engage in a
pattern of conduct where the Initiating
Member breaks up a PIXL Order into
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separate orders for the purpose of
gaining a higher allocation percentage
than the Initiating Member would have
otherwise received in accordance with
the allocation procedures described
above.
Crossing Public Customer Orders On
PIXL
Proposed Rule 1080(n)(v) addresses
the situation where an Initiating
Member holds public customer orders
on both sides of the market in the same
option series. Instead of initiating a
PIXL Auction, an Initiating Member
may enter a PIXL Order for the account
of a public customer paired with an
order for the account of a public
customer and such paired orders will be
automatically executed without a PIXL
Auction. The execution price must be
expressed in the minimum quoting
increment applicable to the affected
series. Such an execution may not trade
through the NBBO or at the same price
as any resting customer order. The
Exchange believes that permitting such
executions will benefit public customers
on both sides of the crossing transaction
by providing speedy and efficient
executions to public customer orders in
this circumstance.
Rule 1080(c)(ii)(C) prevents an Order
Entry Firm from executing agency
orders to increase its economic gain
from trading against the order without
first giving other trading interests on the
Exchange an opportunity to either trade
with the agency order or to trade at the
execution price when the member was
already bidding or offering on the book.
However, the Exchange recognizes that
it may be possible for a firm to establish
a relationship with a customer or other
person to deny agency orders the
opportunity to interact on the Exchange
and to realize similar economic benefits
as it would achieve by executing agency
orders as principal. It would be a
violation of Rule 1080(c)(ii)(C) for a firm
to circumvent Rule 1080(c)(ii)(C) by
providing an opportunity for (i) a
customer affiliated with the firm, or (ii)
a customer with whom the firm has an
arrangement that allows the firm to
realize similar economic benefits from
the transaction as the firm would
achieve by executing agency orders as
principal, to regularly execute against
agency orders handled by the firm
immediately upon their entry as PIXL
customer-to-customer immediate
crosses.
Pilot Program Information to the
Commission
The Exchange represents that, in
support of its proposed pilot programs
concerning (i) the early conclusion of
PO 00000
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Fmt 4703
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the Auction, and (ii) permitting orders
of fewer than 50 contracts into the
Auction, it will provide the following
information each month during the pilot
period: 22
Regarding the early conclusion of the
Auction due to the PBBO crossing the
PIXL Order stop price on the same side
of the market as the PIXL order, or due
to a trading halt, the Exchange will
provide the following monthly
information:
(1) The number of times that the
PBBO crossed the PIXL Order stop price
on the same side of the market as the
PIXL Order and prematurely ended the
PIXL Auction, and at what time the
PIXL Auction ended;
(2) The number of times that a trading
halt prematurely ended the PIXL
auction and at what time the trading
halt ended the PIXL Auction;
(3) Of the Auctions terminated early
due to the PBBO crossing the PIXL order
stop price, the number that resulted in
price improvement over the PIXL Order
stop price, and the average amount of
price improvement provided to the PIXL
Order;
(4) In the Auctions terminated early
due to the PBBO crossing the PIXL order
stop price, the percentage of contracts
that received price improvement over
the PIXL order stop price;
(5) Of the Auctions terminated early
due to a trading halt, the number that
resulted in price improvement over the
PIXL Order stop price, and the average
amount of price improvement provided
to the PIXL Order;
(6) In the auctions terminated early
due to a trading halt, the percentage of
contracts that received price
improvement over the PIXL order stop
price; and
(7) The average amount of price
improvement provided to the PIXL
Order when the PIXL Auction is not
terminated early (i.e., runs the full one
second).
(8) The number of times an unrelated
market or marketable limit order
(against the PBBO) on the opposite side
of the PIXL Order is received during the
Auction Period;
(9) The price(s) at which an unrelated
market or marketable limit order
(against the PBBO) on the opposite side
of the PIXL Order that is received
during the Auction Period is executed,
compared to the execution price of the
PIXL Order.
22 The Exchange will provide the information for
a particular month not later than the last business
day of the subsequent month. For example,
information for the month of September would be
provided to the Commission no later than the last
business day of October. Information for the month
of October would be provided no later than the last
business day of November, etc.
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Regarding PIXL Orders of fewer than
50 contracts, the Exchange will provide
the following monthly information:
(1) The number of orders of fewer
than 50 contracts entered into the PIXL
Auction;
(2) The percentage of all orders of
fewer than 50 contracts sent to Phlx that
are entered into the PIXL Auction;
(3) The percentage of all Phlx trades
represented by orders of fewer than 50
contracts;
(4) The percentage of all Phlx trades
effected through the PIXL Auction
represented by orders of fewer than 50
contracts;
(5) The percentage of all contracts
traded on Phlx represented by orders of
fewer than 50 contracts;
(6) The percentage of all contracts
effected through the PIXL Auction
represented by orders of fewer than 50
contracts;
(7) The spread in the option, at the
time an order of fewer than 50 contracts
is submitted to the PIXL Auction;
(8) The number of orders of 50
contracts or greater entered into the
PIXL Auction;
(9) The percentage of all orders of 50
contracts or greater sent to PHLX that
are entered into the PIXL Auction;
(10) The spread in the option, at the
time an order of 50 contracts or greater
is submitted to the PIXL Auction;
(11) Of PIXL trades where the PIXL
Order is for the account of a public
customer, and is for a size of fewer than
50 contracts, the percentage done at the
NBBO plus $.01, plus $.02, plus $.03,
etc.;
(12) Of PIXL trades where the PIXL
Order is for the account of a public
customer, and is for a size of 50
contracts or greater, the percentage done
at the NBBO plus $.01, plus $.02, plus
$.03, etc.; and
(13) Of PIXL trades where the PIXL
Order is for the account of a broker
dealer or any other person or entity that
is not a public customer, and is for a
size of fewer than 50 contracts, the
percentage done at the NBBO plus $.01,
plus $.02, plus $.03, etc.
(14) Of PIXL trades where the PIXL
Order is for the account of a broker
dealer or any other person or entity that
is not a public customer, and is for a
size of 50 contracts or greater, the
percentage done at the NBBO plus $.01,
plus $.02, plus $.03, etc.;
(15) The number of orders submitted
by Initiating Members when the spread
was $.05, $.10, $.15, etc. For each
spread, specify the percentage of
contracts in orders of fewer than 50
contracts submitted to the PIXL Auction
that were traded by: (a) The Initiating
Member that submitted the order to the
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PIXL; (b) PHLX Market Makers assigned
to the class; (c) other PHLX members;
(d) Public Customer Orders; and (e)
unrelated orders (orders in standard
increments entered during the PIXL
Auction). For each spread, also specify
the percentage of contracts in orders of
50 contracts or greater submitted to the
PIXL Auction that were traded by: (a)
the Initiating Member that submitted the
order to the PIXL Auction; (b) PHLX
market makers assigned to the class; (c)
other PHLX members; (d) Public
Customer Orders; and (e) unrelated
orders (orders in standard increments
entered during the PIXL Auction);
Regarding PIXL auto-match, the
Exchange will provide the following
monthly information:
(1) The percentage of all PHLX trades
effected through the PIXL Auction in
which the Initiating Member has chosen
the auto-match feature, and the average
amount of price improvement provided
to the PIXL Order when the Initiating
Member has chosen the auto-match
feature vs. the average amount of price
improvement provided to the PIXL
Order when the Initiating Member has
chosen a stop price submission.
Regarding competition, the Exchange
will provide the following monthly
information:
(1) For the first Wednesday of each
month: (a) The total number of PIXL
auctions on that date; (b) the number of
PIXL auctions where the order
submitted to the PIXL was fewer than 50
contracts; (c) the number of PIXL
auctions where the order submitted to
the PIXL was 50 contracts or greater; (d)
the number of PIXL auctions (for orders
of fewer than 50 contracts) with 0
participants (excluding the initiating
participant), 1 participant (excluding
the initiating participant), 2 participants
(excluding the initiating participant), 3
participants (excluding the initiating
participant), 4 participants (excluding
the initiating participant), etc., and (e)
the number of PIXL auctions (for orders
of 50 contracts or greater) with 0
participants (excluding the initiating
participant), 1 participant (excluding
the initiating participant), 2 participants
(excluding the initiating participant), 3
participants (excluding the initiating
participant), 4 participants (excluding
the initiating participant), etc.; and
(2) For the third Wednesday of each
month: (a) The total number of PIXL
auctions on that date; (b) the number of
PIXL auctions where the order
submitted to the PIXL was fewer than 50
contracts; (c) the number of PIXL
auctions where the order submitted to
the PIXL was 50 contracts or greater; (d)
the number of PIXL auctions (for orders
of fewer than 50 contracts) with 0
PO 00000
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Fmt 4703
Sfmt 4703
50027
participants (excluding the initiating
participant), 1 participant (excluding
the initiating participant), 2 participants
(excluding the initiating participant), 3
participants (excluding the initiating
participant), 4 participants (excluding
the initiating participant), etc., and (e)
the number of PIXL auctions (for orders
of 50 contracts or greater) with 0
participants (excluding the initiating
participant), 1 participant (excluding
the initiating participant), 2 participants
(excluding the initiating participant), 3
participants (excluding the initiating
participant), 4 participants (excluding
the initiating participant), etc.
Deployment
The Exchange anticipates that it will
deploy PIXL floor-wide at or before the
end of August 2010. Members will be
notified of the deployment date by way
of an Options Trader Alert posted on the
Exchange’s Web site.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the Act,23
in general and with Section 6(b)(5) of
the Act,24 in that it is designed to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest; and is not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers,
or to regulate by virtue of any authority
conferred by the Act matters not related
to the purposes of the Act or the
administration of the Exchange.
The Exchange believes that the
proposed rule change is also consistent
with Section 6(b)(8) of the Act 25 in that
it does not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.
Specifically, the Exchange believes
that the proposal will result in increased
liquidity available at improved prices,
with competitive final pricing out of the
Initiating Member’s complete control.
PIXL should promote and foster
competition and provide more options
contracts with the opportunity for price
improvement. As a result of the
increased opportunities for price
23 15
U.S.C. 78f.
U.S.C. 78f(b)(5).
25 15 U.S.C. 78f(b)(8).
24 15
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improvement, the Exchange believes
that participants will use PIXL to
increase the number of customer orders
that are provided with the opportunity
to receive price improvement over the
NBBO.
The Exchange further believes that the
proposal is consistent with the
requirements of Section 11(a) of the
Act 26 and Rule 11a2–2(T) 27 thereunder.
Section 11(a) prohibits a member of a
national securities exchange from
effecting transactions on the exchange
for its own account, the account of an
associated person, or an account in
which it or an associated person
exercises investment discretion, unless
an exception applies. In enacting this
provision, Congress was concerned
about members benefiting in their
principal transactions from special
‘‘time and place’’ advantages associated
with floor trading—such as the ability to
‘‘execute decisions faster than public
investors.’’ The Commission, however,
has adopted a number of exceptions to
the general statutory prohibition for
situations in which the principal
transactions contribute to the fairness
and orderliness of exchange markets or
do not reflect any time and place trading
advantages.28
One such exception is Rule 11a2–2(T)
under the Act, known as the ‘‘Effect
Versus Execute Rule.’’ Rule 11a2–2(T)
permits an exchange member, subject to
certain conditions, to effect a
transaction for such accounts, utilizing
an unaffiliated member to execute
transactions on an exchange floor. The
Rule requires that: (1) The order must be
transmitted from off the exchange floor;
(2) once the order has been transmitted,
the exchange member that transmitted
the order may not participate in the
execution; (3) the transmitting member
may not be affiliated with the executing
member; and (4) neither the member or
the associated person may retain any
compensation in connection with
effecting such a transaction respecting
accounts over which either has
investment discretion without the
express written consent of the person
authorized to transact business in the
account.
The Exchange believes that the instant
proposal is consistent with Rule 11a2–
2(T), and that therefore the exception
should apply in this case.
26 15
U.S.C. 78k(a).
CFR 240.11a2–2(T).
28 See Securities Exchange Act Release No. 14563
(March 14, 1978), 43 FR 11542 (March 17, 1978);
Securities Exchange Act Release No. 14713 (April
28, 1978), 43 FR 18557 (May 1, 1978); Securities
Exchange Act Release No. 15533 (January 29, 1979),
44 FR 6093 (Jan. 31, 1979). The 1978 and 1979
Releases cite the House Report at 54–57.
27 17
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First, there is no mechanism or
system that would enable an Exchange
member to transmit a PIXL Order from
on the floor of the Exchange. All PIXL
Orders will be transmitted from off the
floor of the Exchange.
Second, once the PIXL Order has been
transmitted, the Exchange Initiating
Member that transmitted the order will
not participate in the execution of the
PIXL Order. Initiating Members
submitting PIXL Orders will relinquish
control of their PIXL Orders upon
transmission to the Exchange’s
automated options trading platform,
PHLX XL,29 and will not be able to
influence or guide the execution of their
PIXL Orders.
Third, although Rule 11a2–2T
contemplates having an order executed
by an exchange member who is
unaffiliated with the member initiating
the order, the Commission has
recognized that the requirement is not
applicable when automated exchange
facilities are used. Because the design of
these systems (such as PHLX XL)
ensures that members do not possess
any special or unique trading
advantages in handling orders after
transmitting them to exchange floors,
the commission has stated that
executions obtained through these
systems satisfy the independent
execution requirement of Rule 11a2–
2T.30 The Exchange believes that the
design of PHLX XL ensures that
members do not possess any special or
unique trading advantages in the
handling of their orders.
Finally, respecting non-retention of
compensation for discretionary
accounts, the Exchange represents that
members who intend to rely on Rule
11a2–2(T) in connection with
transactions in PIXL Orders must
comply with the requirements of
Section (a)(2)(iv) of the rule.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
29 See Securities Exchange Act Release No. 59995
(May 28, 2009), 74 FR 26750 (June 3, 2009) (SR–
Phlx–2009–32). For branding purposes, references
to ‘‘PHLX XL’’ are synonymous with references to
‘‘Phlx XL II’’ in other filings.
30 See, e.g., Securities Exchange Act Release No.
15533 (January 29, 1979), 44 FR 6084 (January 31,
1979).
PO 00000
Frm 00143
Fmt 4703
Sfmt 4703
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 if it
finds such longer period to be
appropriate and publishes its reasons
for so finding or (ii) as to which the selfregulatory organization consents, the
Commission will:
(A) By order approve or disapprove
the 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/wro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Phlx–2010–108 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–Phlx–2010–108. This file
number should be included on the
subject line if e-mail 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
E:\FR\FM\16AUN1.SGM
16AUN1
Federal Register / Vol. 75, No. 157 / Monday, August 16, 2010 / Notices
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 20549–1090 on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2010–108 and should be submitted on
or before September 7, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–20100 Filed 8–13–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62682; File No. SR–EDGX–
2010–09]
Self-Regulatory Organizations; EDGX
Exchange, Inc.; Notice of Filing of
Proposed Rule Change Relating to a
Revenue Sharing Program with
Correlix, Inc.
August 10, 2010.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, July 28,
2010, EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
sroberts on DSKD5P82C1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
EDGX proposes to establish a revenue
sharing program with Correlix, Inc.
(‘‘Correlix’’). There is no new proposed
rule text.
31 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
VerDate Mar<15>2010
18:51 Aug 13, 2010
Jkt 220001
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
self-regulatory organization 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 is filing a proposed rule
change to establish a revenue sharing
program with Correlix effective upon
filing with the Commission. Pursuant to
an agreement with Correlix, Correlix
will provide to users of the Exchange
real-time analytical tools to measure the
latency of orders to and from that
System. Under the agreement, the
Exchange will receive 30% of the total
monthly subscription fees received by
Correlix from parties who have
contracted directly with Correlix to use
their RaceTeam latency measurement
service for the Exchange. The Exchange
will not bill or contract with any
Correlix RaceTeam customer directly.
Pricing for the Correlix RaceTeam
product for the Exchange varies
depending on the depth of latency
information requested, the number of
unique MPIDs subscribed by the
customer, and the number of ports
available for monitoring by Correlix. For
boundary-level Exchange latency
information,4 the fee will be an initial
$1,500 monthly base fee for the first 25
ports associated in aggregate with any of
the MPIDs selected by the Member for
latency monitoring. For each additional
25 ports associated in aggregate with
any of the MPIDs selected by the
Member for latency monitoring, an
additional monthly charge of $750 will
be assessed. For match-level Exchange
4 The time that elapses from an order message’s
receipt by an Exchange device until the time that
a matching engine acknowledgement with respect
to such order message is transmitted from the
Exchange device back to the user. For market data,
the time measurement will be from the time that the
market data engine receives a market data update
until the time that the market data update is
transmitted from the Exchange device back to the
user.
PO 00000
Frm 00144
Fmt 4703
Sfmt 4703
50029
latency information,5 the fee will be an
initial $2,000 monthly base fee for the
first 25 ports associated in aggregate
with any of the MPIDs selected for
latency monitoring, and an additional
$1,000 per month for each additional 25
ports associated in aggregate with any of
the MPIDs selected for latency
monitoring.
Under the program, Correlix will see
an individualized unique Exchangegenerated identifier that will allow
Correlix RaceTeam to determine round
trip order time,6 from the time the order
reaches the Exchange extranet, through
the Exchange matching engine, and back
out of the Exchange extranet. The
RaceTeam product offering does not
measure latency outside of the Exchange
extranet. The unique identifier serves as
a technological information barrier so
that the RaceTeam data collector will
only be able to view data for Correlix
RaceTeam subscriber firms related to
latency. Correlix will not see
subscriber’s individual order detail such
as security, price or size. Individual
RaceTeam subscribers’ logins will
restrict access to only their own latency
data. Correlix will see no specific
information regarding the trading
activity of non-subscribers.
The Exchange believes that above
arrangement will provide users of the
Exchange greater transparency into the
processing of their trading activity and
allow them to make more efficient
trading decisions.
2. Statutory Basis
The statutory basis for the proposed
rule change is Section 6(b)(5) of the
Act,7 which requires the rules of an
exchange to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest. In
particular, the proposal will provide
greater transparency into trade and
information processing and thus allow
market participants to make betterinformed and more efficient trading
decisions.
5 In addition to the boundary-level Exchange
latency information, match level information will
also provide further elapsed time detail for
messaging between Exchange internal systems.
6 The product measures latency of orders whether
the orders are rejected, executed, or partially
executed.
7 15 U.S.C. 78f(b)(5).
E:\FR\FM\16AUN1.SGM
16AUN1
]]>Agencies
[Federal Register Volume 75, Number 157 (Monday, August 16, 2010)]
[Notices]
[Pages 50021-50029]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20100]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62678; File No. SR-Phlx-2010-108]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX, Inc. Relating to a Proposed Price
Improvement System, Price Improvement XL (PIXL\SM\)
August 10, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on July 30, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\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, pursuant to Section 19(b)(1) of the Act \3\ and Rule
19b-4 thereunder,\4\ proposes to adopt new Rule 1080(n), Price
Improvement XL (PIXL\SM\), to establish a price-improvement mechanism
on the Exchange.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at https://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings,
at the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to establish a price-
improvement mechanism, PIXL, on the Exchange, which includes auto-match
functionality in which a member (an ``Initiating Member'') may
electronically submit for execution an order it represents as agent on
behalf of a public customer, broker dealer, or any other entity (``PIXL
Order'') against principal interest or against any other order it
represents as agent (an ``Initiating Order'') provided it submits the
PIXL Order for electronic execution into the PIXL Auction (``Auction'')
pursuant to the proposed Rule.
Auction Eligibility Requirements
All options traded on the Exchange are eligible for PIXL. Proposed
Rule 1080(n)(i) describes the circumstances under which an Initiating
Member may initiate an Auction.
If the PIXL Order is for the account of a public customer and is
for a size of 50 contracts or more, the Initiating Member must stop the
entire PIXL Order at a price that is equal to or better than the
National Best Bid/Offer (``NBBO'') on the opposite side of the market
from the PIXL Order, provided that such price must be at least one
minimum price improvement increment (as determined by the Exchange but
not smaller than one cent) better than any limit order on the limit
order book on the same side of the market as the PIXL Order. The
purpose of this provision is to ensure that public customer PIXL Orders
for 50 contracts or more are guaranteed at least the NBBO but do not
trade ahead of other limit orders already on the Exchange's limit order
book at the existing limit order's limit price.
For example, assume the Exchange's disseminated market (the
``PBBO'') in the affected series is the NBBO and is 1.00 bid for 10
contracts, 1.01 offered for 20 contracts and the existing disseminated
1.00 bid is a public customer limit order. If an initiating Member
submits a public customer PIXL Order to buy 100 contracts @ the market
together with a contra-side Initiating Order to sell 100 contracts, the
entire PIXL Order must be stopped at a price of 1.01 because the public
customer limit order on the limit order book has time priority at 1.00
over the public customer PIXL order.
If the PIXL Order is for the account of a public customer and is
for a size of less than 50 contracts, the Initiating Member must stop
the entire PIXL Order at a price that is the better of: (i) The PBBO
price on the opposite side of the market from the PIXL Order improved
by at least one minimum price improvement increment, or (ii) the PIXL
Order's limit price (if the order is a limit order), provided in either
case that such price is at or better than the NBBO, and at least one
minimum price improvement increment better than any limit order on the
book on the same side of the market as the PIXL Order. The purpose of
this provision is to ensure that smaller PIXL Orders will be guaranteed
price improvement by establishing a size under which a PIXL Order must
be submitted at a price better than the PBBO. The Exchange believes
this should especially benefit public customers.\5\ The provision
concerning PIXL Orders for a size of less than 50 contracts will be
effective for a pilot period scheduled to expire August 31, 2011.\6\
---------------------------------------------------------------------------
\5\ The Exchange notes that Chicago Board Options Exchange, Inc.
(``CBOE'') Rule 6.74A(a)(3) provides that any AIM Agency Order (the
equivalent of a PIXL Order) for less than 50 contracts that is
entered into the CBOE's Automated Improvement Mechanism (``AIM'') is
guaranteed an execution at the NBBO price improved by one minimum
price improvement increment or at the AIM Agency Order's limit price
(if the order is a limit order). See Securities Exchange Act Release
No. 53222 (February 3, 2006), 71 FR 7089 (February 10, 2006) (SR-
CBOE-2005-60).
\6\ The Exchange proposes the one-year pilot in order to
ascertain the level of price improvement attained for such smaller-
sized orders during the pilot period.
---------------------------------------------------------------------------
For example, assume the PBBO in the affected series is 1.00 bid--
1.03 offer and the NBBO is 1.00--1.03. If an initiating Member submits
a public customer PIXL Order to buy 25 contracts @ the market together
with a contra-side Initiating Order to sell 25 contracts, the public
customer PIXL Order must be stopped at least one minimum improvement
increment better than the PBBO offer of 1.03 to guarantee price
improvement. Therefore, in this example, the PIXL
[[Page 50022]]
Order could be stopped at 1.00, 1.01 or 1.02, but not at 1.03. If,
however, the 1.00 bid price on PHLX represents a limit order resting on
the book, the PIXL Order must be stopped at a price that is at least
one minimum price improvement increment better than any limit order on
the limit order book on the same side of the market as the PIXL Order.
Therefore, in this circumstance the PIXL Order could be stopped at 1.01
or 1.02, but not at 1.00 and not at 1.03.
If the PIXL Order is for the account of a broker dealer or any
other person or entity that is not a public customer, and is for a size
of 50 contracts or more, the Initiating Member must stop the entire
PIXL Order at a price that is the better of: (i) the PBBO price
improved by at least one minimum price improvement increment on the
same side of the market as the PIXL Order, or (ii) the PIXL Order's
limit price (if the order is a limit order), provided in either case
that such price is at or better than the NBBO.
If the PIXL Order is for the account of a broker dealer or any
other person or entity that is not a public customer and is for a size
of less than 50 contracts, the Initiating Member must stop the entire
PIXL Order at a price that is the better of: (i) the PBBO price
improved by at least one minimum price improvement increment on the
same side of the market as the PIXL Order, or (ii) the PIXL Order's
limit price (if the order is a limit order), provided in either case
that such price is at or better than the NBBO and at least one minimum
improvement increment better than the PBBO on the opposite side of the
market from the PIXL Order. The provision concerning PIXL Orders for a
size of less than 50 contracts will be effective for a pilot period
scheduled to expire August 31, 2011.
Broker dealers generally do not have priority over market maker
quotes or orders and the Exchange believes that they should not be
afforded such priority in the PIXL mechanism. The Exchange proposes to
adopt proposed Rule 1080(n)(i)(B)(2), concerning such orders that are
submitted with a size of less than 50 contracts, on a pilot basis
scheduled to expire August 31, 2011, in order to ascertain the level of
price improvement attained for such smaller-sized orders during the
pilot period.
For example, if the PBBO and the NBBO are both .97-1.03 with no
public customer orders on the book, the proposed rule would permit stop
prices for a PIXL Order as follows:
A public customer PIXL Order to buy 50 contracts or more may be
stopped at prices equal to or within a range of .97-1.03. A public
customer PIXL Order of less than 50 contracts may be stopped at prices
equal to or within a range of .97-1.02.\7\ A PIXL order of 50 contracts
or more for the account of a broker dealer may be stopped at prices
equal to or within a range of .98-1.03. A PIXL order of less than 50
contracts for the account of a broker dealer may be stopped equal to or
within a price range of .98-1.02.\8\
---------------------------------------------------------------------------
\7\ This example assumes that there is no limit order on the
book at a price of .97. If there were, the rule requires that the
order must be stopped at a price of .98 or better (at least one
minimum price improvement increment better than the PBBO).
\8\ This is at least one minimum price improvement increment
better than the PBBO.
---------------------------------------------------------------------------
PIXL Orders submitted at or before the opening of trading are not
eligible to initiate an Auction and will be rejected. Because a PIXL
Auction must last for one second, PIXL Orders submitted during the
final second of the trading session in the affected series are not
eligible to initiate an Auction and will be rejected.
Finally, an Initiating Order may not be a solicited order for the
account of any Exchange specialist, SQT, RSQT or non-streaming ROT
assigned in the affected series. The Exchange believes that in order to
maintain fair and orderly markets, a market maker assigned in an option
should not be solicited for participation in an Auction by an
Initiating Member. The Exchange believes that market makers interested
in participating in transactions on the Exchange should do so by way of
his/her quotations, and is able to respond to PIXL Auction
Notifications, not create them by having an Initiating Member
submitting Initiating Orders on his/her behalf.
Auction Process
An Initiating Member may initiate a PIXL Auction by submitting a
PIXL Order in one of three ways. First, the Initiating Member could
submit a PIXL Order specifying a single price at which it seeks to
execute the PIXL Order (a ``stop price'').
Second, an Initiating Member could submit a PIXL Order specifying
that it is willing to automatically match as principal or as agent on
behalf of an Initiating Order the price and size of all trading
interest \9\ and responses to the PIXL Auction Notification (``PAN,''
as described below) (``auto-match''), in which case the PIXL Order will
be stopped at the NBBO on the Initiating Order side of the market (if
50 contracts or greater) or, if less than 50 contracts, the better of:
(i) the PBBO price on the opposite side of the market from the PIXL
Order improved by at least one minimum price improvement increment, or
(ii) the PIXL Order's limit price (if the order is a limit order),
provided in either case that such price is at or better than the NBBO
and at least one increment better than the limit of an order on the
book on the same side as the PIXL Order.
---------------------------------------------------------------------------
\9\ ``Trading interest'' refers to unrelated orders received
during the Auction, booked orders, and quotes that are considered
for execution and allocation against the PIXL Order following the
Auction.
---------------------------------------------------------------------------
Third, an Initiating Member could submit a PIXL Order specifying
that it is willing to either: (i) Stop the entire order at a single
stop price and auto-match PAN responses, as described below, together
with trading interest, at a price or prices that improve the stop price
to a specified price above or below which the Initiating Member will
not trade (a ``Not Worse Than'' or ``NWT'' price); (ii) stop the entire
order at a single stop price and auto-match all PAN responses and
trading interest at or better than the stop price; or (iii) stop the
entire order at the NBBO on the Initiating Order side (if 50 contracts
or greater) or the better of: (A) the PBBO price on the opposite side
of the market from the PIXL Order improved by one minimum price
improvement increment, or (B) the PIXL Order's limit price (if the
order is a limit order) on the Initiating Order side (if for less than
50 contracts), and auto-match PAN responses and trading interest at a
price or prices that improve the stop price up to the NWT price. In all
cases, if the PBBO on the same side of the market as the PIXL Order
represents a limit order on the book, the stop price must be at least
one minimum price improvement increment better than the booked limit
order's limit price.
For example, assume the PBBO and the NBBO are .97 bid-1.03 offer.
An Initiating Member may submit a PIXL Order to buy 100 contracts for
1.01 together with a contra-side Initiating Order to sell 100 contracts
at 1.01 with a NWT price of .99. In this example the Initiating Member
has stopped the PIXL Order at 1.01 (two increments better than the
NBBO) and will auto-match responses and trading interest down to the
NWT price of .99.
Once the Initiating Member has submitted a PIXL Order for
processing, such PIXL Order may not be modified or cancelled. Under any
of these circumstances, the stop price or NWT price may be improved to
the benefit of the PIXL Order during the Auction, but may not be
cancelled. The purpose of this provision is to ensure that an
Initiating Member guarantees the stop or NWT price or better (by way of
improvement of the stop and/or NWT price to the PIXL Order's benefit
during
[[Page 50023]]
the Auction), without ``backing away'' from that guarantee.\10\
---------------------------------------------------------------------------
\10\ The Exchange notes that Boston Options Exchange Group LLC
(``BOX'') Rules prohibit a BOX ``Initiating Participant'' from
cancelling or modifying the BOX ``Max Improvement Primary
Improvement Order,'' the equivalent of the proposed NWT price,
during the BOX PIP. See BOX Rules, Chapter V, Section 18(e)(ii). The
Exchange believes that permitting the Initiating Member to improve
the NWT price during the Auction adds another opportunity for price
improvement for the PIXL Order, and that this proposed treatment of
the NWT price simply expands upon the BOX's existing treatment of
the Max Improvement Primary Improvement Order to the benefit of the
PIXL Order. In this regard, the Exchange believes that there are no
new regulatory concerns that are raised by its proposed treatment of
the NWT price.
---------------------------------------------------------------------------
PIXL Auction Notification (``PAN'')
When the Exchange receives a PIXL Order for Auction processing, a
PAN detailing the side, size and the stop price of the PIXL Order will
be sent over the Exchange's TOPO Plus Orders data feed.\11\ An updated
PAN will also be sent over the Exchange's TOPO Plus Orders data feed
when the Initiating Member improves the stop price of the PIXL Order.
The updated PAN will include the side, size, and improved stop price of
the PIXL Order. This information would be used by PAN respondents
wishing to participate at better price levels to improve their price
when they are alerted that a stop price has been improved.
---------------------------------------------------------------------------
\11\ For a description of TOPO Plus Orders, see Securities
Exchange Act Release No. 60877 (October 26, 2009), 74 FR 56255
(October 30, 2009) (SR-Phlx-2009-92). See also, Securities Exchange
Act Release No. 62194 (May 28, 2010), 75 FR 31830 (June 4, 2010)
(SR-Phlx-2010-48) (Order Approving Market Data Fees for TOPO Plus
Orders). Members who are ``Professional Subscribers'' to the TOPO
Plus Orders data feed are subject to lower fees than the ``External
Distributors'' from whom they receive TOPO Plus Orders.
---------------------------------------------------------------------------
PIXL Auction
The PIXL Auction will last for one second,\12\ unless it is
concluded as the result of any of the circumstances described below.
Any person or entity may submit PAN responses provided such response is
properly marked specifying price, size and side of the market. The
Exchange believes that permitting any person or entity to submit
responses to the PAN should attract PAN responses from all sources,
maximizing the potential for liquidity in the Auction and thus
affording the PIXL Order the best opportunity for price
improvement.\13\ PAN responses will not be visible to Auction
participants, and will not be disseminated to the Options Price
Reporting Authority (``OPRA'').\14\ The minimum price increment for PAN
responses and for an Initiating Member's stop price and/or NWT price
will be the minimum price improvement increment as set forth above.\15\
A PAN response size at any given price point may not exceed the size of
the PIXL Order.\16\ A PAN response with a size greater than the size of
the PIXL Order will be rejected. A PAN response must be equal to or
better than the NBBO at the time of receipt of the PAN response. A PAN
response with a price that is outside the NBBO will be rejected. This
is because the Exchange does not want to encourage a large number of
PAN responses that are outside of the NBBO that will be unexecuted (and
subsequently cancelled) unless the NBBO moves to make them eligible.
PAN responses may be modified or cancelled during the Auction.\17\ The
Exchange believes that any PAN response on the same side of the market
as the PIXL Order would be the result of an error, and therefore such a
response will be rejected. Multiple PAN responses from the same member
may be submitted during the Auction. Multiple orders at a particular
price level submitted by a member in response to a PAN may not exceed,
in the aggregate, the size of the PIXL Order.
---------------------------------------------------------------------------
\12\ The Exchange notes that the one-second Auction period is
currently in place on other options exchanges. See CBOE Rule
7.74A(b)(1)(C). See also, BOX Rules, Chapter V, Section 18(e)(i).
\13\ While the CBOE permits members appointed in the affected
series to respond (CBOE Rule 6.74A(b)(1)(D)) and also permits
members representing limit orders at the top of the CBOE limit order
book opposite the Agency Order to respond (CBOE Rule
6.74A(b)(1)(E)), the instant proposal would permit PAN responses
from any person or entity. The Exchange believes that this deviation
from other exchanges' practices is not substantial, and does not
raise any new regulatory concerns. In fact, it should afford greater
opportunities for price improvement for the PIXL Order.
\14\ This is consistent with CBOE Rule 6.74A(b)(1)(F).
\15\ This is consistent with CBOE Rule 6.74A(b)(1)(G).
\16\ This is consistent with CBOE Rule 6.74A(b)(1)(H).
\17\ This is consistent with CBOE Rule 6.74A(b)(1)(I).
---------------------------------------------------------------------------
Conclusion of the PIXL Auction
There are a number of circumstances that will cause the Auction to
conclude. The Auction will conclude at the end of the one-second
Auction period,\18\ except that it may conclude before the expiration
of one second: (i) any time the PBBO crosses the PIXL Order stop price
on the same side of the market as the PIXL Order (since further price
improvement will be unlikely and any responses offering improvement are
likely to be cancelled), or (ii) any time there is a trading halt on
the Exchange in the affected series. The proposed rules concerning the
early conclusion of the Auction will be effective for a pilot period
scheduled to expire August 31, 2011.
---------------------------------------------------------------------------
\18\ This is consistent with CBOE Rule 6.74A(b)(2)(A).
---------------------------------------------------------------------------
If the Auction concludes before the expiration of one second as the
result of the PBBO crossing the stop price, the entire PIXL Order will
be executed at the best response price(s) or, if the stop price is the
best price in the Auction, at the stop price, unless the best response
price is equal to the price of a limit order resting on the PHLX book
on the same side of the market as the PIXL Order, in which case the
PIXL Order will be executed against that response, but at a price that
is at least one minimum price improvement increment better than the
price of such limit order at the time of the conclusion of the Auction.
For example, assume the PBBO and NBBO are both .97-1.03, and the
.97 bid represents an order on the limit order book. A PIXL Order to
buy 100 contracts is submitted with a contra-side Initiating Order to
stop the PIXL Order at 1.00. Assume a PAN response is submitted to sell
10 contracts at .97 and another to sell 10 contracts at .99. Due to a
change in the price of the underlying security, a PHLX specialist or
market maker submits a bid price of 1.02, crossing the 1.00 stop price
and concluding the Auction prior to the expiration of one second. 10
contracts from the PIXL Order will be executed at .98 (representing the
.97 response price re-priced to .98, which is one minimum price
improvement increment better than the .97 bid represented by the limit
order on the book). 10 contracts will be executed at .99 (the next best
response price after the execution at .98) and the remaining 80
contracts will be executed at 1.00 (the stop price) against the
Initiating Order.
If the Auction concludes before the expiration of one second as the
result of a trading halt on the Exchange in the affected series, the
entire PIXL Order will be executed at the stop price against the
Initiating Order. Since the Initiating Member has guaranteed that an
execution will occur at the stop price (or better) prior to the trading
halt, and PAN responses offer no such guarantee, the stop price is the
only valid price at which to execute the PIXL Order, and the Initiating
Member is the appropriate contra-side.\19\
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\19\ The Exchange notes that trading on the Exchange in any
option contract will be halted whenever trading in the underlying
security has been paused or halted by the primary listing market.
See Exchange Rule 1047(e). See also, Securities Exchange Act Release
No. 62269 (June 10, 2010), 75 FR 34491 (June 17, 2010) (SR-Phlx-
2010-82). Any executions that occur during any latency between the
pause or halt in the underlying security and the processing of the
halt on the Exchange will be nullified pursuant to Exchange Rule
1092(c)(iv)(B).
---------------------------------------------------------------------------
[[Page 50024]]
An unrelated market or marketable limit order on the opposite side
of the market from the PIXL Order received during the Auction will not
cause the Auction to end early and will execute against interest
outside of the Auction. If contracts remain from such unrelated order
at the time the Auction ends, they will be considered for participation
in the order allocation process described below. The Exchange believes
that this should increase the number of contracts against which a PIXL
Order could be executed, and should create more opportunities for the
PIXL Order to be executed at each price level. This provision will be
effective for a pilot period scheduled to expire on August 31, 2011.
For example, assume the PBBO is .97 (size of 10)-1.03 (size of 50),
and the NBBO is 97-1.03. If an Initiating Member submits a PIXL Order
to buy 100 contracts @1.00 together with an Initiating Order to sell
100 @1.00, the PIXL Order will be stopped @ 1.00. During the Auction, a
PAN response arrives to sell 20 @.99 and the PBBO moves to .97 (size of
10)--1.00 (size of 50-the offer is 2 market makers @1.00 with 25 each).
While the Auction is taking place, an unrelated order to sell 50
contracts @ .98 is submitted. The PBBO is now .97 (size of 10)-.98
(size of 50) (the offer is the result of the unrelated order to sell 50
contracts at .98). Once the Auction ends after one second, even though
the unrelated order is not part of the Auction, 50 contracts from the
PIXL Order will be executed at .98 against the unrelated order.
Thereafter, 20 contracts from the PIXL Order will be executed at .99
(PIXL order buys from PAN responder), and 30 contracts from the PIXL
Order will be executed at 1.00 (the PIXL order buys 12 contracts from
the Initiating Order (40% of the 30) and 18 from market makers quoting
at 1.00). The Exchange believes that this functionality provides
maximum price improvement to the PIXL order by including limit orders
and quotes in the execution price of the PIXL Order that are priced
better than PAN responses.
Order Allocation
At the conclusion of the Auction, the PIXL Order will be allocated
at the best price(s). As stated above, in order to maximize liquidity
available to be executed against the PIXL Order, such best prices may
include non-Auction quotes and orders that may be present at each price
level. Public customer orders will have priority at each price level.
After public customer interest at a particular price level has been
satisfied, contracts will be allocated among all Exchange quotes,
orders and PAN responses.
Single Price Submission Option
If the Initiating Member selected the single stop price option of
the PIXL Auction, PIXL executions will occur at prices that improve the
stop price, and then at the stop price with up to 40% of the remaining
contracts after public customer interest is satisfied being allocated
to the Initiating Member at the stop price. However, if only one
specialist, SQT or RSQT matches the stop price, then the Initiating
Member may be allocated up to 50% of the contracts executed at such
price. Remaining contracts will be allocated pursuant to the algorithm
set forth in Exchange Rules 1014(g)(vii)(B)(1)(b) and (d) among
remaining quotes, orders and PAN responses at the stop price.\20\
Thereafter, remaining contracts, if any, shall be allocated to the
Initiating Member. The Exchange respectfully submits that this is
identical to functionality currently in place on CBOE.
---------------------------------------------------------------------------
\20\ Under the proposed Rule, the specialist will not be
entitled to receive orders for 5 contracts or fewer. If a price
point has a size of 5 contracts or fewer and the specialist has
submitted a quote, order or PAN response at that price point,
contracts at that price point will nonetheless be allocated pursuant
to Exchange Rules 1014(g)(vii)(B)(1)(b) and (d).
---------------------------------------------------------------------------
Auto-Match Option
If the Initiating Member selected the auto-match option of the PIXL
Auction, the Initiating Member will be allocated an equal number of
contracts as the aggregate size of all other quotes, orders and PAN
responses at each price point until a price point is reached where the
balance of the order can be fully executed, except that the Initiating
Member shall be entitled to receive up to 40% of the contracts
remaining at the final price point (including situations where the
final price point is the stop price). If there are other quotes, orders
and PAN responses at the final price point, the contracts will be
allocated to such interest pursuant to the algorithm set forth in
Exchange Rules 1014(g)(vii)(B)(1)(b) and (d). Any remaining contracts
will be allocated to the Initiating Member.
For example, if the PIXL Order is to buy 1,000 contracts and there
are three price points to be allocated, and quotes, orders and PAN
responses with an aggregate size at each price point as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total size Total
of quotes, contracts Total contracts quotes, Total
Price Responses orders, and Initiating member initiating orders, and responses contracts
auction entitlement member is allocated trading
responses allocated
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.01................................. MM 1 = 100.............. 100 Auto-match size........ 100 100.................... 200
1.02................................. MM 1 = 100.............. 150 Auto-match size........ 150 150.................... 300
MM 2 = 50...............
1.03................................. Customer = 100.......... 400 40% after customer 160 Customer = 100......... 500
MM 1 = 150.............. filled + residual MM 1 = 120.............
MM 2 = 150.............. after all participants MM 2 = 120.............
are satisfied.
--------------------------------------------------------------------------------------------------------------------------------------------------------
In this example, the Initiating Member is entitled to receive 100
contracts at 1.01 (matching the 100 contracts that are allocated among
quotes, orders and PAN responses at 1.01), and the Initiating Member is
entitled to receive 150 contracts at 1.02 (matching the 150 contracts
allocated among quotes, orders and PAN responses at 1.02). Because 1.03
is the final price point, the customer is allocated 100 contracts and
the Initiating Member is entitled to receive 160 contracts at 1.03 (40%
of the remaining 400 contracts), with the remaining 240 contracts
allocated among quotes, orders and PAN responses at 1.03. The residual
PAN responses at 1.03 are cancelled.
[[Page 50025]]
Stop and NWT Option
If the Initiating Member selected the ``stop and NWT'' option of
the PIXL Auction, after public customer interest is satisfied,
contracts will be allocated first to quotes, orders and PAN responses
at prices better than the NWT price (if any), beginning with the best
price, pursuant to the algorithm set forth in Exchange Rules
1014(g)(vii)(B)(1)(b) and (d) at each price point.
Next, contracts will be allocated among quotes, orders and PAN
responses at prices equal to the Initiating Member's NWT price and
better than the Initiating Member's stop price, beginning with the NWT
price. The Initiating Member shall be allocated an equal number of
contracts as the aggregate size of all other quotes, orders and PAN
responses at each price point, except that the Initiating Member will
be entitled to receive up to 40% of the contracts remaining at the
final price point (including situations where the final price point is
the stop price). In the case of an Initiating Order with a NWT price at
the market, the Initiating Member shall be allocated an equal number of
contracts as the aggregate size of all other quotes, orders and PAN
responses at all price points, except that the Initiating Member shall
be entitled to receive up to 40% of the contracts remaining at the
final price point (including situations where the final price is the
stop price).
If there are other quotes, orders and PAN responses at the final
price point the contracts will be allocated to such interest pursuant
to the algorithm set forth in Exchange Rules 1014(g)(vii)(B)(1)(b) and
(d). Any remaining contracts shall be allocated to the Initiating
Member.
Assume, for example, that the PIXL Order is to buy 1,000 contracts.
The Initiating Member submits a stop price of 1.03, and a NWT price of
1.02. There are quotes, orders and PAN responses with an aggregate size
at each price point as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total size Total
of quotes, contracts Total contracts quotes, Total
Price Responses orders, and Initiating member initiating orders, and responses contracts
auction entitlement member is allocated trading
responses allocated
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.01................................. MM 1 = 100.............. 100 Zero--Price is below 0 100.................... 100
NWT level.
1.02................................. MM 1 = 100.............. 150 Auto-match size........ 150 150.................... 300
MM 2 = 50...............
1.03................................. Customer = 100.......... 400 40% after customer 200 Customer = 100......... 600
MM 1 = 150.............. filled + residual MM 1 = 150.............
MM 2 = 150.............. after all participants MM 2 = 150.............
are satisfied.
--------------------------------------------------------------------------------------------------------------------------------------------------------
In this example, the Initiating Member is not entitled to receive
any contracts at 1.01. All 100 contracts at 1.01 will be allocated
among quotes, orders and PAN responses at 1.01 in accordance with Rule
1014(g)(vii)(B)(1 )(b) and (d). The Initiating Member will receive 150
contracts at 1.02, with 150 contracts allocated among quotes, orders
and PAN responses at 1.02. Because 1.03, the stop price, is the final
price point, the customer interest will be allocated 100 contracts with
the Initiating Member entitled to receive 200 contracts at 1.03 (40% of
500), with the remaining 300 contracts allocated among quotes, orders
and PAN responses at 1.03.
A ``stop and NWT'' submission with a NWT price at the market will
be treated in the same manner as a submission under the ``auto-match''
option except that the order may be stopped at any price level provided
such level meets the criterion set forth above for a single stop price.
Professionals
In March, 2010, the Exchange amended its priority rules to give
certain non-broker-dealer orders the same priority as broker-dealer
orders.\21\ In so doing, the Exchange adopted a new term for certain
persons or entities, the ``professional.'' A professional is defined in
Rule 1000(b)14 as a person or entity that (i) is not a broker or dealer
in securities, and (ii) places more than 390 orders in listed options
per day on average during a calendar month for its own beneficial
account(s). A professional account is treated in the same manner as an
off-floor broker-dealer for purposes of Phlx Rule 1014(g), to which the
trade allocation algorithms described in proposed Rule 1080(n)(ii)(E)
refer.
---------------------------------------------------------------------------
\21\ See Securities Exchange Act Release No. 61802 (March 30,
2010), 75 FR 17193 (April 5, 2010) (SR-Phlx-2010-05).
---------------------------------------------------------------------------
Additionally, Rule 1000(b)14 states that all-or-none orders will be
treated like customer orders. PIXL Orders are inherently all-or-none
orders because the Initiating Member guarantees that the PIXL Order
will be filled in its entirety. If a PIXL Order happens to be submitted
for the beneficial account of a professional with the redundant
designation of all-or-none, such PIXL Order will not be rejected, but
will be treated as any other PIXL Order, including for trade allocation
purposes, under proposed Rule 1080(n)(ii)(E).
Accordingly, the Exchange proposes to amend Rule 1000(b)14 by: (i)
clarifying that orders submitted pursuant to Rule 1080(n) for the
beneficial accounts of professionals with an all-or-none designation
will be treated in the same manner as off-floor broker-dealer orders,
and (ii) adding proposed Rule 1080(n) to the list of rules to which the
term ``professional'' applies. The effect of this is that professionals
will not receive the same priority that is afforded to public
customers, and instead will be treated as broker-dealers in this
regard.
Miscellaneous Provisions
Proposed Rules 1080(n)(ii)(F) through (H) address the handling of
the PIXL Order and other orders, quotes and PAN responses when certain
conditions are present.
Specifically, if there are PAN responses that cross the then-
existing NBBO (provided such NBBO is not crossed) at the time of the
conclusion of the Auction, such PAN responses will be executed, if
possible, at their limit price(s).
If the final PIXL Auction price is the same as an order on the
limit order book on the same side of the market as the PIXL Order, the
PIXL Order may only be executed at a price that is at least one minimum
price improvement increment better than the resting order's limit price
or, if such resting order's limit price crosses the stop price, then
the entire PIXL Order will trade at the stop price with all better
priced interest being considered for execution at the stop price.
[[Page 50026]]
For example, assume the PBBO is .97-1.03, and the Exchange receives
a PIXL Order to buy with a stop price of 1.00. During the Auction a PAN
response to sell @ .98 is received, and an unrelated order to buy 10
contracts @ .99 is received, crossing the PAN response price. In this
situation, the PAN response to sell @.98 will be considered for
execution at a price that is .01 better than the order on the PHLX book
to buy at .99 so that it does not trade through the unrelated order to
buy @.99. Therefore in this case the PAN response to sell at .98 will
be executed and included for allocation at 1.00.
Finally, any unexecuted PAN responses will be cancelled.
Regulatory Issues
The proposed rule change contains several paragraphs that describe
prohibited practices when participants use PIXL. Proposed Rule
1080(n)(iii) states that the PIXL Auction may be used only where there
is a genuine intention to execute a bona fide transaction. It will be
considered a violation of Rule 1080(n) and will be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of Exchange Rule 707 if an Initiating Member submits a PIXL
Order (initiating an Auction) and also submits its own PAN response in
the same Auction. The purpose of this provision is to prevent
Initiating Members from submitting an inaccurate or misleading stop
price or trying to improve their allocation entitlement by
participating with multiple expressions of interest.
Proposed Rule 1080(n)(iv) states that a pattern or practice of
submitting multiple orders in response to a PAN at a particular price
point that exceed, in the aggregate, the size of the PIXL Order, will
be deemed conduct inconsistent with just and equitable principles of
trade and a violation of Rule 707. This is to prevent a member
submitting orders in response to a PAN from artificially inflating its
response size in order to gain a higher allocation than the percentage
the member would have otherwise received.
Proposed Rule 1080(n)(v) states that a pattern or practice of
submitting unrelated orders or quotes that cross the stop price,
causing a PIXL Auction to conclude before the end of the PIXL Auction
period will be deemed conduct inconsistent with just and equitable
principles of trade and a violation of Rule 707. It will also be deemed
conduct inconsistent with just and equitable principles of trade and a
violation of Rule 707 to engage in a pattern of conduct where the
Initiating Member breaks up a PIXL Order into separate orders for the
purpose of gaining a higher allocation percentage than the Initiating
Member would have otherwise received in accordance with the allocation
procedures described above.
Crossing Public Customer Orders On PIXL
Proposed Rule 1080(n)(v) addresses the situation where an
Initiating Member holds public customer orders on both sides of the
market in the same option series. Instead of initiating a PIXL Auction,
an Initiating Member may enter a PIXL Order for the account of a public
customer paired with an order for the account of a public customer and
such paired orders will be automatically executed without a PIXL
Auction. The execution price must be expressed in the minimum quoting
increment applicable to the affected series. Such an execution may not
trade through the NBBO or at the same price as any resting customer
order. The Exchange believes that permitting such executions will
benefit public customers on both sides of the crossing transaction by
providing speedy and efficient executions to public customer orders in
this circumstance.
Rule 1080(c)(ii)(C) prevents an Order Entry Firm from executing
agency orders to increase its economic gain from trading against the
order without first giving other trading interests on the Exchange an
opportunity to either trade with the agency order or to trade at the
execution price when the member was already bidding or offering on the
book. However, the Exchange recognizes that it may be possible for a
firm to establish a relationship with a customer or other person to
deny agency orders the opportunity to interact on the Exchange and to
realize similar economic benefits as it would achieve by executing
agency orders as principal. It would be a violation of Rule
1080(c)(ii)(C) for a firm to circumvent Rule 1080(c)(ii)(C) by
providing an opportunity for (i) a customer affiliated with the firm,
or (ii) a customer with whom the firm has an arrangement that allows
the firm to realize similar economic benefits from the transaction as
the firm would achieve by executing agency orders as principal, to
regularly execute against agency orders handled by the firm immediately
upon their entry as PIXL customer-to-customer immediate crosses.
Pilot Program Information to the Commission
The Exchange represents that, in support of its proposed pilot
programs concerning (i) the early conclusion of the Auction, and (ii)
permitting orders of fewer than 50 contracts into the Auction, it will
provide the following information each month during the pilot period:
\22\
---------------------------------------------------------------------------
\22\ The Exchange will provide the information for a particular
month not later than the last business day of the subsequent month.
For example, information for the month of September would be
provided to the Commission no later than the last business day of
October. Information for the month of October would be provided no
later than the last business day of November, etc.
---------------------------------------------------------------------------
Regarding the early conclusion of the Auction due to the PBBO
crossing the PIXL Order stop price on the same side of the market as
the PIXL order, or due to a trading halt, the Exchange will provide the
following monthly information:
(1) The number of times that the PBBO crossed the PIXL Order stop
price on the same side of the market as the PIXL Order and prematurely
ended the PIXL Auction, and at what time the PIXL Auction ended;
(2) The number of times that a trading halt prematurely ended the
PIXL auction and at what time the trading halt ended the PIXL Auction;
(3) Of the Auctions terminated early due to the PBBO crossing the
PIXL order stop price, the number that resulted in price improvement
over the PIXL Order stop price, and the average amount of price
improvement provided to the PIXL Order;
(4) In the Auctions terminated early due to the PBBO crossing the
PIXL order stop price, the percentage of contracts that received price
improvement over the PIXL order stop price;
(5) Of the Auctions terminated early due to a trading halt, the
number that resulted in price improvement over the PIXL Order stop
price, and the average amount of price improvement provided to the PIXL
Order;
(6) In the auctions terminated early due to a trading halt, the
percentage of contracts that received price improvement over the PIXL
order stop price; and
(7) The average amount of price improvement provided to the PIXL
Order when the PIXL Auction is not terminated early (i.e., runs the
full one second).
(8) The number of times an unrelated market or marketable limit
order (against the PBBO) on the opposite side of the PIXL Order is
received during the Auction Period;
(9) The price(s) at which an unrelated market or marketable limit
order (against the PBBO) on the opposite side of the PIXL Order that is
received during the Auction Period is executed, compared to the
execution price of the PIXL Order.
[[Page 50027]]
Regarding PIXL Orders of fewer than 50 contracts, the Exchange will
provide the following monthly information:
(1) The number of orders of fewer than 50 contracts entered into
the PIXL Auction;
(2) The percentage of all orders of fewer than 50 contracts sent to
Phlx that are entered into the PIXL Auction;
(3) The percentage of all Phlx trades represented by orders of
fewer than 50 contracts;
(4) The percentage of all Phlx trades effected through the PIXL
Auction represented by orders of fewer than 50 contracts;
(5) The percentage of all contracts traded on Phlx represented by
orders of fewer than 50 contracts;
(6) The percentage of all contracts effected through the PIXL
Auction represented by orders of fewer than 50 contracts;
(7) The spread in the option, at the time an order of fewer than 50
contracts is submitted to the PIXL Auction;
(8) The number of orders of 50 contracts or greater entered into
the PIXL Auction;
(9) The percentage of all orders of 50 contracts or greater sent to
PHLX that are entered into the PIXL Auction;
(10) The spread in the option, at the time an order of 50 contracts
or greater is submitted to the PIXL Auction;
(11) Of PIXL trades where the PIXL Order is for the account of a
public customer, and is for a size of fewer than 50 contracts, the
percentage done at the NBBO plus $.01, plus $.02, plus $.03, etc.;
(12) Of PIXL trades where the PIXL Order is for the account of a
public customer, and is for a size of 50 contracts or greater, the
percentage done at the NBBO plus $.01, plus $.02, plus $.03, etc.; and
(13) Of PIXL trades where the PIXL Order is for the account of a
broker dealer or any other person or entity that is not a public
customer, and is for a size of fewer than 50 contracts, the percentage
done at the NBBO plus $.01, plus $.02, plus $.03, etc.
(14) Of PIXL trades where the PIXL Order is for the account of a
broker dealer or any other person or entity that is not a public
customer, and is for a size of 50 contracts or greater, the percentage
done at the NBBO plus $.01, plus $.02, plus $.03, etc.;
(15) The number of orders submitted by Initiating Members when the
spread was $.05, $.10, $.15, etc. For each spread, specify the
percentage of contracts in orders of fewer than 50 contracts submitted
to the PIXL Auction that were traded by: (a) The Initiating Member that
submitted the order to the PIXL; (b) PHLX Market Makers assigned to the
class; (c) other PHLX members; (d) Public Customer Orders; and (e)
unrelated orders (orders in standard increments entered during the PIXL
Auction). For each spread, also specify the percentage of contracts in
orders of 50 contracts or greater submitted to the PIXL Auction that
were traded by: (a) the Initiating Member that submitted the order to
the PIXL Auction; (b) PHLX market makers assigned to the class; (c)
other PHLX members; (d) Public Customer Orders; and (e) unrelated
orders (orders in standard increments entered during the PIXL Auction);
Regarding PIXL auto-match, the Exchange will provide the following
monthly information:
(1) The percentage of all PHLX trades effected through the PIXL
Auction in which the Initiating Member has chosen the auto-match
feature, and the average amount of price improvement provided to the
PIXL Order when the Initiating Member has chosen the auto-match feature
vs. the average amount of price improvement provided to the PIXL Order
when the Initiating Member has chosen a stop price submission.
Regarding competition, the Exchange will provide the following
monthly information:
(1) For the first Wednesday of each month: (a) The total number of
PIXL auctions on that date; (b) the number of PIXL auctions where the
order submitted to the PIXL was fewer than 50 contracts; (c) the number
of PIXL auctions where the order submitted to the PIXL was 50 contracts
or greater; (d) the number of PIXL auctions (for orders of fewer than
50 contracts) with 0 participants (excluding the initiating
participant), 1 participant (excluding the initiating participant), 2
participants (excluding the initiating participant), 3 participants
(excluding the initiating participant), 4 participants (excluding the
initiating participant), etc., and (e) the number of PIXL auctions (for
orders of 50 contracts or greater) with 0 participants (excluding the
initiating participant), 1 participant (excluding the initiating
participant), 2 participants (excluding the initiating participant), 3
participants (excluding the initiating participant), 4 participants
(excluding the initiating participant), etc.; and
(2) For the third Wednesday of each month: (a) The total number of
PIXL auctions on that date; (b) the number of PIXL auctions where the
order submitted to the PIXL was fewer than 50 contracts; (c) the number
of PIXL auctions where the order submitted to the PIXL was 50 contracts
or greater; (d) the number of PIXL auctions (for orders of fewer than
50 contracts) with 0 participants (excluding the initiating
participant), 1 participant (excluding the initiating participant), 2
participants (excluding the initiating participant), 3 participants
(excluding the initiating participant), 4 participants (excluding the
initiating participant), etc., and (e) the number of PIXL auctions (for
orders of 50 contracts or greater) with 0 participants (excluding the
initiating participant), 1 participant (excluding the initiating
participant), 2 participants (excluding the initiating participant), 3
participants (excluding the initiating participant), 4 participants
(excluding the initiating participant), etc.
Deployment
The Exchange anticipates that it will deploy PIXL floor-wide at or
before the end of August 2010. Members will be notified of the
deployment date by way of an Options Trader Alert posted on the
Exchange's Web site.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\23\ in general and with
Section 6(b)(5) of the Act,\24\ in that it is designed to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest; and is not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers, or to regulate by virtue of any authority conferred by the Act
matters not related to the purposes of the Act or the administration of
the Exchange.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f.
\24\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is also
consistent with Section 6(b)(8) of the Act \25\ in that it does not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
Specifically, the Exchange believes that the proposal will result
in increased liquidity available at improved prices, with competitive
final pricing out of the Initiating Member's complete control. PIXL
should promote and foster competition and provide more options
contracts with the opportunity for price improvement. As a result of
the increased opportunities for price
[[Page 50028]]
improvement, the Exchange believes that participants will use PIXL to
increase the number of customer orders that are provided with the
opportunity to receive price improvement over the NBBO.
The Exchange further believes that the proposal is consistent with
the requirements of Section 11(a) of the Act \26\ and Rule 11a2-2(T)
\27\ thereunder.
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\26\ 15 U.S.C. 78k(a).
\27\ 17 CFR 240.11a2-2(T).
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Section 11(a) prohibits a member of a national securities exchange
from effecting transactions on the exchange for its own account, the
account of an associated person, or an account in which it or an
associated person exercises investment discretion, unless an exception
applies. In enacting this provision, Congress was concerned about
members benefiting in their principal transactions from special ``time
and place'' advantages associated with floor trading--such as the
ability to ``execute decisions faster than public investors.'' The
Commission, however, has adopted a number of exceptions to the general
statutory prohibition for situations in which the principal
transactions contribute to the fairness and orderliness of exchange
markets or do not reflect any time and place trading advantages.\28\
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\28\ See Securities Exchange Act Release No. 14563 (March 14,
1978), 43 FR 11542 (March 17, 1978); Securities Exchange Act Release
No. 14713 (April 28, 1978), 43 FR 18557 (May 1, 1978); Securities
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6093 (Jan.
31, 1979). The 1978 and 1979 Releases cite the House Report at 54-
57.
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One such exception is Rule 11a2-2(T) under the Act, known as the
``Effect Versus Execute Rule.'' Rule 11a2-2(T) permits an exchange
member, subject to certain conditions, to effect a transaction for such
accounts, utilizing an unaffiliated member to execute transactions on
an exchange floor. The Rule requires that: (1) The order must be
transmitted from off the exchange floor; (2) once the order has been
transmitted, the exchange member that transmitted the order may not
participate in the execution; (3) the transmitting member may not be
affiliated with the executing member; and (4) neither the member or the
associated person may retain any compensation in connection with
effecting such a transaction respecting accounts over which either has
investment discretion without the express written consent of the person
authorized to transact business in the account.
The Exchange believes that the instant proposal is consistent with
Rule 11a2-2(T), and that therefore the exception should apply in this
case.
First, there is no mechanism or system that would enable an
Exchange member to transmit a PIXL Order from on the floor of the
Exchange. All PIXL Orders will be transmitted from off the floor of the
Exchange.
Second, once the PIXL Order has been transmitted, the Exchange
Initiating Member that transmitted the order will not participate in
the execution of the PIXL Order. Initiating Members submitting PIXL
Orders will relinquish control of their PIXL Orders upon transmission
to the Exchange's automated options trading platform, PHLX XL,\29\ and
will not be able to influence or guide the execution of their PIXL
Orders.
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\29\ See Securities Exchange Act Release No. 59995 (May 28,
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). For branding
purposes, references to ``PHLX XL'' are synonymous with references
to ``Phlx XL II'' in other filings.
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Third, although Rule 11a2-2T contemplates having an order executed
by an exchange member who is unaffiliated with the member initiating
the order, the Commission has recognized that the requirement is not
applicable when automated exchange facilities are used. Because the
design of these systems (such as PHLX XL) ensures that members do not
possess any special or unique trading advantages in handling orders
after transmitting them to exchange floors, the commission has stated
that executions obtained through these systems satisfy the independent
execution requirement of Rule 11a2-2T.\30\ The Exchange believes that
the design of PHLX XL ensures that members do not possess any special
or unique trading advantages in the handling of their orders.
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\30\ See, e.g., Securities Exchange Act Release No. 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979).
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Finally, respecting non-retention of compensation for discretionary
accounts, the Exchange represents that members who intend to rely on
Rule 11a2-2(T) in connection with transactions in PIXL Orders must
comply with the requirements of Section (a)(2)(iv) of the rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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 if it finds such longer period to be appropriate and
publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
(A) By order approve or disapprove the 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/wro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2010-108 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2010-108. This file
number should be included on the subject line if e-mail 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
[[Page 50029]]
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 20549-1090 on
official business days between the hours of 10 a.m. and 3 p.m. Copies
of the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2010-108 and should be submitted on or before
September 7, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20100 Filed 8-13-10; 8:45 am]
BILLING CODE 8011-01-P
