Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order Granting Approval to a Proposed Rule Change Relating to a Proposed Price Improvement System, Price Improvement XL, 62160-62167 [2010-25252]
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2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) 6 and the rules and regulations
thereunder and, in particular, the
requirements of Section 6(b) of the Act.7
Specifically, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 8 requirements that
the rules of an exchange be designed to
promote just and equitable principles of
trade, to prevent fraudulent and
manipulative acts, to remove
impediments to and to perfect the
mechanism for a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. Updating the C2 rules to
keep them in line with those of CBOE
provides for consistency in rules.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
C2 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
The Exchange neither solicited nor
received comments on the proposal.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change: (1) Does not significantly affect
the protection of investors or the public
interest; (2) does not impose any
significant burden on competition; and
(3) by its terms does not become
operative for 30 days after the date of
this filing, or such shorter time as the
Commission may designate if consistent
with the protection of investors and the
public interest, the proposed rule
change has become effective pursuant to
Section 19(b)(3)(A) of the Act 9 and Rule
19b–4(f)(6) thereunder.10
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days after the
6 15
U.S.C. 78s(b)(1). [sic]
U.S.C. 78f(b).
8 15 U.S.C. 78f(b)(5).
9 15 U.S.C. 78s(b)(3)(A).
10 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
provide the Commission with written notice of its
intent to file the proposed rule change, along with
a brief description and text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission. C2
has satisfied this requirement.
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date of filing. However, Rule 19b–
4(f)(6)(iii) permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange requests that the Commission
waive the 30-day operative delay, as
specified in Rule 19b–4(f)(6)(iii),11
which would make the rule change
effective and operative upon filing. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest.12 The Commission notes
the proposal is substantively identical to
SRO rules that were approved by the
Commission, and does not raise any
new regulatory issues. For these
reasons, the Commission designates the
proposed rule change as operative upon
filing.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to
rule-comments@sec.gov. Please include
File Number SR–C2–2010–004 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities Exchange Commission, 100 F
Street, NE., Washington, DC 20549–
1090.
All submissions should refer to File
Number SR–C2–2010–004. 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
11 17
CFR 240.19b–4(f)(6)(iii).
purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
12 For
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Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
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–C2–
2010–004 and should be submitted on
or before October 28, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–25247 Filed 10–6–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63027; File No. SR–Phlx–
2010–108]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Order
Granting Approval to a Proposed Rule
Change Relating to a Proposed Price
Improvement System, Price
Improvement XL
October 1, 2010.
I. Introduction
On July 30, 2010, NASDAQ OMX
PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to establish Price
Improvement XL (‘‘PIXL’’). The
proposed rule change was published for
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 75, No. 194 / Thursday, October 7, 2010 / Notices
comment in the Federal Register on
August 16, 2010.3 The Commission
received no comment letters on the
proposal. This order approves the
proposed rule change.
II. Description of the Proposal
In its filing, Phlx proposes to establish
a price-improvement mechanism in
which a member (an ‘‘Initiating
Member’’) may electronically submit for
execution an order it represents as agent
on behalf of a public customer, brokerdealer, or any other entity (this initial
order is referred to as the ‘‘PIXL Order’’)
against principal interest or against any
other order it represents as agent (this
matching order is referred to as the
‘‘Initiating Order’’) provided it submits
the PIXL Order for electronic execution
into the PIXL Auction (‘‘Auction’’)
pursuant to the proposed Rule.4 In
addition, Phlx proposes to provide for
the automatic execution, under certain
conditions, of a crossing transaction
where there is a public customer order
in the same options series on each side.
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III. Discussion and Commission
Findings
After careful review of the proposal,
the Commission finds that the proposed
rule change to establish rules for the
implementation of the PIXL auction is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange 5 and, in particular,
the requirements of Section 6 of the
Act.6 Specifically, as discussed further
below, the Commission finds that the
proposal is consistent with Section
6(b)(5) of the Act,7 which requires, in
part, that the rules of an exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, and
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.
Section 6(b)(5) of the Act also requires
that the rules of an exchange not be
3 See Securities Exchange Act Release No. 62678
(August 10, 2010), 75 FR 50021 (‘‘Notice’’).
4 For a more detailed discussion of the purpose
of the proposal and examples, see Notice.
5 In approving this proposal, the Commission has
considered the proposed rule change’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
6 15 U.S.C. 78f.
7 15 U.S.C. 78f(b)(5).
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designed to permit unfair
discrimination among customers,
issuers, brokers, or dealers. The
Commission believes that approving the
Exchange’s proposal to establish PIXL
should increase competition among
those options exchanges that offer
similar functionality. For the reasons
discussed below, the Commission finds
that the Exchange’s proposal is
consistent with the Act.
A. Auction Eligibility
Proposed Rule 1080(n)(i) describes
the circumstances under which an
Initiating Member may initiate a PIXL
Auction. Notably, the proposal draws a
distinction between orders for less than
50 contracts and those for 50 contracts
or more, and affords slightly different
treatment based on that distinction. The
specific treatment of public customer
and non-public customer orders for
above and below 50 contracts is
described directly below.8
For public customer orders, if the
PIXL Order is for 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. If the PIXL
Order 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 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.
For non-public customer orders (i.e.,
where the order is for the account of a
broker-dealer or any other person or
entity that is not a public customer), if
the order is for 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
8 In addition, the Notice contains an example that
illustrates the application of these specific
provisions. See Notice, supra note 3, at 75 FR
50022.
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62161
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 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 Commission finds that the
Exchange’s proposed rule with respect
to auction eligibility requirements for
PIXL is consistent with the Act. The
Commission notes that the PIXL Order
will be guaranteed an execution price of
at least the NBBO in all cases and will
be given an opportunity for execution at
a price better than the NBBO.9 Further,
for public customer orders of less than
50 contracts, the Commission notes that
minimum stop price must be one
minimum increment better than the
NBBO. In addition, the proposal seeks
to protect the priority of resting limit
orders on the Exchange book. The
Commission notes that proposed Rule
1080(n)(i)(A)(2) and (n)(i)(B)(2),
concerning orders that are submitted
with a size of less than 50 contracts, will
be effective on a pilot basis expiring
August 31, 2011. The Exchange has
agreed to provide the Commission with
detailed information each month during
the pilot period to assist the
Commission, as well as the Exchange, in
9 The Boston Options Exchange (‘‘BOX’’), a trading
facility of NASDAQ OMX BX, Inc., operates an
auction known as the PIP, see Securities Exchange
Act Release No. 49068 (January 13, 2004), 69 FR
2775 (January 20, 2004) (Order approving SR–BSE–
2002–15 to establish trading rules for the BOX
facility (‘‘PIP Order’’)), the International Securities
Exchange, LLC. (‘‘ISE’’) operates an auction known
as the PIM, see Securities Exchange Act Release No.
50819 (December 8, 2004), 69 FR 75093 (December
15, 2004) (Order approving SR–ISE–2003–06 to
adopt rules for the PIM (‘‘PIM Order’’)), and the
Chicago Board Stock Exchange, Incorporated
(‘‘CBOE’’) operates an auction known as the AIM,
see Securities Exchange Act Release No. 53222
(February 3, 2006), 71 FR 7089 (February 10, 2006)
(Order approving SR–CBOE 2005–60 to adopt rules
for the AIM (‘‘AIM Order’’)). The PIP and PIM also
require a member to enter an order into the auction
at a price that is at least equal to the NBBO. See
BOX Rules, Chapter V, Section 18(e) and ISE Rule
723(b)(1). The CBOE requires an agency order that
is for 50 contracts or more to be entered into the
AIM at a price that is the better of the NBBO or the
agency order’s limit price, and an agency order that
is less than 50 contracts at a price that is the better
of the NBBO price improved by one minimum price
improvement increment or the agency order’s limit
price. See CBOE Rule 6.74A(a).
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ascertaining the level of price
improvement attained for smaller-sized
orders during the pilot period.
B. Initiating the Auction
An Initiating Member may initiate a
PIXL Auction by submitting a PIXL
Order in one of three ways: (1) Single
stop price, (2) auto-match price, or (3)
not-worse-than price.
Under the first option, the Initiating
Member could submit a PIXL Order
specifying a single ‘‘stop’’ price at which
it seeks to execute the PIXL Order.
Under the second option, an Initiating
Member could submit a PIXL Order
specifying that it is willing to
automatically match (‘‘auto-match’’) as
principal or as agent on behalf of an
Initiating Order the price and size of all
trading interest 10 and responses to the
PIXL Auction Notification (‘‘PAN,’’ as
described below), in which case the
PIXL Order would 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.
Under the third and final option, 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,
10 ‘‘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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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.
Once the Initiating Member has
submitted a PIXL Order for processing,
the PIXL Order may not be cancelled.
The Initiating Member may improve the
stop price or NWT price of its Initiating
Order, however such price may be
improved only to the benefit of the PIXL
Order during the Auction, and the order
may not be cancelled.
The Commission notes that the
proposed PIXL procedures regarding the
submission of a PIXL Order using the
auto-match and NWT prices are similar
to the rules of the CBOE, BOX, and
ISE.11 One notable difference is that the
BOX and ISE Rules prohibit a member
from cancelling or modifying the automatch price during the price
improvement auction 12 whereas the
Phlx proposal would allow a member to
modify the stop or NWT price, but such
price may only be improved to the
benefit of the PIXL Order during the
Auction and the order may not be
cancelled after it is entered. The
Commission notes that when the
Initiating Member selects the automatch or NTW price prior to the start of
the auction, competitive final pricing
would be out of the Initiating Member’s
control. The Commission believes that
permitting the Initiating Member to
improve the NWT price during the PIXL
Auction could allow members to
quickly react to an improving market
and thereby provide additional
opportunity for the member to offer
price improvement to the PIXL Order.
In addition, the Exchange has
undertaken to provide the Commission
with the following data on a monthly
basis, which the Commission and the
Exchange can use to evaluate the
proposed auto-match functionality: the
percentage of all Phlx trades effected
through the PIXL Auction in which the
Initiating Member has chosen the automatch feature, and the average amount
of price improvement provided to the
PIXL Order when the Initiating Member
has chosen the auto-match feature
versus the average amount of price
improvement provided to the PIXL
Order when the Initiating Member has
chosen a stop price submission.
11 See BOX Rules, Ch. V, Section 18(e), CBOE
Rule 6.74A(b)(1)(A), and ISE Rule 716(d)(iii).
12 See BOX Rules, Ch. V, Section 18(e) and ISE
Rule 716(d)(iii).
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C. 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.13 An updated PAN message will
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. Messages
concerning updates to the stop price by
the Initiating Member would be used by
PAN respondents to improve a
previously-submitted price when they
are alerted that a stop price has been
improved. Any person or entity may
submit PAN responses, provided such
response is properly marked specifying
price, size, and side of the market. The
Commission believes that access to the
PIXL auction for those who may wish to
compete for a PIXL Order should be
sufficient to provide opportunities for a
meaningful, competitive auction.14
D. PIXL Auction
A PIXL Auction would last for one
second,15 unless it is concluded early as
the result of any of the circumstances
described below. PAN responses will
not be visible to Auction participants,
and will not be disseminated to the
Options Price Reporting Authority
(‘‘OPRA’’).16 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 would be rejected.
PAN responses may be modified or
cancelled during the Auction.17 PAN
responses on the same side of the
market as the PIXL Order are considered
13 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) (‘‘TOPO
Plus Approval Order’’). 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.
14 See TOPO Plus Approval Order, supra note 13
(approving market data fees for TOPO Plus Orders
as consistent with Sections 6(b)(4) and 6(b)(5) of the
Act).
15 The PIP, AIM, and PIM also are one-second
auctions. See BOX Rules, Chapter V, Section
18(e)(i), CBOE Rule 6.74A(b)(1)(C), and ISE Rule
723(c)(1).
16 CBOE’s AIM also provides that responses to the
auction will not be visible to other participants and
will not be disseminated to OPRA. See CBOE Rule
6.74A(b)(1)(F).
17 See also CBOE Rule 6.74A(b)(1)(I).
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invalid and will be rejected.18 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.19
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E. Conclusion of the PIXL Auction
An Auction could conclude early any
time: (i) 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) there is a
trading halt on the Exchange in the
affected series. The proposed rules
concerning the early conclusion of an
Auction will be effective for a pilot
period scheduled to expire August 31,
2011. The Exchange has undertaken to
provide the Commission with detailed
information each month during the pilot
period to assist the Commission, as well
as the Exchange, in ascertaining the
effect of early Auction conclusions
during the pilot period.
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. The Commission notes that
Phlx 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
Phlx Rule 707.
If the Auction concludes early as the
result of a trading halt on the Exchange
in the affected series, the entire PIXL
Order would execute against the
18 The Exchange stated in its proposal that any
PAN response on the same side of the market as the
PIXL Order would be the result of an error, and
therefore Phlx would reject such response.
19 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 Phlx Rule 707. See Phlx Rule
1080(n)(iv).
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Initiating Order at the stop price, since
the Initiating Member had guaranteed
that an execution would occur at the
stop price (or better) prior to the
initiation of the trading halt.
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. Such order would
execute against interest outside of the
Auction. If contracts remain from such
unrelated order at the time the Auction
ends, however, they would participate
in the PIXL order allocation process.
This provision would be effective for a
pilot period scheduled to expire on
August 31, 2011. The Commission
believes that allowing the PIXL auction
to continue for the full auction period
despite receipt of unrelated orders
outside the Auction would allow the
auction to run its full course and, in so
doing, will provide a full opportunity
for price improvement to the PIXL
Order. Further, the unrelated order
would be available to participate in the
PIXL order allocation.
The Commission believes that
approval of these provisions on a pilot
basis is appropriate and will afford both
the Exchange and the Commission an
opportunity to analyze the impact of
early terminations and unrelated orders
on the PIXL process, as well as the
Exchange’s surveillance procedures
with respect to PIXL.20 In particular, the
Exchange has agreed to provide the
Commission with data on a monthly
basis to assist the Commission, and the
Exchange, in evaluating the operation of
the PIXL Auction and the provisions for
early termination of an Auction. In
addition, the Exchange has agreed to
provide information on (1) 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 and (2) 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. The
Commission expects to be able to use
this information to consider the impact
of the proposed rule on the PIXL Order
as well as the unrelated order.
20 The Exchange’s surveillance plan and
procedures are subject to inspection by the
Commission, to ensure that the Exchange
adequately monitors its market and its members,
and enforces its rules and the federal securities
laws, including the anti-fraud provisions.
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F. Order Allocation
At the conclusion of the Auction, the
PIXL Order would be allocated at the
best price(s), which may include nonAuction quotes and orders that may be
present at each price level. Public
customer orders would have priority at
each price level, after which contracts
would be allocated among all Exchange
quotes, orders, and PAN responses.21
Any unexecuted PAN responses would
be cancelled.
1. Single Price Submission Option
Under the single stop price option,
allocations would be made first 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.22 Remaining contracts would
be allocated among remaining quotes,
orders, and PAN responses at the stop
price, and then to the Initiating
Member.23
2. Auto-Match Option
Under the auto-match option, the
Initiating Member would 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 would receive up to 40% of the
contracts remaining at the final price
point (including situations where the
final price point is the stop price).
3. Stop and NWT Option
Under the NWT option, after public
customer interest is satisfied, contracts
would be allocated first to quotes,
orders, and PAN responses at prices
21 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.
22 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. This allocation is consistent
with CBOE Rule 6.74A(b)(3)(F).
23 Under the proposed Rule, the specialist would
not be entitled to receive orders for 5 contracts or
fewer.
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better than the NWT price (if any),
beginning with the best price. Next,
contracts would 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
would receive 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 would 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).
The Commission believes that the
proposed PIXL rules should promote
price competition within a PIXL auction
by providing Phlx members with a
reasonable opportunity to compete for a
significant percentage of the PIXL order
and, therefore, should protect investors
and the public interest. The
Commission continues to believe that a
40% allocation is consistent with the
statutory standards for competition and
free and open markets.24
G. Professionals
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Phlx Rule 1000(b)(14) defines the
term ‘‘professional’’ and provides that
professional orders will be treated in the
same manner as orders for an off-floor
broker-dealer for the purposes of certain
rules.25 The definition provides an
exception for professional all-or-none
orders, which are treated like customer
orders. Phlx proposes to amend this
definition to provide that professional
orders will be treated in the same
manner as orders for an off-floor brokerdealers for the purposes of PIXL and to
also provide that PIXL orders for the
beneficial accounts of professionals
with an all-or-none designation 26 will
be treated in the same manner as offfloor broker-dealer orders (i.e., not
treated like customer orders). The
Commission notes that this is consistent
with the ISE’s PIM, where ISE Priority
Customer interest is executed in full
before Professional Orders and market
maker quotes.27
24 See PIP Order, supra note 9, at 2789–2790 and
PIM Order, supra note 9, at 75097–75098.
25 See Securities Exchange Act Release No. 61802
(March 30, 2010), 75 FR 17193 (April 5, 2010)(SR–
Phlx–2010–05) (adopting the term ‘‘professional’’ 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)).
26 According to the Exchange, PIXL Orders are
inherently all-or-none orders because the Initiating
Member guarantees that the PIXL Order will be
filled in its entirety.
27 See ISE Rule 723(d)(1).
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H. 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
would be able to enter a PIXL Order for
the account of a public customer paired
with an order for the account of another
public customer and such paired orders
would be automatically executed
without the need to commence a PIXL
Auction. The execution price would be
required to be expressed in the
minimum quoting increment applicable
to the series (e.g., a penny where the
series trades in penny increments). An
execution may not trade through the
NBBO or at the same price as any
resting customer order. The Commission
believes that these specifications are
designed to protect resting limit orders
on the book, and would ensure that this
mechanism could not be used to trade
in increments that would not otherwise
be available for trading outside the PIXL
context.
Phlx 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. The proposed rule
would provide that 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. These provisions are
substantially similar to those of CBOE.28
28 See
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I. No Minimum Size Requirement for
PIXL
Like the BOX’s PIP auction, the ISE’s
PIM auction, and the CBOE’s AIM
auction, the PIXL auction would be
available for orders of fewer than 50
contracts. Under the Exchange’s
proposal, there would be no minimum
size requirement for orders entered into
the PIXL for a pilot period expiring on
August 31, 2011.
The Commission believes that the
Exchange’s proposal should provide
small customer orders with the
opportunity for price improvement in a
manner that is consistent with the Act.
The Commission will evaluate the PIXL
auction during the Pilot Period to
determine whether it would be
beneficial to customers and to the
options market as a whole to approve
any proposal requesting permanent
approval to permit orders of fewer than
50 contracts to be submitted to the PIXL
auction. In addition, the Commission
will examine the data submitted by the
Exchange with respect to situations in
which the PIXL auction is terminated
prematurely by an unrelated order. To
aid the Commission in its evaluation,
the Exchange represents that it will
provide the following information each
month:
Regarding the early conclusion of an
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 has
undertaken to provide the following
information on a monthly basis during
the pilot period:
(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;
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(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; and
(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.
Regarding PIXL Orders of fewer than
50 contracts, the Exchange has
undertaken to provide the following
information on a monthly basis during
the pilot period:
(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
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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.; and
(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 has undertaken to provide the
following information on a monthly
basis during the pilot period:
(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
has undertaken to provide the following
information on a monthly basis during
the pilot period:
(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
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62165
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.
J. Section 11(a) of the Act
Section 11(a)(1) of the Act 29 prohibits
a member of a national securities
exchange from effecting transactions on
that exchange for its own account, the
account of an associated person, or an
account over which it or its associated
person exercises discretion (collectively,
‘‘covered accounts’’) unless an exception
applies. Rule 11a2–2(T) under the Act,30
known as the ‘‘effect versus execute’’
rule, provides exchange members with
an exemption from the Section 11(a)(1)
prohibition. Rule 11a2–2(T) permits an
exchange member, subject to certain
conditions, to effect transactions for
covered accounts by arranging for an
unaffiliated member to execute
transactions on the exchange. To
comply with Rule 11a2–2(T)’s
conditions, a member: (i) Must transmit
the order from off the exchange floor;
(ii) may not participate in the execution
29 15
30 17
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U.S.C. 78k(a)(1).
CFR 240.11a2–2(T).
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of the transaction once it has been
transmitted to the member performing
the execution; 31 (iii) may not be
affiliated with the executing member;
and (iv) with respect to an account over
which the member has investment
discretion, neither the member nor its
associated person may retain any
compensation in connection with
effecting the transaction except as
provided in the Rule.
In a letter to the Commission, the
Exchange requests that the Commission
concur with Phlx’s conclusion that
members who enter orders into the
Auction satisfy the requirements of Rule
11a2–2(T).32 For the reasons set forth
below, the Commission believes that
Exchange members entering orders into
the Auction would satisfy the
conditions of the Rule.
The Rule’s first condition is that
orders for covered accounts be
transmitted from off the exchange floor.
In the context of automated trading
systems, the Commission has found that
the off-floor transmission requirement is
met if a covered account order is
transmitted from a remote location
directly to an exchange’s floor by
electronic means.33 Phlx has
represented that only specialists and onfloor Streaming Quote Traders
(‘‘SQTs’’) 34 have the ability to submit
orders into the Auction from on the
floor of the Exchange.35 These members,
however, would be subject to the
31 The member may, however, participate in
clearing and settling the transaction.
32 See Letter from Richard S. Rudolph, Associate
General Counsel, Phlx, to Elizabeth M. Murphy,
Secretary, Commission, dated October 1, 2010
(‘‘Phlx 11(a) Letter’’).
33 See, e.g., Securities Exchange Act Release Nos.
61419 (January 26, 2010), 75 FR 5157 (February 1,
2010) (SR–BATS–2009–031) (approving BATS
options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR–BSE–2008–48)
(approving equity securities listing and trading on
BSE); 57478 (March 12, 2008), 73 FR 14521 (March
18, 2008) (SR–NASDAQ–2007–004 and SR–
NASDAQ–2007–080) (approving NOM options
trading); 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006) (File No. 10–131) (approving The
Nasdaq Stock Market LLC); 44983 (October 25,
2001), 66 FR 55225 (November 1, 2001) (SR–PCX–
00–25) (approving Archipelago Exchange); 29237
(May 24, 1991), 56 FR 24853 (May 31, 1991) (SR–
NYSE–90–52 and SR–NYSE–90–53) (approving
NYSE’s Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979)
(‘‘1979 Release’’).
34 An SQT is an Exchange Registered Options
Trader (‘‘ROT’’) who has received permission from
the Exchange to generate and submit option
quotations electronically through AUTOM in
eligible options to which such SQT is assigned. An
SQT may only submit such quotations while such
SQT is physically present on the floor of the
Exchange. See Exchange Rule 1014(b)(ii)(A).
35 See Phlx 11(a) Letter, supra note 32, at note 21
and accompanying text. Also, the Exchange
represented that SQTs and RSQTs are market
makers on the Exchange. See Phlx 11(a) Letter,
supra note 32.
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‘‘market maker’’ exception to Section
11(a) of the Act and Rule 11a2–
2(T)(a)(1) thereunder.36 Remote
Streaming Quote Traders (‘‘RSQTs’’) may
only submit orders into the Auction
from off the floor of the Exchange.37
Phlx has also represented that, while
Floor Brokers have the ability to submit
orders they represent as agent to the
electronic limit order book through the
Exchange’s Options Floor Broker
Management System (‘‘FBMS’’), there is
no mechanism by which such Floor
Brokers can directly submit orders to
the Auction or send orders to off-floor
broker-dealers through FBMS for
indirect submission into the Auction.38
Because no Exchange members, other
than specialists and SQTs, may submit
orders into the Auction from on the
floor of the Exchange, the Commission
believes that PIXL satisfies the off-floor
transmission requirement.
Second, the Rule requires that the
member not participate in the execution
of its order. Phlx has represented that at
no time following the submission of an
order is a member organization able to
acquire control or influence over the
result or timing of an order’s
execution.39 According to the Exchange,
the execution of a member’s order is
determined by what other orders are
present in the Auction and the priority
of those orders.40 Accordingly, the
36 See 15 U.S.C. Section 78k(a)(1)(A); 17 CFR
240.11a2–2(T)(a)(1). According to the Exchange,
there are no other on-floor members, other than
Exchange specialists and SQTs, who have the
ability to submit orders into the Auction.
37 See Phlx 11(a) Letter, supra note 32, at note 18
and accompanying text. An RSQT is an ROT that
is a member or member organization with no
physical trading floor presence and who has
received permission from the Exchange to generate
and submit option quotations electronically through
AUTOM in eligible options to which such RSQT
has been assigned. An RSQT may only submit such
quotations electronically from off the floor of the
Exchange. See Exchange Rule 1014(b)(ii)(B).
The Commission notes that, while RSQTs may
only submit orders into the Auction from off the
Exchange floor, RSQTs also would be subject to the
‘‘market maker’’ exception to Section 11(a) of the
Act and Rule 11a2–2(T)(a)(1) thereunder.
38 The Exchange represented that because FBMS
does not have the coding required to enter orders
into the Auction, and, as a result, it is impossible
for such Floor Brokers to submit orders into the
Auction. See Phlx 11(a) Letter, supra note 32, at
note 20 and accompanying text.
39 See Phlx 11(a) Letter, supra note 32.
40 See id. A member may cancel or modify the
order, or modify the instruction for executing the
order, but only from off the floor. The Commission
has stated that the non-participation requirement is
satisfied under such circumstances, so long as such
modifications or cancellations are also transmitted
from off the floor. See Securities Exchange Act
Release No. 14713 (April 27, 1978), 43 FR 18557
(May 1, 1978) (‘‘1978 Release’’) (stating that the
‘‘non-participation requirement does not prevent
initiating members from canceling or modifying
orders (or the instructions pursuant to which the
initiating member wishes orders to be executed)
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Commission believes that a member
does not participate in the execution of
an order submitted to the Auction.
Third, Rule 11a2–2(T) requires that
the order be executed by an exchange
member who is unaffiliated with the
member initiating the order. The
Commission has stated that this
requirement is satisfied when
automated systems, such as PIXL, are
used, as long as the design of these
systems ensures that members do not
possess any special or unique trading
advantages in handling their orders after
transmitting them to the exchange.41
Phlx has represented that the design of
the Auction ensures that no member
organization has any special or unique
trading advantage in the handling of its
orders after transmitting its orders to the
Auction.42 Based on the Exchange’s
representation, the Commission believes
that PIXL satisfies this requirement.
Fourth, in the case of a transaction
effected for an account with respect to
which the initiating member or an
associated person thereof exercises
investment discretion, neither the
initiating member nor any associated
person thereof may retain any
compensation in connection with
effecting the transaction, unless the
person authorized to transact business
for the account has expressly provided
otherwise by written contract referring
to Section 11(a) of the Act and Rule
11a2–2(T) thereunder.43 Phlx represents
that member organizations relying on
Rule 11a2–2(T) for transactions effected
after the orders have been transmitted to the
executing member, provided that any such
instructions are also transmitted from off the floor’’).
41 In considering the operation of automated
execution systems operated by an exchange, the
Commission noted that, while there is not an
independent executing exchange member, the
execution of an order is automatic once it has been
transmitted into the system. Because the design of
these systems ensures that members do not possess
any special or unique trading advantages in
handling their orders after transmitting them to the
exchange, the Commission has stated that
executions obtained through these systems satisfy
the independent execution requirement of Rule
11a2–2(T). See 1979 Release, supra note 33.
42 See Phlx 11(a) Letter, supra note 32.
43 See 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition,
Rule 11a2–2(T)(d) requires a member or associated
person authorized by written contract to retain
compensation, in connection with effecting
transactions for covered accounts over which such
member or associated persons thereof exercises
investment discretion, to furnish at least annually
to the person authorized to transact business for the
account a statement setting forth the total amount
of compensation retained by the member in
connection with effecting transactions for the
account during the period covered by the statement.
See 17 CFR 240.11a2–2(T)(d). See also 1978
Release, supra note 40 (stating ‘‘[t]he contractual
and disclosure requirements are designed to assure
that accounts electing to permit transaction-related
compensation do so only after deciding that such
arrangements are suitable to their interests’’).
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been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
through PIXL must comply with this
condition of the Rule.44
IV. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange, and, in
particular, with Section 6(b)(5) of the
Act.45
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,46 that the
proposed rule change (SR–Phlx–2010–
108) is approved, except that (1)
paragraphs (n)(i)(A)(2), (n)(i)(B)(2),
(n)(ii)(B)(4), and (n)(ii)(D) of Phlx Rule
1080 are approved on a pilot basis until
August 31, 2011; and (2) there shall be
no minimum size requirement for orders
entered into the PIXL for a pilot period
expiring on August 31, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–25252 Filed 10–6–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63026; File No. SR–CBOE–
2010–046]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change To Amend
Certain Rules Pertaining to Credit
Options
October 1, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 20, 2010, the Chicago Board
Options Exchange, Incorporated
(‘‘CBOE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
44 See
Phlx 11(a) Letter, supra note 32.
U.S.C. 78f(b)(5). In connection with the
issuance of this approval order, neither the
Commission nor its staff is granting any exemptive
or no-action relief from the requirements of Rule
10b–0 under the Act. 17 CFR 240.10b–10.
Accordingly, a broker-dealer executing a customer
order through the PIXL auction will need to comply
with all applicable requirements of that Rule.
46 15 U.S.C. 78s(b)(2).
47 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
jdjones on DSK8KYBLC1PROD with NOTICES
45 15
VerDate Mar<15>2010
14:42 Oct 06, 2010
Jkt 223001
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CBOE proposes to amend certain rules
pertaining to Credit Options. The text of
the rule proposal is available on the
Exchange’s Web site (https://
www.cboe.org/legal), at the Exchange’s
principal office, 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
self-regulatory organization 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 those 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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange received approval to
list and trade Credit Default Options
and Credit Default Basket Options
(collectively ‘‘Credit Options’’) in 2007,
and is planning to re-launch these
products.3 In connection with the
Exchange’s planned re-launching of
Credit Options, the Exchange will be
introducing contracts that have a payout
that is less than $100,000.4 In addition,
the Exchange would like to: (1) Change
the quoting convention for Credit
Default Options, (2) change the
minimum price variation for Credit
Option, and (3) designate a single
applicable Credit Event for Credit
Options.
Quoting Convention and Minimum
Price Variation Changes
When CBOE launched Credit Default
Options, the Exchange designated the
3 See Securities Exchange Act Release Nos.
55871(June 6, 2007), 72 FR 32372 (June 12, 2007)
(SR–CBOE–2006–84); 56275 (August 17, 2007), 72
FR 47097 (August 22, 2007).
4 See Securities Exchange Act Release No. 56380
(September 10, 2007), 72 FR 52948 (September 17,
2007) (SR–CBOE–2007–105) (immediately effective
filing pertaining to contract multiplier for Credit
Default Options).
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
62167
cash settlement amount to be $100,000,
which was equal to an exercise
settlement value of $100 multiplied by
a contract multiplier of 1,000 (which
was specified by the Exchange at
listing).5 Because the exercise
settlement value is currently fixed by
rule at $100,6 bids and offers for
contracts are expressed in amounts
ranging from $0 (no bid) to $100. The
range of bids and offers is not hard
coded into CBOE’s rules and is a
function of pricing options that have a
fixed payout.7 To arrive at the total
amount a bid or offer represents per
contract, the bid or offer is multiplied
by the contract multiplier. For example,
if a Credit Default Option has a cash
settlement amount of $100,000 ($100 ×
1,000), bids of $0.05, $45.15 and $67.50
equate to premium amounts of $50,
$45,150 and $67,500, respectively.
CBOE proposes to change the quoting
conventions for Credit Default Options
by permitting the exercise settlement
value to be an amount determined by
the Exchange on a class-by-class basis
and that would be equal to $1 or $100,
or a value between those values. By
permitting the Exchange to vary the
exercise settlement value, the range of
bids and offers would vary in tandem.
For example, if the Exchange sets the
exercise settlement value at $10, bids
and offers for that contract would range
from $0 (no bid) to $10, and the total
premium amount would be determined
by multiplying the bid or offer by the
contract multiplier.
In addition, by permitting the
Exchange to set the exercise settlement
value on a class-by-class basis, the
Exchange would be able to list a
contract having a cash settlement
amount that could be arrived at in
different ways. For example, for a Credit
Default Option with a cash settlement
amount of $1,000, the Exchange could:
(1) Set the exercise settlement value at
$1 with a contract multiplier of $1,000,
(2) set the exercise settlement value at
$10 with a contract multiplier of 100, (3)
set the exercise settlement value at $100
with a contract multiplier of 10, or (4)
set the exercise settlement value at
$1,000 with a contract multiplier of 1.
The Exchange notes that it will not list
more than one Credit Default Option
contract with a cash settlement amount
5 The Exchange may vary the particular contract
multiplier on a class-by-class basis within a range
of 1 to 1,000. See 29.1(a).
6 See Rule 29.1(a)(i).
7 The Exchange notes that with a fixed exercise
settlement value of $100, any quote above $100
(e.g., $150) would not make economic sense since
it would represent a premium cost ($150 × 1,000 =
$150,000) that exceeds than [sic] the exercise
settlement amount of the contract ($100 × 1,000 =
$100,000).
E:\FR\FM\07OCN1.SGM
07OCN1
]]>Agencies
[Federal Register Volume 75, Number 194 (Thursday, October 7, 2010)]
[Notices]
[Pages 62160-62167]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-25252]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63027; File No. SR-Phlx-2010-108]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Granting Approval to a Proposed Rule Change Relating to a Proposed
Price Improvement System, Price Improvement XL
October 1, 2010.
I. Introduction
On July 30, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (the ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
establish Price Improvement XL (``PIXL''). The proposed rule change was
published for
[[Page 62161]]
comment in the Federal Register on August 16, 2010.\3\ The Commission
received no comment letters on the proposal. This order approves the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 62678 (August 10,
2010), 75 FR 50021 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
In its filing, Phlx proposes to establish a price-improvement
mechanism 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 (this
initial order is referred to as the ``PIXL Order'') against principal
interest or against any other order it represents as agent (this
matching order is referred to as the ``Initiating Order'') provided it
submits the PIXL Order for electronic execution into the PIXL Auction
(``Auction'') pursuant to the proposed Rule.\4\ In addition, Phlx
proposes to provide for the automatic execution, under certain
conditions, of a crossing transaction where there is a public customer
order in the same options series on each side.
---------------------------------------------------------------------------
\4\ For a more detailed discussion of the purpose of the
proposal and examples, see Notice.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review of the proposal, the Commission finds that the
proposed rule change to establish rules for the implementation of the
PIXL auction is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange \5\ and, in particular, the requirements of Section 6 of the
Act.\6\ Specifically, as discussed further below, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\7\
which requires, in part, that the rules of an exchange be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
and 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. Section
6(b)(5) of the Act also requires that the rules of an exchange not be
designed to permit unfair discrimination among customers, issuers,
brokers, or dealers. The Commission believes that approving the
Exchange's proposal to establish PIXL should increase competition among
those options exchanges that offer similar functionality. For the
reasons discussed below, the Commission finds that the Exchange's
proposal is consistent with the Act.
---------------------------------------------------------------------------
\5\ In approving this proposal, the Commission has considered
the proposed rule change's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\6\ 15 U.S.C. 78f.
\7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Auction Eligibility
Proposed Rule 1080(n)(i) describes the circumstances under which an
Initiating Member may initiate a PIXL Auction. Notably, the proposal
draws a distinction between orders for less than 50 contracts and those
for 50 contracts or more, and affords slightly different treatment
based on that distinction. The specific treatment of public customer
and non-public customer orders for above and below 50 contracts is
described directly below.\8\
---------------------------------------------------------------------------
\8\ In addition, the Notice contains an example that illustrates
the application of these specific provisions. See Notice, supra note
3, at 75 FR 50022.
---------------------------------------------------------------------------
For public customer orders, if the PIXL Order is for 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. If the PIXL Order 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 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.
For non-public customer orders (i.e., where the order is for the
account of a broker-dealer or any other person or entity that is not a
public customer), if the order is for 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 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 Commission finds that the Exchange's proposed rule with respect
to auction eligibility requirements for PIXL is consistent with the
Act. The Commission notes that the PIXL Order will be guaranteed an
execution price of at least the NBBO in all cases and will be given an
opportunity for execution at a price better than the NBBO.\9\ Further,
for public customer orders of less than 50 contracts, the Commission
notes that minimum stop price must be one minimum increment better than
the NBBO. In addition, the proposal seeks to protect the priority of
resting limit orders on the Exchange book. The Commission notes that
proposed Rule 1080(n)(i)(A)(2) and (n)(i)(B)(2), concerning orders that
are submitted with a size of less than 50 contracts, will be effective
on a pilot basis expiring August 31, 2011. The Exchange has agreed to
provide the Commission with detailed information each month during the
pilot period to assist the Commission, as well as the Exchange, in
[[Page 62162]]
ascertaining the level of price improvement attained for smaller-sized
orders during the pilot period.
---------------------------------------------------------------------------
\9\ The Boston Options Exchange (``BOX''), a trading facility of
NASDAQ OMX BX, Inc., operates an auction known as the PIP, see
Securities Exchange Act Release No. 49068 (January 13, 2004), 69 FR
2775 (January 20, 2004) (Order approving SR-BSE-2002-15 to establish
trading rules for the BOX facility (``PIP Order'')), the
International Securities Exchange, LLC. (``ISE'') operates an
auction known as the PIM, see Securities Exchange Act Release No.
50819 (December 8, 2004), 69 FR 75093 (December 15, 2004) (Order
approving SR-ISE-2003-06 to adopt rules for the PIM (``PIM
Order'')), and the Chicago Board Stock Exchange, Incorporated
(``CBOE'') operates an auction known as the AIM, see Securities
Exchange Act Release No. 53222 (February 3, 2006), 71 FR 7089
(February 10, 2006) (Order approving SR-CBOE 2005-60 to adopt rules
for the AIM (``AIM Order'')). The PIP and PIM also require a member
to enter an order into the auction at a price that is at least equal
to the NBBO. See BOX Rules, Chapter V, Section 18(e) and ISE Rule
723(b)(1). The CBOE requires an agency order that is for 50
contracts or more to be entered into the AIM at a price that is the
better of the NBBO or the agency order's limit price, and an agency
order that is less than 50 contracts at a price that is the better
of the NBBO price improved by one minimum price improvement
increment or the agency order's limit price. See CBOE Rule 6.74A(a).
---------------------------------------------------------------------------
B. Initiating the Auction
An Initiating Member may initiate a PIXL Auction by submitting a
PIXL Order in one of three ways: (1) Single stop price, (2) auto-match
price, or (3) not-worse-than price.
Under the first option, the Initiating Member could submit a PIXL
Order specifying a single ``stop'' price at which it seeks to execute
the PIXL Order. Under the second option, an Initiating Member could
submit a PIXL Order specifying that it is willing to automatically
match (``auto-match'') as principal or as agent on behalf of an
Initiating Order the price and size of all trading interest \10\ and
responses to the PIXL Auction Notification (``PAN,'' as described
below), in which case the PIXL Order would 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.
---------------------------------------------------------------------------
\10\ ``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.
---------------------------------------------------------------------------
Under the third and final option, 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.
Once the Initiating Member has submitted a PIXL Order for
processing, the PIXL Order may not be cancelled. The Initiating Member
may improve the stop price or NWT price of its Initiating Order,
however such price may be improved only to the benefit of the PIXL
Order during the Auction, and the order may not be cancelled.
The Commission notes that the proposed PIXL procedures regarding
the submission of a PIXL Order using the auto-match and NWT prices are
similar to the rules of the CBOE, BOX, and ISE.\11\ One notable
difference is that the BOX and ISE Rules prohibit a member from
cancelling or modifying the auto-match price during the price
improvement auction \12\ whereas the Phlx proposal would allow a member
to modify the stop or NWT price, but such price may only be improved to
the benefit of the PIXL Order during the Auction and the order may not
be cancelled after it is entered. The Commission notes that when the
Initiating Member selects the auto-match or NTW price prior to the
start of the auction, competitive final pricing would be out of the
Initiating Member's control. The Commission believes that permitting
the Initiating Member to improve the NWT price during the PIXL Auction
could allow members to quickly react to an improving market and thereby
provide additional opportunity for the member to offer price
improvement to the PIXL Order.
---------------------------------------------------------------------------
\11\ See BOX Rules, Ch. V, Section 18(e), CBOE Rule
6.74A(b)(1)(A), and ISE Rule 716(d)(iii).
\12\ See BOX Rules, Ch. V, Section 18(e) and ISE Rule
716(d)(iii).
---------------------------------------------------------------------------
In addition, the Exchange has undertaken to provide the Commission
with the following data on a monthly basis, which the Commission and
the Exchange can use to evaluate the proposed auto-match functionality:
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 versus the average
amount of price improvement provided to the PIXL Order when the
Initiating Member has chosen a stop price submission.
C. 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.\13\ An updated
PAN message will 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. Messages concerning updates to the stop price by the
Initiating Member would be used by PAN respondents to improve a
previously-submitted price when they are alerted that a stop price has
been improved. Any person or entity may submit PAN responses, provided
such response is properly marked specifying price, size, and side of
the market. The Commission believes that access to the PIXL auction for
those who may wish to compete for a PIXL Order should be sufficient to
provide opportunities for a meaningful, competitive auction.\14\
---------------------------------------------------------------------------
\13\ 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) (``TOPO Plus Approval Order''). 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.
\14\ See TOPO Plus Approval Order, supra note 13 (approving
market data fees for TOPO Plus Orders as consistent with Sections
6(b)(4) and 6(b)(5) of the Act).
---------------------------------------------------------------------------
D. PIXL Auction
A PIXL Auction would last for one second,\15\ unless it is
concluded early as the result of any of the circumstances described
below. PAN responses will not be visible to Auction participants, and
will not be disseminated to the Options Price Reporting Authority
(``OPRA'').\16\ 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 would be rejected. PAN responses may be
modified or cancelled during the Auction.\17\ PAN responses on the same
side of the market as the PIXL Order are considered
[[Page 62163]]
invalid and will be rejected.\18\ 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.\19\
---------------------------------------------------------------------------
\15\ The PIP, AIM, and PIM also are one-second auctions. See BOX
Rules, Chapter V, Section 18(e)(i), CBOE Rule 6.74A(b)(1)(C), and
ISE Rule 723(c)(1).
\16\ CBOE's AIM also provides that responses to the auction will
not be visible to other participants and will not be disseminated to
OPRA. See CBOE Rule 6.74A(b)(1)(F).
\17\ See also CBOE Rule 6.74A(b)(1)(I).
\18\ The Exchange stated in its proposal that any PAN response
on the same side of the market as the PIXL Order would be the result
of an error, and therefore Phlx would reject such response.
\19\ 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 Phlx Rule 707. See Phlx Rule 1080(n)(iv).
---------------------------------------------------------------------------
E. Conclusion of the PIXL Auction
An Auction could conclude early any time: (i) 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) there is a
trading halt on the Exchange in the affected series. The proposed rules
concerning the early conclusion of an Auction will be effective for a
pilot period scheduled to expire August 31, 2011. The Exchange has
undertaken to provide the Commission with detailed information each
month during the pilot period to assist the Commission, as well as the
Exchange, in ascertaining the effect of early Auction conclusions
during the pilot period.
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.
The Commission notes that Phlx 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 Phlx Rule 707.
If the Auction concludes early as the result of a trading halt on
the Exchange in the affected series, the entire PIXL Order would
execute against the Initiating Order at the stop price, since the
Initiating Member had guaranteed that an execution would occur at the
stop price (or better) prior to the initiation of the trading halt.
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. Such order would execute against
interest outside of the Auction. If contracts remain from such
unrelated order at the time the Auction ends, however, they would
participate in the PIXL order allocation process. This provision would
be effective for a pilot period scheduled to expire on August 31, 2011.
The Commission believes that allowing the PIXL auction to continue for
the full auction period despite receipt of unrelated orders outside the
Auction would allow the auction to run its full course and, in so
doing, will provide a full opportunity for price improvement to the
PIXL Order. Further, the unrelated order would be available to
participate in the PIXL order allocation.
The Commission believes that approval of these provisions on a
pilot basis is appropriate and will afford both the Exchange and the
Commission an opportunity to analyze the impact of early terminations
and unrelated orders on the PIXL process, as well as the Exchange's
surveillance procedures with respect to PIXL.\20\ In particular, the
Exchange has agreed to provide the Commission with data on a monthly
basis to assist the Commission, and the Exchange, in evaluating the
operation of the PIXL Auction and the provisions for early termination
of an Auction. In addition, the Exchange has agreed to provide
information on (1) 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 and (2) 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. The Commission expects to be able to use this information
to consider the impact of the proposed rule on the PIXL Order as well
as the unrelated order.
---------------------------------------------------------------------------
\20\ The Exchange's surveillance plan and procedures are subject
to inspection by the Commission, to ensure that the Exchange
adequately monitors its market and its members, and enforces its
rules and the federal securities laws, including the anti-fraud
provisions.
---------------------------------------------------------------------------
F. Order Allocation
At the conclusion of the Auction, the PIXL Order would be allocated
at the best price(s), which may include non-Auction quotes and orders
that may be present at each price level. Public customer orders would
have priority at each price level, after which contracts would be
allocated among all Exchange quotes, orders, and PAN responses.\21\ Any
unexecuted PAN responses would be cancelled.
---------------------------------------------------------------------------
\21\ 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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1. Single Price Submission Option
Under the single stop price option, allocations would be made first
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.\22\ Remaining contracts would be allocated among remaining
quotes, orders, and PAN responses at the stop price, and then to the
Initiating Member.\23\
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\22\ 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. This allocation is consistent
with CBOE Rule 6.74A(b)(3)(F).
\23\ Under the proposed Rule, the specialist would not be
entitled to receive orders for 5 contracts or fewer.
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2. Auto-Match Option
Under the auto-match option, the Initiating Member would 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 would receive up to 40% of
the contracts remaining at the final price point (including situations
where the final price point is the stop price).
3. Stop and NWT Option
Under the NWT option, after public customer interest is satisfied,
contracts would be allocated first to quotes, orders, and PAN responses
at prices
[[Page 62164]]
better than the NWT price (if any), beginning with the best price.
Next, contracts would 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 would receive 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 would 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).
The Commission believes that the proposed PIXL rules should promote
price competition within a PIXL auction by providing Phlx members with
a reasonable opportunity to compete for a significant percentage of the
PIXL order and, therefore, should protect investors and the public
interest. The Commission continues to believe that a 40% allocation is
consistent with the statutory standards for competition and free and
open markets.\24\
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\24\ See PIP Order, supra note 9, at 2789-2790 and PIM Order,
supra note 9, at 75097-75098.
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G. Professionals
Phlx Rule 1000(b)(14) defines the term ``professional'' and
provides that professional orders will be treated in the same manner as
orders for an off-floor broker-dealer for the purposes of certain
rules.\25\ The definition provides an exception for professional all-
or-none orders, which are treated like customer orders. Phlx proposes
to amend this definition to provide that professional orders will be
treated in the same manner as orders for an off-floor broker-dealers
for the purposes of PIXL and to also provide that PIXL orders for the
beneficial accounts of professionals with an all-or-none designation
\26\ will be treated in the same manner as off-floor broker-dealer
orders (i.e., not treated like customer orders). The Commission notes
that this is consistent with the ISE's PIM, where ISE Priority Customer
interest is executed in full before Professional Orders and market
maker quotes.\27\
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\25\ See Securities Exchange Act Release No. 61802 (March 30,
2010), 75 FR 17193 (April 5, 2010)(SR-Phlx-2010-05) (adopting the
term ``professional'' 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)).
\26\ According to the Exchange, PIXL Orders are inherently all-
or-none orders because the Initiating Member guarantees that the
PIXL Order will be filled in its entirety.
\27\ See ISE Rule 723(d)(1).
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H. 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 would be able to enter a PIXL Order for the
account of a public customer paired with an order for the account of
another public customer and such paired orders would be automatically
executed without the need to commence a PIXL Auction. The execution
price would be required to be expressed in the minimum quoting
increment applicable to the series (e.g., a penny where the series
trades in penny increments). An execution may not trade through the
NBBO or at the same price as any resting customer order. The Commission
believes that these specifications are designed to protect resting
limit orders on the book, and would ensure that this mechanism could
not be used to trade in increments that would not otherwise be
available for trading outside the PIXL context.
Phlx 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. The proposed rule would
provide that 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. These provisions are
substantially similar to those of CBOE.\28\
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\28\ See CBOE Rule 6.74A.09.
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I. No Minimum Size Requirement for PIXL
Like the BOX's PIP auction, the ISE's PIM auction, and the CBOE's
AIM auction, the PIXL auction would be available for orders of fewer
than 50 contracts. Under the Exchange's proposal, there would be no
minimum size requirement for orders entered into the PIXL for a pilot
period expiring on August 31, 2011.
The Commission believes that the Exchange's proposal should provide
small customer orders with the opportunity for price improvement in a
manner that is consistent with the Act. The Commission will evaluate
the PIXL auction during the Pilot Period to determine whether it would
be beneficial to customers and to the options market as a whole to
approve any proposal requesting permanent approval to permit orders of
fewer than 50 contracts to be submitted to the PIXL auction. In
addition, the Commission will examine the data submitted by the
Exchange with respect to situations in which the PIXL auction is
terminated prematurely by an unrelated order. To aid the Commission in
its evaluation, the Exchange represents that it will provide the
following information each month:
Regarding the early conclusion of an 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 has undertaken
to provide the following information on a monthly basis during the
pilot period:
(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;
[[Page 62165]]
(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; and
(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.
Regarding PIXL Orders of fewer than 50 contracts, the Exchange has
undertaken to provide the following information on a monthly basis
during the pilot period:
(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.; and
(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 has undertaken to provide
the following information on a monthly basis during the pilot period:
(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 has undertaken to provide the
following information on a monthly basis during the pilot period:
(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.
J. Section 11(a) of the Act
Section 11(a)(1) of the Act \29\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\30\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution
[[Page 62166]]
of the transaction once it has been transmitted to the member
performing the execution; \31\ (iii) may not be affiliated with the
executing member; and (iv) with respect to an account over which the
member has investment discretion, neither the member nor its associated
person may retain any compensation in connection with effecting the
transaction except as provided in the Rule.
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\29\ 15 U.S.C. 78k(a)(1).
\30\ 17 CFR 240.11a2-2(T).
\31\ The member may, however, participate in clearing and
settling the transaction.
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In a letter to the Commission, the Exchange requests that the
Commission concur with Phlx's conclusion that members who enter orders
into the Auction satisfy the requirements of Rule 11a2-2(T).\32\ For
the reasons set forth below, the Commission believes that Exchange
members entering orders into the Auction would satisfy the conditions
of the Rule.
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\32\ See Letter from Richard S. Rudolph, Associate General
Counsel, Phlx, to Elizabeth M. Murphy, Secretary, Commission, dated
October 1, 2010 (``Phlx 11(a) Letter'').
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The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. In the context of automated
trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\33\ Phlx has represented that only specialists and
on-floor Streaming Quote Traders (``SQTs'') \34\ have the ability to
submit orders into the Auction from on the floor of the Exchange.\35\
These members, however, would be subject to the ``market maker''
exception to Section 11(a) of the Act and Rule 11a2-2(T)(a)(1)
thereunder.\36\ Remote Streaming Quote Traders (``RSQTs'') may only
submit orders into the Auction from off the floor of the Exchange.\37\
Phlx has also represented that, while Floor Brokers have the ability to
submit orders they represent as agent to the electronic limit order
book through the Exchange's Options Floor Broker Management System
(``FBMS''), there is no mechanism by which such Floor Brokers can
directly submit orders to the Auction or send orders to off-floor
broker-dealers through FBMS for indirect submission into the
Auction.\38\ Because no Exchange members, other than specialists and
SQTs, may submit orders into the Auction from on the floor of the
Exchange, the Commission believes that PIXL satisfies the off-floor
transmission requirement.
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\33\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
\34\ An SQT is an Exchange Registered Options Trader (``ROT'')
who has received permission from the Exchange to generate and submit
option quotations electronically through AUTOM in eligible options
to which such SQT is assigned. An SQT may only submit such
quotations while such SQT is physically present on the floor of the
Exchange. See Exchange Rule 1014(b)(ii)(A).
\35\ See Phlx 11(a) Letter, supra note 32, at note 21 and
accompanying text. Also, the Exchange represented that SQTs and
RSQTs are market makers on the Exchange. See Phlx 11(a) Letter,
supra note 32.
\36\ See 15 U.S.C. Section 78k(a)(1)(A); 17 CFR 240.11a2-
2(T)(a)(1). According to the Exchange, there are no other on-floor
members, other than Exchange specialists and SQTs, who have the
ability to submit orders into the Auction.
\37\ See Phlx 11(a) Letter, supra note 32, at note 18 and
accompanying text. An RSQT is an ROT that is a member or member
organization with no physical trading floor presence and who has
received permission from the Exchange to generate and submit option
quotations electronically through AUTOM in eligible options to which
such RSQT has been assigned. An RSQT may only submit such quotations
electronically from off the floor of the Exchange. See Exchange Rule
1014(b)(ii)(B).
The Commission notes that, while RSQTs may only submit orders
into the Auction from off the Exchange floor, RSQTs also would be
subject to the ``market maker'' exception to Section 11(a) of the
Act and Rule 11a2-2(T)(a)(1) thereunder.
\38\ The Exchange represented that because FBMS does not have
the coding required to enter orders into the Auction, and, as a
result, it is impossible for such Floor Brokers to submit orders
into the Auction. See Phlx 11(a) Letter, supra note 32, at note 20
and accompanying text.
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Second, the Rule requires that the member not participate in the
execution of its order. Phlx has represented that at no time following
the submission of an order is a member organization able to acquire
control or influence over the result or timing of an order's
execution.\39\ According to the Exchange, the execution of a member's
order is determined by what other orders are present in the Auction and
the priority of those orders.\40\ Accordingly, the Commission believes
that a member does not participate in the execution of an order
submitted to the Auction.
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\39\ See Phlx 11(a) Letter, supra note 32.
\40\ See id. A member may cancel or modify the order, or modify
the instruction for executing the order, but only from off the
floor. The Commission has stated that the non-participation
requirement is satisfied under such circumstances, so long as such
modifications or cancellations are also transmitted from off the
floor. See Securities Exchange Act Release No. 14713 (April 27,
1978), 43 FR 18557 (May 1, 1978) (``1978 Release'') (stating that
the ``non-participation requirement does not prevent initiating
members from canceling or modifying orders (or the instructions
pursuant to which the initiating member wishes orders to be
executed) after the orders have been transmitted to the executing
member, provided that any such instructions are also transmitted
from off the floor'').
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated systems, such as PIXL, are used, as long as the design
of these systems ensures that members do not possess any special or
unique trading advantages in handling their orders after transmitting
them to the exchange.\41\ Phlx has represented that the design of the
Auction ensures that no member organization has any special or unique
trading advantage in the handling of its orders after transmitting its
orders to the Auction.\42\ Based on the Exchange's representation, the
Commission believes that PIXL satisfies this requirement.
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\41\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release, supra note 33.
\42\ See Phlx 11(a) Letter, supra note 32.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\43\ Phlx represents that member organizations relying
on Rule 11a2-2(T) for transactions effected
[[Page 62167]]
through PIXL must comply with this condition of the Rule.\44\
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\43\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 40 (stating ``[t]he contractual and disclosure requirements are
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests'').
\44\ See Phlx 11(a) Letter, supra note 32.
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IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with Section 6(b)(5) of the Act.\45\
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\45\ 15 U.S.C. 78f(b)(5). In connection with the issuance of
this approval order, neither the Commission nor its staff is
granting any exemptive or no-action relief from the requirements of
Rule 10b-0 under the Act. 17 CFR 240.10b-10. Accordingly, a broker-
dealer executing a customer order through the PIXL auction will need
to comply with all applicable requirements of that Rule.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\46\ that the proposed rule change (SR-Phlx-2010-108) is approved,
except that (1) paragraphs (n)(i)(A)(2), (n)(i)(B)(2), (n)(ii)(B)(4),
and (n)(ii)(D) of Phlx Rule 1080 are approved on a pilot basis until
August 31, 2011; and (2) there shall be no minimum size requirement for
orders entered into the PIXL for a pilot period expiring on August 31,
2011.
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\46\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25252 Filed 10-6-10; 8:45 am]
BILLING CODE 8011-01-P
