Self-Regulatory Organizations; The NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change To Establish Remote Specialists, 67427-67431 [2010-27645]
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Federal Register / Vol. 75, No. 211 / Tuesday, November 2, 2010 / Notices
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
hsrobinson on DSK69SOYB1PROD with NOTICES
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSEAmex–2010–100 on
the subject line.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–27659 Filed 11–1–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63192; File No. SR–Phlx–
2010–145]
Self-Regulatory Organizations; The
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To
Establish Remote Specialists
October 27, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 2 thereunder,
Paper Comments
notice is hereby given that on October
14, 2010, NASDAQ OMX PHLX LLC
• Send paper comments in triplicate
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission
Securities and Exchange Commission,
(‘‘SEC’’ or ‘‘Commission’’) the proposed
100 F Street, NE., Washington, DC
rule change as described in Items I, II,
20549–1090.
and III below, which Items have been
All submissions should refer to File
prepared by the Exchange. The
Number SR–NYSEAmex–2010–100.
Commission is publishing this notice to
This file number should be included on solicit comments on the proposed rule
the subject line if e-mail is used. To help change from interested persons.
the Commission process and review
I. Self-Regulatory Organization’s
your comments more efficiently, please
Statement of the Terms of Substance of
use only one method. The Commission
the Proposed Rule Change
will post all comments on the
Commission’s Web site (https://
The Exchange is filing with the
www.sec.gov/rules/sro.shtml). Copies of Commission a proposal to amend
the submission, all subsequent
Exchange Rule 501 (Specialist
amendments, all written statements
Appointment), Rule 506 (Allocation
with respect to the proposed rule
Application), Rule 507 (Application for
change that are filed with the
Approval as an SQT or RSQT and
Commission, and all written
Assignment in Options), Rule 1014
communications relating to the
(Obligations and Restrictions Applicable
proposed rule change between the
to Specialists and Registered Options
Commission and any person, other than Traders), and Rule 1020 (Registration
those that may be withheld from the
and Functions of Options Specialists) to
public in accordance with the
allow certain Exchange members to act
provisions of 5 U.S.C. 552, will be
as option specialists that are not
available for Web site viewing and
physically present on the option trading
printing in the Commission’s Public
floor. The Exchange also proposes to
Reference Room, 100 F Street, NE.,
amend Options Floor Procedure
Washington, DC 20549, on official
Advices A–7 (Responsibility To Cancel),
business days between the hours of 10
A–10 (Specialist Trading With Book),
a.m. and 3 p.m. Copies of the filing will B–3 (Trading Requirements), and E–1
also be available for inspection and
(Required Staffing of Options Floor) 3 to
copying at the Exchange’s principal
7 17 CFR 200.30–3(a)(12).
office. All comments received will be
1 15 U.S.C. 78s(b)(1).
posted without change; the Commission
2 17 CFR 240.19b–4.
does not edit personal identifying
3 Options Floor Procedure Advices (‘‘OFPAs’’ or
information from submissions. You
‘‘Advices’’) generally correspond to Exchange rules.
should submit only information that
For example, OFPA B–3 is a corresponding Advice
you wish to make publicly available. All to Rule 1014 Commentary .01 and OFPA A–10 is
a corresponding Advice to Rule 1063. OFPAs are
submissions should refer to File
Number SR–NYSEAmex–2010–100 and part of the Exchange’s minor rule plan (‘‘MRP’’ or
‘‘Minor Rule Plan’’), which consists of Advices with
should be submitted on or before
preset fines, pursuant to Rule 19d–1(c) under the
November 23, 2010.
Act. 17 CFR 240.19d–1(c). See Securities Exchange
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conform them with the proposed rule
changes.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.com/
NASDAQOMXPHLX/Filings/, at the
principal office of the Exchange, on the
Commission’s Web site at https://
www.sec.gov; and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this proposal is to
amend Exchange Rules 501, 506, 507,
1014, and 1020 and Option Floor
Procedure Advices A–7, A–10, B–3, and
E–1 to allow certain Exchange members
to act as option specialists that are not
physically present on the option trading
floor.
Background
There are several types of market
makers on the Exchange, including
Registered Options Traders (‘‘ROTs’’),4
Streaming Quote Traders (‘‘SQTs’’),5
Remote Streaming Quote Traders
Act Release No. 50997 (January 7, 2005), 70 FR
2444 (January 13, 2005) (SR–Phlx–2003–40)
(approval order establishing Floor Broker
Management System in OFPA C–2 and Rule 1063).
The Exchange is not proposing to change the fines
in any Advices.
4 An ROT is a regular member or a foreign
currency options participant of the Exchange
located on the trading floor who has received
permission from the Exchange to trade in options
for his own account. See Rule 1014(b)(i).
5 An SQT is an ROT who has received permission
from the Exchange to generate and submit option
quotations electronically in options to which such
SQT is assigned. An SQT may only submit such
quotations while such SQT is physically present on
the floor of the Exchange. See Rule 1014(b)(ii)(A).
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(‘‘RSQTs’’),6 and specialists.7 Specialists
are Exchange members who are
registered as options specialists
pursuant to Rule 1020(a). Paragraph (b)
of Rule 1020 states that as a condition
of a member being registered as a
specialist in one or more options, it is
understood that, in addition to the
execution of commission orders 8
entrusted to him in such options, a
specialist is to engage in a course of
dealings for his own account to assist in
the maintenance, insofar as reasonably
practicable, of a fair and orderly market
on the Exchange in such options.
Paragraph (c) states that a specialist or
his member organization shall not effect
on the Exchange purchases or sales of
any option in which such specialist is
registered, for any account in which he
or his member organization is directly
or indirectly interested, unless such
dealings are reasonably necessary to
permit such specialist to maintain a fair
and orderly market. Paragraph (d) sets
forth criteria for a specialist dealing in
his own account in relation to assisting
in the maintenance, insofar as
reasonably practicable, of a fair and
orderly market in the options in which
he is registered.
Specialists apply for allocation of
options issues pursuant to Rule 501 and
RSQTs apply for assignment in options
pursuant to Rule 507. The Exchange
administers Rules 500 through 599 (the
‘‘Allocation and Assignment Rules’’),
including Rules 501, 506, and 507 as
proposed herein.9
The Allocation and Assignment Rules
generally describe the process for:
Application for becoming and
appointment of specialists; allocation of
classes of options to specialist units and
individual specialists; application for
becoming and approval of SQTs and
RSQTs and assignment of options to
them; and specialist, SQT, and RSQT
performance evaluations. The
Allocation and Assignment Rules also
6 An RSQT is an ROT that is a member or member
organization with no physical trading floor
presence who has received permission from the
Exchange to generate and submit option quotations
electronically in options to which such RSQT has
been assigned. An RSQT may only submit such
quotations electronically from off the floor of the
Exchange. See Rule 1014(b)(ii)(B).
7 Rule 1014 also discusses other market makers
including Directed SQTs and Directed RSQTs,
which receive Directed Orders as defined in Rule
1080(l)(i)(A). Specialists may likewise receive
Directed Orders.
8 The Exchange proposes to delete the word
‘‘commission’’ from Rule 1020(b) to clarify that
orders entrusted to specialists and [sic] are not
limited to only commission orders.
9 See Securities Exchange Act Release No. 59924
(May 14, 2009), 74 FR 23759 (May 20, 2009) (SR–
Phlx–2009–23) (approval order that, among other
things, established that Exchange staff administers
Rules 500 through 599). See also Rule 500.
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indicate under what circumstances new
allocations may not be made.10
Each options class and series listed on
the Exchange must currently have a
specialist that has a physical presence
on the options floor (‘‘floor-based
specialist’’).11 The floor-based specialist
system is historically based in the
traditional open outcry auction market
system that has trading crowds at
physical trading posts on the floor and
Floor Brokers 12 that represent orders on
the floor on behalf of others (‘‘auction
market system’’ or ‘‘open outcry
system’’). The auction market system is
necessary, and indeed invaluable, to
certain types of market participants
(e.g., institutional traders and certain
large-volume traders). The Exchange has
developed, in parallel to the auction
market system, an extensive electronic
means to execute option orders.13 As a
result, the Exchange operates an options
market that combines a traditional open
outcry auction market trading floor with
electronic trading (the ‘‘current Phlx
market’’).14
10 See, e.g., Supplementary Material .01 to Rule
506 (specialist may not apply for a new allocation
for a period of six months after an option allocation
was taken away from the specialist in a disciplinary
proceeding or an involuntary reallocation
proceeding).
11 At least one exchange that uses a specialist
system has allowed certain option series to trade
without a designated lead market maker (specialist).
See Securities Exchange Act Release No. 56001
(July 2, 2007), 72 FR 37557 (July 10, 2007) (SR–
NYSEArca–2007–34) (order approving). And at
least one exchange that does not have a specialist
system has allowed options to be traded without
any market maker. See Securities Exchange Act
Release No. 61735 (March 18, 2010), 75 FR 14227
(March 24, 2010) (SR–NASDAQ–2010–007) (order
approving).
12 An Options Floor Broker is an individual who
is registered with the Exchange for the purpose,
while on the Options Floor, of accepting and
executing options orders received from members
and member organizations. An Options Floor
Broker shall not accept an order from any other
source unless he is the nominee of a member
organization qualified to transact business with the
public in which event he may accept orders from
public customers of the organization. See Rule
1060.
13 See Rule 1080 regarding the Exchange’s
electronic order, trading, and execution system. See
also Securities Exchange Act Release Nos. 46763
(November 1, 2002), 67 FR 68898 (November 13,
2002) (SR–Phlx–2002–04) (order approving the
Exchange’s electronic interface for specialists and
ROTs, AUTOM); 50100 (July 27, 2004), 69 FR 46612
(August 3, 2004) (SR–Phlx–2003–59) (order
approving the Exchange’s electronic platform for
options, XL); and 59995 (May 28, 2009), 74 FR
26750 (June 3, 2009) (SR–Phlx–2009–32) (order
approving the Exchange’s enhanced electronic
platform, XL II).
14 The current Phlx market model combining
open outcry and electronic trading is also used by
other options exchanges, such as Chicago Board
Options Exchange, Inc. (‘‘CBOE’’), NYSE Amex LLC
(‘‘NYSE Amex’’) and NYSE Arca, Inc. (‘‘NYSE
Arca’’). Only electronic options trading is done on
other exchanges, such as the International
Securities Exchange, LLC (‘‘ISE’’) and The NASDAQ
Stock Market LLC (‘‘NASDAQ’’).
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The Exchange has found that it can be
difficult, if not impossible, to allocate
certain option products; and has found
that specialists may at times relinquish
their options privileges. This could
occur when, as an example, underlying
securities are involved in a takeover, a
merger/acquisition situation, or some
type of rights offering. Without a
specialist that is willing to accept, or
retain, allocation of an option, however,
the Exchange may not list such options,
to the detriment of market participants
and public investors. This filing seeks to
remedy the inability to allocate options
where no floor-based specialists are
available for allocation.15
Specialist Rights and Obligations
The Exchange initially proposes to
define remote specialist in Rule 1020. In
particular, the Exchange proposes to
add sub-paragraph (a)(ii) stating that a
Remote Specialist is a qualified RSQT
approved by the Exchange to function as
a specialist in one or more options if the
Exchange determines that it cannot
allocate such options to a non-remote
specialist (that is, a floor based
specialist) (‘‘Remote Specialist’’).
A Remote Specialist has all the rights
and obligations of a specialist, unless
Exchange rules provide otherwise. The
Exchange believes that the concept of
specialist rights and obligations
applying to all specialists, including
Remote Specialists, is paramount to the
proposal and therefore uniformly
applicable. The Exchange proposes to
underscore this principle by indicating
in Rule 1020(a) that the term specialist
includes a Remote Specialist as defined
in Rule 1020(a)(ii) and registered
pursuant to Rule 501; and indicating
that a Remote Specialist has all the
rights and obligations of an options
specialist unless Exchange rules provide
otherwise.
Becoming a Remote Specialist
The Exchange proposes to amend
Rule 501, which generally deals with
the process of applying for approval as
a specialist, and to amend the rule to
indicate that in certain circumstances
RSQTs may act as specialists.
In particular, the Exchange proposes
new paragraph (f)(i) to state that RSQTs,
15 The Exchange has a process whereby certain
options (e.g. securities of a subsidiary, or
convertible into the securities of the issuer, issued
in connection with a name change or a reverse stock
split, or created in connection of a merger or
acquisition or a ‘‘spin-off’’ transaction), are
automatically allocated to the specialist that is
already allocated the related options. See
Supplementary Material .02 to Rule 506 and
Exchange Act Release No. 60455 (August 6, 2009),
74 FR 40857 (August 13, 2009) (SR–Phlx–2009–62)
(notice of filing and immediate effectiveness).
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as defined in Rule 1014, may submit an
application to be an approved specialist
unit.16 Upon application by a qualified
RSQT (which has to become an RSQT
pursuant to Rule 507), the Exchange
will approve such organization as an
approved off-floor Remote Specialist
unit which may function as a specialist
unit in one or more options. The
Exchange could approve a Remote
Specialist if the Exchange determines
that it cannot allocate such options to a
floor specialist. A Remote Specialist
would not, in contrast to an on-floor
specialist, have any physical presence
on the options floor. Therefore, a
Remote Specialist would not, in contrast
to an on-floor specialist, have any duties
emanating from having a floor presence.
The Exchange clarifies in proposed Rule
501(f)(iii) that, as stated in Rule
1020(a)(ii), all specialist rights and
obligations apply to Remote Specialists
unless otherwise noted in the rules.
The Exchange believes that it is
important that each Remote Specialist is
available and reachable at all times
during trading hours. The Exchange
therefore proposes language in Rule
501(f)(ii) stating that every Remote
Specialist must be accessible to
exchange staff and members throughout
all trading hours for the products
allocated to the specialist.17 To ensure
that each Remote Specialist is reachable,
the Exchange proposes language in subparagraph (f)(ii) stating that a Remote
Specialist shall provide Exchange staff
and members with telephone access to
such specialist and/or associated staff at
all times during trading hours.18
Rule 501(b) currently indicates that
each specialist unit will include in the
initial application the unit’s back up
specialist arrangements; and Rule 501(d)
indicates that each specialist unit will
indicate its assistant specialist.19
Remote Specialists will not need to
meet the assistant specialist staffing or
the back-up specialist unit requirement.
16 A ‘‘specialist unit’’ including a Remote
Specialist unit, may have one or more individual
‘‘specialists.’’
17 For Exchange trading hours, see Rule 101.
18 To the extent necessary, the Exchange will
announce such communication arrangements to its
members via an Options Trading Alert (‘‘OTA’’) or
Options Regulatory Alert (‘‘ORA’’).
19 Paragraph (b) of Rule 501 states, in relevant
part, that initial application(s) to become a
specialist unit shall be in a form and/or format
prescribed by the Exchange and shall include the
following: the identity of the unit’s staff positions
and who will occupy those positions; the unit’s
clearing arrangements; the unit’s capital structure,
including any lines of credit; and the unit’s back up
arrangements endorsed by the parties.
Paragraph (d) of Rule 501 states, in relevant part,
that each unit must consist of at least the following
staff for each trading floor specialist post: one head
specialist; and one assistant specialist that must be
associated with the specialist unit.
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The Exchange believes that this is
rational and appropriate for Remote
Specialists, who have constrained open
outcry capabilities.20 As such, the
Exchange proposes to amend Rule 501
to indicate that back up specialist
arrangements and assistant specialist
requirements are not applicable to
Remote Specialists.21 All other Rule 501
application requirements will be
applicable to Remote Specialists.
The requirement that each specialist
designates an assistant specialist and a
back-up specialist was initially
established to help ensure that there
would be adequate liquidity in a given
issue in the event the appointed
specialist was unavailable. At the time,
the Exchange options market was
strictly a floor-based auction market and
there may have only been a few market
makers (or market participants) in any
given issue. It was therefore necessary to
have an assistant or back-up specialist
ready to take over as specialist if the
appointed specialist was unable to
fulfill its obligations. The rationale
underlying the assistant/back-up
requirement has become antiquated
with the development of the classic
auction system into the current Phlx
market with extensive electronic-based
trading. As such, RSQTs are assigned in
the same options that are allocated to
specialists and, in conjunction with
other market makers on the Exchange,
are able to provide liquidity in the event
of a specialist’s temporary absence.
Moreover, since nearly all option issues
traded on the Exchange are traded on
multiple exchanges, the historical risk
to be managed by the current assistant/
backup requirement (namely, the ability
of the Exchange to foster the provision
of liquidity for investors) is no longer
present.
The Exchange proposes clarifying
changes to Rule 506, which deals with
the process of qualified specialist units
(that is, specialist units approved
pursuant to Rule 501) applying for, and
receiving, allocation of a class of
20 Moreover, recognizing that the market making
functions of Remote Specialists and RSQTs may be
similar in many respects but are not identical, the
Exchange notes that current RSQTs, who also have
constrained open outcry capabilities, have been
fulfilling market making requirements on the
Exchange (e.g. making two-sided market quotations)
for years without specific back-up personnel
requirements. See Securities Exchange Act Release
No. 50100 (July 27, 2004), 69 FR 46612 (SR–Phlx–
2003–59) (approval order relating to the Exchange’s
electronic trading platform XL and, among other
things, Rule 507). See also Rules 507 and 1014.
21 This concept follows through to the OFPAs.
The Exchange proposes to clarify Advice E–1 to
exempt a Remote Specialist from the specialist
obligation to have personnel on the trading floor,
while retaining the Remote Specialist obligation to
have a representative available telephonically.
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options; and indicates under what
circumstances new allocations cannot
be made. Paragraph (b) currently states
that an allocation application shall, at a
minimum, include the name and
background of the head specialist and
assistant specialist(s), the unit’s
experience and capitalization
demonstrating an ability to trade the
particular options class sought, and any
other reasons why the unit believes it
should be assigned or allocated the
security. In addition, the Exchange may
require that the application include
other information such as system
acceptance/execution levels and
guarantees. The Exchange proposes to
indicate in paragraph (b) that the
assistant specialist requirement is not
applicable to Remote Specialists.
Paragraph (c) currently states that the
Exchange’s decisions regarding
allocation of specialist privileges are
communicated in writing to floor
members. In light of the off-floor Remote
Specialist proposal, the Exchange would
modify paragraph (c) to indicate that
communications would not be confined
only to floor members, but would be
made to all Exchange members (e.g.
specialists, RSQTs, SQTs and ROTs).
Finally in terms of the application
process, the Exchange proposes to
clarify the parameters of Rule 507. This
rule currently describes the process and
criteria for successfully becoming an
RSQT or SQT, which includes:
Significant market-making and/or
specialist experience; superior
resources, including capital, technology
and personnel; demonstrated history of
stability, superior electronic capacity,
and superior operational capacity; and
proven ability to interact with order
flow in all types of markets.22
After a market maker on the Exchange
applies and is approved pursuant to
Rule 507 to be an RSQT, the RSQT may
then apply to become a Remote
Specialist pursuant to the separate
process set forth in Rule 501. The
Exchange clarifies this two-step process
in proposed new paragraph (f) of Rule
507, which states that nothing in Rule
507 shall be construed to automatically
qualify an RSQT to be a Remote
Specialist on the Exchange.
Quoting Obligations and Priority
Rule 1014 sets forth the quoting
(market making) obligations for all
market makers on the Exchange, with
quoting requirements for RSQTs
specified in Rule 1014(b)(ii)(D)(1) 23 and
22 For all RSQT application and approval criteria,
see Rule 507(a)(i)(A) through (a)(i)(G).
23 Regarding RSQT market making obligations,
Rule 1014(b)(ii)(D)(1) states, in relevant part, that in
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quoting requirements for specialists
specified in Rule 1014(b)(ii)(D)(2).24 The
Exchange proposes to clarify that the
two-sided market quoting requirements
for specialists are applicable to Remote
Specialists. The Exchange proposes also
to clarify that RSQTs will have different
quoting requirements when they are
acting as Remote Specialists as opposed
to when they are acting as RSQTs.
Specifically, the Exchange proposes to
state in Rule 1014(b)(ii)(D)(2) that
RSQTs functioning as Remote
Specialists in particular options shall be
responsible to quote two-sided markets
just as on-floor specialists are now
required to do. The Exchange also
proposes to state in Rule
1014(b)(ii)(D)(1) that the RSQT quoting
requirements found therein are not
applicable to RSQTs when they are
acting as Remote Specialists (in which
case the specialist quoting requirements
found in sub-paragraph (D)(2) are
applicable). The Exchange believes that
this appropriately establishes quoting
equivalency among on-floor specialists
and Remote Specialists.
Rule 1014 establishes that the market
making (quoting) obligations do not
addition to the other requirements for ROTs set
forth in this Rule 1014, except as provided in subparagraph (4) below, an SQT and an RSQT shall be
responsible to quote two-sided markets in not less
than 60% of the series in which such SQT or RSQT
is assigned, provided that, on any given day, a
Directed SQT (‘‘DSQT’’) or a Directed RSQT
(‘‘DRSQT’’) (as defined in Rule 1080(l)(i)(C)) shall be
responsible to quote two-sided markets in the lesser
of 99% of the series listed on the Exchange or 100%
of the series listed on the Exchange minus one callput pair, in each case in at least 60% of the options
in which such DSQT or DRSQT is assigned.
Whenever a DSQT or DRSQT enters a quotation in
an option in which such DSQT or DRSQT is
assigned, such DSQT or DRSQT must maintain
until the close of that trading day quotations for the
lesser of 99% of the series of the option listed on
the Exchange or 100% of the series of the option
listed on the Exchange minus one call-put pair. To
satisfy the applicable requirements of this subparagraph (D)(1) with respect to quoting a series, an
SQT, RSQT, DSQT, or DRSQT must quote such
series 90% of the trading day (as a percentage of
the total number of minutes in such trading day) or
such higher percentage as the Exchange may
announce in advance. The Exchange may consider
exceptions to the requirement to quote 90% (or
higher) of the trading day based on demonstrated
legal or regulatory requirements or other mitigating
circumstances.
24 Regarding specialist market making obligations,
Rule 1014(b)(ii)(D)(2) states, in relevant part, that
the specialist shall be responsible to quote twosided markets in the lesser of 99% of the series or
100% of the series minus one call-put pair in each
option in which such specialist is assigned. To
satisfy the requirement of this sub-paragraph (D)(2)
with respect to quoting a series, the specialist must
quote such series 90% of the trading day (as a
percentage of the total number of minutes in such
trading day) or such higher percentage as the
Exchange may announce in advance. The Exchange
may consider exceptions to the requirement to
quote 90% (or higher) of the trading day based on
demonstrated legal or regulatory requirements or
other mitigating circumstances.
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apply to RSQTs (as well as to SQTs,
DSQTs, and DRSQTs) in terms of certain
types of options products. In particular,
Rule 1014(b)(ii)(D)(4) states that RSQTs
and the other market makers shall be
deemed not to be assigned in any
Quarterly Option Series (‘‘QOS’’),25 any
adjusted option series,26 and any option
series until the time to expiration for
such series is less than nine months;
and thereby establishes an exemption
for RSQTs and the other market makers
from the obligations set forth in Rule
1014 in the noted categories of products.
The Exchange proposes to add new
language to sub-paragraph (D)(4) to
indicate that these exemptions apply to
RSQTs only when they are acting as
RSQTs, and do not apply to RSQTs
when they are functioning as Remote
Specialists in particular options.
Rule 1014(b)(ii)(B) currently indicates
that no person who is either directly or
indirectly affiliated with an RSQT
(‘‘affiliated RSQT’’) is allowed to submit
quotations as a specialist, SQT, RSQT or
non-SQT ROT in options in which such
affiliated RSQT is assigned. These
restrictions remain. The Exchange
proposes to amend sub-paragraph
(b)(ii)(B) only to indicate that an RSQT
cannot quote both as RSQT and as
Remote Specialist in a particular
security. That is, if an RSQT is a Remote
Specialist in a particular security, the
Remote specialist must make a market
(submit quotations) as a specialist and
may not make a market as an RSQT in
that particular security.
On-floor specialists currently
participate in trades that are affected in
open outcry, as well as electronically. In
general, a trading crowd (including an
on-floor specialist) has priority over outof-crowd SQTs and RSQTs at the
execution price for orders with the size
of at least 500 contracts, while out-of
crowd SQTs and RSQTs have priority
for orders of less than 500 contracts. In
light of the central concept that to the
extent practicable (and unless otherwise
noted in Exchange rules), specialists
and Remote Specialists are treated the
same, that is, have similar rights and
obligations, both specialists and Remote
Specialists would have similar priority
rights to the extent practicable. As such,
Remote Specialist priority rights would
be coextensive with their ability to
submit electronic quotations via the
25 QOS are options series that expire at the close
of business on the last business day of a calendar
quarter. See Commentary .08 to Rule 1012. For
index QOS, see Rule 1101A.
26 Adjusted option series are defined in Rule
1014(b)(ii)(D)(4) as an option series wherein one
option contract in the series represents the delivery
of other than 100 shares of underlying stock or
Exchange-Traded Fund Shares.
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
Exchange’s electronic order, execution,
and trading system, Phlx XL, while not
being on the floor. For example,
Commentary .05(c)(ii) states that
respecting crossing, facilitation and
solicited orders (as defined in Rule
1064) with a size of at least 500
contracts on each side that are
represented and executed in open
outcry, priority shall be afforded to incrowd participants over RSQTs and outof crowd SQTs, and that such orders
shall be allocated in accordance with
Exchange rules. The Exchange proposes
to add Remote Specialists to
Commentary .05(c)(ii) so that they are
treated similarly for priority purposes
because they do not engage in open
outcry floor trading.
Commentary .05(b) to Rule 1014 states
that SQTs and RSQTs can submit orders
electronically via XL, the Exchange’s
electronic order, execution and trading
system. The Exchange proposes to add
Remote Specialists to Commentary
.05(b) so that they can likewise submit
quotes electronically; and to confirm
that, similarly to RSQTs, the Exchange
has the ability to allocate one or more
options to Remote Specialists.
Commentary .05(C)(i) indicates that if a
Floor Broker presents a non-electronic
order in an option assigned to an RSQT,
such RSQT or SQT may not participate
in trades stemming from the nonelectronic order unless the order is
executed at the price quoted by the noncrowd RSQT or SQT at the time of
execution. The Exchange proposes to
include Remote Specialists in
Commentary .05(C)(i) to establish
priority that is coextensive with Remote
Specialist electronic quoting and trading
capabilities.27
The Exchange proposes to clarify
several OFPAs commensurate with a
Remote Specialist’s off-floor electronic
quoting and trading capabilities. In
particular, the Exchange proposes to
state in Advice A–10 that a Remote
Specialist is exempted from the
specialist duty of ensuring that at least
one ROT is present in a floor trading
crowd before such specialist can
participate as principal in a trade. The
Exchange proposes to state in Advice
27 The Exchange has submitted an immediately
effective filing proposing to delete obsolete
terminology from certain Exchange rules including
Rule 1014, which filing is subject to a 30 day
operative delay. See Securities Exchange Act
Release No. 63036 (October 4, 2010), 75 FR 62621
(October 12, 2010) (SR–Phlx–2010–131) (notice of
filing and immediate effectiveness). SR–Phlx–2010–
131 has proposed changes to the rule text of certain
rules that are discussed in this filing, specifically
sub-paragraph (b)(i)(B) and Commentary .05 of Rule
1014, and the text of these rules in Exhibit 5 reflects
the changes made in SR–Phlx–2010–131 that are
operative as of October 27, 2010.
E:\FR\FM\02NON1.SGM
02NON1
Federal Register / Vol. 75, No. 211 / Tuesday, November 2, 2010 / Notices
A–7 that a Remote Specialist is
exempted from the specialist obligation
to advise a Floor Broker about
cancellations. Additionally, the
Exchange proposes to state in Advice B–
3 that a Remote Specialist is exempted
from the requirement that an ROT,
including a specialist, trade a certain
percentage of volume on the Exchange
in person.
Surveillance
The Exchange has developed
surveillance procedures for its auction
and electronic markets. The Exchange
will use the surveillance procedures
now in place regarding specialists to
perform surveillance of Remote
Specialists.
Conclusion
hsrobinson on DSK69SOYB1PROD with NOTICES
The Exchange believes that its
proposal to enable Remote Streaming
Quote Traders to act as Remote
Specialists where no on-floor specialists
are willing to accept, or retain, an
option allocation would enable Remote
Specialists to provide a market that does
not otherwise exist on the Exchange to
the benefit of traders, investors, and
public customers making hedging and
trading decisions. The Exchange
believes that allowing specialists to
function off-floor also removes an
operational issue by allowing off-floor
specialists that are not required to be
present on the trading floor in respect of
certain option issues. Accordingly, the
Exchange believes that the proposed
rule change is designed to promote just
and equitable principles of trade and to
be in the public interest.
Finally, the Exchange notes that the
Commission has approved, or options
exchanges have filed for immediate
effectiveness, proposals that allow these
exchanges to have off-floor (remote)
market makers that are similar in
concept to the proposed Remote
Specialists.28 The Exchange does not
believe that this filing raises any novel
issues.
28 See Securities Exchange Act Release Nos.
55531 (March 26, 2007), 72 FR 15736 (April 2,
2007) (SR–CBOE–2006–94) (order approving
proposal to establish off-floor Delegated Primary
Market-Makers); 57747 (April 30, 2008), 73 FR
25811 (May 7, 2008) (SR–CBOE–2008–49) (notice of
filing and immediate effectiveness to establish offfloor Lead Market-Makers); 57568 (March 26, 2008),
73 FR 18016 (April 2, 2008) (SR–CBOE–2008–32
(notice of filing and immediate effectiveness to
establish ability of off-floor Delegated Primary
Market-Makers to operate in any options class
traded on Hybrid); and 52827 (November 23, 2005),
70 FR 72139 (December 1, 2005) (SR–PCX–2005–
56) (approval order establishing Lead Market
Makers).
VerDate Mar<15>2010
18:39 Nov 01, 2010
Jkt 223001
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 29 in general, and furthers the
objectives of Section 6(b)(5) of the Act 30
in particular, in that it is 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 facilitating
transactions in securities, and to remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system by
allowing Exchange option specialists
that are not on an Exchange floor where
the Exchange determines that it cannot
allocate options to a floor based
specialist.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
29 15
30 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00088
Fmt 4703
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Phlx–2010–145 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–Phlx–2010–145. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
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 such filing
also will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–Phlx–2010–
145 and should be submitted on or
before November 23, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–27645 Filed 11–1–10; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice: 7221]
State-40, Employee Contact Records
SUMMARY: Notice is hereby given that
the Department of State proposes to
31 17
Sfmt 4703
67431
E:\FR\FM\02NON1.SGM
CFR 200.30–3(a)(12).
02NON1
]]>Agencies
[Federal Register Volume 75, Number 211 (Tuesday, November 2, 2010)]
[Notices]
[Pages 67427-67431]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-27645]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63192; File No. SR-Phlx-2010-145]
Self-Regulatory Organizations; The NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Establish Remote Specialists
October 27, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on October 14, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposal to amend
Exchange Rule 501 (Specialist Appointment), Rule 506 (Allocation
Application), Rule 507 (Application for Approval as an SQT or RSQT and
Assignment in Options), Rule 1014 (Obligations and Restrictions
Applicable to Specialists and Registered Options Traders), and Rule
1020 (Registration and Functions of Options Specialists) to allow
certain Exchange members to act as option specialists that are not
physically present on the option trading floor. The Exchange also
proposes to amend Options Floor Procedure Advices A-7 (Responsibility
To Cancel), A-10 (Specialist Trading With Book), B-3 (Trading
Requirements), and E-1 (Required Staffing of Options Floor) \3\ to
conform them with the proposed rule changes.
---------------------------------------------------------------------------
\3\ Options Floor Procedure Advices (``OFPAs'' or ``Advices'')
generally correspond to Exchange rules. For example, OFPA B-3 is a
corresponding Advice to Rule 1014 Commentary .01 and OFPA A-10 is a
corresponding Advice to Rule 1063. OFPAs are part of the Exchange's
minor rule plan (``MRP'' or ``Minor Rule Plan''), which consists of
Advices with preset fines, pursuant to Rule 19d-1(c) under the Act.
17 CFR 240.19d-1(c). See Securities Exchange Act Release No. 50997
(January 7, 2005), 70 FR 2444 (January 13, 2005) (SR-Phlx-2003-40)
(approval order establishing Floor Broker Management System in OFPA
C-2 and Rule 1063). The Exchange is not proposing to change the
fines in any Advices.
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, on the Commission's
Web site at https://www.sec.gov; and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposal is to amend Exchange Rules 501, 506,
507, 1014, and 1020 and Option Floor Procedure Advices A-7, A-10, B-3,
and E-1 to allow certain Exchange members to act as option specialists
that are not physically present on the option trading floor.
Background
There are several types of market makers on the Exchange, including
Registered Options Traders (``ROTs''),\4\ Streaming Quote Traders
(``SQTs''),\5\ Remote Streaming Quote Traders
[[Page 67428]]
(``RSQTs''),\6\ and specialists.\7\ Specialists are Exchange members
who are registered as options specialists pursuant to Rule 1020(a).
Paragraph (b) of Rule 1020 states that as a condition of a member being
registered as a specialist in one or more options, it is understood
that, in addition to the execution of commission orders \8\ entrusted
to him in such options, a specialist is to engage in a course of
dealings for his own account to assist in the maintenance, insofar as
reasonably practicable, of a fair and orderly market on the Exchange in
such options. Paragraph (c) states that a specialist or his member
organization shall not effect on the Exchange purchases or sales of any
option in which such specialist is registered, for any account in which
he or his member organization is directly or indirectly interested,
unless such dealings are reasonably necessary to permit such specialist
to maintain a fair and orderly market. Paragraph (d) sets forth
criteria for a specialist dealing in his own account in relation to
assisting in the maintenance, insofar as reasonably practicable, of a
fair and orderly market in the options in which he is registered.
---------------------------------------------------------------------------
\4\ An ROT is a regular member or a foreign currency options
participant of the Exchange located on the trading floor who has
received permission from the Exchange to trade in options for his
own account. See Rule 1014(b)(i).
\5\ An SQT is an ROT who has received permission from the
Exchange to generate and submit option quotations electronically in
options to which such SQT is assigned. An SQT may only submit such
quotations while such SQT is physically present on the floor of the
Exchange. See Rule 1014(b)(ii)(A).
\6\ An RSQT is an ROT that is a member or member organization
with no physical trading floor presence who has received permission
from the Exchange to generate and submit option quotations
electronically in options to which such RSQT has been assigned. An
RSQT may only submit such quotations electronically from off the
floor of the Exchange. See Rule 1014(b)(ii)(B).
\7\ Rule 1014 also discusses other market makers including
Directed SQTs and Directed RSQTs, which receive Directed Orders as
defined in Rule 1080(l)(i)(A). Specialists may likewise receive
Directed Orders.
\8\ The Exchange proposes to delete the word ``commission'' from
Rule 1020(b) to clarify that orders entrusted to specialists and
[sic] are not limited to only commission orders.
---------------------------------------------------------------------------
Specialists apply for allocation of options issues pursuant to Rule
501 and RSQTs apply for assignment in options pursuant to Rule 507. The
Exchange administers Rules 500 through 599 (the ``Allocation and
Assignment Rules''), including Rules 501, 506, and 507 as proposed
herein.\9\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 59924 (May 14,
2009), 74 FR 23759 (May 20, 2009) (SR-Phlx-2009-23) (approval order
that, among other things, established that Exchange staff
administers Rules 500 through 599). See also Rule 500.
---------------------------------------------------------------------------
The Allocation and Assignment Rules generally describe the process
for: Application for becoming and appointment of specialists;
allocation of classes of options to specialist units and individual
specialists; application for becoming and approval of SQTs and RSQTs
and assignment of options to them; and specialist, SQT, and RSQT
performance evaluations. The Allocation and Assignment Rules also
indicate under what circumstances new allocations may not be made.\10\
---------------------------------------------------------------------------
\10\ See, e.g., Supplementary Material .01 to Rule 506
(specialist may not apply for a new allocation for a period of six
months after an option allocation was taken away from the specialist
in a disciplinary proceeding or an involuntary reallocation
proceeding).
---------------------------------------------------------------------------
Each options class and series listed on the Exchange must currently
have a specialist that has a physical presence on the options floor
(``floor-based specialist'').\11\ The floor-based specialist system is
historically based in the traditional open outcry auction market system
that has trading crowds at physical trading posts on the floor and
Floor Brokers \12\ that represent orders on the floor on behalf of
others (``auction market system'' or ``open outcry system''). The
auction market system is necessary, and indeed invaluable, to certain
types of market participants (e.g., institutional traders and certain
large-volume traders). The Exchange has developed, in parallel to the
auction market system, an extensive electronic means to execute option
orders.\13\ As a result, the Exchange operates an options market that
combines a traditional open outcry auction market trading floor with
electronic trading (the ``current Phlx market'').\14\
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\11\ At least one exchange that uses a specialist system has
allowed certain option series to trade without a designated lead
market maker (specialist). See Securities Exchange Act Release No.
56001 (July 2, 2007), 72 FR 37557 (July 10, 2007) (SR-NYSEArca-2007-
34) (order approving). And at least one exchange that does not have
a specialist system has allowed options to be traded without any
market maker. See Securities Exchange Act Release No. 61735 (March
18, 2010), 75 FR 14227 (March 24, 2010) (SR-NASDAQ-2010-007) (order
approving).
\12\ An Options Floor Broker is an individual who is registered
with the Exchange for the purpose, while on the Options Floor, of
accepting and executing options orders received from members and
member organizations. An Options Floor Broker shall not accept an
order from any other source unless he is the nominee of a member
organization qualified to transact business with the public in which
event he may accept orders from public customers of the
organization. See Rule 1060.
\13\ See Rule 1080 regarding the Exchange's electronic order,
trading, and execution system. See also Securities Exchange Act
Release Nos. 46763 (November 1, 2002), 67 FR 68898 (November 13,
2002) (SR-Phlx-2002-04) (order approving the Exchange's electronic
interface for specialists and ROTs, AUTOM); 50100 (July 27, 2004),
69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59) (order approving the
Exchange's electronic platform for options, XL); and 59995 (May 28,
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32) (order approving
the Exchange's enhanced electronic platform, XL II).
\14\ The current Phlx market model combining open outcry and
electronic trading is also used by other options exchanges, such as
Chicago Board Options Exchange, Inc. (``CBOE''), NYSE Amex LLC
(``NYSE Amex'') and NYSE Arca, Inc. (``NYSE Arca''). Only electronic
options trading is done on other exchanges, such as the
International Securities Exchange, LLC (``ISE'') and The NASDAQ
Stock Market LLC (``NASDAQ'').
---------------------------------------------------------------------------
The Exchange has found that it can be difficult, if not impossible,
to allocate certain option products; and has found that specialists may
at times relinquish their options privileges. This could occur when, as
an example, underlying securities are involved in a takeover, a merger/
acquisition situation, or some type of rights offering. Without a
specialist that is willing to accept, or retain, allocation of an
option, however, the Exchange may not list such options, to the
detriment of market participants and public investors. This filing
seeks to remedy the inability to allocate options where no floor-based
specialists are available for allocation.\15\
---------------------------------------------------------------------------
\15\ The Exchange has a process whereby certain options (e.g.
securities of a subsidiary, or convertible into the securities of
the issuer, issued in connection with a name change or a reverse
stock split, or created in connection of a merger or acquisition or
a ``spin-off'' transaction), are automatically allocated to the
specialist that is already allocated the related options. See
Supplementary Material .02 to Rule 506 and Exchange Act Release No.
60455 (August 6, 2009), 74 FR 40857 (August 13, 2009) (SR-Phlx-2009-
62) (notice of filing and immediate effectiveness).
---------------------------------------------------------------------------
Specialist Rights and Obligations
The Exchange initially proposes to define remote specialist in Rule
1020. In particular, the Exchange proposes to add sub-paragraph (a)(ii)
stating that a Remote Specialist is a qualified RSQT approved by the
Exchange to function as a specialist in one or more options if the
Exchange determines that it cannot allocate such options to a non-
remote specialist (that is, a floor based specialist) (``Remote
Specialist'').
A Remote Specialist has all the rights and obligations of a
specialist, unless Exchange rules provide otherwise. The Exchange
believes that the concept of specialist rights and obligations applying
to all specialists, including Remote Specialists, is paramount to the
proposal and therefore uniformly applicable. The Exchange proposes to
underscore this principle by indicating in Rule 1020(a) that the term
specialist includes a Remote Specialist as defined in Rule 1020(a)(ii)
and registered pursuant to Rule 501; and indicating that a Remote
Specialist has all the rights and obligations of an options specialist
unless Exchange rules provide otherwise.
Becoming a Remote Specialist
The Exchange proposes to amend Rule 501, which generally deals with
the process of applying for approval as a specialist, and to amend the
rule to indicate that in certain circumstances RSQTs may act as
specialists.
In particular, the Exchange proposes new paragraph (f)(i) to state
that RSQTs,
[[Page 67429]]
as defined in Rule 1014, may submit an application to be an approved
specialist unit.\16\ Upon application by a qualified RSQT (which has to
become an RSQT pursuant to Rule 507), the Exchange will approve such
organization as an approved off-floor Remote Specialist unit which may
function as a specialist unit in one or more options. The Exchange
could approve a Remote Specialist if the Exchange determines that it
cannot allocate such options to a floor specialist. A Remote Specialist
would not, in contrast to an on-floor specialist, have any physical
presence on the options floor. Therefore, a Remote Specialist would
not, in contrast to an on-floor specialist, have any duties emanating
from having a floor presence. The Exchange clarifies in proposed Rule
501(f)(iii) that, as stated in Rule 1020(a)(ii), all specialist rights
and obligations apply to Remote Specialists unless otherwise noted in
the rules.
---------------------------------------------------------------------------
\16\ A ``specialist unit'' including a Remote Specialist unit,
may have one or more individual ``specialists.''
---------------------------------------------------------------------------
The Exchange believes that it is important that each Remote
Specialist is available and reachable at all times during trading
hours. The Exchange therefore proposes language in Rule 501(f)(ii)
stating that every Remote Specialist must be accessible to exchange
staff and members throughout all trading hours for the products
allocated to the specialist.\17\ To ensure that each Remote Specialist
is reachable, the Exchange proposes language in sub-paragraph (f)(ii)
stating that a Remote Specialist shall provide Exchange staff and
members with telephone access to such specialist and/or associated
staff at all times during trading hours.\18\
---------------------------------------------------------------------------
\17\ For Exchange trading hours, see Rule 101.
\18\ To the extent necessary, the Exchange will announce such
communication arrangements to its members via an Options Trading
Alert (``OTA'') or Options Regulatory Alert (``ORA'').
---------------------------------------------------------------------------
Rule 501(b) currently indicates that each specialist unit will
include in the initial application the unit's back up specialist
arrangements; and Rule 501(d) indicates that each specialist unit will
indicate its assistant specialist.\19\ Remote Specialists will not need
to meet the assistant specialist staffing or the back-up specialist
unit requirement. The Exchange believes that this is rational and
appropriate for Remote Specialists, who have constrained open outcry
capabilities.\20\ As such, the Exchange proposes to amend Rule 501 to
indicate that back up specialist arrangements and assistant specialist
requirements are not applicable to Remote Specialists.\21\ All other
Rule 501 application requirements will be applicable to Remote
Specialists.
---------------------------------------------------------------------------
\19\ Paragraph (b) of Rule 501 states, in relevant part, that
initial application(s) to become a specialist unit shall be in a
form and/or format prescribed by the Exchange and shall include the
following: the identity of the unit's staff positions and who will
occupy those positions; the unit's clearing arrangements; the unit's
capital structure, including any lines of credit; and the unit's
back up arrangements endorsed by the parties.
Paragraph (d) of Rule 501 states, in relevant part, that each
unit must consist of at least the following staff for each trading
floor specialist post: one head specialist; and one assistant
specialist that must be associated with the specialist unit.
\20\ Moreover, recognizing that the market making functions of
Remote Specialists and RSQTs may be similar in many respects but are
not identical, the Exchange notes that current RSQTs, who also have
constrained open outcry capabilities, have been fulfilling market
making requirements on the Exchange (e.g. making two-sided market
quotations) for years without specific back-up personnel
requirements. See Securities Exchange Act Release No. 50100 (July
27, 2004), 69 FR 46612 (SR-Phlx-2003-59) (approval order relating to
the Exchange's electronic trading platform XL and, among other
things, Rule 507). See also Rules 507 and 1014.
\21\ This concept follows through to the OFPAs. The Exchange
proposes to clarify Advice E-1 to exempt a Remote Specialist from
the specialist obligation to have personnel on the trading floor,
while retaining the Remote Specialist obligation to have a
representative available telephonically.
---------------------------------------------------------------------------
The requirement that each specialist designates an assistant
specialist and a back-up specialist was initially established to help
ensure that there would be adequate liquidity in a given issue in the
event the appointed specialist was unavailable. At the time, the
Exchange options market was strictly a floor-based auction market and
there may have only been a few market makers (or market participants)
in any given issue. It was therefore necessary to have an assistant or
back-up specialist ready to take over as specialist if the appointed
specialist was unable to fulfill its obligations. The rationale
underlying the assistant/back-up requirement has become antiquated with
the development of the classic auction system into the current Phlx
market with extensive electronic-based trading. As such, RSQTs are
assigned in the same options that are allocated to specialists and, in
conjunction with other market makers on the Exchange, are able to
provide liquidity in the event of a specialist's temporary absence.
Moreover, since nearly all option issues traded on the Exchange are
traded on multiple exchanges, the historical risk to be managed by the
current assistant/backup requirement (namely, the ability of the
Exchange to foster the provision of liquidity for investors) is no
longer present.
The Exchange proposes clarifying changes to Rule 506, which deals
with the process of qualified specialist units (that is, specialist
units approved pursuant to Rule 501) applying for, and receiving,
allocation of a class of options; and indicates under what
circumstances new allocations cannot be made. Paragraph (b) currently
states that an allocation application shall, at a minimum, include the
name and background of the head specialist and assistant specialist(s),
the unit's experience and capitalization demonstrating an ability to
trade the particular options class sought, and any other reasons why
the unit believes it should be assigned or allocated the security. In
addition, the Exchange may require that the application include other
information such as system acceptance/execution levels and guarantees.
The Exchange proposes to indicate in paragraph (b) that the assistant
specialist requirement is not applicable to Remote Specialists.
Paragraph (c) currently states that the Exchange's decisions regarding
allocation of specialist privileges are communicated in writing to
floor members. In light of the off-floor Remote Specialist proposal,
the Exchange would modify paragraph (c) to indicate that communications
would not be confined only to floor members, but would be made to all
Exchange members (e.g. specialists, RSQTs, SQTs and ROTs).
Finally in terms of the application process, the Exchange proposes
to clarify the parameters of Rule 507. This rule currently describes
the process and criteria for successfully becoming an RSQT or SQT,
which includes: Significant market-making and/or specialist experience;
superior resources, including capital, technology and personnel;
demonstrated history of stability, superior electronic capacity, and
superior operational capacity; and proven ability to interact with
order flow in all types of markets.\22\
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\22\ For all RSQT application and approval criteria, see Rule
507(a)(i)(A) through (a)(i)(G).
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After a market maker on the Exchange applies and is approved
pursuant to Rule 507 to be an RSQT, the RSQT may then apply to become a
Remote Specialist pursuant to the separate process set forth in Rule
501. The Exchange clarifies this two-step process in proposed new
paragraph (f) of Rule 507, which states that nothing in Rule 507 shall
be construed to automatically qualify an RSQT to be a Remote Specialist
on the Exchange.
Quoting Obligations and Priority
Rule 1014 sets forth the quoting (market making) obligations for
all market makers on the Exchange, with quoting requirements for RSQTs
specified in Rule 1014(b)(ii)(D)(1) \23\ and
[[Page 67430]]
quoting requirements for specialists specified in Rule
1014(b)(ii)(D)(2).\24\ The Exchange proposes to clarify that the two-
sided market quoting requirements for specialists are applicable to
Remote Specialists. The Exchange proposes also to clarify that RSQTs
will have different quoting requirements when they are acting as Remote
Specialists as opposed to when they are acting as RSQTs.
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\23\ Regarding RSQT market making obligations, Rule
1014(b)(ii)(D)(1) states, in relevant part, that in addition to the
other requirements for ROTs set forth in this Rule 1014, except as
provided in sub-paragraph (4) below, an SQT and an RSQT shall be
responsible to quote two-sided markets in not less than 60% of the
series in which such SQT or RSQT is assigned, provided that, on any
given day, a Directed SQT (``DSQT'') or a Directed RSQT (``DRSQT'')
(as defined in Rule 1080(l)(i)(C)) shall be responsible to quote
two-sided markets in the lesser of 99% of the series listed on the
Exchange or 100% of the series listed on the Exchange minus one
call-put pair, in each case in at least 60% of the options in which
such DSQT or DRSQT is assigned. Whenever a DSQT or DRSQT enters a
quotation in an option in which such DSQT or DRSQT is assigned, such
DSQT or DRSQT must maintain until the close of that trading day
quotations for the lesser of 99% of the series of the option listed
on the Exchange or 100% of the series of the option listed on the
Exchange minus one call-put pair. To satisfy the applicable
requirements of this sub-paragraph (D)(1) with respect to quoting a
series, an SQT, RSQT, DSQT, or DRSQT must quote such series 90% of
the trading day (as a percentage of the total number of minutes in
such trading day) or such higher percentage as the Exchange may
announce in advance. The Exchange may consider exceptions to the
requirement to quote 90% (or higher) of the trading day based on
demonstrated legal or regulatory requirements or other mitigating
circumstances.
\24\ Regarding specialist market making obligations, Rule
1014(b)(ii)(D)(2) states, in relevant part, that the specialist
shall be responsible to quote two-sided markets in the lesser of 99%
of the series or 100% of the series minus one call-put pair in each
option in which such specialist is assigned. To satisfy the
requirement of this sub-paragraph (D)(2) with respect to quoting a
series, the specialist must quote such series 90% of the trading day
(as a percentage of the total number of minutes in such trading day)
or such higher percentage as the Exchange may announce in advance.
The Exchange may consider exceptions to the requirement to quote 90%
(or higher) of the trading day based on demonstrated legal or
regulatory requirements or other mitigating circumstances.
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Specifically, the Exchange proposes to state in Rule
1014(b)(ii)(D)(2) that RSQTs functioning as Remote Specialists in
particular options shall be responsible to quote two-sided markets just
as on-floor specialists are now required to do. The Exchange also
proposes to state in Rule 1014(b)(ii)(D)(1) that the RSQT quoting
requirements found therein are not applicable to RSQTs when they are
acting as Remote Specialists (in which case the specialist quoting
requirements found in sub-paragraph (D)(2) are applicable). The
Exchange believes that this appropriately establishes quoting
equivalency among on-floor specialists and Remote Specialists.
Rule 1014 establishes that the market making (quoting) obligations
do not apply to RSQTs (as well as to SQTs, DSQTs, and DRSQTs) in terms
of certain types of options products. In particular, Rule
1014(b)(ii)(D)(4) states that RSQTs and the other market makers shall
be deemed not to be assigned in any Quarterly Option Series
(``QOS''),\25\ any adjusted option series,\26\ and any option series
until the time to expiration for such series is less than nine months;
and thereby establishes an exemption for RSQTs and the other market
makers from the obligations set forth in Rule 1014 in the noted
categories of products. The Exchange proposes to add new language to
sub-paragraph (D)(4) to indicate that these exemptions apply to RSQTs
only when they are acting as RSQTs, and do not apply to RSQTs when they
are functioning as Remote Specialists in particular options.
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\25\ QOS are options series that expire at the close of business
on the last business day of a calendar quarter. See Commentary .08
to Rule 1012. For index QOS, see Rule 1101A.
\26\ Adjusted option series are defined in Rule
1014(b)(ii)(D)(4) as an option series wherein one option contract in
the series represents the delivery of other than 100 shares of
underlying stock or Exchange-Traded Fund Shares.
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Rule 1014(b)(ii)(B) currently indicates that no person who is
either directly or indirectly affiliated with an RSQT (``affiliated
RSQT'') is allowed to submit quotations as a specialist, SQT, RSQT or
non-SQT ROT in options in which such affiliated RSQT is assigned. These
restrictions remain. The Exchange proposes to amend sub-paragraph
(b)(ii)(B) only to indicate that an RSQT cannot quote both as RSQT and
as Remote Specialist in a particular security. That is, if an RSQT is a
Remote Specialist in a particular security, the Remote specialist must
make a market (submit quotations) as a specialist and may not make a
market as an RSQT in that particular security.
On-floor specialists currently participate in trades that are
affected in open outcry, as well as electronically. In general, a
trading crowd (including an on-floor specialist) has priority over out-
of-crowd SQTs and RSQTs at the execution price for orders with the size
of at least 500 contracts, while out-of crowd SQTs and RSQTs have
priority for orders of less than 500 contracts. In light of the central
concept that to the extent practicable (and unless otherwise noted in
Exchange rules), specialists and Remote Specialists are treated the
same, that is, have similar rights and obligations, both specialists
and Remote Specialists would have similar priority rights to the extent
practicable. As such, Remote Specialist priority rights would be
coextensive with their ability to submit electronic quotations via the
Exchange's electronic order, execution, and trading system, Phlx XL,
while not being on the floor. For example, Commentary .05(c)(ii) states
that respecting crossing, facilitation and solicited orders (as defined
in Rule 1064) with a size of at least 500 contracts on each side that
are represented and executed in open outcry, priority shall be afforded
to in-crowd participants over RSQTs and out-of crowd SQTs, and that
such orders shall be allocated in accordance with Exchange rules. The
Exchange proposes to add Remote Specialists to Commentary .05(c)(ii) so
that they are treated similarly for priority purposes because they do
not engage in open outcry floor trading.
Commentary .05(b) to Rule 1014 states that SQTs and RSQTs can
submit orders electronically via XL, the Exchange's electronic order,
execution and trading system. The Exchange proposes to add Remote
Specialists to Commentary .05(b) so that they can likewise submit
quotes electronically; and to confirm that, similarly to RSQTs, the
Exchange has the ability to allocate one or more options to Remote
Specialists. Commentary .05(C)(i) indicates that if a Floor Broker
presents a non-electronic order in an option assigned to an RSQT, such
RSQT or SQT may not participate in trades stemming from the non-
electronic order unless the order is executed at the price quoted by
the non-crowd RSQT or SQT at the time of execution. The Exchange
proposes to include Remote Specialists in Commentary .05(C)(i) to
establish priority that is coextensive with Remote Specialist
electronic quoting and trading capabilities.\27\
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\27\ The Exchange has submitted an immediately effective filing
proposing to delete obsolete terminology from certain Exchange rules
including Rule 1014, which filing is subject to a 30 day operative
delay. See Securities Exchange Act Release No. 63036 (October 4,
2010), 75 FR 62621 (October 12, 2010) (SR-Phlx-2010-131) (notice of
filing and immediate effectiveness). SR-Phlx-2010-131 has proposed
changes to the rule text of certain rules that are discussed in this
filing, specifically sub-paragraph (b)(i)(B) and Commentary .05 of
Rule 1014, and the text of these rules in Exhibit 5 reflects the
changes made in SR-Phlx-2010-131 that are operative as of October
27, 2010.
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The Exchange proposes to clarify several OFPAs commensurate with a
Remote Specialist's off-floor electronic quoting and trading
capabilities. In particular, the Exchange proposes to state in Advice
A-10 that a Remote Specialist is exempted from the specialist duty of
ensuring that at least one ROT is present in a floor trading crowd
before such specialist can participate as principal in a trade. The
Exchange proposes to state in Advice
[[Page 67431]]
A-7 that a Remote Specialist is exempted from the specialist obligation
to advise a Floor Broker about cancellations. Additionally, the
Exchange proposes to state in Advice B-3 that a Remote Specialist is
exempted from the requirement that an ROT, including a specialist,
trade a certain percentage of volume on the Exchange in person.
Surveillance
The Exchange has developed surveillance procedures for its auction
and electronic markets. The Exchange will use the surveillance
procedures now in place regarding specialists to perform surveillance
of Remote Specialists.
Conclusion
The Exchange believes that its proposal to enable Remote Streaming
Quote Traders to act as Remote Specialists where no on-floor
specialists are willing to accept, or retain, an option allocation
would enable Remote Specialists to provide a market that does not
otherwise exist on the Exchange to the benefit of traders, investors,
and public customers making hedging and trading decisions. The Exchange
believes that allowing specialists to function off-floor also removes
an operational issue by allowing off-floor specialists that are not
required to be present on the trading floor in respect of certain
option issues. Accordingly, the Exchange believes that the proposed
rule change is designed to promote just and equitable principles of
trade and to be in the public interest.
Finally, the Exchange notes that the Commission has approved, or
options exchanges have filed for immediate effectiveness, proposals
that allow these exchanges to have off-floor (remote) market makers
that are similar in concept to the proposed Remote Specialists.\28\ The
Exchange does not believe that this filing raises any novel issues.
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\28\ See Securities Exchange Act Release Nos. 55531 (March 26,
2007), 72 FR 15736 (April 2, 2007) (SR-CBOE-2006-94) (order
approving proposal to establish off-floor Delegated Primary Market-
Makers); 57747 (April 30, 2008), 73 FR 25811 (May 7, 2008) (SR-CBOE-
2008-49) (notice of filing and immediate effectiveness to establish
off-floor Lead Market-Makers); 57568 (March 26, 2008), 73 FR 18016
(April 2, 2008) (SR-CBOE-2008-32 (notice of filing and immediate
effectiveness to establish ability of off-floor Delegated Primary
Market-Makers to operate in any options class traded on Hybrid); and
52827 (November 23, 2005), 70 FR 72139 (December 1, 2005) (SR-PCX-
2005-56) (approval order establishing Lead Market Makers).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \29\ in general, and furthers the objectives of Section
6(b)(5) of the Act \30\ in particular, in that it is 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 facilitating transactions in
securities, and to remove impediments to and perfect the mechanisms of
a free and open market and a national market system by allowing
Exchange option specialists that are not on an Exchange floor where the
Exchange determines that it cannot allocate options to a floor based
specialist.
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\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2010-145 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2010-145. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the 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 such filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-Phlx-2010-145 and should be
submitted on or before November 23, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27645 Filed 11-1-10; 8:45 am]
BILLING CODE 8011-01-P
