Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change To Update and Streamline the Process for Specialist Evaluations and Clarify the Time Within Which SQTs and RSQTs Begin To Electronically Quote After Assignment, 70331-70335 [2010-28900]
Download as PDF
<![CDATA[
Federal Register / Vol. 75, No. 221 / Wednesday, November 17, 2010 / Notices
Number SR–MSRB–2010–13 and should
be submitted on or before December 8,
2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–28982 Filed 11–16–10; 8:45 am]
BILLING CODE 8011–01–P
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63305; File No. SR–Phlx–
2010–153]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To
Update and Streamline the Process for
Specialist Evaluations and Clarify the
Time Within Which SQTs and RSQTs
Begin To Electronically Quote After
Assignment
November 10, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on November 5, 2010, NASDAQ OMX
PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
mstockstill on DSKH9S0YB1PROD with NOTICES
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 Phlx
By-Law Article XI (Appeals) Section 11–
1; Phlx Rules 507 (Application for
Approval as an SQT or RSQT and
Assignment in Options), 508 (Allocation
Application), 510 (SQT and RSQT
Performance Evaluation), 511 (Specialist
Performance Evaluation), and 515
(Specialist Evaluations); and Phlx
Options Floor Procedure Advice
(‘‘OFPA’’) C–8 (Options Specialist
Evaluations) to update the specialist
evaluation process; ensure timely
electronic quotations by Streaming
Quote Traders and Remote Streaming
Quote Traders; ensure the ability of the
Exchange to control allocation transfers;
6 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Mar<15>2010
16:21 Nov 16, 2010
Jkt 223001
and consolidate and delete unnecessary
and obsolete rules and processes.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
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 purpose of the proposed rule
change is to amend By-Law Article XI
Section 11–1; Phlx Rules 507, 508, 510,
511, and 515; and OFPA C–8 to enhance
the ability to gauge specialist
performance in an ever-increasingly
competitive electronic trading
environment; ensure timely electronic
quotations by Streaming Quote Traders
and Remote Streaming Quote Traders;
ensure the ability of the Exchange to
control allocation transfers; and
consolidate and delete unnecessary and
obsolete rules and processes.
Background
After the merger of The NASDAQ
OMX Group, Inc. (‘‘NASDAQ OMX’’)
and the Philadelphia Stock Exchange,
Inc. (now NASDAQ OMX PHLX LLC),3
the Commission in May 2009 approved
a Phlx filing that, among other things,
transferred all relevant duties from the
Options Allocation, Evaluation and
Securities Committee (‘‘Allocation
Committee’’) to the Exchange staff and
established that the Exchange
administers Exchange Rules 500
3 See Securities Exchange Act Release Nos. 58179
(July 17, 2008), 73 FR 42874 (July 23, 2008) (SR–
Phlx–2008–31); and 58183 (July 17, 2008), 73 FR
42850 (July 23, 2008) (SR–NASDAQ–2008–035).
See also Securities Exchange Act Release No. 62783
(August 27, 2010), 75 FR 54204 (September 3, 2010)
(SR–Phlx–2010–104).
PO 00000
Frm 00133
Fmt 4703
Sfmt 4703
70331
through 599 (the ‘‘Allocation and
Assignment Rules’’).4
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; 5 application for
becoming and approval of Streaming
Quote Traders (‘‘SQTs’’) 6 and Remote
Streaming Quote Traders (‘‘RQTs’’) 7
(together the ‘‘Streaming Quote
Traders’’) 8 and assignment of options to
them; and performance evaluations for
specialist units and Streaming Quote
Traders. The Allocation and Assignment
Rules also indicate, among other things,
under what circumstances new
specialist allocations and Streaming
Quote Trader assignments may not be
made.9
Specialist Evaluations
Rule 511 and Rule 515 deal with
specialist evaluations and certain
allocation procedures. Currently, Rule
511 indicates, among other things, that
specialist performance evaluations
standards and procedures may be used
in respect of Exchange decisions
regarding allocating new options
classes; reallocating options classes for
substandard performance; determining
whether a specialist that has been
transferred an options class is
performing adequately; and determining
whether a staff reorganization or
material change with respect to a
specialist unit has affected the ability of
the unit to continue to perform
4 See Securities Exchange Act Release No. 59924
(May 14, 2009), 74 FR 23759 (May 20, 2009) (SR–
Phlx–2009–23) (approval order.) See also Rule 500.
5 A specialist unit may have one or more
individual specialists. See proposed Supplementary
Material .05 to Rule 511.
6 An SQT is a Registered Options Trader (‘‘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).
7 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).
8 Streaming Quote Traders also include Directed
SQTs (‘‘DSQTs’’) and Directed RSQTs (‘‘DRSQTs’’),
which are SQTs and RSQTs that receive a Directed
Order. Exchange Rule 1080(l)(i)(A) defines Directed
Order.
9 See, for example, 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). See also Commentary .02
to Rule 507 (establishing the Maximum Number of
Quoters in assigned equity options).
E:\FR\FM\17NON1.SGM
17NON1
70332
Federal Register / Vol. 75, No. 221 / Wednesday, November 17, 2010 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
adequately in order to retain allocated
securities. Rule 511 also discusses the
process and timing for doing routine
and special (cause) evaluations and
reviews. Currently, Rule 515 similarly
discusses specialist performance
evaluations for options specialists and
indicates, among other things, the
timing and frequency of evaluations.
The criterion to evaluate specialists may
include, but is not limited to, quality of
markets, observance of ethical
standards, administrative
responsibilities, and trade correction
and exemptive relief data. Rule 515, like
OFPA C–8, also discusses the use of
floor broker questionnaires in the
specialist evaluation process.
The Exchange proposes to eliminate
the floor broker questionnaire
(‘‘questionnaire’’), which asks floor
brokers their opinions of specialist
performance and presumes that a
specialist unit performed below
minimum standards if the specialist
unit was rated in the bottom 10% of all
units in the aggregate results for all
questionnaires. The Exchange has found
that such questionnaires, being wholly
subjective in nature and not based on
any hard data, would generally provide
limited, if any, substantial value in the
current fast-paced, competitive trading
environment that includes numerous
market participants and liquidity
providers. The Exchange believes that
the various types of specialist
performance evaluations that are
discussed in this filing enhance the
evaluation process and make it
increasingly data-based, and make
questionnaires unnecessary. As such,
the Exchange is deleting OFPA C–8 and
all references to floor broker
questionnaires in its Allocation and
Assignment Rules and OFPAs.
The Exchange proposes to consolidate
Rules 511 and 515 into Rule 511 and to
adopt for specialist units 10 an objective
review process that is similar to the
process currently in use for Streaming
Quote Traders per Rule 510, particularly
in respect of minimum performance
standards. The Exchange also proposes
to relocate portions of the existing
evaluation process from Rule 515 into
Rule 511. As such, there would be two
types of specialist evaluations or
10 Proposed Supplementary Material .05 to Rule
511 states that reference to specialist unit within
Rule 511 means the unit as a whole or any subpart
of its operation that is acting in a specialist capacity
on the Exchange and is subject to evaluation; and
that a specialist unit may have one or more
individual specialists. As such, individual
specialist actions may be attributable to relevant
specialist units in respect of matters discussed in
this proposal such as evaluations. The proposed
language in Rule 511 was moved from Rule 515 and
updated to reflect current usage.
VerDate Mar<15>2010
16:21 Nov 16, 2010
Jkt 223001
reviews per Rule 511: a) routine
Specialist Performance Evaluations,
which would be conducted on at least
an annual basis,11 and would include
monthly Minimum Performance
Reviews; 12 and b) Special Circumstance
Evaluations, which may be conducted if
a specialist unit’s performance was so
egregiously deficient as to call into
question the Exchange’s integrity or
impair the Exchange’s reputation for
maintaining efficient, fair and orderly
markets; and within six months after a
new allocation and within four months
after transfer of one or more options.13
The Exchange proposes changes to
Rule 511 so that specialist suspension,
termination, or restriction of allocations
in one or more options may occur after
two or more consecutive sub-standard
Minimum Performance Reviews or after
Special Circumstance Evaluations and
after written notice. As discussed below,
following substandard minimum
performance, a specialist unit may have
an opportunity for an informal meeting
with Exchange staff; and following a
Special Circumstance Evaluation may
be afforded thirty days to improve
performance. Moroever, after a
Minimum Performance Review or a
Special Circumstance Evaluation, a
specialist or specialist unit 14 may
appeal from a decision of the Exchange
in accordance with Exchange By-Law
Article XI, Section 11–1, after filing a
written notice of appeal with the
Exchange.15 The Exchange believes that
11 See
proposed Rule 511(c).
proposed Rule 511(d).
13 See proposed Rule 511(e).
14 In proposed Rule 511(d) and Rule 511(e), a
specialist has the right to request an appeal on
behalf of his specialist unit.
15 By-Law Article XI Section 11–1(c) states that an
appeal: shall be heard by a special committee of the
Board of Governors composed of three (3)
Governors, of whom at least one (1) shall be an
Independent Governor. The person requesting
review may appeal by filing a written notice thereof
with the Secretary of the Exchange within ten (10)
days after a decision. The person requesting review
shall be permitted to submit a written statement to
and/or appear before this special committee. The
Secretary of the Exchange shall certify the record
of the proceeding, if any and the written decision
and shall submit these documents to the special
committee. The special committee’s review of the
action shall be based solely on the record, the
written decision and any statement submitted by
the person requesting the review. The special
committee shall prepare and deliver to such person
a written decision and reasons therefor. If the
special committee affirms the action, the action
shall become effective ten (10) days from the date
of the special committee’s decision. There shall be
no appeal to the Board of Governors from any
decision of the special committee.
The Exchange is correcting a reference in By-Law
Article XI Section 11–1(c) from Rule 511(e) to Rule
511(d) or (e), in light of the internal numbering
changes proposed in Rule 511; and crossreferencing Rule 507, which notes the availability
of the appeal process.
this appeal process for specialists or
specialist units per Rule 511, which is
similar to the process afforded to
Streaming Quote Traders per Rules 507
and 510, is fair and equitable and
promotes uniformity for the various
market participant members of the
Exchange.16 The Exchange is, for similar
reasons of uniformity, establishing new
minimum performance standards for
specialist units.
The minimum performance standards
for specialist units in proposed Rule
511(d), which are part of the Specialist
Performance Evaluation process, are
similar to the minimum performance
standards for Streaming Quote Traders
in Rule 510 Commentary .01.17 This is
done to promote a minimum
performance floor across the Exchange
for specialist units and Streaming Quote
Traders.18 Thus, proposed Rule 511(d)
suggests the minimum acceptable
performance for specialist units using
the following criteria: (a) The percentage
of time that the specialist unit
represents or exceeds the Phlx Best Bid
or Offer (‘‘PBBO’’) in the options
allocated to the unit; 19 and (b) quoting
requirements of specialist units
pursuant to Rule 1014.20 Specifically, if
the percentage of the total time that the
options allocated to a specialist unit
represent or exceed the PBBO is in the
lowest quartile of all specialist units for
two or more consecutive months, this
may be considered sub-standard
performance, that is, performance that
does not attain minimum performance
standards; and if a specialist unit fails
12 See
PO 00000
Frm 00134
Fmt 4703
Sfmt 4703
16 For consistency, the Exchange proposes appeal
language in Rules 510 and 511 that is similar, in
relevant part, to that of Rule 507: An appeal to the
Board of Governors from a decision of the Exchange
* * * may be requested * * * by filing with the
Secretary of the Exchange written notice of appeal
within ten (10) days after the decision has been
rendered, in accordance with Exchange By-Law
Article XI, Section 11–1.
17 See Securities Exchange Act Release No. 55080
(January 10, 2007), 72 FR 2324 (January 18, 2007)
(SR–Phlx–2006–51) (order approving performance
standards for Streaming Quote Traders and Remote
Streaming Traders).
18 Recognizing that among market participants on
the Exchange specialists have diverse and at times
greater market making responsibilities, which are
not diminished by this filing, Specialist
Performance Evaluations are available to the
Exchange to review specialist performance and
behavior (as discussed in more detail below).
19 In that the Exchange is specifically establishing
a measure of specialist performance on Phlx, the
Exchange is changing the requirement to PBBO
from NBBO (National Best Bid or Offer). A reference
in Commentary .01 of Rule 510 is similarly changed
to PBBO for the sake of conformity.
20 This rule change proposal makes no changes to
current quoting requirements for specialists
delineated in Rule 1014. Rule 1014 is written in
terms of specialists; as noted in proposed
Supplementary Material .05 to Rule 511, a specialist
unit may have one or more specialists. See supra
note 10.
E:\FR\FM\17NON1.SGM
17NON1
mstockstill on DSKH9S0YB1PROD with NOTICES
Federal Register / Vol. 75, No. 221 / Wednesday, November 17, 2010 / Notices
to meet the quoting requirements as
prescribed by Rule 1014, this may be
considered sub-standard performance.
The Exchange proposes a process that
would allow specialist to meet with
Exchange staff regarding their substandard performance.
The Exchange proposes in Rule
511(d)(ii) that if the Exchange finds that
a specialist unit failed to meet
Minimum Performance Standards, it
will provide written notice to the unit.
The Exchange proposes in Rule
511(d)(iii) that the specialist unit may
request and the Exchange may hold an
informal meeting with the head
specialist and any other appropriate
specialist of the specialist unit to
discuss the failure to meet minimum
standards and to explore possible
remedies. The Exchange will give notice
of the meeting and no verbatim record
will be kept. If, after receiving such
notice for the Exchange, the specialist
unit refuses or otherwise fails without
reasonable justification to meet with the
Exchange, the Exchange may refer the
matter to the Business Conduct
Committee (a standing committee of the
Exchange) for the commencement of
formal disciplinary proceedings. If the
Exchange believes there are no
mitigating circumstances that would
demonstrate substantial improvement of
or reasonable justification for the failure
to meet minimum standards, the
Exchange may take remedial action
pursuant to subparagraph (d)(ii).
The Exchange proposes in Rule
511(d)(ii) that if it finds sub-standard
minimum performance by a specialist
unit, the Exchange may take the
following remedial actions: a) restriction
of allocations in additional options
(subsection (d)(ii)(A)); b) suspension,
termination, or restriction of allocations
in one or more options (subsection
(d)(ii)(B)); or c) suspension, termination,
or restriction of the specialist or
specialist unit’s registration in general
(subsection (d)(ii)(C)). Specialist units or
specialists therein may appeal to the
Board of Governors from a decision of
the Exchange pursuant to subsection
(d)(ii)(B) or subsection (d)(ii)(C) by filing
the requisite notice of appeal.21
Minimum Performance Reviews will be
conducted at least annually but may be
conducted at monthly intervals.
Routine Specialist Performance
Evaluations pursuant to proposed Rule
511(c) are conducted at annual (or
shorter) intervals to determine whether
21 See supra note 15. The Minimum Performance
Standards; remedial action by the Exchange if there
is a failure to attain such performance standards;
and appeal rights therefrom are substantially
similar for specialist units and SQTs/RSQTs per
Rules 511 and 510, respectively.
VerDate Mar<15>2010
16:21 Nov 16, 2010
Jkt 223001
specialists have fulfilled performance
standards that may include, but are not
limited to, trade correction data,
exemptive relief data, quality of markets
data, proper execution of duties as a
specialist unit, competition among
market makers and in representing the
Exchange as specialist unit, observance
of ethical standards, and administrative
factors. The Exchange may also
consider, when doing these routine
evaluations, any other relevant
information including, but not limited
to, trading data, regulatory history, the
number of requests for quote spread
parameter relief, how a specialist unit
optimizes the submission of quotes
through the Specialized Quote Feed as
defined in Rule 1080 by evaluating the
number of individual quotes per quote
block received by the Exchange, and
such other factors and data as may be
pertinent in the circumstances.
The Exchange may also, but is not
required to, conduct Special
Circumstance Evaluations pursuant to
proposed Rule 511(e) whenever the
Exchange feels that circumstances
warrant such reviews. These include,
but are not limited to, where the
Exchange believes that a specialist
unit’s performance in a particular
market situation was so egregiously
deficient as to call into question the
Exchange’s integrity or impair the
Exchange’s reputation for maintaining
efficient, fair and orderly markets.
Special Circumstance Evaluations may
incorporate the same review
methodology and procedures as
established for routine Specialist
Performance Evaluations or Minimum
Performance Reviews. However, Special
Circumstance Evaluations may instead
or in addition examine such other
matters related to a specialist unit’s
performance as the Exchange deems
necessary and appropriate. Special
Circumstance Evaluations may be done
within six months of new allocations 22
and within four months of transfers of
allocations to specialist units.23
The Exchange may determine,
pursuant to a Rule 511 Special
Circumstance Evaluation, that a
specialist unit that received a new
allocation has not complied with any of
the commitments that it made when
applying for the options class, including
but not limited to commitments
regarding capital, personnel and order
22 For purposes of conformity with the proposed
six month period, 90 days is changed to 180 days
(six months) in Rule 511(b).
23 While Special Circumstance Evaluations are
optional during the noted four month and six
month periods, the Exchange may also conduct
independent Minimum Performance Reviews on a
monthly basis.
PO 00000
Frm 00135
Fmt 4703
Sfmt 4703
70333
flow (subsection (e)(i)(A)); or that the
performance of a specialist unit was
inadequate after the transfer of one or
more options classes or when there has
been a material change in the specialist
unit (subsection (e)(i)(B)). After the
Exchange indicates to the applicable
specialist unit why its performance is
inadequate, the specialist unit will be
afforded thirty days in which to
improve its performance. If the
specialist unit does not improve its
performance, the Exchange may, after
written notice, remove and reallocate
one or more securities that were
allocated to such unit. Specialists units
and specialists therein may appeal to
the Board of Governors from a decision
of the Exchange pursuant to proposed
subsection (e)(ii) by filing the requisite
notice of appeal.24
Additionally, the rules establish
limits on the allocation of options to
specialist units that fail to perform
adequately. By virtue of proposed Rule
511(e)(iii), if a specialist allocation in an
option is terminated as a result of a
Special Circumstance Evaluation, the
specialist unit may not receive an
allocation (or re-allocation) in the
terminated option or options for a
period not to exceed six months.
Similarly, by virtue of proposed Rule
511(d)(v), if an allocation is terminated
because a specialist exhibits substandard performance in terms of best
bid and offer or in terms of quoting
requirements, such specialist may not
receive an allocation (or re-allocation) in
the terminated option or options for a
period not to exceed six months; and if
an allocation is terminated because a
specialist unit exhibits sub-standard
performance in terms of minimum
quoting requirements per Rule 1014,
such specialist unit may not receive an
allocation (or re-allocation) in the
terminated option or options for a
period not to exceed twelve months.
As discussed, all specialists and
specialist units have the right to appeal
from an Exchange decision that was
taken pursuant to a Specialist
Evaluation or a Special Circumstance
Evaluation. Moreover, the rules indicate
that the Exchange must provide written
notice regarding the lack of adequate
performance; and give specialist units
an opportunity to discuss performance
or improve performance before the
Exchange takes remedial action. The
Exchange feels that these procedures are
fair, reasonable, and uniform for all
specialists on the Exchange.25
24 See
supra note 15.
an effort to streamline the specialist
evaluation process, and in light of the noted
25 In
E:\FR\FM\17NON1.SGM
Continued
17NON1
70334
Federal Register / Vol. 75, No. 221 / Wednesday, November 17, 2010 / Notices
In Rule 510 (regarding SQTs and
RSQTs) and Rule 511 (regarding
specialists), the Exchange proposes to
eliminate the right to appeal from an
Exchange’s determination to restrict
additional options allocations based on
failure to meet minimum performance
requirements. The Exchange believes
that an appeals process for restriction of
allocations or assignments in additional
(not currently allocated or assigned)
options, which would require a 10 day
notice period followed by a potentially
lengthy appeals proceeding, is not
necessary and indeed may be
counterproductive in light of the need to
efficiently and timely allocate or assign
additional options.
mstockstill on DSKH9S0YB1PROD with NOTICES
Assignment in Options
Rule 507 deals with the process of
applying for approval as an SQT or
RSQT on the Exchange and assignment
of options to SQTs and RSQTs. These
are Registered Options Traders that,
similarly to other market makers on the
Exchange such as specialists, provide
depth and liquidity through two-sided
quotes in the options in which they are
assigned. Rule 1014 discusses, among
other things, the quote obligations of
market makers and participants on the
Exchange.26 Rule 507 defines the
Maximum Number of Quoters (‘‘MNQ’’)
in equity options, which establishes the
greatest number of SQT and RSQT
assignments that the Exchange may
make in a particular class of option.
MNQ in equity options is currently set
in Commentary .02 to Rule 507 at no
more than: Twenty-four market
participants (SQTs and RSQTs) for
equity options in the top 5% most
actively traded options; nineteen market
participants for the next 10% most
actively traded options; and seventeen
safeguards built into the Exchange’s rules and ByLaws, the Exchange is deleting the formal hearing
process that is currently in Rule 511(e) and
proposes an informal hearing process in Rule 510
(regarding SQTs and RSQTs) and Rule 511
(regarding specialists).
26 Rule 1014(b)(ii)(D) states 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.
VerDate Mar<15>2010
16:21 Nov 16, 2010
Jkt 223001
market participants for all other
options.27
Because the number of assignments
that may be made by the Exchange are
limited by MNQ, thereby resulting in
situations where SQTs and RSQTs may
not be able to get assignments that they
applied (and may be eligible) for, the
Exchange is striving to ensure that
option assignments are used to provide
liquidity within a reasonable time after
assignment. It is for this reason that the
Exchange proposes to add new
Commentary .01 to Rule 507 to state that
within not more than thirty business
days after assignment of an option
pursuant to this rule, an assigned SQTs
or RSQTs shall begin to generate and
submit electronic quotations for such
option through the Exchange’s
electronic quotation, execution, and
trading system. Quoting requirements
are, as previously noted, set forth in
Rule 1014.28 Should an assigned SQT or
RSQT not generate electronic quotes
within the requisite time frame, the
Exchange shall have the ability to
terminate the assignment in question
after providing written notice to the
assigned SQT or RSQT, and make a reassignment, unless there are exigent
circumstances that the Exchange
believes may not have allowed timely
generation and submission of electronic
quotes.29
Transfer of Allocated Option Classes
Rule 508 deals with agreements
between specialist units to transfer one
or more options classes that are already
allocated by the Exchange to one of such
units. This type of process tends to
happen most often, and in fact is
instrumental to facilitating the orderly
transfer and continuation of markets in
classes of allocated options, when a
27 Regarding MNQ procedures in general, see
Commentaries .01 to .05 to Rule 507. See also
Securities Exchange Act Release No. 60688
(September 18, 2009), 74 FR 49058 (September 25,
2009) (SR–Phlx–2009–82) (order approving modest
increase in MNQ levels).
28 Rule 1014 also sets forth circumstances in
which market participants do not have quoting
responsibilities. As an example, subsection
(b)(ii)(D)(4) states that SQTs, DSQTs, RSQTs and
DRSQTs are deemed not to be assigned, and
therefore do not have quoting responsibilities,
respecting Quarterly Option Series, adjusted option
series, and series with an expiration of nine months
or greater. Adjusted option series are defined as
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. See Securities Exchange Act Release
No. 61095 (December 2, 2009), 74 FR 64786
(December 8, 2009) (SR–Phlx–2009–99) (notice of
filing and immediate effectiveness).
29 The Exchange has proposed other amendments
to Rule 507 at SR–Phlx–2010–145 that should not
impact this filing. Should it become necessary,
however, the Exchange will propose additional rule
text amendments.
PO 00000
Frm 00136
Fmt 4703
Sfmt 4703
specialist unit significantly changes the
scale or breadth of its specialist
operation on the Exchange or withdraws
from the Exchange.
Currently, Rule 508 states that failure
to provide the Exchange with prior
notice of an arranged (agreed-upon)
transfer of one or more already allocated
options classes in accordance with this
rule permits the Exchange to reallocate
such options classes. The proposed
change to Rule 508 states that failure to
provide the Exchange prior notice of a
transfer in accordance with this Rule, or
failure to obtain Exchange approval of a
transfer, permits the Exchange to
recover the allocated securities and
reallocate them. The Exchange believes
that this is appropriate given that the
Exchange initially makes the allocation
of the option class after evaluating the
relevant factors, and should continue to
have a similar ability to evaluate the
propriety of subsequent transfer of the
same option class.
Commentary .01 to Rule 508 also
currently indicates that no member may
effect a change in the floor trading
location of any equity option or index
option class until forty-five calendar
days after final approval of the change
by the Exchange has been disseminated
to the option floor. The Exchange
proposes to delete this provision. The
Exchange believes that the forty-five day
delay to affect a change is functionally
obsolete and no longer necessary,
particularly in the current fast-paced
trading environment.30
Finally, the Exchange is proposing
technical, housekeeping rule changes in
respect of ensuring conformity of rule
language and deleting references that
are obsolete or no longer in use. For
example, the reference to Registrant is
changed to specialist or specialist unit
in Rules 508 and 511, and the reference
to grant is changed to allocate in Rule
511 for purposes of conformity.31 The
Exchange is proposing to clean up the
language of Commentary .02 of Rule 510
by removing reference to initial
implementation of the existing rule. The
Exchange is also proposing to conform
Rule 511 language in light of the
consolidation with Rule 515. Thus,
reference to Specialist Performance
Evaluations and Special Circumstance
Evaluations, and reference to factors
that may be considered by the Exchange
(e.g., evaluations, trade correction data,
exemptive relief data) are added to Rule
30 The Exchange will notify relevant specialist
units, specialists, or members regarding transfer
applications pursuant to Rule 508.
31 This change in terminology conforms it to
current usage.
E:\FR\FM\17NON1.SGM
17NON1
Federal Register / Vol. 75, No. 221 / Wednesday, November 17, 2010 / Notices
511(b); and reference to Rule 515 is
deleted.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 32 in general, and furthers the
objectives of Section 6(b)(5) of the Act 33
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest, by
updating and making more uniform the
evaluation process for specialist units,
ensuring timely electronic quotations by
SQTs and RSQTs, and consolidating
and deleting unnecessary and obsolete
rules and processes. The Exchange
believes that its rule change proposal
does not engender unfair discrimination
among specialists, specialist units, SQTs
and RSQTs in that it proposes to amend
rules and procedures that are equally
applicable to all members and member
organizations at the Exchange.
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.
mstockstill on DSKH9S0YB1PROD with NOTICES
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
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–Phlx-2010–153 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–2010–153. 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 Number SR–Phlx–
2010–153 and should be submitted on
or before December 8, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–28900 Filed 11–16–10; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63308; File No. SR–MSRB–
2010–15]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing and Immediate
Effectiveness of Rule D–13, on a
Definition of ‘‘Municipal Advisory
Activities’’, Rule D–14, on a Definition
of ‘‘Appropriate Regulatory Agency’’,
and Amendments to Rule D–11
(‘‘Associated Persons’’), Rule G–40 on
Electronic Mail Contacts, and Form G–
40, on Electronic Mail Contacts
November 12, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘the
Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
10, 2010, the Municipal Securities
Rulemaking Board (‘‘Board’’ or ‘‘MSRB’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by the MSRB. The
Board has designated the proposed rule
change as concerned solely with the
administration of the Board or other
matters which the Commission, by rule,
consistent with the public interest and
the purposes of this subsection, may
specify as without the provisions of
Section 19(b)(2) of the Act. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The MSRB is filing a proposed rule
change relating to municipal advisors,
consisting of: (i) Amendments to Rule
D–11 (definition of ‘‘associated
persons’’); (ii) new Rule D–13 (definition
of ‘‘municipal advisory activities’’); (iii)
new Rule D–14 (definition of
‘‘appropriate regulatory agency’’); (iv)
amendments to Rule G–40, on electronic
mail contacts, by municipal advisors;
and (v) amendments to Form G–40, on
electronic mail contacts. The proposed
rule change is effective immediately
upon filing.
The text of the proposed rule change
is available on the MSRB’s Web site at
https://www.msrb.org/Rules-andInterpretations/SEC-Filings/2010Filings.aspx, at the MSRB’s principal
office, and at the Commission’s Public
Reference Room.
BILLING CODE 8011–01–P
32 15
U.S.C. 78f(b).
33 15 U.S.C. 78f(b)(5).
VerDate Mar<15>2010
16:21 Nov 16, 2010
1 15
34 17
Jkt 223001
PO 00000
CFR 200.30–3(a)(12).
Frm 00137
Fmt 4703
Sfmt 4703
70335
2 17
E:\FR\FM\17NON1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
17NON1
]]>Agencies
[Federal Register Volume 75, Number 221 (Wednesday, November 17, 2010)]
[Notices]
[Pages 70331-70335]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28900]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63305; File No. SR-Phlx-2010-153]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Update and Streamline the Process for
Specialist Evaluations and Clarify the Time Within Which SQTs and RSQTs
Begin To Electronically Quote After Assignment
November 10, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on November 5, 2010, NASDAQ OMX PHLX LLC (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
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 Phlx
By-Law Article XI (Appeals) Section 11-1; Phlx Rules 507 (Application
for Approval as an SQT or RSQT and Assignment in Options), 508
(Allocation Application), 510 (SQT and RSQT Performance Evaluation),
511 (Specialist Performance Evaluation), and 515 (Specialist
Evaluations); and Phlx Options Floor Procedure Advice (``OFPA'') C-8
(Options Specialist Evaluations) to update the specialist evaluation
process; ensure timely electronic quotations by Streaming Quote Traders
and Remote Streaming Quote Traders; ensure the ability of the Exchange
to control allocation transfers; and consolidate and delete unnecessary
and obsolete rules and processes.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxphlx.cchwallstreet.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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 purpose of the proposed rule change is to amend By-Law Article
XI Section 11-1; Phlx Rules 507, 508, 510, 511, and 515; and OFPA C-8
to enhance the ability to gauge specialist performance in an ever-
increasingly competitive electronic trading environment; ensure timely
electronic quotations by Streaming Quote Traders and Remote Streaming
Quote Traders; ensure the ability of the Exchange to control allocation
transfers; and consolidate and delete unnecessary and obsolete rules
and processes.
Background
After the merger of The NASDAQ OMX Group, Inc. (``NASDAQ OMX'') and
the Philadelphia Stock Exchange, Inc. (now NASDAQ OMX PHLX LLC),\3\ the
Commission in May 2009 approved a Phlx filing that, among other things,
transferred all relevant duties from the Options Allocation, Evaluation
and Securities Committee (``Allocation Committee'') to the Exchange
staff and established that the Exchange administers Exchange Rules 500
through 599 (the ``Allocation and Assignment Rules'').\4\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release Nos. 58179 (July 17,
2008), 73 FR 42874 (July 23, 2008) (SR-Phlx-2008-31); and 58183
(July 17, 2008), 73 FR 42850 (July 23, 2008) (SR-NASDAQ-2008-035).
See also Securities Exchange Act Release No. 62783 (August 27,
2010), 75 FR 54204 (September 3, 2010) (SR-Phlx-2010-104).
\4\ See Securities Exchange Act Release No. 59924 (May 14,
2009), 74 FR 23759 (May 20, 2009) (SR-Phlx-2009-23) (approval
order.) 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; \5\ application for becoming and approval of Streaming
Quote Traders (``SQTs'') \6\ and Remote Streaming Quote Traders
(``RQTs'') \7\ (together the ``Streaming Quote Traders'') \8\ and
assignment of options to them; and performance evaluations for
specialist units and Streaming Quote Traders. The Allocation and
Assignment Rules also indicate, among other things, under what
circumstances new specialist allocations and Streaming Quote Trader
assignments may not be made.\9\
---------------------------------------------------------------------------
\5\ A specialist unit may have one or more individual
specialists. See proposed Supplementary Material .05 to Rule 511.
\6\ An SQT is a Registered Options Trader (``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).
\7\ 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).
\8\ Streaming Quote Traders also include Directed SQTs
(``DSQTs'') and Directed RSQTs (``DRSQTs''), which are SQTs and
RSQTs that receive a Directed Order. Exchange Rule 1080(l)(i)(A)
defines Directed Order.
\9\ See, for example, 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). See also Commentary .02 to Rule 507 (establishing the
Maximum Number of Quoters in assigned equity options).
---------------------------------------------------------------------------
Specialist Evaluations
Rule 511 and Rule 515 deal with specialist evaluations and certain
allocation procedures. Currently, Rule 511 indicates, among other
things, that specialist performance evaluations standards and
procedures may be used in respect of Exchange decisions regarding
allocating new options classes; reallocating options classes for
substandard performance; determining whether a specialist that has been
transferred an options class is performing adequately; and determining
whether a staff reorganization or material change with respect to a
specialist unit has affected the ability of the unit to continue to
perform
[[Page 70332]]
adequately in order to retain allocated securities. Rule 511 also
discusses the process and timing for doing routine and special (cause)
evaluations and reviews. Currently, Rule 515 similarly discusses
specialist performance evaluations for options specialists and
indicates, among other things, the timing and frequency of evaluations.
The criterion to evaluate specialists may include, but is not limited
to, quality of markets, observance of ethical standards, administrative
responsibilities, and trade correction and exemptive relief data. Rule
515, like OFPA C-8, also discusses the use of floor broker
questionnaires in the specialist evaluation process.
The Exchange proposes to eliminate the floor broker questionnaire
(``questionnaire''), which asks floor brokers their opinions of
specialist performance and presumes that a specialist unit performed
below minimum standards if the specialist unit was rated in the bottom
10% of all units in the aggregate results for all questionnaires. The
Exchange has found that such questionnaires, being wholly subjective in
nature and not based on any hard data, would generally provide limited,
if any, substantial value in the current fast-paced, competitive
trading environment that includes numerous market participants and
liquidity providers. The Exchange believes that the various types of
specialist performance evaluations that are discussed in this filing
enhance the evaluation process and make it increasingly data-based, and
make questionnaires unnecessary. As such, the Exchange is deleting OFPA
C-8 and all references to floor broker questionnaires in its Allocation
and Assignment Rules and OFPAs.
The Exchange proposes to consolidate Rules 511 and 515 into Rule
511 and to adopt for specialist units \10\ an objective review process
that is similar to the process currently in use for Streaming Quote
Traders per Rule 510, particularly in respect of minimum performance
standards. The Exchange also proposes to relocate portions of the
existing evaluation process from Rule 515 into Rule 511. As such, there
would be two types of specialist evaluations or reviews per Rule 511:
a) routine Specialist Performance Evaluations, which would be conducted
on at least an annual basis,\11\ and would include monthly Minimum
Performance Reviews; \12\ and b) Special Circumstance Evaluations,
which may be conducted if a specialist unit's performance was so
egregiously deficient as to call into question the Exchange's integrity
or impair the Exchange's reputation for maintaining efficient, fair and
orderly markets; and within six months after a new allocation and
within four months after transfer of one or more options.\13\
---------------------------------------------------------------------------
\10\ Proposed Supplementary Material .05 to Rule 511 states that
reference to specialist unit within Rule 511 means the unit as a
whole or any subpart of its operation that is acting in a specialist
capacity on the Exchange and is subject to evaluation; and that a
specialist unit may have one or more individual specialists. As
such, individual specialist actions may be attributable to relevant
specialist units in respect of matters discussed in this proposal
such as evaluations. The proposed language in Rule 511 was moved
from Rule 515 and updated to reflect current usage.
\11\ See proposed Rule 511(c).
\12\ See proposed Rule 511(d).
\13\ See proposed Rule 511(e).
---------------------------------------------------------------------------
The Exchange proposes changes to Rule 511 so that specialist
suspension, termination, or restriction of allocations in one or more
options may occur after two or more consecutive sub-standard Minimum
Performance Reviews or after Special Circumstance Evaluations and after
written notice. As discussed below, following substandard minimum
performance, a specialist unit may have an opportunity for an informal
meeting with Exchange staff; and following a Special Circumstance
Evaluation may be afforded thirty days to improve performance.
Moroever, after a Minimum Performance Review or a Special Circumstance
Evaluation, a specialist or specialist unit \14\ may appeal from a
decision of the Exchange in accordance with Exchange By-Law Article XI,
Section 11-1, after filing a written notice of appeal with the
Exchange.\15\ The Exchange believes that this appeal process for
specialists or specialist units per Rule 511, which is similar to the
process afforded to Streaming Quote Traders per Rules 507 and 510, is
fair and equitable and promotes uniformity for the various market
participant members of the Exchange.\16\ The Exchange is, for similar
reasons of uniformity, establishing new minimum performance standards
for specialist units.
---------------------------------------------------------------------------
\14\ In proposed Rule 511(d) and Rule 511(e), a specialist has
the right to request an appeal on behalf of his specialist unit.
\15\ By-Law Article XI Section 11-1(c) states that an appeal:
shall be heard by a special committee of the Board of Governors
composed of three (3) Governors, of whom at least one (1) shall be
an Independent Governor. The person requesting review may appeal by
filing a written notice thereof with the Secretary of the Exchange
within ten (10) days after a decision. The person requesting review
shall be permitted to submit a written statement to and/or appear
before this special committee. The Secretary of the Exchange shall
certify the record of the proceeding, if any and the written
decision and shall submit these documents to the special committee.
The special committee's review of the action shall be based solely
on the record, the written decision and any statement submitted by
the person requesting the review. The special committee shall
prepare and deliver to such person a written decision and reasons
therefor. If the special committee affirms the action, the action
shall become effective ten (10) days from the date of the special
committee's decision. There shall be no appeal to the Board of
Governors from any decision of the special committee.
The Exchange is correcting a reference in By-Law Article XI
Section 11-1(c) from Rule 511(e) to Rule 511(d) or (e), in light of
the internal numbering changes proposed in Rule 511; and cross-
referencing Rule 507, which notes the availability of the appeal
process.
\16\ For consistency, the Exchange proposes appeal language in
Rules 510 and 511 that is similar, in relevant part, to that of Rule
507: An appeal to the Board of Governors from a decision of the
Exchange * * * may be requested * * * by filing with the Secretary
of the Exchange written notice of appeal within ten (10) days after
the decision has been rendered, in accordance with Exchange By-Law
Article XI, Section 11-1.
---------------------------------------------------------------------------
The minimum performance standards for specialist units in proposed
Rule 511(d), which are part of the Specialist Performance Evaluation
process, are similar to the minimum performance standards for Streaming
Quote Traders in Rule 510 Commentary .01.\17\ This is done to promote a
minimum performance floor across the Exchange for specialist units and
Streaming Quote Traders.\18\ Thus, proposed Rule 511(d) suggests the
minimum acceptable performance for specialist units using the following
criteria: (a) The percentage of time that the specialist unit
represents or exceeds the Phlx Best Bid or Offer (``PBBO'') in the
options allocated to the unit; \19\ and (b) quoting requirements of
specialist units pursuant to Rule 1014.\20\ Specifically, if the
percentage of the total time that the options allocated to a specialist
unit represent or exceed the PBBO is in the lowest quartile of all
specialist units for two or more consecutive months, this may be
considered sub-standard performance, that is, performance that does not
attain minimum performance standards; and if a specialist unit fails
[[Page 70333]]
to meet the quoting requirements as prescribed by Rule 1014, this may
be considered sub-standard performance. The Exchange proposes a process
that would allow specialist to meet with Exchange staff regarding their
sub-standard performance.
---------------------------------------------------------------------------
\17\ See Securities Exchange Act Release No. 55080 (January 10,
2007), 72 FR 2324 (January 18, 2007) (SR-Phlx-2006-51) (order
approving performance standards for Streaming Quote Traders and
Remote Streaming Traders).
\18\ Recognizing that among market participants on the Exchange
specialists have diverse and at times greater market making
responsibilities, which are not diminished by this filing,
Specialist Performance Evaluations are available to the Exchange to
review specialist performance and behavior (as discussed in more
detail below).
\19\ In that the Exchange is specifically establishing a measure
of specialist performance on Phlx, the Exchange is changing the
requirement to PBBO from NBBO (National Best Bid or Offer). A
reference in Commentary .01 of Rule 510 is similarly changed to PBBO
for the sake of conformity.
\20\ This rule change proposal makes no changes to current
quoting requirements for specialists delineated in Rule 1014. Rule
1014 is written in terms of specialists; as noted in proposed
Supplementary Material .05 to Rule 511, a specialist unit may have
one or more specialists. See supra note 10.
---------------------------------------------------------------------------
The Exchange proposes in Rule 511(d)(ii) that if the Exchange finds
that a specialist unit failed to meet Minimum Performance Standards, it
will provide written notice to the unit. The Exchange proposes in Rule
511(d)(iii) that the specialist unit may request and the Exchange may
hold an informal meeting with the head specialist and any other
appropriate specialist of the specialist unit to discuss the failure to
meet minimum standards and to explore possible remedies. The Exchange
will give notice of the meeting and no verbatim record will be kept.
If, after receiving such notice for the Exchange, the specialist unit
refuses or otherwise fails without reasonable justification to meet
with the Exchange, the Exchange may refer the matter to the Business
Conduct Committee (a standing committee of the Exchange) for the
commencement of formal disciplinary proceedings. If the Exchange
believes there are no mitigating circumstances that would demonstrate
substantial improvement of or reasonable justification for the failure
to meet minimum standards, the Exchange may take remedial action
pursuant to subparagraph (d)(ii).
The Exchange proposes in Rule 511(d)(ii) that if it finds sub-
standard minimum performance by a specialist unit, the Exchange may
take the following remedial actions: a) restriction of allocations in
additional options (subsection (d)(ii)(A)); b) suspension, termination,
or restriction of allocations in one or more options (subsection
(d)(ii)(B)); or c) suspension, termination, or restriction of the
specialist or specialist unit's registration in general (subsection
(d)(ii)(C)). Specialist units or specialists therein may appeal to the
Board of Governors from a decision of the Exchange pursuant to
subsection (d)(ii)(B) or subsection (d)(ii)(C) by filing the requisite
notice of appeal.\21\ Minimum Performance Reviews will be conducted at
least annually but may be conducted at monthly intervals.
---------------------------------------------------------------------------
\21\ See supra note 15. The Minimum Performance Standards;
remedial action by the Exchange if there is a failure to attain such
performance standards; and appeal rights therefrom are substantially
similar for specialist units and SQTs/RSQTs per Rules 511 and 510,
respectively.
---------------------------------------------------------------------------
Routine Specialist Performance Evaluations pursuant to proposed
Rule 511(c) are conducted at annual (or shorter) intervals to determine
whether specialists have fulfilled performance standards that may
include, but are not limited to, trade correction data, exemptive
relief data, quality of markets data, proper execution of duties as a
specialist unit, competition among market makers and in representing
the Exchange as specialist unit, observance of ethical standards, and
administrative factors. The Exchange may also consider, when doing
these routine evaluations, any other relevant information including,
but not limited to, trading data, regulatory history, the number of
requests for quote spread parameter relief, how a specialist unit
optimizes the submission of quotes through the Specialized Quote Feed
as defined in Rule 1080 by evaluating the number of individual quotes
per quote block received by the Exchange, and such other factors and
data as may be pertinent in the circumstances.
The Exchange may also, but is not required to, conduct Special
Circumstance Evaluations pursuant to proposed Rule 511(e) whenever the
Exchange feels that circumstances warrant such reviews. These include,
but are not limited to, where the Exchange believes that a specialist
unit's performance in a particular market situation was so egregiously
deficient as to call into question the Exchange's integrity or impair
the Exchange's reputation for maintaining efficient, fair and orderly
markets. Special Circumstance Evaluations may incorporate the same
review methodology and procedures as established for routine Specialist
Performance Evaluations or Minimum Performance Reviews. However,
Special Circumstance Evaluations may instead or in addition examine
such other matters related to a specialist unit's performance as the
Exchange deems necessary and appropriate. Special Circumstance
Evaluations may be done within six months of new allocations \22\ and
within four months of transfers of allocations to specialist units.\23\
---------------------------------------------------------------------------
\22\ For purposes of conformity with the proposed six month
period, 90 days is changed to 180 days (six months) in Rule 511(b).
\23\ While Special Circumstance Evaluations are optional during
the noted four month and six month periods, the Exchange may also
conduct independent Minimum Performance Reviews on a monthly basis.
---------------------------------------------------------------------------
The Exchange may determine, pursuant to a Rule 511 Special
Circumstance Evaluation, that a specialist unit that received a new
allocation has not complied with any of the commitments that it made
when applying for the options class, including but not limited to
commitments regarding capital, personnel and order flow (subsection
(e)(i)(A)); or that the performance of a specialist unit was inadequate
after the transfer of one or more options classes or when there has
been a material change in the specialist unit (subsection (e)(i)(B)).
After the Exchange indicates to the applicable specialist unit why its
performance is inadequate, the specialist unit will be afforded thirty
days in which to improve its performance. If the specialist unit does
not improve its performance, the Exchange may, after written notice,
remove and reallocate one or more securities that were allocated to
such unit. Specialists units and specialists therein may appeal to the
Board of Governors from a decision of the Exchange pursuant to proposed
subsection (e)(ii) by filing the requisite notice of appeal.\24\
---------------------------------------------------------------------------
\24\ See supra note 15.
---------------------------------------------------------------------------
Additionally, the rules establish limits on the allocation of
options to specialist units that fail to perform adequately. By virtue
of proposed Rule 511(e)(iii), if a specialist allocation in an option
is terminated as a result of a Special Circumstance Evaluation, the
specialist unit may not receive an allocation (or re-allocation) in the
terminated option or options for a period not to exceed six months.
Similarly, by virtue of proposed Rule 511(d)(v), if an allocation is
terminated because a specialist exhibits sub-standard performance in
terms of best bid and offer or in terms of quoting requirements, such
specialist may not receive an allocation (or re-allocation) in the
terminated option or options for a period not to exceed six months; and
if an allocation is terminated because a specialist unit exhibits sub-
standard performance in terms of minimum quoting requirements per Rule
1014, such specialist unit may not receive an allocation (or re-
allocation) in the terminated option or options for a period not to
exceed twelve months.
As discussed, all specialists and specialist units have the right
to appeal from an Exchange decision that was taken pursuant to a
Specialist Evaluation or a Special Circumstance Evaluation. Moreover,
the rules indicate that the Exchange must provide written notice
regarding the lack of adequate performance; and give specialist units
an opportunity to discuss performance or improve performance before the
Exchange takes remedial action. The Exchange feels that these
procedures are fair, reasonable, and uniform for all specialists on the
Exchange.\25\
---------------------------------------------------------------------------
\25\ In an effort to streamline the specialist evaluation
process, and in light of the noted safeguards built into the
Exchange's rules and By-Laws, the Exchange is deleting the formal
hearing process that is currently in Rule 511(e) and proposes an
informal hearing process in Rule 510 (regarding SQTs and RSQTs) and
Rule 511 (regarding specialists).
---------------------------------------------------------------------------
[[Page 70334]]
In Rule 510 (regarding SQTs and RSQTs) and Rule 511 (regarding
specialists), the Exchange proposes to eliminate the right to appeal
from an Exchange's determination to restrict additional options
allocations based on failure to meet minimum performance requirements.
The Exchange believes that an appeals process for restriction of
allocations or assignments in additional (not currently allocated or
assigned) options, which would require a 10 day notice period followed
by a potentially lengthy appeals proceeding, is not necessary and
indeed may be counterproductive in light of the need to efficiently and
timely allocate or assign additional options.
Assignment in Options
Rule 507 deals with the process of applying for approval as an SQT
or RSQT on the Exchange and assignment of options to SQTs and RSQTs.
These are Registered Options Traders that, similarly to other market
makers on the Exchange such as specialists, provide depth and liquidity
through two-sided quotes in the options in which they are assigned.
Rule 1014 discusses, among other things, the quote obligations of
market makers and participants on the Exchange.\26\ Rule 507 defines
the Maximum Number of Quoters (``MNQ'') in equity options, which
establishes the greatest number of SQT and RSQT assignments that the
Exchange may make in a particular class of option. MNQ in equity
options is currently set in Commentary .02 to Rule 507 at no more than:
Twenty-four market participants (SQTs and RSQTs) for equity options in
the top 5% most actively traded options; nineteen market participants
for the next 10% most actively traded options; and seventeen market
participants for all other options.\27\
---------------------------------------------------------------------------
\26\ Rule 1014(b)(ii)(D) states 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.
\27\ Regarding MNQ procedures in general, see Commentaries .01
to .05 to Rule 507. See also Securities Exchange Act Release No.
60688 (September 18, 2009), 74 FR 49058 (September 25, 2009) (SR-
Phlx-2009-82) (order approving modest increase in MNQ levels).
---------------------------------------------------------------------------
Because the number of assignments that may be made by the Exchange
are limited by MNQ, thereby resulting in situations where SQTs and
RSQTs may not be able to get assignments that they applied (and may be
eligible) for, the Exchange is striving to ensure that option
assignments are used to provide liquidity within a reasonable time
after assignment. It is for this reason that the Exchange proposes to
add new Commentary .01 to Rule 507 to state that within not more than
thirty business days after assignment of an option pursuant to this
rule, an assigned SQTs or RSQTs shall begin to generate and submit
electronic quotations for such option through the Exchange's electronic
quotation, execution, and trading system. Quoting requirements are, as
previously noted, set forth in Rule 1014.\28\ Should an assigned SQT or
RSQT not generate electronic quotes within the requisite time frame,
the Exchange shall have the ability to terminate the assignment in
question after providing written notice to the assigned SQT or RSQT,
and make a re-assignment, unless there are exigent circumstances that
the Exchange believes may not have allowed timely generation and
submission of electronic quotes.\29\
---------------------------------------------------------------------------
\28\ Rule 1014 also sets forth circumstances in which market
participants do not have quoting responsibilities. As an example,
subsection (b)(ii)(D)(4) states that SQTs, DSQTs, RSQTs and DRSQTs
are deemed not to be assigned, and therefore do not have quoting
responsibilities, respecting Quarterly Option Series, adjusted
option series, and series with an expiration of nine months or
greater. Adjusted option series are defined as 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.
See Securities Exchange Act Release No. 61095 (December 2, 2009), 74
FR 64786 (December 8, 2009) (SR-Phlx-2009-99) (notice of filing and
immediate effectiveness).
\29\ The Exchange has proposed other amendments to Rule 507 at
SR-Phlx-2010-145 that should not impact this filing. Should it
become necessary, however, the Exchange will propose additional rule
text amendments.
---------------------------------------------------------------------------
Transfer of Allocated Option Classes
Rule 508 deals with agreements between specialist units to transfer
one or more options classes that are already allocated by the Exchange
to one of such units. This type of process tends to happen most often,
and in fact is instrumental to facilitating the orderly transfer and
continuation of markets in classes of allocated options, when a
specialist unit significantly changes the scale or breadth of its
specialist operation on the Exchange or withdraws from the Exchange.
Currently, Rule 508 states that failure to provide the Exchange
with prior notice of an arranged (agreed-upon) transfer of one or more
already allocated options classes in accordance with this rule permits
the Exchange to reallocate such options classes. The proposed change to
Rule 508 states that failure to provide the Exchange prior notice of a
transfer in accordance with this Rule, or failure to obtain Exchange
approval of a transfer, permits the Exchange to recover the allocated
securities and reallocate them. The Exchange believes that this is
appropriate given that the Exchange initially makes the allocation of
the option class after evaluating the relevant factors, and should
continue to have a similar ability to evaluate the propriety of
subsequent transfer of the same option class.
Commentary .01 to Rule 508 also currently indicates that no member
may effect a change in the floor trading location of any equity option
or index option class until forty-five calendar days after final
approval of the change by the Exchange has been disseminated to the
option floor. The Exchange proposes to delete this provision. The
Exchange believes that the forty-five day delay to affect a change is
functionally obsolete and no longer necessary, particularly in the
current fast-paced trading environment.\30\
---------------------------------------------------------------------------
\30\ The Exchange will notify relevant specialist units,
specialists, or members regarding transfer applications pursuant to
Rule 508.
---------------------------------------------------------------------------
Finally, the Exchange is proposing technical, housekeeping rule
changes in respect of ensuring conformity of rule language and deleting
references that are obsolete or no longer in use. For example, the
reference to Registrant is changed to specialist or specialist unit in
Rules 508 and 511, and the reference to grant is changed to allocate in
Rule 511 for purposes of conformity.\31\ The Exchange is proposing to
clean up the language of Commentary .02 of Rule 510 by removing
reference to initial implementation of the existing rule. The Exchange
is also proposing to conform Rule 511 language in light of the
consolidation with Rule 515. Thus, reference to Specialist Performance
Evaluations and Special Circumstance Evaluations, and reference to
factors that may be considered by the Exchange (e.g., evaluations,
trade correction data, exemptive relief data) are added to Rule
[[Page 70335]]
511(b); and reference to Rule 515 is deleted.
---------------------------------------------------------------------------
\31\ This change in terminology conforms it to current usage.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \32\ in general, and furthers the objectives of Section
6(b)(5) of the Act \33\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest, by updating and making more uniform the evaluation process
for specialist units, ensuring timely electronic quotations by SQTs and
RSQTs, and consolidating and deleting unnecessary and obsolete rules
and processes. The Exchange believes that its rule change proposal does
not engender unfair discrimination among specialists, specialist units,
SQTs and RSQTs in that it proposes to amend rules and procedures that
are equally applicable to all members and member organizations at the
Exchange.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-Phlx-2010-153 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-2010-153. 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 Number SR-Phlx-2010-153 and should be
submitted on or before December 8, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
---------------------------------------------------------------------------
\34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28900 Filed 11-16-10; 8:45 am]
BILLING CODE 8011-01-P
