Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Relating to Complex Orders, 78320-78327 [2010-31487]
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Federal Register / Vol. 75, No. 240 / Wednesday, December 15, 2010 / Notices
Exchange believes the benefits to market
participants from the more objective
clearly erroneous executions rule
should be approved to continue on a
pilot basis.
2. Statutory Basis
The statutory basis for the proposed
rule change is Section 6(b)(5) of the
Act,5 which requires the rules of an
exchange 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. The Exchange believes
that the proposed rule meets these
requirements in that it promotes
transparency and uniformity across
markets concerning review of
transactions as clearly erroneous.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 6 and Rule 19b–
4(f)(6)(iii) thereunder.7 The Exchange
has asked the Commission to waive the
30-day operative delay so that the
proposal may become operative
5 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(3)(A).
7 17 CFR 240.19b–4(f)(6)(iii). In addition, Rule
19b–4(f)(6)(iii) requires that a self- regulatory
organization submit to the Commission written
notice of its intent to file the proposed rule change,
along with a brief description and text of the
proposed rule change, at least five business days
prior to the filing of the proposed rule change, or
such shorter time as designated by the Commission.
The Commission notes that the Exchange has
satisfied this requirement.
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immediately upon filing. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest because such waiver will
allow the pilot program to continue
uninterrupted and help ensure
uniformity among the national
securities exchanges and FINRA with
respect to the treatment of clearly
erroneous transactions.8 Accordingly,
the Commission waives the 30-day
operative delay requirement and
designates the proposed rule change as
operative upon filing with the
Commission.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–EDGX–2010–23 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–EDGX–2010–23. 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
8 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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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
publicly available. All submissions
should refer to File Number SR–EDGX–
2010–23 and should be submitted on or
before January 5, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–31490 Filed 12–14–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63509; File No. SR–Phlx–
2010–157]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change, as
Modified by Amendment No. 1,
Relating to Complex Orders
December 9, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–42 thereunder,
notice is hereby given that on November
29, 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. On December
6, 2010, the Exchange filed Amendment
No. 1 to the proposed rule change. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as modified by Amendment No.
1, from interested persons.
9 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 75, No. 240 / Wednesday, December 15, 2010 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange, pursuant to Section
19(b)(1) of the Act 3 and Rule 19b–4
thereunder,4 proposes to amend Rule
1080.08 to change the following aspects
of its Complex Orders System: (i) Permit
Complex Orders where one of the
components of the Complex Order is the
underlying security (stock or Exchange
Traded Fund Share (‘‘ETF’’)); (ii) permit
Complex Orders with more than two
components; (iii) add a ‘‘Do Not
Auction’’ condition for Complex Orders
that prevents orders so marked from
triggering (or joining) a Complex Order
Live Auction; 5 (iv) permit day orders to
be sent by certain participants; (v) add
an execution priority provision that
clarifies execution priority respecting
current Complex Orders and establishes
the execution priority of the proposed
new Complex Orders; and (vi) revise the
definition section.
The text of the proposed rule change
is available on the Exchange’s Website
at https://www.nasdaqtrader.com/
micro.aspx?id=PHLXRulefilings, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
In 2008, the Exchange automated the
handling of Complex Orders on its
electronic trading platform for options,
Phlx XL.6 Currently, the Exchange’s
3 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
5 See Rule 1080.08(e).
6 Securities Exchange Act Release No. 58361
(August 14, 2008), 73 FR 49529 (August 21, 2008)
(SR–Phlx–2008–50). Since that time, the Exchange
has enhanced its options trading platform, now
known as Phlx XL II. See Securities Exchange Act
Release No. 59995 (May 28, 2009), 74 FR 26750
(June 3, 2009) (SR–Phlx–2009–32).
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Complex Orders functionality is limited
to Complex Orders consisting solely of
two option components. The Exchange
proposes to add Complex Orders where
one component is the underlying stock
or ETF. The Exchange also proposes to
permit Complex Orders consisting of up
to six components. The purpose of the
proposed rule change is to more
efficiently handle these new Complex
Orders on the Exchange by establishing
rules and systems that would enable the
Exchange to handle such orders
electronically.7
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Definitions
The Exchange is proposing to revise
the definition of Complex Order in Rule
1080.08(a)(i) to provide that a Complex
Order is any order involving the
simultaneous purchase and/or sale of
two or more different options series in
the same underlying security, priced at
a net debit or credit based on the
relative prices of the individual
components, for the same account, for
the purpose of executing a particular
investment strategy.8 Furthermore, a
Complex Order can also be a stockoption order, which is an order to buy
or sell a stated number of units of an
underlying stock or ETF coupled with
the purchase or sale of options
contract(s).9 Accordingly, the Exchange
is now permitting one component of a
Complex Order to consist of the
underlying stock or ETF.10 A Complex
Order with one component that is the
underlying stock or ETF is also referred
to as a stock-option order. The
underlying stock or ETF must be the
deliverable for the options component
of that Complex Order and represent
exactly 100 shares per option for regular
way delivery.11 In the case of Complex
Orders with a stock or ETF component,
these cannot be executed against orders
for the individual legs; stock-option
orders in the System can only be
executed against other stock-option
orders. The Exchange is proposing to
state that the maximum number of
components will be six, including both
options and stock components. For
example, under the proposal, a Complex
Order could consist of up to five options
series plus the underlying security. Or,
a Complex Order could consist of up to
six options series.
This revision of the definition of a
Complex Order is intended to simplify
the rule and recognizes that there are
many types and permutations possible,
as strategies develop and become more
sophisticated.12 As a result of this
revision of the definition of a Complex
Order, several subparagraphs are being
deleted because they are too specific
and no longer needed, as they are
covered under the new, broader
definition; these include the definition
of a spread order, a straddle order, a
combination order, a ratio order, a collar
order, and a tied hedge order.13
In Rule 1080.08(a)(ii), the Exchange is
also revising the definition of Complex
Order Strategy, in addition to moving
the pricing language, as explained
above, to expressly state in the rule that
each such strategy is assigned a strategy
identifier by the System.14 This is
intended to make the program clearer in
the rules. The Exchange is also
proposing to better state that a Complex
Order Strategy means a particular
combination of components and their
ratios to one another.
In conjunction with permitting one of
the components of a Complex Order to
be the underlying security, the
7 Currently, complex orders also trade on the floor
of the Exchange pursuant to various rules,
including Rule 1033; this proposal does not impact
such manual trading.
8 This includes additional language that provides
that a Complex Order is priced at a net debit or
credit based on the relative prices of the individual
components, which is currently in the definition of
Complex Order Strategy in Rule 1080.08(a)(ii), but
fits better in the definition of Complex Order.
9 This definition is similar to ISE Rule 722(a).
10 The term ‘‘stock’’ is used interchangeably with
‘‘underlying security’’ herein. In addition, in the
case of foreign currency options and index options,
the underlying cannot be a component of a
Complex Order, because such underlying
instrument is not a security and instead consists of
actual foreign currency and an index, respectively,
which are not currently included in the program the
Exchange has developed.
11 Because it must represent exactly 100 shares,
there can be no cash component. For example, XRX
bought ACS, resulting in an adjusted option trading
under the symbol AGY; AGY options settle into
4.935 XRX shares plus $18.60 cash. See e.g., https://
www.theocc.com/components/docs/market-data/
infomemos/2010/feb/26947.pdf. Accordingly,
because AGY options settle through delivery of
XRX shares and cash rather than AGY shares, it
would not possible to enter a AGY stock-option
order. Instead, AGY Complex Orders can only
consist of options components to be traded on the
Exchange.
12 The ISE has adopted a similar generic
provision. See Securities Exchange Act Release No.
59021 (November 26, 2008), 73 FR 74545
(December 8, 2008) (SR–ISE–2008–91).
13 See current Phlx Rule 1080.08(a)(i)(A)–(F).
14 For example, a Complex Order Strategy might
be ‘‘buy one XYZ January 20 call, sell one XYZ
January 20 put.’’ The System would assign this
Complex Order Strategy a specific identification
number or code that would be used in the System
to identify this Complex Order Strategy.
Hypothetically, the identification number for this
particular Complex Order Strategy could be
‘‘Complex Order Strategy #12345.’’ Complex Order
Strategy #12345 would have a bid price and an offer
price. If an investor wishes to purchase or sell, for
example, 10 Complex Order Strategy 12345, such
an investor would be bidding for or offering to buy
10 XYZ January 20 calls and sell 10 XYZ January
20 puts. This is not a new feature and was included
in the original proposal. See Securities Exchange
Act Release No. 58361 (August 14, 2008), 73 FR
49529 (August 21, 2008) (SR–Phlx–2008–50).
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Federal Register / Vol. 75, No. 240 / Wednesday, December 15, 2010 / Notices
Exchange proposes to amend
subparagraphs (a)(iv) and (vi) to update
the definitions of cPBBO and cNBBO,
respectively, to include the underlying
security. Specifically, both would be
amended to state that the best net debit
or credit price for a Complex Order
Strategy that includes a stock/ETF
component includes the national best
bid or offer for the underlying security.
The Exchange also proposes to adopt,
in new subparagraph (a)(viii), a new
order condition called ‘‘Do Not
Auction,’’ or DNA, which causes an
order to not be eligible to begin a
Complex Order Live Auction
(‘‘COLA’’).15 DNA Orders cannot join a
COLA in progress. These orders can
avoid an auction and, instead, be either
executed immediately or cancelled.16
DNA Orders received prior to the
opening or when the Complex Order
Strategy is not available for trading will
be cancelled. DNA Orders will initially
only be available for Complex Orders
consisting of more than two option
components or where the underlying
security is a component; once the
Exchange has fully rolled out its
enhanced Complex Order System,
which will be announced in an Options
Trader Alert, DNA Orders will also
become available for Complex Orders
consisting of two option components.
Priority
The Exchange proposes to clarify and
expand upon the trade-through and
execution priority provisions applicable
to Complex Orders, including the
expanded definition of Complex Orders.
Accordingly, the Exchange, first,
proposes to add to the definitions
section of the rule, Rule 1080.08(a), the
definition of a conforming ratio. A
conforming ratio, in proposed Rule
1080.08(a)(ix), is essentially a
permissible ratio, renamed. Specifically,
it is where the ratio between the sizes
of the options components of a Complex
Order is equal to or greater than one-tothree (.333) and less than or equal to
three-to-one (3.00). For example, a oneto-two (.5) ratio, a two-to-three (.667)
ratio, or a two-to-one (2.00) ratio is a
conforming ratio,17 whereas a one-to15 See
Rule 1080.08(e).
orders can be marked IOC, which means
that the order cannot start an auction (whereas an
IOC order can), and get rejected if there is an
auction in progress.
17 One example of a conforming five-legged ratio
is: B 100 GE Dec 12.50 calls for 4.00, S 200 GE Dec
15.00 calls for 2.00, B 100 GE Dec 17.50 calls for
.60 and also S 100 Dec 17.50/Dec 16.50 put spreads
at .60; because the highest volume to the lowest
volume is in a ratio of 2:1 (200 versus 100 options),
this order is conforming.
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four (.25) ratio or a four-to-one (4.0)
ratio is not.18
Where one component of the Complex
Order is the underlying security, the
ratio between any options component
and the underlying security component
must be eight contracts to 100 shares of
the underlying security or less.19 One
example of a two-legged ratio order with
a stock component that is conforming is:
B 400 GE Dec 16.50 calls, S 400 Dec
17.50 calls and S 12,000 shares of GE at
16.50; after comparing the largest option
leg (400) to each 100 lot of shares (100
× 120 = 12,000 shares, or 120 lots of
100), the ratio is 3.33 (400 divided by
120) options per 100 shares, which is
less than the maximum allowable 8
options per 100 shares, which is a
conforming ratio. In contrast, B 200 GE
Dec 16.50 calls, S 400 GE Dec 17.50
calls and S 3,000 shares of GE at 16.50
is a nonconforming ratio, because
comparing the largest leg of the options
trade (400) to 30 lots of 100 (3,000
shares) equals 13.33 (400 divided by 30)
options per 100 shares, which is greater
than the maximum allowable 8 options
per 100 shares and thus nonconforming.
Currently, the same ratio appears in
Rule 1080.08(a)(i)(D), within the
definition of a Ratio Order; that
provision is proposed to be deleted and
replaced by the new definition of
conforming ratio to make the rule
clearer.20
Today, Complex Orders consisting of
permissible (now called conforming)
ratios are excepted from the tradethrough prohibitions of the Options
Order Protection and Locked/Crossed
Market Plan (‘‘Options Linkage Plan’’),
because the Plan contains an exception
for Complex Orders with a certain ratio.
Accordingly, these orders can be
executed without regard to prices for the
individual legs on other exchanges,
meaning trading through possibly better
prices.21 The Exchange now proposes to
18 One example of a non-conforming five-legged
ratio is: B 100 GE Dec 12.50 calls for 4.00, S 200
GE Dec 15.00 calls for 2.00, B 100 GE Dec 17.50
calls for .60 and also S 400 Dec 17.50/Dec 16.50 put
spreads at .60; because the highest volume to the
lowest volume is in a ratio of 4:1 (400 versus 100
options), this order is not conforming.
19 These are the same ratios found in ISE Rule
722(a)(4). If the largest option leg versus stock meets
the conforming ratio, then, necessarily, all smaller
legs would also meet the definition of conforming
ratio.
20 Complex orders consisting of a nonconforming
ratio will not be accepted.
21 See Securities Exchange Act Release No. 60405
(July 30, 2009), 74 FR 39362 (August 6, 2009)
Options Linkage Plan at Section 5(b)(viii), which
prohibits trading through a better price of another
exchange unless an exception applies. Phlx Rule
1084(b)(viii) provides an exception for complex
orders. This exception applies to Complex Orders
executed as such, and not those executed by
legging, such as pursuant to Rule 1080.08(e)(vi)(A).
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codify this in new subparagraph
(c)(iii)(C).
In addition to trade-through
provisions, whether a Complex Order
has a conforming ratio is also relevant
in determining how the Exchange’s
spread priority rules apply. Today, Rule
1033(d) applies to executions of
Complex Orders.22 Throughout Rule
1080.08, there are cross references to
Rule 1033(d), which will now be
deleted and replaced with new
paragraph (c)(iii), which is the spread
priority provision applicable to
Complex Orders executed on Phlx XL II.
The spread priority provisions in new
subparagraph (c)(iii) provide the same
priority under the same conditions to a
broader class of Complex Orders under
this proposal.
Spread priority refers to the priority of
orders and quotes on the Exchange’s
own market and permits part of an
eligible Complex Order to have priority
over other bids and offers in the
marketplace. Today, for a Complex
Order consisting of two options
components, if the ratio between those
options components is a permissible
(now called conforming) ratio, then if
one option ‘‘leg’’ or component improves
the Exchange’s market for that option
series, then the other option leg can be
executed with priority over existing
bids/offers (including customers),
provided that neither option leg is
executed at a price outside of the
established bid or offer for that option
contract.23 For example, if a Complex
Order is received to buy one option A
contract and sell one option B contract
for a net debit of .65, where option A
has a PBBO of 1.00–1.20 with a 1.00
customer limit order to buy on the book
and option B has a PBBO of .45–.50
with a .50 customer limit order to sell
on the book, permissible trade prices
could be 1.15 for option A and .50 for
option B. Option B is allowed to execute
at .50 because option A executed at a
price that improved the Exchange’s
market in that option. The application
of spread priority to Complex Orders
consisting only of options is not
changing and will now be covered by
new Rule 1080.08(c)(iii)(A).
Furthermore, under this proposal,
because Complex Orders with a stock
22 Exchange Rule 1033(d) affords priority to
spread type orders over either the bid or the offer
established in the marketplace that is not better
than the bids or offers comprising such total credit
or debit, provided that, the member executes at
least one option leg at a better price than
established bid or offer for that option contract AND
no option leg is executed at a price outside of the
established bid or offer for that option contract.
23 This applies to both trading in the complex
orders automated functionality as well as manual
trading on the floor. See Rule 1033(d).
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Federal Register / Vol. 75, No. 240 / Wednesday, December 15, 2010 / Notices
component will now be permitted on
Phlx XL II, priority provisions similar to
Rule 1033 will now also apply to
Complex Orders on Phlx XL II where
one component is the underlying stock
or ETF. Today, this is true for Complex
Orders with a stock component
executed manually on the trading floor,
which are subject to Rule 1033(e). Thus,
new subparagraph (c)(iii)(B) will govern
the execution priority of the new stockoption Complex Orders on Phlx XL II.
Specifically, it provides that where a
conforming Complex Order consists of
the underlying stock or ETF and one
options leg, such options leg does not
have priority over bids and offers
established in the marketplace,
including customer orders. Where a
conforming Complex Order consists of
the underlying stock or ETF and more
than one options leg, the options legs
have priority over bids and offers
established in the marketplace,
including customer orders, if at least
one options leg improves the existing
market for that option.
For example, where there is a
conforming Complex Order to buy 1
option A, sell 1 option B, and sell 50
shares of the underlying stock for a net
debit of 9.55 where the PBBO of option
A is 1.00–1.20 with a customer 1.00 bid,
the PBBO of option B is .40–.50, and the
stock NBBO is 20.10–20.20, the
following trade prices would be
permissible: Option A could execute at
1.00, option B at .45, and the stock at
20.20. Option A is able to trade on the
PBBO at the same price as the customer
because option B improved the PBBO.
The price of the stock portion is not
relevant in applying the Exchange’s
option execution priority rules. As a
second example, if a conforming
Complex Order consists of only one
option component and stock, then the
option component may not be allowed
to be executed at the same price as any
existing bid/offer including customer
bids/offers. For example, a conforming
Complex Order to sell 1 option A and
buy 100 shares, with option A having a
PBBO of 2.00–2.20 and the stock having
a NBBO of 10.00–10.20, for a net debit
of 7.90 could receive the following
permissible trade prices: Option A
could execute at 2.10 with the stock
execution occurring at 10.00. Option A
could not execute at 2.20, because the
option component does not have
priority over existing bids/offers.
Order Entry
Currently, under subparagraph (b)(ii),
Streaming Quote Traders (‘‘SQTs’’),24
24 An SQT is a Registered Options Trader (‘‘ROT’’)
who has received permission from the Exchange to
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Remote Streaming Quote Traders
(‘‘RSQTs’’),25 non-SQT ROTs,26
specialists and non-Phlx market makers
on another exchange are permitted to
enter Complex Orders as IOC only.
However, for Complex Orders consisting
of more than two option components or
where the underlying security is a
component, SQTs, RSQTs, non-SQT
ROTs, specialists and non-Phlx market
makers on another exchange may also
enter Day orders; 27 once the Exchange
has fully rolled out its enhanced
Complex Order System, which will be
announced in an Options Trader Alert,
Day orders will become available for
Complex Orders consisting of two
option components. The Exchange
expects that adding Day orders here
should encourage more orders from this
group of participants.
Currently, pursuant to subparagraph
(b)(iii), Floor Brokers using the Options
Floor Broker Management System may
enter Complex Orders into the
Exchange’s electronic Complex Orders
System as Day, GTC or IOC on behalf of
non-broker-dealer customers and nonmarket maker off-floor broker-dealers,
and as IOC only on behalf of brokerdealers or affiliates of broker-dealers.
The Exchange proposes to amend this
subparagraph to reflect that DNA orders
and orders with more than two legs or
a stock/ETF component (which are new)
cannot be entered by Floor Brokers at
this time. The Exchange believes that
Floor Brokers are able to and use other,
non-Exchange systems to access Phlx
XL II, such that the FBMS, which is
primarily intended to capture brokered
orders into the options audit trail
system, is not the sole method for them
to submit orders to the Exchange. In
addition, complex orders can be
handled manually on the Exchange
trading floor today. The Exchange
believes that Floor Brokers are not likely
to need or request these changes to
FBMS, because they execute far more
generate and submit options quotations
electronically through an electronic interface via an
Exchange approved proprietary electronic quoting
device in eligible options to which such SQT is
assigned. See Rule 1014(b)(ii)(A).
25 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 options quotations
electronically in eligible options to which such
RSQT has been assigned. An RSQT may only
submit such quotations electronically from off the
floor of the Exchange. See Rule 1014(b)(ii)(B).
26 A non-SQT ROT is an ROT who is neither an
SQT nor an RSQT. See Rule 1014(b)(ii)(C).
27 As a result of adding Day orders for this
category of users, the Exchange also proposes to
amend Rule 1080.08(f)(i) to eliminate reference to
the types of orders on the Complex Limit Order
Book, because it is too specific.
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78323
complex orders in the trading crowd
today than through FBMS.
Rule 1080.08(c) currently provides
that a Complex Order is eligible to trade
only when each component of the
Complex Order is open for trading on
the Exchange. The Exchange proposes to
add the word ‘‘option’’ in certain places
in this provision, because one
component of a Complex Order can now
be the underlying security. The
Exchange also proposes to require that
the underlying security be open for
trading on its primary market 28 if such
underlying security is a component of a
Complex Order.
Complex Order Processing and
Execution
Currently, pursuant to Rule
1080.08(e)(i)(B)(2), a Complex Order
that would otherwise be a COLAeligible order that is received in the
System during the final ten seconds of
any trading session shall not be COLAeligible. The Exchange proposes to make
this time configurable, not to exceed the
current ten seconds. The Exchange will
issue an Options Trader Alert when the
number of seconds changes.
COLA-eligible orders, COLA Sweeps,
and responsive Complex Orders trade
first based on the best price or prices
available at the end of the COLA Timer.
If no COLA Sweeps or responsive
Complex Orders for the same Complex
Order Strategy as the COLA-eligible
order that improve the initial cPBBO
were received during the COLA Timer,
each component of the COLA-eligible
order may trade at the PBBO with
existing quotes and/or limit orders on
the limit order book for the individual
components of the Complex Order,
provided that each component is
executed such that the components
comprise the Complex Order Strategy
with the correct ratio for the desired net
debit or credit. This is known as
‘‘legging,’’ and the Exchange proposes to
label subparagraph (e)(vi)(A)(1) as such.
The Exchange is proposing to add that
legging only occurs where there is no
underlying security as a component of
the Complex Order. If a COLA-eligible
order cannot be filled in its entirety, any
remaining balance would be placed on
the CBOOK unless the COLA-eligible
order has been submitted with other
instructions (i.e., cancel).
Currently, Complex Orders are
automatically executed against orders
on the CBOOK in price priority and in
28 The Exchange intends to consider the primary
market for the underlying security to be the listing
market; if the Exchange determines to use a market
other than the listing market, the Exchange will
issue an Options Trader Alert announcing any such
change.
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time priority at the same price, as
described in subparagraph (f)(iii).
Specifically, a Complex Order resting on
the CBOOK will execute automatically
against: (i) Quotes or orders on the limit
order book for the individual
components of the order (allocated in
accordance with Exchange Rule
1014(g)(vii), and an SQT or RSQT
quoting on all components of the
Complex Order will have priority over
SQTs and RSQTs quoting a single
component, but not over customer
orders); or (ii) an incoming marketable
Complex Order that does not trigger a
COLA Timer, whichever arrives first. At
this time, the Exchange proposes to
delete the provision that an SQT or
RSQT quoting on all components of the
Complex Order will have priority over
SQTs and RSQTs quoting a single
component in order to simplify the
allocation process as the Exchange
begins to accept more Complex Order
types. Instead, an SQT or RSQT quoting
on all components of the Complex
Order will be on parity with SQTs and
RSQTs quoting a single component.29
This is being deleted from Rule
1080.08(e)(vi)(A)(1), (f)(iii)(A) and
(f)(iii)(B)(1). The Exchange is deleting
this provision to simplify system
processing and does not believe,
currently, that the benefits are material
or being realized intentionally by
participants. Furthermore, in Rule
1080.08(f)(iii), the Exchange proposes to
state that the execution against orders
on the limit order book for the
individual components means the
options components, such that ‘‘legging’’
will not occur where any of the
components is the underlying security.
The Exchange proposes to add the
word ‘‘options’’ in various places where
the provision clearly applies only to the
options component. For example, in
subparagraph (c)(ii), most of the reasons
why Complex Orders would not trade
on the System relate to the options
components. Similarly, in subparagraph
(f)(i) governing what orders go on the
CBOOK, ‘‘options’’ is being added to
several of the provisions.
Underlying Stock/ETF Component
In addition to making the various new
references to the underlying stock/ETF
as a component of a Complex Order, the
Exchange also proposes to adopt new
subparagraph (h), which will state that
29 This change will initially only apply to
Complex Orders consisting of more than two
options components or where the underlying stock/
ETF is a component; once the Exchange has fully
rolled out its enhanced Complex Order System,
which will be announced in an Options Trader
Alert, it will apply to Complex Orders consisting of
two options components.
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19:10 Dec 14, 2010
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where one component of a Complex
Order is the underlying stock/ETF, the
Exchange shall electronically
communicate the underlying stock/ETF
component of a Complex Order to
Nasdaq Options Services LLC (‘‘NOS’’),
its designated broker-dealer, for
execution; this occurs once the Phlx
trading System determines that a
Complex Order trade is possible and at
what prices. Specifically, NOS will act
as agent for such stock/ETF orders; NOS
will match those orders, which always
consist of both a buy and sell order for
the stock/ETF, because the System has
determined that two Complex Orders
can trade with each other.30 NOS will
match these orders not on an exchange,
but rather ‘‘over-the-counter.’’
Accordingly, the Exchange proposes to
permit NOS to perform this function, in
addition to its approved routing
functions.31
NOS is a broker-dealer and member of
various exchanges and the Financial
Industry Regulatory Authority
(‘‘FINRA’’). As discussed in detail below,
NOS, under this proposal, would be
responsible for the proper execution,
trade reporting and submission to
clearing of the stock/ETF trade that is
part of a Complex Order. Because these
trades will occur off-exchange, the
principal regulator is FINRA, rather
than Phlx or NASDAQ. Furthermore,
NOS is responsible for compliance with
FINRA rules generally and is subject to
examination by FINRA. Specifically,
NOS is subject to NASD Rule 3010,32
which generally requires that the
policies and procedures and supervisory
systems be reasonably designed to
achieve compliance with applicable
securities laws and regulations and with
applicable NASD and FINRA rules,
including those relating to the misuse of
material non-public information. To this
end, NOS intends to have in place
policies related to confidentiality and
the potential for informational
advantages relating to its affiliates,
30 This is because Complex Orders consisting of
the underlying stock or ETF can only trade with
other Complex Orders. See proposed Rule
1080.08(a)(i), which reads as follows: Stock-option
orders can only be executed against other stockoption orders and cannot be executed by the System
against orders for the individual components.
31 Securities Exchange Act Release Nos. 57478
(March 12, 2008), 73 FR 14521 (March 18, 2008)
(SR–NASDAQ–2007–004 and SR–NASDAQ–2007–
080); and 59995 (May 28, 2009), 74 FR 26750 (June
3, 2009) (SR–Phlx–2009–32).
32 FINRA was created in July 2007 through the
consolidation of NASD and the member regulation,
enforcement and arbitration functions of the NYSE.
The FINRA rulebook currently consists of both
NASD Rules and certain NYSE Rules that FINRA
has incorporated (‘‘Incorporated NYSE Rules’’).
PO 00000
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Fmt 4703
Sfmt 4703
intended to protect against the misuse of
material nonpublic information.33
In addition, because the execution
and reporting of the stock/ETF piece
will occur otherwise than on this
Exchange or any other exchange, it will
be handled by NOS pursuant to
applicable rules regarding equity
trading,34 including the rules governing
trade reporting, trade throughs and short
sales. Specifically, NOS will report the
trades to the Trade Reporting Facility.35
Firms that are members of FINRA or the
NASDAQ Stock Market (‘‘NASDAQ’’) are
required to have a Uniform Service
Bureau/Executing Broker Agreement
(‘‘AGU’’) with NOS in order to trade
Complex Orders containing a stock/ETF
component. Firms that are not members
of FINRA or NASDAQ are required to
have a Qualified Special Representative
(‘‘QSR’’) arrangement with NOS in order
to trade Complex Orders containing a
stock/ETF component. This requirement
is codified in proposed Rule
1080.08(a)(i). Accordingly, this process
is available to all Phlx member
organizations and the stock/ETF
component of a Complex Order, once
executed, will be properly processed for
trade reporting purposes.
With respect to trade throughs, the
Exchange believes that the stock/ETF
component of a Complex Order is
eligible for the Qualified Contingent
Trade Exemption from Rule 611(a) of
Regulation NMS. A Qualified
Contingent Trade is a transaction
consisting of two or more component
orders, executed as agent or principal,
that satisfy the six elements in the
Commission’s order exempting
Qualified Contingent Trades (‘‘QCTs’’)
from the requirements of Rule 611(a),36
which requires trading centers to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to prevent trade33 Similarly, pursuant to Phlx Rule
1080(m)(iii)(C), the Exchange must establish and
maintain procedures and internal controls
reasonably designed to adequately restrict the flow
of confidential and proprietary information between
the Exchange and the Routing Facility.
34 See Securities Exchange Act Release No. 49023
(January 5, 2004) (SR–ISE–2003–37) (‘‘Once the
orders are communicated to the broker-dealer for
execution, the broker-dealer has complete
responsibility for determining whether the orders
may be executed in accordance with all of the rules
applicable to execution of equity orders, * * *’’).
35 Specifically, the trades will be reported to the
FINRA/Nasdaq TRF, which is a facility of FINRA
that is operated by The NASDAQ OMX Group, Inc.
(‘‘NASDAQ OMX’’) and utilizes Automated
Confirmation Transaction (‘‘ACT’’) Service
technology. See e.g., Securities Exchange Act
Release No. 61817 (March 31, 2010) (SR–FINRA–
2010–011).
36 17 CFR 242.611(a).
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throughs.37 The Exchange believes that
the stock/ETF portion of a Complex
Order under this proposal complies
with all six requirements. Moreover, as
explained below, the Phlx trading
System will validate compliance with
each requirement such that any matched
order received by NOS under this
proposal has been checked for
compliance with the exemption, as
follows:
(1) At least one component order is in
an NMS stock: The stock/ETF
component must be an NMS stock,
which is validated by the System;
(2) all components are effected with a
product or price contingency that either
has been agreed to by the respective
counterparties or arranged for by a
broker-dealer as principal or agent: A
Complex Order, by definition consists of
a single net/debit price and this price
contingency applies to all the
components of the order, such that the
stock price computed and sent to NOS
allows the stock/ETF order to be
executed at the proper net debit/credit
price based on the execution price of
each of the option legs, which is
determined by the Phlx System;
(3) the execution of one component is
contingent upon the execution of all
other components at or near the same
time: Once a Complex Order is accepted
and validated by the System, the entire
package is processed as a single
transaction and each of the option leg
and stock/ETF components are
simultaneously processed;
(4) the specific relationship between
the component orders (e.g., the spread
between the prices of the component
orders) is determined at the time the
contingent order is placed: Complex
Orders, upon entry, must have a size for
each component and a net debit/credit,
which the System validates and
processes to determine the ratio
between the components; an order is
rejected if the net debit/credit price and
size are not provided on the order;
(5) the component orders bear a
derivative relationship to one another,
represent different classes of shares of
the same issuer, or involve the securities
of participants in mergers or with
intentions to merge that have been
announced or since cancelled: under
this proposal, the stock/ETF component
must be the underlying security
respecting the option legs, which is
validated by the System; and
(6) the transaction is fully hedged
(without regard to any prior existing
37 See Securities Exchange Act Release No. 57620
(April 4, 2008), 73 FR 19271 (April 9, 2008) (‘‘QCT
Release’’). See also Securities Exchange Act Release
No. 54389 (August 31, 2006), 71 FR 52829
(September 7, 2006).
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position) as a result of the other
components of the contingent trade:
Under this proposal, the ratio between
the options and stock/ETF must be a
conforming ratio (8 contracts per 100
shares), which the System validates, and
which under reasonable risk valuation
methodologies, means that the stock/
ETF position is fully hedged.38
Furthermore, proposed Rule
1080.08(a)(i) provides that member
organizations may only submit Complex
Orders with a stock/ETF component if
such orders comply with the Qualified
Contingent Trade Exemption. Member
organizations submitting such Complex
Orders with a stock/ETF component
represent that such orders comply with
the Qualified Contingent Trade
Exemption.39 Thus, the Exchange
believes that Complex Orders consisting
of a stock/ETF component will comply
with the exemption and that the Phlx
trading System will validate such
compliance to assist NOS in carrying
out its responsibilities as agent for these
orders.
With respect to short sale regulation,
the proposed handling of the stock/ETF
component of a Complex Order under
this proposal does not raise any issues
of compliance with the currently
operative provisions of Regulation
SHO.40 When a Complex Order has a
stock/ETF component, member
organizations must indicate, pursuant to
Regulation SHO, whether that order
involves a long or short sale. The
System will accept Complex Orders
with a stock/ETF component marked to
reflect either a long or short position;
specifically, orders not marked as buy,
sell or sell short will be rejected by the
Phlx trading System. The Phlx trading
System will electronically deliver the
stock/ETF component to NOS for
execution. Simultaneous to the options
execution on the Phlx trading System,
NOS will execute and report the stock/
ETF component, which will contain the
long or short indication as it was
delivered by the member organization to
the Phlx trading System. Accordingly,
NOS, as a trading center under Rule
201, will be compliant with the
requirements of Regulation SHO. Of
38 A trading center may demonstrate that an
Exempted NMS Stock Transaction is fully hedged
under the circumstances based on the use of
reasonable risk-valuation methodologies. The
release approving the original exemption stated: To
effectively execute a contingent trade, its
component orders must be executed in full or in
ratio at its predetermined spread or ratio * * * ‘‘In
ratio’’ clarifies that component orders of a
contingent trade do not necessarily have to be
executed in full, but any partial executions must be
in a predetermined ratio.
39 See Amendment No. 1.
40 17 CFR 242.200 et seq.
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78325
course, broker-dealers, including both
NOS and the member organizations
submitting orders to the Phlx with a
stock/ETF component, must comply
with Regulation SHO; various
surveillance and examination regulatory
programs check for compliance thereto.
Earlier this year, the Commission
amended Rule 201 and Rule 200(g) of
Regulation SHO under the Act to adopt
a short sale-related circuit breaker that,
if triggered, imposes a restriction on the
price at which securities may be sold
short (‘‘short sale price test restriction’’);
the amendments to Rule 200(g) provide
that a broker-dealer may mark certain
qualifying short sale orders ‘‘short
exempt.’’ 41 Recently, the Commission
extended the compliance date for the
amendments to Rule 201 and Rule
200(g) until February 28, 2011.42 Once
the new provisions of Regulation SHO
become operative, NOS will accept
orders marked ‘‘short exempt.’’ The
Exchange intends to file a proposed rule
change addressing the new provisions.
For these reasons, the processing of
the stock/ETF component of a Complex
Order under this proposal will comply
with applicable rules regarding equity
trading, including the rules governing
trade reporting, trade throughs and short
sales. NOS’ responsibilities respecting
these equity trading rules will be
documented in NOS’ written policies
and procedures. NOS compliance with
these policies and procedures is
monitored, reviewed, and updated as
part of NOS’ regular and routine
regulatory program.
As part of the execution of the stock/
ETF component, the Exchange intends
to ensure that the execution price is
within the intraday high-low range in
that stock at the time the Complex Order
is processed and within a certain price
range from the current market, which
the Exchange will establish in an
Options Trader Alert. If the stock price
is not within these parameters, the
Complex Order is not executable.
The Exchange believes that electronic
submission of the stock/ETF piece of the
Complex Order should help ensure that
the Complex Order, as a whole, is
executed timely and at the desired
price.43 In addition, electronic
communication eliminates the need for
each party to separately manually
submit the stock component to a brokerdealer for execution. The Exchange
41 See Securities Exchange Act Release No. 61595
(February 26, 2010), 75 FR 11232 (March 10, 2010)
(‘‘Rule 201 Adopting Release’’).
42 See Securities Exchange Act Release No. 63247
(November 4, 2010), 75 FR 68702 (November 9,
2010) (File No. S7–08–09) (Order extending the
compliance date until February 28, 2011).
43 For a similar process, see ISE Rule 722.02.
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emphasizes that the execution of the
stock/ETF portion of a Complex Order
will be immediate; the Exchange’s
System will calculate the stock price
based on the net debit/credit price of the
Complex Order,44 while also calculating
and determining the appropriate options
price(s), all electronically and
immediately. The Exchange believes
that this is a superior approach and
would not require the Exchange to later
nullify options trades if the stock price
cannot be achieved. Accordingly, the
Exchange is not proposing to adopt a
rule permitting such option trade
nullification, like other exchange rules,
because the trade would not occur at a
price that required later nullification
due to the unavailability of the stock/
ETF price.45 The Exchange further
believes that the certainty associated
with such electronic calculations and
processing should be an attractive
feature for users of Complex Orders
with a stock or ETF component.
The Exchange also believes that it is
appropriate to construct a program
wherein its affiliate, NOS, is the
exclusive conduit for the execution of
the stock/ETF component of a Complex
Order under this proposal, similar to the
routing functionality of several options
and equities exchanges.46 As a practical
matter, complex order programs on
other exchanges necessarily involve
specific arrangements with a brokerdealer to facilitate prompt execution.
NOS does not intend to charge a fee for
the execution of the stock/ETF
component of a Complex Order, nor
does Phlx.47 The Exchange believes that
is consistent with the Act for such an
arrangement to involve one broker44 The stock/ETF price is, of course, included
within the net debit/credit price of the Complex
Order. See e.g. examples, infra, at 36.
45 See e.g., ISE Rule 722.02 (A trade of a stockoption order will be automatically cancelled if
market conditions prevent the execution of the
stock or option leg(s) at the prices necessary to
achieve the agreed upon net price.).
46 See also Phlx Rule 985(c)(1), which provides
that The NASDAQ OMX Group, Inc., which owns
NOS and the Exchange, shall establish and
maintain procedures and internal controls
reasonably designed to ensure that NOS does not
develop or implement changes to its system on the
basis of non-public information regarding planned
changes to the Exchange’s systems, obtained as a
result of its affiliation with the Exchange, until such
information is available generally to similarly
situated Exchange members and member
organizations in connection with the provision of
inbound routing to the Exchange.
47 However, Trade Reporting Facility and clearing
fees, not charged by Phlx or NOS, may result. NSCC
and ACT will bill firms directly for their use of the
NSCC and ACT systems, respectively. To the extent
that NOS is billed by NSCC or ACT, it will not pass
through such fees to firms for the stock/ETF portion
of a Complex Order under this proposal. Phlx’s fees
applicable to Complex Orders appear in its Fee
Schedule and may change from time to time.
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19:10 Dec 14, 2010
Jkt 223001
dealer, even one that is an affiliate,
particularly to offer the aforementioned
benefits of a prompt, electronic
execution for Complex Orders involving
stock/ETFs. Specifically, offering a
seamless, automatic execution for both
the options and stock/ETF components
of a Complex Order is an important
feature that should promote just and
equitable principles of trade and remove
impediments to and perfect the
mechanism of a free and open market
and a national market system by deeply
enhancing the sort of complex order
processing available on options
exchanges today. Nevertheless, users of
Phlx’s proposed new Complex Orders
system could, in lieu of this proposed
arrangement with NOS, choose, instead,
the following alternatives: (i) Avoid
using Complex Orders that involve
stock/ETFs, (ii) use the trading floor
manual method of executing complex
orders with stock, or (iii) go to another
venue, several of which offer a similar
feature, as described further below.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 48 in general, and furthers the
objectives of Section 6(b)(5) of the Act 49
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
enhancing its System and rules
governing Complex Orders, by adding
additional order types and components.
These additional order types and
components should provide market
participants with trading opportunities
more closely aligned with their
investment or risk management
strategies. Noting that complex orders,
including those with a stock/ETF
component are widely recognized and
utilized by market participants, this
proposal to offer new order types and
components on an electronic system
should provide a more efficient
mechanism for carrying out these
strategies.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. Rather, this
proposal enhances competition by
providing an additional alternative to
the existing methods of trading complex
48 15
49 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00124
Fmt 4703
Sfmt 4703
orders, including the stock/ETF
component, in a single, seamless
transaction. Member use of the
Exchange’s proposed Complex Order
processing is entirely voluntary.
The Exchange competes vigorously
for complex orders among several
options exchanges that offer a stockoption order type. The Exchange’s
proposed new alternative differs from
and competes against existing Complex
Order mechanisms by offering fully
electronic processing. Existing Complex
Order mechanisms at Chicago Board
Options Exchange, Incorporated
(‘‘CBOE’’) and International Securities
Exchange, LLC (‘‘ISE’’) offer a similar
end result—execution of paired option
and stock orders—using different, less
automated means.
Market participants that prefer not to
use the stock/ETF functionality offered
herein through NOS have a variety of
alternatives; stock-option orders can be
executed on other options exchanges via
various electronic methods, on various
options trading floors or on the
Exchange, without employing a stock/
ETF component.
Accordingly, in light of these various
alternatives and the keen competition
among options exchanges for complex
order flow, the processing method
selected by the Exchange, including the
use of NOS, presents no burden on
competition. In fact, the Exchange’s
proposal will likely promote
competition for the most efficient means
to execute complex orders with a stock/
ETF component. The Exchange fully
expects that other exchanges will mimic
the proposed processing if it succeeds in
attracting order flow for which many
markets compete.
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.
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
1, 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
Number SR–Phlx–2010–157 on the
subject line.
Paper Comments
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Florence E. Harmon,
Deputy Secretary.
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.
[FR Doc. 2010–31487 Filed 12–14–10; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63488; File No. SR–BATS–
2010–036]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Extend Pilot Program
Related To Clearly Erroneous
Execution Reviews
December 9, 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 December
2, 2010, BATS Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BATS’’) filed with the
Securities and Exchange Commission
All submissions should refer to File
(‘‘Commission’’) the proposed rule
Number SR–Phlx–2010–157. This file
change as described in Items I and II
number should be included on the
subject line if e-mail is used. To help the below, which Items have been prepared
by the Exchange. The Commission is
Commission process and review your
publishing this notice to solicit
comments more efficiently, please use
only one method. The Commission will comments on the proposed rule change
post all comments on the Commission’s from interested persons.
Internet Web site (https://www.sec.gov/
I. Self-Regulatory Organization’s
rules/sro.shtml). Copies of the
Statement of the Terms of Substance of
submission, all subsequent
the Proposed Rule Change
amendments, all written statements
The Exchange is filing with the
with respect to the proposed rule
Commission a proposal to extend a pilot
change that are filed with the
program previously approved by the
Commission, and all written
Commission related to Rule 11.17,
communications relating to the
entitled ‘‘Clearly Erroneous Executions.’’
proposed rule change between the
The Exchange proposes to extend both
Commission and any person, other than pilot programs through April 11, 2011.
those that may be withheld from the
The text of the proposed rule change
public in accordance with the
is available at the Exchange’s Web site
provisions of 5 U.S.C. 552, will be
at https://www.batstrading.com, at the
available for website viewing and
principal office of the Exchange, and at
printing in the Commission’s Public
the Commission’s Public Reference
Reference Room, 100 F Street, NE.,
Room.
Washington, DC 20549, on official
II. Self-Regulatory Organization’s
business days between the hours of 10
Statement of the Purpose of, and
a.m. and 3 p.m. Copies of such filing
Statutory Basis for, the Proposed Rule
also will be available for inspection and Change
copying at the principal office of the
In its filing with the Commission, the
Exchange. All comments received will
Exchange included statements
be posted without change; the
concerning the purpose of and basis for
Commission does not edit personal
the proposed rule change and discussed
identifying information from
any comments it received on the
submissions. You should submit only
proposed rule change. The text of these
information that you wish to make
statements may be examined at the
available publicly. All submissions
should refer to File Number SR–Phlx–
50 17 CFR 200.30–3(a)(12).
2010–157 and should be submitted on
1 15 U.S.C. 78s(b)(1).
or before January 5, 2011.
2 17 CFR 240.19b–4.
hsrobinson on DSK69SOYB1PROD with NOTICES
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
VerDate Mar<15>2010
19:10 Dec 14, 2010
Jkt 223001
78327
PO 00000
Frm 00125
Fmt 4703
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1. Purpose
The purpose of this filing is to extend
the effectiveness of the Exchange’s
current rule applicable to Clearly
Erroneous Executions, Rule 11.17. The
rule, explained in further detail below,
was approved to operate under a pilot
program set to expire on December 10,
2010. The Exchange proposes to extend
the pilot program to April 11, 2011.
On September 10, 2010, the
Commission approved, on a pilot basis,
changes to BATS Rule 11.17 to provide
for uniform treatment: (1) Of clearly
erroneous execution reviews in multistock events involving twenty or more
securities; and (2) in the event
transactions occur that result in the
issuance of an individual stock trading
pause by the primary market and
subsequent transactions that occur
before the trading pause is in effect on
the Exchange.3 The Exchange also
adopted additional changes to Rule
11.17 that reduced the ability of the
Exchange to deviate from the objective
standards set forth in Rule 11.17.4 The
Exchange believes the benefits to market
participants from the more objective
clearly erroneous executions rule
should be approved to continue on a
pilot basis.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange, and, in particular, with the
requirements of Section 6(b) of the Act.5
In particular, the proposal is consistent
with Section 6(b)(5) of the Act,6 because
it would promote just and equitable
principles of trade, remove
impediments to, and perfect the
mechanism of, a free and open market
and a national market system. The
Exchange believes that the pilot
program promotes just and equitable
principles of trade in that it promotes
transparency and uniformity across
3 Securities Exchange Act Release No. 62886
(September 10, 2010), 75 FR 56613 (September 16,
2010) (SR–BATS–2010–016).
4 Id.
5 15 U.S.C. 78f(b).
6 15 U.S.C. 78f(b)(5).
E:\FR\FM\15DEN1.SGM
15DEN1
]]>Agencies
[Federal Register Volume 75, Number 240 (Wednesday, December 15, 2010)]
[Notices]
[Pages 78320-78327]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31487]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63509; File No. SR-Phlx-2010-157]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change, as Modified by Amendment No. 1,
Relating to Complex Orders
December 9, 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 November 29, 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. On
December 6, 2010, the Exchange filed Amendment No. 1 to the proposed
rule change. The Commission is publishing this notice to solicit
comments on the proposed rule change, as modified by Amendment No. 1,
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
[[Page 78321]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule
19b-4 thereunder,\4\ proposes to amend Rule 1080.08 to change the
following aspects of its Complex Orders System: (i) Permit Complex
Orders where one of the components of the Complex Order is the
underlying security (stock or Exchange Traded Fund Share (``ETF''));
(ii) permit Complex Orders with more than two components; (iii) add a
``Do Not Auction'' condition for Complex Orders that prevents orders so
marked from triggering (or joining) a Complex Order Live Auction; \5\
(iv) permit day orders to be sent by certain participants; (v) add an
execution priority provision that clarifies execution priority
respecting current Complex Orders and establishes the execution
priority of the proposed new Complex Orders; and (vi) revise the
definition section.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ See Rule 1080.08(e).
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Website at https://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings,
at the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In 2008, the Exchange automated the handling of Complex Orders on
its electronic trading platform for options, Phlx XL.\6\ Currently, the
Exchange's Complex Orders functionality is limited to Complex Orders
consisting solely of two option components. The Exchange proposes to
add Complex Orders where one component is the underlying stock or ETF.
The Exchange also proposes to permit Complex Orders consisting of up to
six components. The purpose of the proposed rule change is to more
efficiently handle these new Complex Orders on the Exchange by
establishing rules and systems that would enable the Exchange to handle
such orders electronically.\7\
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 58361 (August 14, 2008),
73 FR 49529 (August 21, 2008) (SR-Phlx-2008-50). Since that time,
the Exchange has enhanced its options trading platform, now known as
Phlx XL II. See Securities Exchange Act Release No. 59995 (May 28,
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
\7\ Currently, complex orders also trade on the floor of the
Exchange pursuant to various rules, including Rule 1033; this
proposal does not impact such manual trading.
---------------------------------------------------------------------------
Definitions
The Exchange is proposing to revise the definition of Complex Order
in Rule 1080.08(a)(i) to provide that a Complex Order is any order
involving the simultaneous purchase and/or sale of two or more
different options series in the same underlying security, priced at a
net debit or credit based on the relative prices of the individual
components, for the same account, for the purpose of executing a
particular investment strategy.\8\ Furthermore, a Complex Order can
also be a stock-option order, which is an order to buy or sell a stated
number of units of an underlying stock or ETF coupled with the purchase
or sale of options contract(s).\9\ Accordingly, the Exchange is now
permitting one component of a Complex Order to consist of the
underlying stock or ETF.\10\ A Complex Order with one component that is
the underlying stock or ETF is also referred to as a stock-option
order. The underlying stock or ETF must be the deliverable for the
options component of that Complex Order and represent exactly 100
shares per option for regular way delivery.\11\ In the case of Complex
Orders with a stock or ETF component, these cannot be executed against
orders for the individual legs; stock-option orders in the System can
only be executed against other stock-option orders. The Exchange is
proposing to state that the maximum number of components will be six,
including both options and stock components. For example, under the
proposal, a Complex Order could consist of up to five options series
plus the underlying security. Or, a Complex Order could consist of up
to six options series.
---------------------------------------------------------------------------
\8\ This includes additional language that provides that a
Complex Order is priced at a net debit or credit based on the
relative prices of the individual components, which is currently in
the definition of Complex Order Strategy in Rule 1080.08(a)(ii), but
fits better in the definition of Complex Order.
\9\ This definition is similar to ISE Rule 722(a).
\10\ The term ``stock'' is used interchangeably with
``underlying security'' herein. In addition, in the case of foreign
currency options and index options, the underlying cannot be a
component of a Complex Order, because such underlying instrument is
not a security and instead consists of actual foreign currency and
an index, respectively, which are not currently included in the
program the Exchange has developed.
\11\ Because it must represent exactly 100 shares, there can be
no cash component. For example, XRX bought ACS, resulting in an
adjusted option trading under the symbol AGY; AGY options settle
into 4.935 XRX shares plus $18.60 cash. See e.g., https://www.theocc.com/components/docs/market-data/infomemos/2010/feb/26947.pdf. Accordingly, because AGY options settle through delivery
of XRX shares and cash rather than AGY shares, it would not possible
to enter a AGY stock-option order. Instead, AGY Complex Orders can
only consist of options components to be traded on the Exchange.
---------------------------------------------------------------------------
This revision of the definition of a Complex Order is intended to
simplify the rule and recognizes that there are many types and
permutations possible, as strategies develop and become more
sophisticated.\12\ As a result of this revision of the definition of a
Complex Order, several subparagraphs are being deleted because they are
too specific and no longer needed, as they are covered under the new,
broader definition; these include the definition of a spread order, a
straddle order, a combination order, a ratio order, a collar order, and
a tied hedge order.\13\
---------------------------------------------------------------------------
\12\ The ISE has adopted a similar generic provision. See
Securities Exchange Act Release No. 59021 (November 26, 2008), 73 FR
74545 (December 8, 2008) (SR-ISE-2008-91).
\13\ See current Phlx Rule 1080.08(a)(i)(A)-(F).
---------------------------------------------------------------------------
In Rule 1080.08(a)(ii), the Exchange is also revising the
definition of Complex Order Strategy, in addition to moving the pricing
language, as explained above, to expressly state in the rule that each
such strategy is assigned a strategy identifier by the System.\14\ This
is intended to make the program clearer in the rules. The Exchange is
also proposing to better state that a Complex Order Strategy means a
particular combination of components and their ratios to one another.
---------------------------------------------------------------------------
\14\ For example, a Complex Order Strategy might be ``buy one
XYZ January 20 call, sell one XYZ January 20 put.'' The System would
assign this Complex Order Strategy a specific identification number
or code that would be used in the System to identify this Complex
Order Strategy. Hypothetically, the identification number for this
particular Complex Order Strategy could be ``Complex Order Strategy
12345.'' Complex Order Strategy 12345 would have a
bid price and an offer price. If an investor wishes to purchase or
sell, for example, 10 Complex Order Strategy 12345, such an investor
would be bidding for or offering to buy 10 XYZ January 20 calls and
sell 10 XYZ January 20 puts. This is not a new feature and was
included in the original proposal. See Securities Exchange Act
Release No. 58361 (August 14, 2008), 73 FR 49529 (August 21, 2008)
(SR-Phlx-2008-50).
---------------------------------------------------------------------------
In conjunction with permitting one of the components of a Complex
Order to be the underlying security, the
[[Page 78322]]
Exchange proposes to amend subparagraphs (a)(iv) and (vi) to update the
definitions of cPBBO and cNBBO, respectively, to include the underlying
security. Specifically, both would be amended to state that the best
net debit or credit price for a Complex Order Strategy that includes a
stock/ETF component includes the national best bid or offer for the
underlying security.
The Exchange also proposes to adopt, in new subparagraph (a)(viii),
a new order condition called ``Do Not Auction,'' or DNA, which causes
an order to not be eligible to begin a Complex Order Live Auction
(``COLA'').\15\ DNA Orders cannot join a COLA in progress. These orders
can avoid an auction and, instead, be either executed immediately or
cancelled.\16\ DNA Orders received prior to the opening or when the
Complex Order Strategy is not available for trading will be cancelled.
DNA Orders will initially only be available for Complex Orders
consisting of more than two option components or where the underlying
security is a component; once the Exchange has fully rolled out its
enhanced Complex Order System, which will be announced in an Options
Trader Alert, DNA Orders will also become available for Complex Orders
consisting of two option components.
---------------------------------------------------------------------------
\15\ See Rule 1080.08(e).
\16\ DNA orders can be marked IOC, which means that the order
cannot start an auction (whereas an IOC order can), and get rejected
if there is an auction in progress.
---------------------------------------------------------------------------
Priority
The Exchange proposes to clarify and expand upon the trade-through
and execution priority provisions applicable to Complex Orders,
including the expanded definition of Complex Orders. Accordingly, the
Exchange, first, proposes to add to the definitions section of the
rule, Rule 1080.08(a), the definition of a conforming ratio. A
conforming ratio, in proposed Rule 1080.08(a)(ix), is essentially a
permissible ratio, renamed. Specifically, it is where the ratio between
the sizes of the options components of a Complex Order is equal to or
greater than one-to-three (.333) and less than or equal to three-to-one
(3.00). For example, a one-to-two (.5) ratio, a two-to-three (.667)
ratio, or a two-to-one (2.00) ratio is a conforming ratio,\17\ whereas
a one-to-four (.25) ratio or a four-to-one (4.0) ratio is not.\18\
---------------------------------------------------------------------------
\17\ One example of a conforming five-legged ratio is: B 100 GE
Dec 12.50 calls for 4.00, S 200 GE Dec 15.00 calls for 2.00, B 100
GE Dec 17.50 calls for .60 and also S 100 Dec 17.50/Dec 16.50 put
spreads at .60; because the highest volume to the lowest volume is
in a ratio of 2:1 (200 versus 100 options), this order is
conforming.
\18\ One example of a non-conforming five-legged ratio is: B 100
GE Dec 12.50 calls for 4.00, S 200 GE Dec 15.00 calls for 2.00, B
100 GE Dec 17.50 calls for .60 and also S 400 Dec 17.50/Dec 16.50
put spreads at .60; because the highest volume to the lowest volume
is in a ratio of 4:1 (400 versus 100 options), this order is not
conforming.
---------------------------------------------------------------------------
Where one component of the Complex Order is the underlying
security, the ratio between any options component and the underlying
security component must be eight contracts to 100 shares of the
underlying security or less.\19\ One example of a two-legged ratio
order with a stock component that is conforming is: B 400 GE Dec 16.50
calls, S 400 Dec 17.50 calls and S 12,000 shares of GE at 16.50; after
comparing the largest option leg (400) to each 100 lot of shares (100 x
120 = 12,000 shares, or 120 lots of 100), the ratio is 3.33 (400
divided by 120) options per 100 shares, which is less than the maximum
allowable 8 options per 100 shares, which is a conforming ratio. In
contrast, B 200 GE Dec 16.50 calls, S 400 GE Dec 17.50 calls and S
3,000 shares of GE at 16.50 is a nonconforming ratio, because comparing
the largest leg of the options trade (400) to 30 lots of 100 (3,000
shares) equals 13.33 (400 divided by 30) options per 100 shares, which
is greater than the maximum allowable 8 options per 100 shares and thus
nonconforming. Currently, the same ratio appears in Rule
1080.08(a)(i)(D), within the definition of a Ratio Order; that
provision is proposed to be deleted and replaced by the new definition
of conforming ratio to make the rule clearer.\20\
---------------------------------------------------------------------------
\19\ These are the same ratios found in ISE Rule 722(a)(4). If
the largest option leg versus stock meets the conforming ratio,
then, necessarily, all smaller legs would also meet the definition
of conforming ratio.
\20\ Complex orders consisting of a nonconforming ratio will not
be accepted.
---------------------------------------------------------------------------
Today, Complex Orders consisting of permissible (now called
conforming) ratios are excepted from the trade-through prohibitions of
the Options Order Protection and Locked/Crossed Market Plan (``Options
Linkage Plan''), because the Plan contains an exception for Complex
Orders with a certain ratio. Accordingly, these orders can be executed
without regard to prices for the individual legs on other exchanges,
meaning trading through possibly better prices.\21\ The Exchange now
proposes to codify this in new subparagraph (c)(iii)(C).
---------------------------------------------------------------------------
\21\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) Options Linkage Plan at Section
5(b)(viii), which prohibits trading through a better price of
another exchange unless an exception applies. Phlx Rule
1084(b)(viii) provides an exception for complex orders. This
exception applies to Complex Orders executed as such, and not those
executed by legging, such as pursuant to Rule 1080.08(e)(vi)(A).
---------------------------------------------------------------------------
In addition to trade-through provisions, whether a Complex Order
has a conforming ratio is also relevant in determining how the
Exchange's spread priority rules apply. Today, Rule 1033(d) applies to
executions of Complex Orders.\22\ Throughout Rule 1080.08, there are
cross references to Rule 1033(d), which will now be deleted and
replaced with new paragraph (c)(iii), which is the spread priority
provision applicable to Complex Orders executed on Phlx XL II. The
spread priority provisions in new subparagraph (c)(iii) provide the
same priority under the same conditions to a broader class of Complex
Orders under this proposal.
---------------------------------------------------------------------------
\22\ Exchange Rule 1033(d) affords priority to spread type
orders over either the bid or the offer established in the
marketplace that is not better than the bids or offers comprising
such total credit or debit, provided that, the member executes at
least one option leg at a better price than established bid or offer
for that option contract AND no option leg is executed at a price
outside of the established bid or offer for that option contract.
---------------------------------------------------------------------------
Spread priority refers to the priority of orders and quotes on the
Exchange's own market and permits part of an eligible Complex Order to
have priority over other bids and offers in the marketplace. Today, for
a Complex Order consisting of two options components, if the ratio
between those options components is a permissible (now called
conforming) ratio, then if one option ``leg'' or component improves the
Exchange's market for that option series, then the other option leg can
be executed with priority over existing bids/offers (including
customers), provided that neither option leg is executed at a price
outside of the established bid or offer for that option contract.\23\
For example, if a Complex Order is received to buy one option A
contract and sell one option B contract for a net debit of .65, where
option A has a PBBO of 1.00-1.20 with a 1.00 customer limit order to
buy on the book and option B has a PBBO of .45-.50 with a .50 customer
limit order to sell on the book, permissible trade prices could be 1.15
for option A and .50 for option B. Option B is allowed to execute at
.50 because option A executed at a price that improved the Exchange's
market in that option. The application of spread priority to Complex
Orders consisting only of options is not changing and will now be
covered by new Rule 1080.08(c)(iii)(A).
---------------------------------------------------------------------------
\23\ This applies to both trading in the complex orders
automated functionality as well as manual trading on the floor. See
Rule 1033(d).
---------------------------------------------------------------------------
Furthermore, under this proposal, because Complex Orders with a
stock
[[Page 78323]]
component will now be permitted on Phlx XL II, priority provisions
similar to Rule 1033 will now also apply to Complex Orders on Phlx XL
II where one component is the underlying stock or ETF. Today, this is
true for Complex Orders with a stock component executed manually on the
trading floor, which are subject to Rule 1033(e). Thus, new
subparagraph (c)(iii)(B) will govern the execution priority of the new
stock-option Complex Orders on Phlx XL II. Specifically, it provides
that where a conforming Complex Order consists of the underlying stock
or ETF and one options leg, such options leg does not have priority
over bids and offers established in the marketplace, including customer
orders. Where a conforming Complex Order consists of the underlying
stock or ETF and more than one options leg, the options legs have
priority over bids and offers established in the marketplace, including
customer orders, if at least one options leg improves the existing
market for that option.
For example, where there is a conforming Complex Order to buy 1
option A, sell 1 option B, and sell 50 shares of the underlying stock
for a net debit of 9.55 where the PBBO of option A is 1.00-1.20 with a
customer 1.00 bid, the PBBO of option B is .40-.50, and the stock NBBO
is 20.10-20.20, the following trade prices would be permissible: Option
A could execute at 1.00, option B at .45, and the stock at 20.20.
Option A is able to trade on the PBBO at the same price as the customer
because option B improved the PBBO. The price of the stock portion is
not relevant in applying the Exchange's option execution priority
rules. As a second example, if a conforming Complex Order consists of
only one option component and stock, then the option component may not
be allowed to be executed at the same price as any existing bid/offer
including customer bids/offers. For example, a conforming Complex Order
to sell 1 option A and buy 100 shares, with option A having a PBBO of
2.00-2.20 and the stock having a NBBO of 10.00-10.20, for a net debit
of 7.90 could receive the following permissible trade prices: Option A
could execute at 2.10 with the stock execution occurring at 10.00.
Option A could not execute at 2.20, because the option component does
not have priority over existing bids/offers.
Order Entry
Currently, under subparagraph (b)(ii), Streaming Quote Traders
(``SQTs''),\24\ Remote Streaming Quote Traders (``RSQTs''),\25\ non-SQT
ROTs,\26\ specialists and non-Phlx market makers on another exchange
are permitted to enter Complex Orders as IOC only. However, for Complex
Orders consisting of more than two option components or where the
underlying security is a component, SQTs, RSQTs, non-SQT ROTs,
specialists and non-Phlx market makers on another exchange may also
enter Day orders; \27\ once the Exchange has fully rolled out its
enhanced Complex Order System, which will be announced in an Options
Trader Alert, Day orders will become available for Complex Orders
consisting of two option components. The Exchange expects that adding
Day orders here should encourage more orders from this group of
participants.
---------------------------------------------------------------------------
\24\ An SQT is a Registered Options Trader (``ROT'') who has
received permission from the Exchange to generate and submit options
quotations electronically through an electronic interface via an
Exchange approved proprietary electronic quoting device in eligible
options to which such SQT is assigned. See Rule 1014(b)(ii)(A).
\25\ 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 options quotations
electronically in eligible options to which such RSQT has been
assigned. An RSQT may only submit such quotations electronically
from off the floor of the Exchange. See Rule 1014(b)(ii)(B).
\26\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT.
See Rule 1014(b)(ii)(C).
\27\ As a result of adding Day orders for this category of
users, the Exchange also proposes to amend Rule 1080.08(f)(i) to
eliminate reference to the types of orders on the Complex Limit
Order Book, because it is too specific.
---------------------------------------------------------------------------
Currently, pursuant to subparagraph (b)(iii), Floor Brokers using
the Options Floor Broker Management System may enter Complex Orders
into the Exchange's electronic Complex Orders System as Day, GTC or IOC
on behalf of non-broker-dealer customers and non-market maker off-floor
broker-dealers, and as IOC only on behalf of broker-dealers or
affiliates of broker-dealers. The Exchange proposes to amend this
subparagraph to reflect that DNA orders and orders with more than two
legs or a stock/ETF component (which are new) cannot be entered by
Floor Brokers at this time. The Exchange believes that Floor Brokers
are able to and use other, non-Exchange systems to access Phlx XL II,
such that the FBMS, which is primarily intended to capture brokered
orders into the options audit trail system, is not the sole method for
them to submit orders to the Exchange. In addition, complex orders can
be handled manually on the Exchange trading floor today. The Exchange
believes that Floor Brokers are not likely to need or request these
changes to FBMS, because they execute far more complex orders in the
trading crowd today than through FBMS.
Rule 1080.08(c) currently provides that a Complex Order is eligible
to trade only when each component of the Complex Order is open for
trading on the Exchange. The Exchange proposes to add the word
``option'' in certain places in this provision, because one component
of a Complex Order can now be the underlying security. The Exchange
also proposes to require that the underlying security be open for
trading on its primary market \28\ if such underlying security is a
component of a Complex Order.
---------------------------------------------------------------------------
\28\ The Exchange intends to consider the primary market for the
underlying security to be the listing market; if the Exchange
determines to use a market other than the listing market, the
Exchange will issue an Options Trader Alert announcing any such
change.
---------------------------------------------------------------------------
Complex Order Processing and Execution
Currently, pursuant to Rule 1080.08(e)(i)(B)(2), a Complex Order
that would otherwise be a COLA-eligible order that is received in the
System during the final ten seconds of any trading session shall not be
COLA-eligible. The Exchange proposes to make this time configurable,
not to exceed the current ten seconds. The Exchange will issue an
Options Trader Alert when the number of seconds changes.
COLA-eligible orders, COLA Sweeps, and responsive Complex Orders
trade first based on the best price or prices available at the end of
the COLA Timer. If no COLA Sweeps or responsive Complex Orders for the
same Complex Order Strategy as the COLA-eligible order that improve the
initial cPBBO were received during the COLA Timer, each component of
the COLA-eligible order may trade at the PBBO with existing quotes and/
or limit orders on the limit order book for the individual components
of the Complex Order, provided that each component is executed such
that the components comprise the Complex Order Strategy with the
correct ratio for the desired net debit or credit. This is known as
``legging,'' and the Exchange proposes to label subparagraph
(e)(vi)(A)(1) as such. The Exchange is proposing to add that legging
only occurs where there is no underlying security as a component of the
Complex Order. If a COLA-eligible order cannot be filled in its
entirety, any remaining balance would be placed on the CBOOK unless the
COLA-eligible order has been submitted with other instructions (i.e.,
cancel).
Currently, Complex Orders are automatically executed against orders
on the CBOOK in price priority and in
[[Page 78324]]
time priority at the same price, as described in subparagraph (f)(iii).
Specifically, a Complex Order resting on the CBOOK will execute
automatically against: (i) Quotes or orders on the limit order book for
the individual components of the order (allocated in accordance with
Exchange Rule 1014(g)(vii), and an SQT or RSQT quoting on all
components of the Complex Order will have priority over SQTs and RSQTs
quoting a single component, but not over customer orders); or (ii) an
incoming marketable Complex Order that does not trigger a COLA Timer,
whichever arrives first. At this time, the Exchange proposes to delete
the provision that an SQT or RSQT quoting on all components of the
Complex Order will have priority over SQTs and RSQTs quoting a single
component in order to simplify the allocation process as the Exchange
begins to accept more Complex Order types. Instead, an SQT or RSQT
quoting on all components of the Complex Order will be on parity with
SQTs and RSQTs quoting a single component.\29\ This is being deleted
from Rule 1080.08(e)(vi)(A)(1), (f)(iii)(A) and (f)(iii)(B)(1). The
Exchange is deleting this provision to simplify system processing and
does not believe, currently, that the benefits are material or being
realized intentionally by participants. Furthermore, in Rule
1080.08(f)(iii), the Exchange proposes to state that the execution
against orders on the limit order book for the individual components
means the options components, such that ``legging'' will not occur
where any of the components is the underlying security.
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\29\ This change will initially only apply to Complex Orders
consisting of more than two options components or where the
underlying stock/ETF is a component; once the Exchange has fully
rolled out its enhanced Complex Order System, which will be
announced in an Options Trader Alert, it will apply to Complex
Orders consisting of two options components.
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The Exchange proposes to add the word ``options'' in various places
where the provision clearly applies only to the options component. For
example, in subparagraph (c)(ii), most of the reasons why Complex
Orders would not trade on the System relate to the options components.
Similarly, in subparagraph (f)(i) governing what orders go on the
CBOOK, ``options'' is being added to several of the provisions.
Underlying Stock/ETF Component
In addition to making the various new references to the underlying
stock/ETF as a component of a Complex Order, the Exchange also proposes
to adopt new subparagraph (h), which will state that where one
component of a Complex Order is the underlying stock/ETF, the Exchange
shall electronically communicate the underlying stock/ETF component of
a Complex Order to Nasdaq Options Services LLC (``NOS''), its
designated broker-dealer, for execution; this occurs once the Phlx
trading System determines that a Complex Order trade is possible and at
what prices. Specifically, NOS will act as agent for such stock/ETF
orders; NOS will match those orders, which always consist of both a buy
and sell order for the stock/ETF, because the System has determined
that two Complex Orders can trade with each other.\30\ NOS will match
these orders not on an exchange, but rather ``over-the-counter.''
Accordingly, the Exchange proposes to permit NOS to perform this
function, in addition to its approved routing functions.\31\
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\30\ This is because Complex Orders consisting of the underlying
stock or ETF can only trade with other Complex Orders. See proposed
Rule 1080.08(a)(i), which reads as follows: Stock-option orders can
only be executed against other stock-option orders and cannot be
executed by the System against orders for the individual components.
\31\ Securities Exchange Act Release Nos. 57478 (March 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080); and 59995 (May 28, 2009), 74 FR 26750 (June 3,
2009) (SR-Phlx-2009-32).
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NOS is a broker-dealer and member of various exchanges and the
Financial Industry Regulatory Authority (``FINRA''). As discussed in
detail below, NOS, under this proposal, would be responsible for the
proper execution, trade reporting and submission to clearing of the
stock/ETF trade that is part of a Complex Order. Because these trades
will occur off-exchange, the principal regulator is FINRA, rather than
Phlx or NASDAQ. Furthermore, NOS is responsible for compliance with
FINRA rules generally and is subject to examination by FINRA.
Specifically, NOS is subject to NASD Rule 3010,\32\ which generally
requires that the policies and procedures and supervisory systems be
reasonably designed to achieve compliance with applicable securities
laws and regulations and with applicable NASD and FINRA rules,
including those relating to the misuse of material non-public
information. To this end, NOS intends to have in place policies related
to confidentiality and the potential for informational advantages
relating to its affiliates, intended to protect against the misuse of
material nonpublic information.\33\
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\32\ FINRA was created in July 2007 through the consolidation of
NASD and the member regulation, enforcement and arbitration
functions of the NYSE. The FINRA rulebook currently consists of both
NASD Rules and certain NYSE Rules that FINRA has incorporated
(``Incorporated NYSE Rules'').
\33\ Similarly, pursuant to Phlx Rule 1080(m)(iii)(C), the
Exchange must establish and maintain procedures and internal
controls reasonably designed to adequately restrict the flow of
confidential and proprietary information between the Exchange and
the Routing Facility.
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In addition, because the execution and reporting of the stock/ETF
piece will occur otherwise than on this Exchange or any other exchange,
it will be handled by NOS pursuant to applicable rules regarding equity
trading,\34\ including the rules governing trade reporting, trade
throughs and short sales. Specifically, NOS will report the trades to
the Trade Reporting Facility.\35\ Firms that are members of FINRA or
the NASDAQ Stock Market (``NASDAQ'') are required to have a Uniform
Service Bureau/Executing Broker Agreement (``AGU'') with NOS in order
to trade Complex Orders containing a stock/ETF component. Firms that
are not members of FINRA or NASDAQ are required to have a Qualified
Special Representative (``QSR'') arrangement with NOS in order to trade
Complex Orders containing a stock/ETF component. This requirement is
codified in proposed Rule 1080.08(a)(i). Accordingly, this process is
available to all Phlx member organizations and the stock/ETF component
of a Complex Order, once executed, will be properly processed for trade
reporting purposes.
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\34\ See Securities Exchange Act Release No. 49023 (January 5,
2004) (SR-ISE-2003-37) (``Once the orders are communicated to the
broker-dealer for execution, the broker-dealer has complete
responsibility for determining whether the orders may be executed in
accordance with all of the rules applicable to execution of equity
orders, * * *'').
\35\ Specifically, the trades will be reported to the FINRA/
Nasdaq TRF, which is a facility of FINRA that is operated by The
NASDAQ OMX Group, Inc. (``NASDAQ OMX'') and utilizes Automated
Confirmation Transaction (``ACT'') Service technology. See e.g.,
Securities Exchange Act Release No. 61817 (March 31, 2010) (SR-
FINRA-2010-011).
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With respect to trade throughs, the Exchange believes that the
stock/ETF component of a Complex Order is eligible for the Qualified
Contingent Trade Exemption from Rule 611(a) of Regulation NMS. A
Qualified Contingent Trade is a transaction consisting of two or more
component orders, executed as agent or principal, that satisfy the six
elements in the Commission's order exempting Qualified Contingent
Trades (``QCTs'') from the requirements of Rule 611(a),\36\ which
requires trading centers to establish, maintain, and enforce written
policies and procedures that are reasonably designed to prevent trade-
[[Page 78325]]
throughs.\37\ The Exchange believes that the stock/ETF portion of a
Complex Order under this proposal complies with all six requirements.
Moreover, as explained below, the Phlx trading System will validate
compliance with each requirement such that any matched order received
by NOS under this proposal has been checked for compliance with the
exemption, as follows:
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\36\ 17 CFR 242.611(a).
\37\ See Securities Exchange Act Release No. 57620 (April 4,
2008), 73 FR 19271 (April 9, 2008) (``QCT Release''). See also
Securities Exchange Act Release No. 54389 (August 31, 2006), 71 FR
52829 (September 7, 2006).
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(1) At least one component order is in an NMS stock: The stock/ETF
component must be an NMS stock, which is validated by the System;
(2) all components are effected with a product or price contingency
that either has been agreed to by the respective counterparties or
arranged for by a broker-dealer as principal or agent: A Complex Order,
by definition consists of a single net/debit price and this price
contingency applies to all the components of the order, such that the
stock price computed and sent to NOS allows the stock/ETF order to be
executed at the proper net debit/credit price based on the execution
price of each of the option legs, which is determined by the Phlx
System;
(3) the execution of one component is contingent upon the execution
of all other components at or near the same time: Once a Complex Order
is accepted and validated by the System, the entire package is
processed as a single transaction and each of the option leg and stock/
ETF components are simultaneously processed;
(4) the specific relationship between the component orders (e.g.,
the spread between the prices of the component orders) is determined at
the time the contingent order is placed: Complex Orders, upon entry,
must have a size for each component and a net debit/credit, which the
System validates and processes to determine the ratio between the
components; an order is rejected if the net debit/credit price and size
are not provided on the order;
(5) the component orders bear a derivative relationship to one
another, represent different classes of shares of the same issuer, or
involve the securities of participants in mergers or with intentions to
merge that have been announced or since cancelled: under this proposal,
the stock/ETF component must be the underlying security respecting the
option legs, which is validated by the System; and
(6) the transaction is fully hedged (without regard to any prior
existing position) as a result of the other components of the
contingent trade: Under this proposal, the ratio between the options
and stock/ETF must be a conforming ratio (8 contracts per 100 shares),
which the System validates, and which under reasonable risk valuation
methodologies, means that the stock/ETF position is fully hedged.\38\
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\38\ A trading center may demonstrate that an Exempted NMS Stock
Transaction is fully hedged under the circumstances based on the use
of reasonable risk-valuation methodologies. The release approving
the original exemption stated: To effectively execute a contingent
trade, its component orders must be executed in full or in ratio at
its predetermined spread or ratio * * * ``In ratio'' clarifies that
component orders of a contingent trade do not necessarily have to be
executed in full, but any partial executions must be in a
predetermined ratio.
Furthermore, proposed Rule 1080.08(a)(i) provides that member
organizations may only submit Complex Orders with a stock/ETF component
if such orders comply with the Qualified Contingent Trade Exemption.
Member organizations submitting such Complex Orders with a stock/ETF
component represent that such orders comply with the Qualified
Contingent Trade Exemption.\39\ Thus, the Exchange believes that
Complex Orders consisting of a stock/ETF component will comply with the
exemption and that the Phlx trading System will validate such
compliance to assist NOS in carrying out its responsibilities as agent
for these orders.
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\39\ See Amendment No. 1.
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With respect to short sale regulation, the proposed handling of the
stock/ETF component of a Complex Order under this proposal does not
raise any issues of compliance with the currently operative provisions
of Regulation SHO.\40\ When a Complex Order has a stock/ETF component,
member organizations must indicate, pursuant to Regulation SHO, whether
that order involves a long or short sale. The System will accept
Complex Orders with a stock/ETF component marked to reflect either a
long or short position; specifically, orders not marked as buy, sell or
sell short will be rejected by the Phlx trading System. The Phlx
trading System will electronically deliver the stock/ETF component to
NOS for execution. Simultaneous to the options execution on the Phlx
trading System, NOS will execute and report the stock/ETF component,
which will contain the long or short indication as it was delivered by
the member organization to the Phlx trading System. Accordingly, NOS,
as a trading center under Rule 201, will be compliant with the
requirements of Regulation SHO. Of course, broker-dealers, including
both NOS and the member organizations submitting orders to the Phlx
with a stock/ETF component, must comply with Regulation SHO; various
surveillance and examination regulatory programs check for compliance
thereto.
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\40\ 17 CFR 242.200 et seq.
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Earlier this year, the Commission amended Rule 201 and Rule 200(g)
of Regulation SHO under the Act to adopt a short sale-related circuit
breaker that, if triggered, imposes a restriction on the price at which
securities may be sold short (``short sale price test restriction'');
the amendments to Rule 200(g) provide that a broker-dealer may mark
certain qualifying short sale orders ``short exempt.'' \41\ Recently,
the Commission extended the compliance date for the amendments to Rule
201 and Rule 200(g) until February 28, 2011.\42\ Once the new
provisions of Regulation SHO become operative, NOS will accept orders
marked ``short exempt.'' The Exchange intends to file a proposed rule
change addressing the new provisions.
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\41\ See Securities Exchange Act Release No. 61595 (February 26,
2010), 75 FR 11232 (March 10, 2010) (``Rule 201 Adopting Release'').
\42\ See Securities Exchange Act Release No. 63247 (November 4,
2010), 75 FR 68702 (November 9, 2010) (File No. S7-08-09) (Order
extending the compliance date until February 28, 2011).
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For these reasons, the processing of the stock/ETF component of a
Complex Order under this proposal will comply with applicable rules
regarding equity trading, including the rules governing trade
reporting, trade throughs and short sales. NOS' responsibilities
respecting these equity trading rules will be documented in NOS'
written policies and procedures. NOS compliance with these policies and
procedures is monitored, reviewed, and updated as part of NOS' regular
and routine regulatory program.
As part of the execution of the stock/ETF component, the Exchange
intends to ensure that the execution price is within the intraday high-
low range in that stock at the time the Complex Order is processed and
within a certain price range from the current market, which the
Exchange will establish in an Options Trader Alert. If the stock price
is not within these parameters, the Complex Order is not executable.
The Exchange believes that electronic submission of the stock/ETF
piece of the Complex Order should help ensure that the Complex Order,
as a whole, is executed timely and at the desired price.\43\ In
addition, electronic communication eliminates the need for each party
to separately manually submit the stock component to a broker-dealer
for execution. The Exchange
[[Page 78326]]
emphasizes that the execution of the stock/ETF portion of a Complex
Order will be immediate; the Exchange's System will calculate the stock
price based on the net debit/credit price of the Complex Order,\44\
while also calculating and determining the appropriate options
price(s), all electronically and immediately. The Exchange believes
that this is a superior approach and would not require the Exchange to
later nullify options trades if the stock price cannot be achieved.
Accordingly, the Exchange is not proposing to adopt a rule permitting
such option trade nullification, like other exchange rules, because the
trade would not occur at a price that required later nullification due
to the unavailability of the stock/ETF price.\45\ The Exchange further
believes that the certainty associated with such electronic
calculations and processing should be an attractive feature for users
of Complex Orders with a stock or ETF component.
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\43\ For a similar process, see ISE Rule 722.02.
\44\ The stock/ETF price is, of course, included within the net
debit/credit price of the Complex Order. See e.g. examples, infra,
at 36.
\45\ See e.g., ISE Rule 722.02 (A trade of a stock-option order
will be automatically cancelled if market conditions prevent the
execution of the stock or option leg(s) at the prices necessary to
achieve the agreed upon net price.).
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The Exchange also believes that it is appropriate to construct a
program wherein its affiliate, NOS, is the exclusive conduit for the
execution of the stock/ETF component of a Complex Order under this
proposal, similar to the routing functionality of several options and
equities exchanges.\46\ As a practical matter, complex order programs
on other exchanges necessarily involve specific arrangements with a
broker-dealer to facilitate prompt execution. NOS does not intend to
charge a fee for the execution of the stock/ETF component of a Complex
Order, nor does Phlx.\47\ The Exchange believes that is consistent with
the Act for such an arrangement to involve one broker-dealer, even one
that is an affiliate, particularly to offer the aforementioned benefits
of a prompt, electronic execution for Complex Orders involving stock/
ETFs. Specifically, offering a seamless, automatic execution for both
the options and stock/ETF components of a Complex Order is an important
feature that should promote just and equitable principles of trade and
remove impediments to and perfect the mechanism of a free and open
market and a national market system by deeply enhancing the sort of
complex order processing available on options exchanges today.
Nevertheless, users of Phlx's proposed new Complex Orders system could,
in lieu of this proposed arrangement with NOS, choose, instead, the
following alternatives: (i) Avoid using Complex Orders that involve
stock/ETFs, (ii) use the trading floor manual method of executing
complex orders with stock, or (iii) go to another venue, several of
which offer a similar feature, as described further below.
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\46\ See also Phlx Rule 985(c)(1), which provides that The
NASDAQ OMX Group, Inc., which owns NOS and the Exchange, shall
establish and maintain procedures and internal controls reasonably
designed to ensure that NOS does not develop or implement changes to
its system on the basis of non-public information regarding planned
changes to the Exchange's systems, obtained as a result of its
affiliation with the Exchange, until such information is available
generally to similarly situated Exchange members and member
organizations in connection with the provision of inbound routing to
the Exchange.
\47\ However, Trade Reporting Facility and clearing fees, not
charged by Phlx or NOS, may result. NSCC and ACT will bill firms
directly for their use of the NSCC and ACT systems, respectively. To
the extent that NOS is billed by NSCC or ACT, it will not pass
through such fees to firms for the stock/ETF portion of a Complex
Order under this proposal. Phlx's fees applicable to Complex Orders
appear in its Fee Schedule and may change from time to time.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \48\ in general, and furthers the objectives of Section
6(b)(5) of the Act \49\ 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 enhancing its System and rules governing Complex Orders,
by adding additional order types and components. These additional order
types and components should provide market participants with trading
opportunities more closely aligned with their investment or risk
management strategies. Noting that complex orders, including those with
a stock/ETF component are widely recognized and utilized by market
participants, this proposal to offer new order types and components on
an electronic system should provide a more efficient mechanism for
carrying out these strategies.
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\48\ 15 U.S.C. 78f(b).
\49\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the Act.
Rather, this proposal enhances competition by providing an additional
alternative to the existing methods of trading complex orders,
including the stock/ETF component, in a single, seamless transaction.
Member use of the Exchange's proposed Complex Order processing is
entirely voluntary.
The Exchange competes vigorously for complex orders among several
options exchanges that offer a stock-option order type. The Exchange's
proposed new alternative differs from and competes against existing
Complex Order mechanisms by offering fully electronic processing.
Existing Complex Order mechanisms at Chicago Board Options Exchange,
Incorporated (``CBOE'') and International Securities Exchange, LLC
(``ISE'') offer a similar end result--execution of paired option and
stock orders--using different, less automated means.
Market participants that prefer not to use the stock/ETF
functionality offered herein through NOS have a variety of
alternatives; stock-option orders can be executed on other options
exchanges via various electronic methods, on various options trading
floors or on the Exchange, without employing a stock/ETF component.
Accordingly, in light of these various alternatives and the keen
competition among options exchanges for complex order flow, the
processing method selected by the Exchange, including the use of NOS,
presents no burden on competition. In fact, the Exchange's proposal
will likely promote competition for the most efficient means to execute
complex orders with a stock/ETF component. The Exchange fully expects
that other exchanges will mimic the proposed processing if it succeeds
in attracting order flow for which many markets compete.
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.
[[Page 78327]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1, 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-2010-157 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-2010-157. 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 website 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-2010-157 and should be
submitted on or before January 5, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-31487 Filed 12-14-10; 8:45 am]
BILLING CODE 8011-01-P
