Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, Relating to Complex Orders, 5630-5636 [2011-2127]

Download as PDF 5630 Federal Register / Vol. 76, No. 21 / Tuesday, February 1, 2011 / Notices not believe that the additional price points will result in fractured liquidity. investors, or otherwise in furtherance of the purposes of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition IV. Solicitation of Comments The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others 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 The Exchange has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not significantly affect the protection of investors or the public interest, does not impose any significant burden on competition, and, by its terms, does not 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) thereunder.7 The Exchange has requested that the Commission waive the 30-day operative delay. The Commission believes that waiver of the operative delay is consistent with the protection of investors and the public interest because the proposal is substantially similar to that of another exchange that has been approved by the Commission.8 Therefore, the Commission designates the proposal operative upon filing.9 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 6 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6)(iii) requires the Exchange to give the Commission written notice of the Exchange’s intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Commission has waived the five-day prefiling requirement in this case. 8 See Securities Exchange Act Release No. 63773 (January 25, 2011) (SR–NYSEAmex–2010–109). See also Securities Exchange Act Release No. 63770 (January 25, 2011) (SR–NYSEArca–2010–106). 9 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). srobinson on DSKHWCL6B1PROD with NOTICES 7 17 VerDate Mar<15>2010 15:05 Jan 31, 2011 Jkt 223001 • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–BX–2011–006 on the subject line. Paper Comments For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–2123 Filed 1–31–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63777; File No. SR–Phlx2010–157] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, Relating to Complex Orders January 26, 2011. I. Introduction • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. On November 29, 2010, NASDAQ OMX PHLX LLC (‘‘Phlx’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section All submissions should refer to File 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b– Number SR–BX–2011–006. This file thereunder,2 a proposed rule change to number should be included on the subject line if e-mail is used. To help the amend the rules governing the trading of Complex Orders on the Phlx’s electronic Commission process and review your options trading platform, Phlx XL II, to, comments more efficiently, please use only one method. The Commission will among other things: (i) Permit Complex post all comments on the Commission’s Orders with up to six components, including the underlying stock or Internet Web site (http://www.sec.gov/ Exchange Traded Fund Share (‘‘ETF’’); rules/sro.shtml). Copies of the (ii) establish a Do Not Auction (‘‘DNA’’) submission, all subsequent designation for Complex Orders; (iii) amendments, all written statements add a definition of conforming ratio; (iv) with respect to the proposed rule provide priority rules for Complex change that are filed with the Orders traded on Phlx XL II; and (v) Commission, and all written provide for the communication of the communications relating to the stock or ETF component of a Complex proposed rule change between the Commission and any person, other than Order by the Exchange to Nasdaq Options Services LLC (‘‘NOS’’), the those that may be withheld from the Phlx’s affiliated broker-dealer, for public in accordance with the execution. The Exchange filed provisions of 5 U.S.C. 552, will be Amendment No. 1 to the proposal on available for Web site viewing and December 6, 2010.3 The proposed rule printing in the Commission’s Public change, as modified by Amendment No. Reference Room, 100 F Street, NE., 1, was published for comment in the Washington, DC 20549, on official Federal Register on December 15, business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also 2010.4 The Exchange filed Amendment No. 2 to the proposal on January 11, will be available for inspection and copying at the principal office of the 10 17 CFR 200.30–3(a)(12). Exchange. All comments received will 1 15 U.S.C. 78s(b)(1). be posted without change; the 2 17 CFR 240.19b–4. Commission does not edit personal 3 Amendment No. 1 revises Phlx Rule 1080, identifying information from Commentary .08(a)(i), to indicate that member submissions. You should submit only organizations submitting Complex Orders with a information that you wish to make stock/ETF component represent that such orders comply with the qualified contingent trade available publicly. All submissions exemption from Rule 611(a) of Regulation NMS should refer to File Number SR–BX– under the Exchange Act. 2011–006 and should be submitted on 4 See Securities Exchange Act Release No. 63509 or before February 22, 2011. (December 9, 2010), 75 FR 78320 (‘‘Notice’’). PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 E:\FR\FM\01FEN1.SGM 01FEN1 Federal Register / Vol. 76, No. 21 / Tuesday, February 1, 2011 / Notices the order complies with the qualified contingent trade exemption (‘‘QCT Exemption’’) 10 from Rule 611(a) of Regulation NMS under the Act,11 and a member submitting a Complex Order II. Description of the Proposal with a stock or ETF component Currently, the Phlx’s rules provide for represents that its order complies with the electronic trading of Complex the QCT Exemption.12 Orders composed of two options The proposal also adds a definition of components. As described in greater conforming ratio for Complex Orders 6 the Phlx detail below and in the Notice, composed solely of options and for proposes to amend Phlx Rule 1080, Complex Orders that include the Commentary .08, to provide for the underlying stock or ETF.13 For Complex electronic trading of Complex Orders Orders composed solely of options, a composed of up to six components, which may include the underlying stock conforming ratio is where the ratio or ETF, and to make other changes to its between the sizes of the options components of a Complex Order is rules governing the trading of Complex equal to or greater than one-to-three Orders on Phlx XL II. (.333) and less than or equal to three-toA. Definitions one (3.00). For Complex Orders that The proposal amends Phlx Rule 1080, include the underlying stock or ETF, a conforming ratio is where the ratio Commentary .08(a)(i) to define a between any options component and the Complex Order, for purposes of that rule, as (i) an order involving the underlying security component is less simultaneous purchase and/or sale of than or equal to eight contracts to 100 two or more different options series in shares of the underlying security. the same underlying security, priced as Complex Orders with a conforming ratio a net debit or credit based on the will be accepted but Complex Orders relative prices of the individual with a nonconforming ratio will not.14 components, for the same account, for In addition, the proposal provides a the purpose of executing a particular DNA designation for Complex Orders.15 investment strategy; or (ii) a stockA DNA Order is not COLA-eligible, as option order. A stock-option order is defined in Phlx Rule 1080, Commentary composed of an order to buy or sell a .08(d)((ii)(B), and will not trigger or join stated number of units of an underlying a Complex Order Live Auction security (stock or ETF) coupled with the (‘‘COLA’’).16 DNA Orders are cancelled if purchase or sale of options contract(s).7 not immediately executed.17 A Complex Order could be composed of The proposal also updates the up to six options series or, in the case definitions of cPBBO and cNBBO to of a stock-option order, five options series and the underlying stock or ETF.8 reflect the underlying security component of a stock-option order.18 In Stock-option orders may only be addition, the proposal clarifies the executed against other stock-option definition of Complex Order Strategy orders and cannot be executed against and indicates that the Phlx’s system will orders for the individual components.9 A member may only submit a Complex 10 See Securities Exchange Act Release Nos. Order with a stock or ETF component if 2011.5 The Commission received no comments regarding the proposal, as amended. This order approves the proposed rule change, as amended. srobinson on DSKHWCL6B1PROD with NOTICES 5 Amendment No. 2 revises Phlx Rule 1080(m)(iii)(A) to include text that was inadvertently omitted from Exhibit 5 of the Form 19b–4 submission. Specifically, the revised text indicates that, in addition to its current routing function, the Routing Facility (as defined below) will execute and report the underlying security component of a Complex Order otherwise than on the Phlx, pursuant to Phlx Rule 1080.08(h). Phlx states that this change is a clarifying and technical correction to conform the text of Rule 1080(m)(iii)(A) to: (i) The discussion in the Form 19b–4 submission regarding the proposed additional functions of NOS; and (ii) proposed Rule 1080.08(h). Because Amendment No. 2 is technical in nature, it is not subject to notice and comment. 6 See Notice. 7 See Phlx Rule 1080, Commentary .08(a)(i). In addition, the underlying security must be the deliverable for the options component of a stockoption order and must represent exactly 100 shares per option for regular way delivery. Id. 8 See Phlx Rule 1080, Commentary .08(a)(i). 9 Id. VerDate Mar<15>2010 15:05 Jan 31, 2011 Jkt 223001 57620 (April 4, 2008), 73 FR 19271 (April 9, 2008) (‘‘QCT Exemptive Order’’). See also Securities Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829 (September 7, 2006). 11 17 CFR 242.611(a). 12 See Phlx Rule 1080, Commentary .08(a)(i) and Amendment No. 1. 13 See Phlx Rule 1080, Commentary .08(a)(ix). 14 See Notice at note 20. 15 See Phlx Rule 1080, Commentary .08(a)(viii). 16 Id. 17 See Phlx Rule 1080, Commentary .08(a)(viii)(B). 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 be available only for Complex Orders with more than two options components or with an underlying security component. See Phlx Rule 1080, Commentary .08(a)(viii)(A) and (C). 18 See Phlx Rule 1080, Commentary .08(a)(iv) and (vi). Specifically, the revised definitions indicate that when the underlying security is a component of a Complex Order, the best net debit or credit refers to the National Best Bid and/or Offer for the underlying security. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 5631 assign a strategy identifier to each Complex Order Strategy.19 B. Priority Currently, the priority provisions in Phlx Rule 1033(d) apply to Complex Orders trading on Phlx XL II and to complex orders trading on the Phlx’s floor.20 The priority provisions in Phlx Rule 1033(e) apply to orders trading on the Phlx’s floor that include a stock and an option component.21 The proposal adds new Phlx Rule 1080, Commentary .08(c)(iii) to provide priority provisions for Complex Orders, including Complex Orders with a stock or ETF component, trading on Phlx XL II. Specifically, Phlx Rule 1080, Commentary .08(c)(iii)(A), which applies to Complex Orders composed solely of options, states that Complex Orders consisting of a conforming ratio 22 may be executed at a total credit or debit price with priority over individual bids or offers established in the marketplace (including customers) that are not better than the bids or offers comprising such total credit or debit, provided that at least one option leg is executed at a better price than the 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. The 19 See Phlx Rule 1080, Commentary .08(a)(ii). Rule 1033(d) states that when a member holding a hedge order, as defined in Rule 1066, and bidding or offering on the basis of a total credit or debit for the order has determined that the order may not be executed by a combination of transactions at or within the bids and offers established in the marketplace, then the order may be executed as a hedge order at the total credit or debit with one other member with priority 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. Hedge orders include spread, straddle, combination, and tied hedge orders. See Phlx Rule 1066(f). 21 Phlx Rule 1033(e) states that when a member holding a synthetic option order, as defined in Rule 1066, and bidding or offering on the basis of a total credit or debit for the order has determined that the order may not be executed by a combination of transactions at or within the bids and offers established in the marketplace, then the order may be executed as a synthetic option order at the total credit or debit with one other member, provided that the member executes the option leg at a better price than the established bid or offer for that option contract, in accordance with Rule 1014. Synthetic option orders in open outcry, in which the option component is for a size of 100 contracts or more, have priority over bids (offers) of crowd participants who are bidding (offering) only for the option component of the synthetic option order, but not over bids (offers) of public customers on the limit order book, and not over crowd participants that are willing to participate in the synthetic option order at the net debit or credit price. 22 See Phlx Rule 1080, Commentary .08(a)(ix). 20 Phlx E:\FR\FM\01FEN1.SGM 01FEN1 5632 Federal Register / Vol. 76, No. 21 / Tuesday, February 1, 2011 / Notices Phlx states that new Phlx Rule 1080, Commentary .08(c)(iii)(A) provides the same priority as Phlx Rule 1033(d), under the same conditions, to a broader class of Complex Orders.23 Phlx Rule 1080, Commentary .08(c)(iii)(B) states that where a Complex Order consists of the underlying stock or ETF and one options leg in a conforming ratio,24 such options leg does not have priority over bids and offers established in the marketplace, including customer orders. However, where a Complex Order consists of the underlying stock or ETF and more than one options leg in a conforming ratio, 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.25 C. Execution of the Stock or ETF Component of a Complex Order 1. Role of NOS To trade Complex Orders with a stock or ETF component through Phlx XL II, members of the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) or the NASDAQ Stock Market (‘‘Nasdaq’’) must have a Uniform Service Bureau/ Executing Broker Agreement (‘‘AGU’’) with NOS, and firms that are not members of FINRA or Nasdaq must have a Qualified Special Representative (‘‘QSR’’) arrangement with NOS.26 NOS, a broker-dealer and FINRA member, serves as the Phlx’s Routing Facility and is subject to regulation as a facility of the Phlx.27 Phlx Rule 985(b), ‘‘Restrictions on Affiliation,’’ generally prohibits the Phlx or an entity with which it is affiliated from acquiring or maintaining an ownership interest in, or engaging in a business venture with a Phlx member or an affiliate of a Phlx member in the absence of an effective filing with the Commission under Section 19(b) of the Act.28 NOS is a member of Phlx and also an indirect wholly-owned subsidiary of Phlx’s parent company, and therefore an affiliate of Phlx.29 The Commission has approved NOS as an affiliate of Phlx for the purpose of routing orders in options listed and open for trading on Phlx XL 23 See Notice at notes 22–23 and accompanying srobinson on DSKHWCL6B1PROD with NOTICES text. 24 See Phlx Rule 1080, Commentary .08(a)(ix) and note 13, supra. 25 See Phlx Rule 1080, Commentary .08(c)(iii)(B). 26 See Phlx Rule 1080, Commentary .08(a)(i). 27 See Phlx Rule 1080(m)(iii). 28 15 U.S.C. 78s(b). 29 See Securities Exchange Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 2009) (order approving File No. SR–Phlx–2009–32) (‘‘NOS Order’’). VerDate Mar<15>2010 15:05 Jan 31, 2011 Jkt 223001 II to away market centers pursuant to Phlx rules on behalf of Phlx.30 Phlx Rule 1080(m)(iii) states that ‘‘[t]he sole use of the Routing Facility by the Phlx XL II system will be to route orders in options listed and open for trading on the Phlx XL II system to away markets pursuant to Exchange rules on behalf of the Exchange.’’ For NOS to perform additional functions for the Phlx, the Phlx must file a proposed rule change with the Commission pursuant to Section 19 of the Act and the rules and regulations thereunder.31 In the current proposal, the Phlx proposes to allow NOS to act as the agent responsible for the execution of the stock or ETF component of a Complex Order in addition to its approved routing functions.32 NOS’s function with respect to the execution of the stock or ETF component of a Complex Order will be available to all Phlx member organizations.33 2. Execution of the Stock or ETF Component of a Complex Order Where one component of a Complex Order is the underlying stock or ETF, the Phlx will electronically communicate the underlying security component to NOS for execution 34 after the Phlx’s trading system determines that a Complex Order trade is possible and the prices for each of the components.35 The execution and reporting of the underlying security component of the order will occur otherwise than on the Exchange, and NOS will handle these orders pursuant to applicable rules regarding equity trading,36 including the rules governing trade reporting, trade-throughs, and short sales.37 30 Id. The Commission also has approved NOS as an affiliate of Phlx for the limited purpose of providing routing services for Nasdaq Exchange for orders that first attempt to access liquidity on Nasdaq Exchange’s systems before routing to Phlx, subject to certain conditions. See Securities Exchange Act Release No. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) (order approving File No. SR–Phlx–2008–31). 31 See NOS Order, supra note 29. 32 Phlx Rule 1080(m)(iii)(A), as amended, states, in part, that ‘‘The sole use of the Routing Facility by the Phlx XL II system will be to route orders in options listed and open for trading on the Phlx XL II system to away markets pursuant to Exchange rules on behalf of the Exchange and, in addition, where one component of a Complex Order is the underlying security, to execute and report such component otherwise than on the Exchange, pursuant to Rule 1080.08(h).’’ See Amendment No. 2. See also Notice at note 31 and accompanying text. 33 See Notice at 78324. 34 See Phlx Rule 1080, Commentary .08(h). 35 See Notice at 78324 and at note 44 and accompanying text. 36 See Phlx Rule 1080, Commentary .08(h). 37 See Notice at note 34 and accompanying text. PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 NOS, a FINRA member, will be responsible for the proper execution, trade reporting, and submission to clearing of the underlying stock or ETF component of a Complex Trade.38 The Phlx notes that NOS is subject to examination by FINRA and is responsible for compliance with applicable rules, including NASD Rule 3010, ‘‘Supervision,’’ which generally requires NOS to establish and maintain supervisory systems that are reasonably designed to achieve compliance with applicable securities laws and regulations and applicable NASD and FINRA rules.39 The Phlx represents that NOS intends to have in place policies related to confidentiality and the potential for informational advantages relating to its affiliates, which are intended to protect against the misuse of material non-public information.40 For the reasons described below, the Phlx believes that the processing of the stock or ETF component of a Complex Order under the proposal will comply with applicable rules regarding equity trading, including the rules governing trade reporting, trade-throughs, and short sales.41 The Phlx represents that NOS’s responsibilities respecting these equity trading rules will be documented in NOS’s written policies and procedures, and that NOS’s compliance with these policies and procedures is monitored, reviewed, and updated as part of NOS’s regular and routine regulatory program.42 3. Compliance With Trade Reporting Requirements and QCT Exemption The Phlx states that NOS will report trades in the underlying stock or ETF to the FINRA/Nasdaq Trade Reporting Facility (‘‘TRF’’).43 Phlx Rule 1080, Commentary .08(a)(i) permits a member to submit a Complex Order with a stock or ETF component only if the order complies with the QCT Exemption, and provides, further, that a member submitting a Complex Order 38 See Notice at notes 31–32 and accompanying text. 39 See Notice at note 32 and accompanying text. Notice at notes 32–33 and accompanying text. In addition, the Phlx notes that Phlx Rule 1080(m)(iii)(C) requires the Exchange to establish and maintain procedures and internal controls reasonably designed to adequately restrict the flow of confidential and proprietary information between the Phlx and NOS, and any other entity, including any affiliate of NOS. See Notice at note 33. 41 See Notice at notes 42–43 and accompanying text. 42 Id. 43 See Notice at note 35 and accompanying text. The FINRA/Nasdaq TRF 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 Notice at note 35. 40 See E:\FR\FM\01FEN1.SGM 01FEN1 Federal Register / Vol. 76, No. 21 / Tuesday, February 1, 2011 / Notices with a stock or ETF component represents that its order complies with the QCT Exemption.44 In addition, as described in greater detail in the Notice, the Phlx represents that its trading system will validate compliance with each of the requirements of the QCT Exemption, thereby assisting NOS in carrying out its responsibilities as agent for these orders.45 srobinson on DSKHWCL6B1PROD with NOTICES 4. Compliance With Regulation SHO The Phlx represents that the proposal raises no issues of compliance with the currently operative provisions of Regulation SHO.46 The Phlx notes that when a Complex Order has a stock or ETF component, Regulation SHO requires a member organization to indicate whether that order involves a long or short sale. The Phlx states that its trading system will accept Complex Orders with a stock or ETF component marked to reflect either a long or short position and the trading system will reject orders not marked as either long or short.47 In addition, the Phlx states that the trading system will reject orders not marked as buy, sell, or sell short.48 The Phlx’s trading system will electronically deliver the stock or ETF component to NOS for execution. Simultaneous with the options execution on the Phlx, NOS will execute and report the stock or ETF component, 44 See Phlx Rule 1080, Commentary .08(a)(i) and Amendment No. 1. The QCT Exemption applies to trade-throughs caused by the execution of an order involving one or more NMS stocks that are components of a ‘‘qualified contingent trade.’’ As described more fully in the QCT Exemptive Order, a qualified contingent trade is a transaction consisting of two or more component orders, executed as principal or agent, where: (1) At least one component order is an NMS stock; (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; (3) the execution of one component is contingent upon the execution of all other components at or near the same time; (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; (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; and (6) the Exempted NMS Stock Transaction is fully hedged (without regard to any prior existing position) as a result of the other components of the contingent trade. See QCT Exemptive Order, supra note 10. 45 See Notice at notes 37–39 and accompanying text. 46 17 CFR 242.200 et seq. See Notice at note 40 and accompanying text. 47 Telephone conversation between Andrea Orr, Special Counsel, Division of Trading and Markets Commission, with Edith Hallahan, Associate General Counsel, Phlx, on January 25, 2011. 48 See Notice at notes 40–42 and accompanying text. VerDate Mar<15>2010 15:05 Jan 31, 2011 Jkt 223001 which will contain the long or short indication as it was delivered to the Phlx’s trading system by the member organization.49 The Phlx also states that various surveillance and examination regulatory programs check for compliance with Regulation SHO.50 The Phlx notes that the Commission amended Rules 201 and Rule 200(g) of Regulation SHO 51 earlier this year to adopt a short sale-related circuit breaker that, if triggered, would impose a restriction on the price at which securities may be sold short (‘‘short sale price test restriction’’).52 Under these amendments, a broker-dealer may mark certain qualifying short sale orders as ‘‘short exempt.’’ 53 The Phlx notes that the Commission extended the compliance date for the amendments to Rules 201 and 200(g) until February 28, 2011.54 The Phlx states that after the new provisions of Regulation SHO become operative, NOS will accept orders marked ‘‘short exempt.’’ 55 The Exchange represents, further, that it intends to file a proposed rule change addressing the new provisions.56 In addition, the Phlx represents that NOS, as a trading center under Rule 201,57 will be compliant with the requirements of Regulation SHO.58 5. Execution Price of the Underlying Security and Electronic Processing Under the proposal, the execution price of the order for the underlying security must be within the security’s high-low range for the day at the time the Complex Order is processed and within a specified price from the current market, which the Phlx will establish in an Options Trader Alert.59 If the stock price is not within these parameters, the Complex Order is not executable.60 The Exchange believes that electronic submission of the stock or ETF component of a Complex Order should help ensure that the Complex Order, as a whole, is executed in a timely manner and at the desired price.61 The Phlx notes that electronic communication 49 Id. 50 Id. 51 17 CFR 242.201 and 200(g). Securities Exchange Act Release No. 61595 (February 26, 2010). 75 FR 11232 (March 10, 2010) 53 See Notice at note 41 and accompanying text. 54 See Securities Exchange Act Release No. 63247 (November 4, 2010), 75 FR 68702 (November 9, 2010) (File No. S7–08–09) (‘‘Compliance Date Extension Release’’). 55 See Notice at note 42 and accompanying text. 56 Id. 57 17 CFR 242.201. 58 See Notice at notes 40–42 and accompanying text. 59 See Phlx Rule 1080, Commentary .08(h). 60 Id. 61 See Notice at note 43 and accompanying text. 52 See PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 5633 eliminates the need for each party to separately manually submit the stock or ETF component to a broker-dealer for execution.62 In addition, the Exchange emphasizes that the execution of the stock or ETF component of a Complex Order will be immediate, with the Phlx’s system calculating the stock or ETF price based on the net debit/credit price of the Complex Order, while also calculating and determining the appropriate options price(s), all electronically and immediately.63 The Exchange believes that this approach will not require the Exchange to later nullify options trades if the stock price cannot be achieved. The Exchange believes that it is appropriate for its affiliate, NOS, to act as the exclusive conduit for the execution of the stock or ETF component of a Complex Order.64 The Phlx states that, as a practical matter, complex order programs on other exchanges necessarily involve specific arrangements with a broker-dealer to facilitate prompt execution.65 The Phlx believes, further, that offering the benefits of prompt, seamless, automatic execution for both the options and stock or ETF components of a Complex Order is an important feature that should enhance the complex order processing available on options exchanges today.66 The Phlx represents that neither the Exchange nor NOS intends to charge a fee for the execution of the stock or ETF component of a Complex Order.67 D. Complex Order Entry, Processing, and Execution The Phlx proposes additional changes to Phlx Rule 1080, Commentary .08, relating to the entry, processing, and 62 See Notice at notes 43–44 and accompanying text. 63 See Notice at note 44 and accompanying text. Notice at note 46 and accompanying text. The Phlx also notes that Phlx Rule 985(c)(1) requires Nasdaq OMX, which owns NOS and the Exchange, to 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. See Notice at note 46. 65 See Notice notes 46–47 and accompanying text. 66 Id. 67 The Phlx notes, however, that TRF and clearing fees, not charged by Phlx or NOS, may result. The Phlx states that the National Securities Clearing Corporation (‘‘NSCC’’) and ACT will bill firms directly for their use of the NSCC and ACT systems, respectively. The Phlx represents that, to the extent that NOS is billed by NSCC or ACT, it will not pass through to firms such fees for the stock or ETF component of a Complex Order. See Notice at note 47. 64 See E:\FR\FM\01FEN1.SGM 01FEN1 srobinson on DSKHWCL6B1PROD with NOTICES 5634 Federal Register / Vol. 76, No. 21 / Tuesday, February 1, 2011 / Notices execution of Complex Orders. In this regard, the proposal revises Phlx Rule 1080, Commentary .08(c)(i) to indicate that a Complex Order with an underlying security component is eligible to trade only when the underlying security component is open for trading on its primary market. In addition, the proposal revises Phlx Rule 1080, Commentary .08(e)(vi)(A)(1) to: (i) Add the word ‘‘legging’’ to refer to the execution of a COLA-eligible order against interest in the leg market, as described in that paragraph; and (ii) indicate that legging may not occur when the underlying security is a component of a Complex Order. Similarly, the proposal revises Phlx Rule 1080, Commentary .08(f)(iii), relating to executions against the CBOOK, to indicate that legging will not take place when the underlying security is a component of a Complex Order. Phlx Rule 1080, Commentary .08(e)(i)(B)(2) currently provides that a Complex Order received during the final ten seconds of a trading session is not COLA-eligible. The proposal modifies the rule to make this time configurable, but no longer than ten seconds. The proposal also amends Phlx Rule 1080, Commentary .08(b)(ii) to allow Streaming Quote Traders (‘‘SQTs’’), Remote Streaming Quote Traders (‘‘RSQTs’’), non-SQT Registered Options Traders (‘‘ROTs’’), specialists, and nonPhlx market makers on another exchange to enter Complex Orders with more than two options components or an underlying security component as Day orders, in addition to entering them as Immediate or Cancel (‘‘IOC’’).68 The Phlx believes that this change could encourage more orders from these market participants. The proposal amends Phlx Rule 1080, Commentary .08(b)(iii) to indicate that Floor Brokers using the Options Floor Broker Management System (‘‘FBMS’’) may not enter DNA Orders, orders with a stock or ETF component, or orders with more than two legs. The Phlx notes that Floor Brokers are able to use systems other than FBMS to access Phlx XL II, and are unlikely to need or request changes to FBMS because they execute more complex orders in the trading crowd than through FBMS.69 The proposal also eliminates provisions that currently provide an SQT or RSQT quoting all of the components of a Complex Order in the leg market with priority over an SQT or 68 After the Phlx has fully rolled out its enhanced Complex Order system, Day orders also will become available for Complex Orders with two options components. See Phlx Rule 1080, Commentary .08(b)(ii). 69 See Notice at 78323. VerDate Mar<15>2010 15:05 Jan 31, 2011 Jkt 223001 RSQT quoting a single component of the order.70 The Phlx believes that these changes will simplify the allocation process as the Exchange’s system begins to accept more Complex Order types.71 The Phlx believes, further, that the benefits provided by these provisions are not material, and that they are not being realized intentionally by market participants.72 Under the revised rules, an SQT or RSQT quoting all components of a Complex Order will be on parity with SQTs and RSQTs quoting a single component.73 III. Discussion and Commission Findings The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.74 In particular, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,75 which requires, in part, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, 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. Currently, only Complex Orders with two options components may be traded on Phlx XL II. For the reasons discussed below, the Commission believes that the proposal, as amended, could facilitate the trading of Complex Orders by, among other things, permitting Complex Orders with up to six components, including the underlying stock or ETF, to be traded on Phlx XL II. A. Priority Rules As discussed above, the proposal adopts a new definition of Complex Order and adds a new defined term, conforming ratio, relating to Complex Orders. The Commission notes that the definition of a Complex Order in Phlx Rule 1080, Commentary .08(a)(i), including Complex Orders composed solely of options and Complex Orders composed of option(s) and the underlying stock or ETF, together with the definition of conforming ratio in 70 See Phlx Rules 1080, Commentary .08(e)(vi)(A)(1), (f)(iii)(A), and (f)(iii)(B)(1). 71 See Notice at note 29 and accompanying text. 72 Id. 73 Id. 74 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 75 15 U.S.C. 78f(b)(5). PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 Phlx Rule 1080, Commentary .08(a)(ix), are comparable to the definitions of Complex Order, Stock/Complex Order, and stock-option order adopted by other options exchanges.76 A Complex Order with a nonconforming ratio will not be accepted,77 and only Complex Orders with conforming ratios will be eligible for the priority treatment provided in Phlx Rule 1080, Commentary .08(c)(iii).78 Specifically, for Complex Orders composed solely of options, Phlx Rule 1080, Commentary .08(c)(iii)(A) provides that a Complex Order with a conforming ratio may be executed at a total net credit or debit with priority over individual bids or offers established in the marketplace (including customers) that are not better than the bids or offers comprising such total credit or debit, provided that at least one option leg is executed at a better price than the established bid or offer for that option and no option leg is executed at a price outside of the established bid or offer for that option. The priority provisions in Phlx Rule 1080, Commentary .08(c)(iii)(A) are consistent with the existing priority provisions in Phlx Rule 1033(d), which will continue to apply to trading on the Phlx’s floor, and with the priority rules of other options exchanges.79 For Complex Orders composed of the underlying stock or ETF and one options leg in a conforming ratio, Phlx Rule 1080, Commentary .08(c)(iii)(B) provides that the options leg does not have priority over bids and offers established in the marketplace, including customer orders. This provision is similar to Phlx Rule 1033(e),80 and to the requirements of 76 See, e.g., ISE Rule 722(a)(1) and NYSEAmex Rule 900.3NY(e) (defining a complex order). See also NYSEAmex Rule 900.3NY(h)(2) (defining a Stock/Complex Order) and ISE Rule 722(a)(2) and NYSEAmex Rule 900.3NY(h)(1) (defining a stockoption order). 77 See Notice at note 20. 78 Throughout Phlx Rule 1080, Commentary .08, the proposal replaces references to the priority provisions in Phlx Rule 1033(d) with references to the priority provisions in Phlx Rule 1080, Commentary .08(c)(iii). Phlx Rule 1033(d) will continue to apply to trading on the Phlx’s floor, and the priority provisions in Commentary .08(c)(iii) will apply to Complex Orders trading on PHLX XL II. 79 See, e.g., ISE Rule 722(b)(2) and NYSEAmex Rule 980, Commentary .02. See also CBOE Rules 6.45(e), 6.45A(b)(ii), and 6.45B(b)(ii). The Phlx states that Phlx Rule 1080, Commentary .08(c)(iii) provides the same priority as Phlx Rule 1033(d), under the same conditions, to a broader class of Complex Orders. See Notice at notes 22–23 and accompanying text. 80 Phlx Rule 1033(e) requires the option leg of a stock-option order (called a synthetic option order) to be executed at a price better than the established bid or offer for that option. For synthetic option orders trading in open outcry in which the option E:\FR\FM\01FEN1.SGM 01FEN1 Federal Register / Vol. 76, No. 21 / Tuesday, February 1, 2011 / Notices other options exchanges.81 For a Complex Order composed of the underlying stock or ETF and more than one options leg in a conforming ratio, 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.82 This provision is similar to ISE Rule 722(b).83 B. Execution of the Stock or ETF Component of a Complex Order srobinson on DSKHWCL6B1PROD with NOTICES 1. NOS’s Role as Agent for the Stock or ETF Component of a Complex Order NOS serves as the Phlx’s Routing Facility. In addition to its currently approved routing functions, the Phlx proposes to allow NOS to act as the agent for orders to buy and sell the underlying stock or ETF component of a Complex Order. As described more fully above, after the Phlx’s system determines that a Complex Order trade is possible and the prices for the trade, the Phlx will electronically communicate the stock or ETF component of the Complex Order to NOS for execution. NOS, acting as agent for the orders to buy and sell the underlying stock or ETF, will execute the orders in the over-the-counter (‘‘OTC’’) market and will handle the orders pursuant to applicable rules regarding equity trading,84 including the component is for 100 contracts or more, the synthetic option order has priority over crowd participants who are bidding (offering) only for the option component of the order, but over the bids (offers) of public customers in the limit order book, and not over crowd participants that are willing to participate in the synthetic option order at the net debit or credit price. 81 See, e.g., CBOE Rule 6.53C, Commentary .06(b) and NYSEAmex Rule 980NY, Commentary .03(b) (the option leg of a Stock-Option Order will not be executed on the exchange’s system at the exchange’s best bid (offer) in that series if one or more public customer orders are resting at that price on the electronic book, unless the option leg trades with such public customer order(s)); and ISE Rule 722(b)(2) (a stock-option order with one options leg has priority over bids and offers established in the marketplace by Professional Orders and market makers at the price of the options leg, but not over such bids or offers established by Priority Customer Orders). See also CBOE Rule 6.45(e) (stock-option orders have priority over bids (offers) of the trading crowd but not over bids (offers) in the public customer limit order book). 82 See Phlx Rule 1080, Commentary .08(c)(iii)(B). 83 ISE Rule 722(b)(2) provides, in part, that the options legs of a stock-option order with more than one options leg may be executed at a total net credit or debit with one other Member without giving priority to established bids or offers that are no better than the bids or offers comprising the net credit or debit, provided that if any of the established bids or offers consist of a Priority Customer Order, the price of at least one leg must trade at a price that is better than the corresponding bid or offer in the marketplace by at least one minimum trading increment. 84 See Phlx Rule 1080, Commentary .08(h). VerDate Mar<15>2010 15:05 Jan 31, 2011 Jkt 223001 rules governing trade reporting, tradethroughs, and short sales.85 NOS will be responsible for the proper execution, trade reporting, and submission to clearing of the underlying stock or ETF component of a Complex Order.86 Based in part on the Phlx’s statements and representations in the Notice, the Commission believes that the proposal to allow NOS to serve as the agent responsible for executing the stock or ETF component of a Complex Order is consistent with the Act. The Commission notes that, as a facility of the Phlx, NOS is subject to oversight by the Commission and by the Phlx.87 In addition, NOS, a member of FINRA, is responsible for compliance with applicable rules regarding equity trading, including rules governing trade reporting, trade-throughs and short sales, and is subject to examination by FINRA.88 Because NOS will execute the stock or ETF component of a Complex Order in the OTC market, the principal regulator of these trades will be FINRA, rather than the Phlx or Nasdaq.89 The Phlx notes that NASD Rule 3010 generally requires NOS to establish and maintain supervisory systems that are reasonably designed to achieve compliance with applicable securities laws and regulations and applicable NASD and FINRA rules.90 The Phlx represents that NOS intends to have in place policies related to confidentiality and the potential for informational advantages relating to its affiliates, which are intended to protect against the misuse of material non-public information.91 The Phlx represents, further, that NOS’s responsibilities respecting applicable equity trading rules, including the rules governing 85 See 86 See Notice at note 34 and accompanying text. Notice at notes 31–32 and accompanying text. 87 Phlx Rule 1080(m)(iii)(A) states that NOS is subject to regulation as a facility of the Phlx. Phlx Rule 1080(m)(iii)(D) provides, further, that the books, records, premises, officers, directors, agents, and employees of NOS, as a facility of the Phlx, shall be deemed to be the books, records, premises, officers, directors, agents, and employees of the Phlx for purposes of and subject to oversight pursuant to the Act. The books and records of NOS, as a facility of the Phlx, shall be subject at all times to inspection and copying by the Phlx and the Commission. 88 See Notice at 78324. Phlx Rule 1080(m)(iii)(A) states that NOS is a member of an unaffiliated selfregulatory organization which the designated examining authority for NOS. 89 See Notice at 78324. 90 See Notice at note 32 and accompanying text. 91 See Notice at note 33 and accompanying text. In addition, the Phlx notes that Phlx Rule 1080(m)(iii)(C) requires the Exchange to establish and maintain procedures and internal controls reasonably designed to adequately restrict the flow of confidential and proprietary information between the Phlx and NOS, and any other entity, including any affiliate of NOS. See Notice at note 33. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 5635 trade reporting, trade-throughs, and short sales, will be documented in NOS’s written policies and procedures, and that NOS’s compliance with these policies and procedures is monitored, reviewed, and updated as part of NOS’s regular and routine regulatory program.92 The Phlx represents that neither the Exchange nor NOS intends to charge a fee for the execution of the stock or ETF component of a Complex Order.93 The Commission notes that if the Phlx or NOS decides in the future to charge fees for NOS’s execution of the stock or ETF component of a Complex Order, or to modify its rules relating to NOS’s execution of the stock or ETF component of a Complex Order, the Phlx would be responsible for filing the proposed fee or rule change with the Commission pursuant to Section 19(b) of the Act.94 The Commission notes, in addition, that NOS’s execution of the stock or ETF component of a Complex Order is subject to exchange nondiscrimination requirements.95 C. DNA Designation and Additional Definitions The proposal adopts a DNA designation for Complex Orders.96 A DNA Order is not COLA-eligible and will not trigger or join a COLA.97 The Commission believes that DNA Orders will provide additional flexibility in executing Complex Orders by allowing market participants to submit Complex Orders that will not trigger or join a COLA. The Commission believes that the revised definitions of cPPBO and cNBBO will update those definitions to reflect that the underlying security could be component of a Complex Order.98 The Commission believes that the changes to the definition of Complex Order Strategy 99 will help to clarify that term and the role of the Phlx’s system in assigning a strategy identifier to a Complex Order Strategy. 92 See Notice at 78325. Notice at note 47 and accompanying text. The Phlx notes, however, that TRF and clearing fees, not charged by Phlx or NOS, may result. The Phlx states that NSCC and ACT will bill firms directly for their use of NSCC and ACT systems, respectively. Further, the Phlx represents that, to the extent that NOS is billed by NSCC or Act, it will not pass through such fees to firms for the stock or ETF portion of a Complex Trade under this proposal. See Notice at note 47. 94 See NOS Order, supra note 30, at footnote 84. 95 Id. 96 See Phlx Rule 1080, Commentary .08(a)(viii). 97 Id. 98 See Phlx Rule 1080, Commentary .08(a)(iv) and (vi). 99 See Phlx Rule 1080, Commentary .08(a)(ii). 93 See E:\FR\FM\01FEN1.SGM 01FEN1 5636 Federal Register / Vol. 76, No. 21 / Tuesday, February 1, 2011 / Notices srobinson on DSKHWCL6B1PROD with NOTICES D. Complex Order Entry, Processing, and Execution The Commission finds that the changes to Phlx Rule 1080, Commentary .08(c)(i) indicating that a Complex Order with an underlying security component is eligible to trade only when the underlying security is open for trading on its primary market, and the changes to Phlx Rule 1080, Commentary .08(e)(vi)(A)(1) and .08(f)(iii) that indicate that legging may not occur, either in a COLA or against the CBOOK, when the underlying security is a component of a Complex Order, should help to clarify the operation of the Phlx’s rules relating to the execution of Complex Orders with an underlying stock or ETF component. Similarly, the Commission believes that adding the term ‘‘legging’’ to Phlx Rule 1080, Commentary .08(e)(vi)(A)(1) to refer to the activity described in that rule could help to clarify the rule. The amendment to Phlx Rule 1080, Commentary .08(e)(i)(B)(2) that permits the Phlx to determine the time period, which will not exceed ten seconds, at the end of a trading session when an order will not be COLA-eligible should provide the Phlx with flexibility in determining the time period within which the Exchange will not initiate a COLA during the final seconds of a trading session. The Commission notes that the Phlx will establish this time period in an Options Trader Alert.100 The Commission believes that modifying Phlx Rule 1080, Commentary .08(b)(ii) to allow SQTs, RSQTs, nonSQT ROTs, specialists, and non-Phlx market makers on another exchange to enter Complex Orders with more than two options components or an underlying security component as Day orders, in addition to entering them as IOC orders, could encourage these market participants to submit Complex Orders by providing them with greater flexibility in entering orders. The Commission believes that the amendments to Phlx Rule 1080, Commentary .08(b)(iii) indicating that Floor Brokers using the FBMS may not enter DNA Orders, orders with a stock or ETF component, or orders with more than two legs are reasonable because, according to the Phlx, Floor Brokers are able to use systems other than FBMS to access Phlx XL II.101 In addition, the Commission notes that the Phlx believes that Floor Brokers are unlikely to need or request changes to FBMS because they execute more complex orders in 100 See 101 See Phlx Rule 1080, Commentary .08(e)(B)(2). Notice at 78323. VerDate Mar<15>2010 15:05 Jan 31, 2011 Jkt 223001 the trading crowd than through FBMS.102 The Commission believes that the changes to Phlx Rules 1080, Commentary .08(e)(vi)(A)(1), (f)(iii)(A), and (f)(iii)(B)(1) that place an SQT or RSQT quoting all components of a Complex Order on parity with SQTs and RSQTs quoting a single component are consistent with the Act. The Phlx believes that these changes will simplify the allocation process as PHLX XL II begins to accept more Complex Order types.103 In addition, the Phlx believes that the benefits provided by the current rules giving priority to SQTs and RSQTs quoting all components of a Complex Order are not material, and that they are not being realized intentionally by market participants.104 The Commission notes that under the revised rules, public customer orders will continue to have priority over SQTs and RSQTs.105 IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,106 that the proposed rule change (File No. SR– Phlx–2010–157), as amended, is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.107 Elizabeth M. Murphy, Secretary. below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as constituting a non-controversial rule change under Rule 19b–4(f)(6) under the Act,3 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend Rule 11.9 to add its routing options, which are currently contained in its fee schedule, to the rule and to introduce additional options to the rule. The text of the proposed rule change is attached as Exhibit 5 and is available on the Exchange’s Web site at http:// www.directedge.com, at the Exchange’s principal office, and at the Public Reference Room of the Commission. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [Release No. 34–63779; File No. SR–EDGX– 2011–01] In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B and C below, of the most significant aspects of such statements. Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 11.9 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [FR Doc. 2011–2127 Filed 1–31–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION 1. Purpose January 26, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 21, 2011, the EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II 102 Id. 103 See Notice at note 29 and accompanying text. 104 Id. 105 See Phlx Rules 1014(g)(vii) and 1080, Commentary .08(e)(vi)(A)(1), (f)(iii)(A), and (f)(iii)(B)(1). 106 15 U.S.C. 78s(b)(2). 107 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 The Exchange’s current fee schedule contains a list of routing options. The Exchange proposes to move the current list of routing options from the fee schedule and codify it in Rule 11.9(a)(3). In addition, the Exchange proposes to amend the existing routing option descriptions to provide additional clarity and introduce additional routing options to Rule 11.9(a)(3). The Exchange intends to implement the rule change upon filing with the Commission with respect to all routing options, except ROOC, which the Exchange intends to implement on or about February 14, 2011. 3 17 E:\FR\FM\01FEN1.SGM CFR 240.19b–4(f)(6). 01FEN1

Agencies

[Federal Register Volume 76, Number 21 (Tuesday, February 1, 2011)]
[Notices]
[Pages 5630-5636]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2127]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63777; File No. SR-Phlx-2010-157]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 
2, Relating to Complex Orders

January 26, 2011.

I. Introduction

    On November 29, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b- thereunder,\2\ a 
proposed rule change to amend the rules governing the trading of 
Complex Orders on the Phlx's electronic options trading platform, Phlx 
XL II, to, among other things: (i) Permit Complex Orders with up to six 
components, including the underlying stock or Exchange Traded Fund 
Share (``ETF''); (ii) establish a Do Not Auction (``DNA'') designation 
for Complex Orders; (iii) add a definition of conforming ratio; (iv) 
provide priority rules for Complex Orders traded on Phlx XL II; and (v) 
provide for the communication of the stock or ETF component of a 
Complex Order by the Exchange to Nasdaq Options Services LLC (``NOS''), 
the Phlx's affiliated broker-dealer, for execution. The Exchange filed 
Amendment No. 1 to the proposal on December 6, 2010.\3\ The proposed 
rule change, as modified by Amendment No. 1, was published for comment 
in the Federal Register on December 15, 2010.\4\ The Exchange filed 
Amendment No. 2 to the proposal on January 11,

[[Page 5631]]

2011.\5\ The Commission received no comments regarding the proposal, as 
amended. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 revises Phlx Rule 1080, Commentary 
.08(a)(i), to indicate that member organizations submitting Complex 
Orders with a stock/ETF component represent that such orders comply 
with the qualified contingent trade exemption from Rule 611(a) of 
Regulation NMS under the Exchange Act.
    \4\ See Securities Exchange Act Release No. 63509 (December 9, 
2010), 75 FR 78320 (``Notice'').
    \5\ Amendment No. 2 revises Phlx Rule 1080(m)(iii)(A) to include 
text that was inadvertently omitted from Exhibit 5 of the Form 19b-4 
submission. Specifically, the revised text indicates that, in 
addition to its current routing function, the Routing Facility (as 
defined below) will execute and report the underlying security 
component of a Complex Order otherwise than on the Phlx, pursuant to 
Phlx Rule 1080.08(h). Phlx states that this change is a clarifying 
and technical correction to conform the text of Rule 1080(m)(iii)(A) 
to: (i) The discussion in the Form 19b-4 submission regarding the 
proposed additional functions of NOS; and (ii) proposed Rule 
1080.08(h). Because Amendment No. 2 is technical in nature, it is 
not subject to notice and comment.
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II. Description of the Proposal

    Currently, the Phlx's rules provide for the electronic trading of 
Complex Orders composed of two options components. As described in 
greater detail below and in the Notice,\6\ the Phlx proposes to amend 
Phlx Rule 1080, Commentary .08, to provide for the electronic trading 
of Complex Orders composed of up to six components, which may include 
the underlying stock or ETF, and to make other changes to its rules 
governing the trading of Complex Orders on Phlx XL II.
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    \6\ See Notice.
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A. Definitions

    The proposal amends Phlx Rule 1080, Commentary .08(a)(i) to define 
a Complex Order, for purposes of that rule, as (i) an order involving 
the simultaneous purchase and/or sale of two or more different options 
series in the same underlying security, priced as 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; 
or (ii) a stock-option order. A stock-option order is composed of an 
order to buy or sell a stated number of units of an underlying security 
(stock or ETF) coupled with the purchase or sale of options 
contract(s).\7\ A Complex Order could be composed of up to six options 
series or, in the case of a stock-option order, five options series and 
the underlying stock or ETF.\8\
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    \7\ See Phlx Rule 1080, Commentary .08(a)(i). In addition, the 
underlying security must be the deliverable for the options 
component of a stock-option order and must represent exactly 100 
shares per option for regular way delivery. Id.
    \8\ See Phlx Rule 1080, Commentary .08(a)(i).
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    Stock-option orders may only be executed against other stock-option 
orders and cannot be executed against orders for the individual 
components.\9\ A member may only submit a Complex Order with a stock or 
ETF component if the order complies with the qualified contingent trade 
exemption (``QCT Exemption'') \10\ from Rule 611(a) of Regulation NMS 
under the Act,\11\ and a member submitting a Complex Order with a stock 
or ETF component represents that its order complies with the QCT 
Exemption.\12\
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    \9\ Id.
    \10\ See Securities Exchange Act Release Nos. 57620 (April 4, 
2008), 73 FR 19271 (April 9, 2008) (``QCT Exemptive Order''). See 
also Securities Exchange Act Release No. 54389 (August 31, 2006), 71 
FR 52829 (September 7, 2006).
    \11\ 17 CFR 242.611(a).
    \12\ See Phlx Rule 1080, Commentary .08(a)(i) and Amendment No. 
1.
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    The proposal also adds a definition of conforming ratio for Complex 
Orders composed solely of options and for Complex Orders that include 
the underlying stock or ETF.\13\ For Complex Orders composed solely of 
options, a conforming ratio 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 
Complex Orders that include the underlying stock or ETF, a conforming 
ratio is where the ratio between any options component and the 
underlying security component is less than or equal to eight contracts 
to 100 shares of the underlying security. Complex Orders with a 
conforming ratio will be accepted but Complex Orders with a 
nonconforming ratio will not.\14\
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    \13\ See Phlx Rule 1080, Commentary .08(a)(ix).
    \14\ See Notice at note 20.
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    In addition, the proposal provides a DNA designation for Complex 
Orders.\15\ A DNA Order is not COLA-eligible, as defined in Phlx Rule 
1080, Commentary .08(d)((ii)(B), and will not trigger or join a Complex 
Order Live Auction (``COLA'').\16\ DNA Orders are cancelled if not 
immediately executed.\17\
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    \15\ See Phlx Rule 1080, Commentary .08(a)(viii).
    \16\ Id.
    \17\ See Phlx Rule 1080, Commentary .08(a)(viii)(B). 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 be available only for Complex Orders with more than two 
options components or with an underlying security component. See 
Phlx Rule 1080, Commentary .08(a)(viii)(A) and (C).
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    The proposal also updates the definitions of cPBBO and cNBBO to 
reflect the underlying security component of a stock-option order.\18\ 
In addition, the proposal clarifies the definition of Complex Order 
Strategy and indicates that the Phlx's system will assign a strategy 
identifier to each Complex Order Strategy.\19\
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    \18\ See Phlx Rule 1080, Commentary .08(a)(iv) and (vi). 
Specifically, the revised definitions indicate that when the 
underlying security is a component of a Complex Order, the best net 
debit or credit refers to the National Best Bid and/or Offer for the 
underlying security.
    \19\ See Phlx Rule 1080, Commentary .08(a)(ii).
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B. Priority

    Currently, the priority provisions in Phlx Rule 1033(d) apply to 
Complex Orders trading on Phlx XL II and to complex orders trading on 
the Phlx's floor.\20\ The priority provisions in Phlx Rule 1033(e) 
apply to orders trading on the Phlx's floor that include a stock and an 
option component.\21\ The proposal adds new Phlx Rule 1080, Commentary 
.08(c)(iii) to provide priority provisions for Complex Orders, 
including Complex Orders with a stock or ETF component, trading on Phlx 
XL II.
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    \20\ Phlx Rule 1033(d) states that when a member holding a hedge 
order, as defined in Rule 1066, and bidding or offering on the basis 
of a total credit or debit for the order has determined that the 
order may not be executed by a combination of transactions at or 
within the bids and offers established in the marketplace, then the 
order may be executed as a hedge order at the total credit or debit 
with one other member with priority 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. Hedge orders include spread, straddle, 
combination, and tied hedge orders. See Phlx Rule 1066(f).
    \21\ Phlx Rule 1033(e) states that when a member holding a 
synthetic option order, as defined in Rule 1066, and bidding or 
offering on the basis of a total credit or debit for the order has 
determined that the order may not be executed by a combination of 
transactions at or within the bids and offers established in the 
marketplace, then the order may be executed as a synthetic option 
order at the total credit or debit with one other member, provided 
that the member executes the option leg at a better price than the 
established bid or offer for that option contract, in accordance 
with Rule 1014. Synthetic option orders in open outcry, in which the 
option component is for a size of 100 contracts or more, have 
priority over bids (offers) of crowd participants who are bidding 
(offering) only for the option component of the synthetic option 
order, but not over bids (offers) of public customers on the limit 
order book, and not over crowd participants that are willing to 
participate in the synthetic option order at the net debit or credit 
price.
---------------------------------------------------------------------------

    Specifically, Phlx Rule 1080, Commentary .08(c)(iii)(A), which 
applies to Complex Orders composed solely of options, states that 
Complex Orders consisting of a conforming ratio \22\ may be executed at 
a total credit or debit price with priority over individual bids or 
offers established in the marketplace (including customers) that are 
not better than the bids or offers comprising such total credit or 
debit, provided that at least one option leg is executed at a better 
price than the 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. The

[[Page 5632]]

Phlx states that new Phlx Rule 1080, Commentary .08(c)(iii)(A) provides 
the same priority as Phlx Rule 1033(d), under the same conditions, to a 
broader class of Complex Orders.\23\
---------------------------------------------------------------------------

    \22\ See Phlx Rule 1080, Commentary .08(a)(ix).
    \23\ See Notice at notes 22-23 and accompanying text.
---------------------------------------------------------------------------

    Phlx Rule 1080, Commentary .08(c)(iii)(B) states that where a 
Complex Order consists of the underlying stock or ETF and one options 
leg in a conforming ratio,\24\ such options leg does not have priority 
over bids and offers established in the marketplace, including customer 
orders. However, where a Complex Order consists of the underlying stock 
or ETF and more than one options leg in a conforming ratio, 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.\25\
---------------------------------------------------------------------------

    \24\ See Phlx Rule 1080, Commentary .08(a)(ix) and note 13, 
supra.
    \25\ See Phlx Rule 1080, Commentary .08(c)(iii)(B).
---------------------------------------------------------------------------

C. Execution of the Stock or ETF Component of a Complex Order

1. Role of NOS
    To trade Complex Orders with a stock or ETF component through Phlx 
XL II, members of the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') or the NASDAQ Stock Market (``Nasdaq'') must have a Uniform 
Service Bureau/Executing Broker Agreement (``AGU'') with NOS, and firms 
that are not members of FINRA or Nasdaq must have a Qualified Special 
Representative (``QSR'') arrangement with NOS.\26\ NOS, a broker-dealer 
and FINRA member, serves as the Phlx's Routing Facility and is subject 
to regulation as a facility of the Phlx.\27\
---------------------------------------------------------------------------

    \26\ See Phlx Rule 1080, Commentary .08(a)(i).
    \27\ See Phlx Rule 1080(m)(iii).
---------------------------------------------------------------------------

    Phlx Rule 985(b), ``Restrictions on Affiliation,'' generally 
prohibits the Phlx or an entity with which it is affiliated from 
acquiring or maintaining an ownership interest in, or engaging in a 
business venture with a Phlx member or an affiliate of a Phlx member in 
the absence of an effective filing with the Commission under Section 
19(b) of the Act.\28\ NOS is a member of Phlx and also an indirect 
wholly-owned subsidiary of Phlx's parent company, and therefore an 
affiliate of Phlx.\29\ The Commission has approved NOS as an affiliate 
of Phlx for the purpose of routing orders in options listed and open 
for trading on Phlx XL II to away market centers pursuant to Phlx rules 
on behalf of Phlx.\30\ Phlx Rule 1080(m)(iii) states that ``[t]he sole 
use of the Routing Facility by the Phlx XL II system will be to route 
orders in options listed and open for trading on the Phlx XL II system 
to away markets pursuant to Exchange rules on behalf of the Exchange.''
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78s(b).
    \29\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (order approving File No. SR-Phlx-
2009-32) (``NOS Order'').
    \30\ Id. The Commission also has approved NOS as an affiliate of 
Phlx for the limited purpose of providing routing services for 
Nasdaq Exchange for orders that first attempt to access liquidity on 
Nasdaq Exchange's systems before routing to Phlx, subject to certain 
conditions. See Securities Exchange Act Release No. 58179 (July 17, 
2008), 73 FR 42874 (July 23, 2008) (order approving File No. SR-
Phlx-2008-31).
---------------------------------------------------------------------------

    For NOS to perform additional functions for the Phlx, the Phlx must 
file a proposed rule change with the Commission pursuant to Section 19 
of the Act and the rules and regulations thereunder.\31\ In the current 
proposal, the Phlx proposes to allow NOS to act as the agent 
responsible for the execution of the stock or ETF component of a 
Complex Order in addition to its approved routing functions.\32\ NOS's 
function with respect to the execution of the stock or ETF component of 
a Complex Order will be available to all Phlx member organizations.\33\
---------------------------------------------------------------------------

    \31\ See NOS Order, supra note 29.
    \32\ Phlx Rule 1080(m)(iii)(A), as amended, states, in part, 
that ``The sole use of the Routing Facility by the Phlx XL II system 
will be to route orders in options listed and open for trading on 
the Phlx XL II system to away markets pursuant to Exchange rules on 
behalf of the Exchange and, in addition, where one component of a 
Complex Order is the underlying security, to execute and report such 
component otherwise than on the Exchange, pursuant to Rule 
1080.08(h).'' See Amendment No. 2. See also Notice at note 31 and 
accompanying text.
    \33\ See Notice at 78324.
---------------------------------------------------------------------------

2. Execution of the Stock or ETF Component of a Complex Order
    Where one component of a Complex Order is the underlying stock or 
ETF, the Phlx will electronically communicate the underlying security 
component to NOS for execution \34\ after the Phlx's trading system 
determines that a Complex Order trade is possible and the prices for 
each of the components.\35\ The execution and reporting of the 
underlying security component of the order will occur otherwise than on 
the Exchange, and NOS will handle these orders pursuant to applicable 
rules regarding equity trading,\36\ including the rules governing trade 
reporting, trade-throughs, and short sales.\37\
---------------------------------------------------------------------------

    \34\ See Phlx Rule 1080, Commentary .08(h).
    \35\ See Notice at 78324 and at note 44 and accompanying text.
    \36\ See Phlx Rule 1080, Commentary .08(h).
    \37\ See Notice at note 34 and accompanying text.
---------------------------------------------------------------------------

    NOS, a FINRA member, will be responsible for the proper execution, 
trade reporting, and submission to clearing of the underlying stock or 
ETF component of a Complex Trade.\38\ The Phlx notes that NOS is 
subject to examination by FINRA and is responsible for compliance with 
applicable rules, including NASD Rule 3010, ``Supervision,'' which 
generally requires NOS to establish and maintain supervisory systems 
that are reasonably designed to achieve compliance with applicable 
securities laws and regulations and applicable NASD and FINRA 
rules.\39\ The Phlx represents that NOS intends to have in place 
policies related to confidentiality and the potential for informational 
advantages relating to its affiliates, which are intended to protect 
against the misuse of material non-public information.\40\
---------------------------------------------------------------------------

    \38\ See Notice at notes 31-32 and accompanying text.
    \39\ See Notice at note 32 and accompanying text.
    \40\ See Notice at notes 32-33 and accompanying text. In 
addition, the Phlx notes that Phlx Rule 1080(m)(iii)(C) requires the 
Exchange to establish and maintain procedures and internal controls 
reasonably designed to adequately restrict the flow of confidential 
and proprietary information between the Phlx and NOS, and any other 
entity, including any affiliate of NOS. See Notice at note 33.
---------------------------------------------------------------------------

    For the reasons described below, the Phlx believes that the 
processing of the stock or ETF component of a Complex Order under the 
proposal will comply with applicable rules regarding equity trading, 
including the rules governing trade reporting, trade-throughs, and 
short sales.\41\ The Phlx represents that NOS's responsibilities 
respecting these equity trading rules will be documented in NOS's 
written policies and procedures, and that NOS's compliance with these 
policies and procedures is monitored, reviewed, and updated as part of 
NOS's regular and routine regulatory program.\42\
---------------------------------------------------------------------------

    \41\ See Notice at notes 42-43 and accompanying text.
    \42\ Id.
---------------------------------------------------------------------------

3. Compliance With Trade Reporting Requirements and QCT Exemption
    The Phlx states that NOS will report trades in the underlying stock 
or ETF to the FINRA/Nasdaq Trade Reporting Facility (``TRF'').\43\
---------------------------------------------------------------------------

    \43\ See Notice at note 35 and accompanying text. The FINRA/
Nasdaq TRF 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 Notice at note 35.
---------------------------------------------------------------------------

    Phlx Rule 1080, Commentary .08(a)(i) permits a member to submit a 
Complex Order with a stock or ETF component only if the order complies 
with the QCT Exemption, and provides, further, that a member submitting 
a Complex Order

[[Page 5633]]

with a stock or ETF component represents that its order complies with 
the QCT Exemption.\44\ In addition, as described in greater detail in 
the Notice, the Phlx represents that its trading system will validate 
compliance with each of the requirements of the QCT Exemption, thereby 
assisting NOS in carrying out its responsibilities as agent for these 
orders.\45\
---------------------------------------------------------------------------

    \44\ See Phlx Rule 1080, Commentary .08(a)(i) and Amendment No. 
1. The QCT Exemption applies to trade-throughs caused by the 
execution of an order involving one or more NMS stocks that are 
components of a ``qualified contingent trade.'' As described more 
fully in the QCT Exemptive Order, a qualified contingent trade is a 
transaction consisting of two or more component orders, executed as 
principal or agent, where: (1) At least one component order is an 
NMS stock; (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; (3) the execution of one component is contingent upon the 
execution of all other components at or near the same time; (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; (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; and (6) the Exempted NMS Stock 
Transaction is fully hedged (without regard to any prior existing 
position) as a result of the other components of the contingent 
trade. See QCT Exemptive Order, supra note 10.
    \45\ See Notice at notes 37-39 and accompanying text.
---------------------------------------------------------------------------

4. Compliance With Regulation SHO
    The Phlx represents that the proposal raises no issues of 
compliance with the currently operative provisions of Regulation 
SHO.\46\ The Phlx notes that when a Complex Order has a stock or ETF 
component, Regulation SHO requires a member organization to indicate 
whether that order involves a long or short sale. The Phlx states that 
its trading system will accept Complex Orders with a stock or ETF 
component marked to reflect either a long or short position and the 
trading system will reject orders not marked as either long or 
short.\47\ In addition, the Phlx states that the trading system will 
reject orders not marked as buy, sell, or sell short.\48\ The Phlx's 
trading system will electronically deliver the stock or ETF component 
to NOS for execution. Simultaneous with the options execution on the 
Phlx, NOS will execute and report the stock or ETF component, which 
will contain the long or short indication as it was delivered to the 
Phlx's trading system by the member organization.\49\ The Phlx also 
states that various surveillance and examination regulatory programs 
check for compliance with Regulation SHO.\50\
---------------------------------------------------------------------------

    \46\ 17 CFR 242.200 et seq. See Notice at note 40 and 
accompanying text.
    \47\ Telephone conversation between Andrea Orr, Special Counsel, 
Division of Trading and Markets Commission, with Edith Hallahan, 
Associate General Counsel, Phlx, on January 25, 2011.
    \48\ See Notice at notes 40-42 and accompanying text.
    \49\ Id.
    \50\ Id.
---------------------------------------------------------------------------

    The Phlx notes that the Commission amended Rules 201 and Rule 
200(g) of Regulation SHO \51\ earlier this year to adopt a short sale-
related circuit breaker that, if triggered, would impose a restriction 
on the price at which securities may be sold short (``short sale price 
test restriction'').\52\ Under these amendments, a broker-dealer may 
mark certain qualifying short sale orders as ``short exempt.'' \53\ The 
Phlx notes that the Commission extended the compliance date for the 
amendments to Rules 201 and 200(g) until February 28, 2011.\54\ The 
Phlx states that after the new provisions of Regulation SHO become 
operative, NOS will accept orders marked ``short exempt.'' \55\ The 
Exchange represents, further, that it intends to file a proposed rule 
change addressing the new provisions.\56\ In addition, the Phlx 
represents that NOS, as a trading center under Rule 201,\57\ will be 
compliant with the requirements of Regulation SHO.\58\
---------------------------------------------------------------------------

    \51\ 17 CFR 242.201 and 200(g).
    \52\ See Securities Exchange Act Release No. 61595 (February 26, 
2010). 75 FR 11232 (March 10, 2010)
    \53\ See Notice at note 41 and accompanying text.
    \54\ See Securities Exchange Act Release No. 63247 (November 4, 
2010), 75 FR 68702 (November 9, 2010) (File No. S7-08-09) 
(``Compliance Date Extension Release'').
    \55\ See Notice at note 42 and accompanying text.
    \56\ Id.
    \57\ 17 CFR 242.201.
    \58\ See Notice at notes 40-42 and accompanying text.
---------------------------------------------------------------------------

5. Execution Price of the Underlying Security and Electronic Processing
    Under the proposal, the execution price of the order for the 
underlying security must be within the security's high-low range for 
the day at the time the Complex Order is processed and within a 
specified price from the current market, which the Phlx will establish 
in an Options Trader Alert.\59\ If the stock price is not within these 
parameters, the Complex Order is not executable.\60\
---------------------------------------------------------------------------

    \59\ See Phlx Rule 1080, Commentary .08(h).
    \60\ Id.
---------------------------------------------------------------------------

    The Exchange believes that electronic submission of the stock or 
ETF component of a Complex Order should help ensure that the Complex 
Order, as a whole, is executed in a timely manner and at the desired 
price.\61\ The Phlx notes that electronic communication eliminates the 
need for each party to separately manually submit the stock or ETF 
component to a broker-dealer for execution.\62\ In addition, the 
Exchange emphasizes that the execution of the stock or ETF component of 
a Complex Order will be immediate, with the Phlx's system calculating 
the stock or ETF price based on the net debit/credit price of the 
Complex Order, while also calculating and determining the appropriate 
options price(s), all electronically and immediately.\63\ The Exchange 
believes that this approach will not require the Exchange to later 
nullify options trades if the stock price cannot be achieved.
---------------------------------------------------------------------------

    \61\ See Notice at note 43 and accompanying text.
    \62\ See Notice at notes 43-44 and accompanying text.
    \63\ See Notice at note 44 and accompanying text.
---------------------------------------------------------------------------

    The Exchange believes that it is appropriate for its affiliate, 
NOS, to act as the exclusive conduit for the execution of the stock or 
ETF component of a Complex Order.\64\ The Phlx states that, as a 
practical matter, complex order programs on other exchanges necessarily 
involve specific arrangements with a broker-dealer to facilitate prompt 
execution.\65\ The Phlx believes, further, that offering the benefits 
of prompt, seamless, automatic execution for both the options and stock 
or ETF components of a Complex Order is an important feature that 
should enhance the complex order processing available on options 
exchanges today.\66\ The Phlx represents that neither the Exchange nor 
NOS intends to charge a fee for the execution of the stock or ETF 
component of a Complex Order.\67\
---------------------------------------------------------------------------

    \64\ See Notice at note 46 and accompanying text. The Phlx also 
notes that Phlx Rule 985(c)(1) requires Nasdaq OMX, which owns NOS 
and the Exchange, to 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. See Notice at note 46.
    \65\ See Notice notes 46-47 and accompanying text.
    \66\ Id.
    \67\ The Phlx notes, however, that TRF and clearing fees, not 
charged by Phlx or NOS, may result. The Phlx states that the 
National Securities Clearing Corporation (``NSCC'') and ACT will 
bill firms directly for their use of the NSCC and ACT systems, 
respectively. The Phlx represents that, to the extent that NOS is 
billed by NSCC or ACT, it will not pass through to firms such fees 
for the stock or ETF component of a Complex Order. See Notice at 
note 47.
---------------------------------------------------------------------------

D. Complex Order Entry, Processing, and Execution

    The Phlx proposes additional changes to Phlx Rule 1080, Commentary 
.08, relating to the entry, processing, and

[[Page 5634]]

execution of Complex Orders. In this regard, the proposal revises Phlx 
Rule 1080, Commentary .08(c)(i) to indicate that a Complex Order with 
an underlying security component is eligible to trade only when the 
underlying security component is open for trading on its primary 
market.
    In addition, the proposal revises Phlx Rule 1080, Commentary 
.08(e)(vi)(A)(1) to: (i) Add the word ``legging'' to refer to the 
execution of a COLA-eligible order against interest in the leg market, 
as described in that paragraph; and (ii) indicate that legging may not 
occur when the underlying security is a component of a Complex Order. 
Similarly, the proposal revises Phlx Rule 1080, Commentary .08(f)(iii), 
relating to executions against the CBOOK, to indicate that legging will 
not take place when the underlying security is a component of a Complex 
Order.
    Phlx Rule 1080, Commentary .08(e)(i)(B)(2) currently provides that 
a Complex Order received during the final ten seconds of a trading 
session is not COLA-eligible. The proposal modifies the rule to make 
this time configurable, but no longer than ten seconds.
    The proposal also amends Phlx Rule 1080, Commentary .08(b)(ii) to 
allow Streaming Quote Traders (``SQTs''), Remote Streaming Quote 
Traders (``RSQTs''), non-SQT Registered Options Traders (``ROTs''), 
specialists, and non-Phlx market makers on another exchange to enter 
Complex Orders with more than two options components or an underlying 
security component as Day orders, in addition to entering them as 
Immediate or Cancel (``IOC'').\68\ The Phlx believes that this change 
could encourage more orders from these market participants.
---------------------------------------------------------------------------

    \68\ After the Phlx has fully rolled out its enhanced Complex 
Order system, Day orders also will become available for Complex 
Orders with two options components. See Phlx Rule 1080, Commentary 
.08(b)(ii).
---------------------------------------------------------------------------

    The proposal amends Phlx Rule 1080, Commentary .08(b)(iii) to 
indicate that Floor Brokers using the Options Floor Broker Management 
System (``FBMS'') may not enter DNA Orders, orders with a stock or ETF 
component, or orders with more than two legs. The Phlx notes that Floor 
Brokers are able to use systems other than FBMS to access Phlx XL II, 
and are unlikely to need or request changes to FBMS because they 
execute more complex orders in the trading crowd than through FBMS.\69\
---------------------------------------------------------------------------

    \69\ See Notice at 78323.
---------------------------------------------------------------------------

    The proposal also eliminates provisions that currently provide an 
SQT or RSQT quoting all of the components of a Complex Order in the leg 
market with priority over an SQT or RSQT quoting a single component of 
the order.\70\ The Phlx believes that these changes will simplify the 
allocation process as the Exchange's system begins to accept more 
Complex Order types.\71\ The Phlx believes, further, that the benefits 
provided by these provisions are not material, and that they are not 
being realized intentionally by market participants.\72\ Under the 
revised rules, an SQT or RSQT quoting all components of a Complex Order 
will be on parity with SQTs and RSQTs quoting a single component.\73\
---------------------------------------------------------------------------

    \70\ See Phlx Rules 1080, Commentary .08(e)(vi)(A)(1), 
(f)(iii)(A), and (f)(iii)(B)(1).
    \71\ See Notice at note 29 and accompanying text.
    \72\ Id.
    \73\ Id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\74\ In particular, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act,\75\ which requires, in 
part, that the rules of a national securities exchange be designed to 
prevent fraudulent and manipulative acts and practices, 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. 
Currently, only Complex Orders with two options components may be 
traded on Phlx XL II. For the reasons discussed below, the Commission 
believes that the proposal, as amended, could facilitate the trading of 
Complex Orders by, among other things, permitting Complex Orders with 
up to six components, including the underlying stock or ETF, to be 
traded on Phlx XL II.
---------------------------------------------------------------------------

    \74\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \75\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Priority Rules

    As discussed above, the proposal adopts a new definition of Complex 
Order and adds a new defined term, conforming ratio, relating to 
Complex Orders. The Commission notes that the definition of a Complex 
Order in Phlx Rule 1080, Commentary .08(a)(i), including Complex Orders 
composed solely of options and Complex Orders composed of option(s) and 
the underlying stock or ETF, together with the definition of conforming 
ratio in Phlx Rule 1080, Commentary .08(a)(ix), are comparable to the 
definitions of Complex Order, Stock/Complex Order, and stock-option 
order adopted by other options exchanges.\76\
---------------------------------------------------------------------------

    \76\ See, e.g., ISE Rule 722(a)(1) and NYSEAmex Rule 900.3NY(e) 
(defining a complex order). See also NYSEAmex Rule 900.3NY(h)(2) 
(defining a Stock/Complex Order) and ISE Rule 722(a)(2) and NYSEAmex 
Rule 900.3NY(h)(1) (defining a stock-option order).
---------------------------------------------------------------------------

    A Complex Order with a nonconforming ratio will not be 
accepted,\77\ and only Complex Orders with conforming ratios will be 
eligible for the priority treatment provided in Phlx Rule 1080, 
Commentary .08(c)(iii).\78\ Specifically, for Complex Orders composed 
solely of options, Phlx Rule 1080, Commentary .08(c)(iii)(A) provides 
that a Complex Order with a conforming ratio may be executed at a total 
net credit or debit with priority over individual bids or offers 
established in the marketplace (including customers) that are not 
better than the bids or offers comprising such total credit or debit, 
provided that at least one option leg is executed at a better price 
than the established bid or offer for that option and no option leg is 
executed at a price outside of the established bid or offer for that 
option. The priority provisions in Phlx Rule 1080, Commentary 
.08(c)(iii)(A) are consistent with the existing priority provisions in 
Phlx Rule 1033(d), which will continue to apply to trading on the 
Phlx's floor, and with the priority rules of other options 
exchanges.\79\
---------------------------------------------------------------------------

    \77\ See Notice at note 20.
    \78\ Throughout Phlx Rule 1080, Commentary .08, the proposal 
replaces references to the priority provisions in Phlx Rule 1033(d) 
with references to the priority provisions in Phlx Rule 1080, 
Commentary .08(c)(iii). Phlx Rule 1033(d) will continue to apply to 
trading on the Phlx's floor, and the priority provisions in 
Commentary .08(c)(iii) will apply to Complex Orders trading on PHLX 
XL II.
    \79\ See, e.g., ISE Rule 722(b)(2) and NYSEAmex Rule 980, 
Commentary .02. See also CBOE Rules 6.45(e), 6.45A(b)(ii), and 
6.45B(b)(ii). The Phlx states that Phlx Rule 1080, Commentary 
.08(c)(iii) provides the same priority as Phlx Rule 1033(d), under 
the same conditions, to a broader class of Complex Orders. See 
Notice at notes 22-23 and accompanying text.
---------------------------------------------------------------------------

    For Complex Orders composed of the underlying stock or ETF and one 
options leg in a conforming ratio, Phlx Rule 1080, Commentary 
.08(c)(iii)(B) provides that the options leg does not have priority 
over bids and offers established in the marketplace, including customer 
orders. This provision is similar to Phlx Rule 1033(e),\80\ and to the 
requirements of

[[Page 5635]]

other options exchanges.\81\ For a Complex Order composed of the 
underlying stock or ETF and more than one options leg in a conforming 
ratio, 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.\82\ This provision is 
similar to ISE Rule 722(b).\83\
---------------------------------------------------------------------------

    \80\ Phlx Rule 1033(e) requires the option leg of a stock-option 
order (called a synthetic option order) to be executed at a price 
better than the established bid or offer for that option. For 
synthetic option orders trading in open outcry in which the option 
component is for 100 contracts or more, the synthetic option order 
has priority over crowd participants who are bidding (offering) only 
for the option component of the order, but over the bids (offers) of 
public customers in the limit order book, and not over crowd 
participants that are willing to participate in the synthetic option 
order at the net debit or credit price.
    \81\ See, e.g., CBOE Rule 6.53C, Commentary .06(b) and NYSEAmex 
Rule 980NY, Commentary .03(b) (the option leg of a Stock-Option 
Order will not be executed on the exchange's system at the 
exchange's best bid (offer) in that series if one or more public 
customer orders are resting at that price on the electronic book, 
unless the option leg trades with such public customer order(s)); 
and ISE Rule 722(b)(2) (a stock-option order with one options leg 
has priority over bids and offers established in the marketplace by 
Professional Orders and market makers at the price of the options 
leg, but not over such bids or offers established by Priority 
Customer Orders). See also CBOE Rule 6.45(e) (stock-option orders 
have priority over bids (offers) of the trading crowd but not over 
bids (offers) in the public customer limit order book).
    \82\ See Phlx Rule 1080, Commentary .08(c)(iii)(B).
    \83\ ISE Rule 722(b)(2) provides, in part, that the options legs 
of a stock-option order with more than one options leg may be 
executed at a total net credit or debit with one other Member 
without giving priority to established bids or offers that are no 
better than the bids or offers comprising the net credit or debit, 
provided that if any of the established bids or offers consist of a 
Priority Customer Order, the price of at least one leg must trade at 
a price that is better than the corresponding bid or offer in the 
marketplace by at least one minimum trading increment.
---------------------------------------------------------------------------

B. Execution of the Stock or ETF Component of a Complex Order

1. NOS's Role as Agent for the Stock or ETF Component of a Complex 
Order
    NOS serves as the Phlx's Routing Facility. In addition to its 
currently approved routing functions, the Phlx proposes to allow NOS to 
act as the agent for orders to buy and sell the underlying stock or ETF 
component of a Complex Order.
    As described more fully above, after the Phlx's system determines 
that a Complex Order trade is possible and the prices for the trade, 
the Phlx will electronically communicate the stock or ETF component of 
the Complex Order to NOS for execution. NOS, acting as agent for the 
orders to buy and sell the underlying stock or ETF, will execute the 
orders in the over-the-counter (``OTC'') market and will handle the 
orders pursuant to applicable rules regarding equity trading,\84\ 
including the rules governing trade reporting, trade-throughs, and 
short sales.\85\ NOS will be responsible for the proper execution, 
trade reporting, and submission to clearing of the underlying stock or 
ETF component of a Complex Order.\86\
---------------------------------------------------------------------------

    \84\ See Phlx Rule 1080, Commentary .08(h).
    \85\ See Notice at note 34 and accompanying text.
    \86\ See Notice at notes 31-32 and accompanying text.
---------------------------------------------------------------------------

    Based in part on the Phlx's statements and representations in the 
Notice, the Commission believes that the proposal to allow NOS to serve 
as the agent responsible for executing the stock or ETF component of a 
Complex Order is consistent with the Act. The Commission notes that, as 
a facility of the Phlx, NOS is subject to oversight by the Commission 
and by the Phlx.\87\ In addition, NOS, a member of FINRA, is 
responsible for compliance with applicable rules regarding equity 
trading, including rules governing trade reporting, trade-throughs and 
short sales, and is subject to examination by FINRA.\88\ Because NOS 
will execute the stock or ETF component of a Complex Order in the OTC 
market, the principal regulator of these trades will be FINRA, rather 
than the Phlx or Nasdaq.\89\
---------------------------------------------------------------------------

    \87\ Phlx Rule 1080(m)(iii)(A) states that NOS is subject to 
regulation as a facility of the Phlx. Phlx Rule 1080(m)(iii)(D) 
provides, further, that the books, records, premises, officers, 
directors, agents, and employees of NOS, as a facility of the Phlx, 
shall be deemed to be the books, records, premises, officers, 
directors, agents, and employees of the Phlx for purposes of and 
subject to oversight pursuant to the Act. The books and records of 
NOS, as a facility of the Phlx, shall be subject at all times to 
inspection and copying by the Phlx and the Commission.
    \88\ See Notice at 78324. Phlx Rule 1080(m)(iii)(A) states that 
NOS is a member of an unaffiliated self-regulatory organization 
which the designated examining authority for NOS.
    \89\ See Notice at 78324.
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    The Phlx notes that NASD Rule 3010 generally requires NOS to 
establish and maintain supervisory systems that are reasonably designed 
to achieve compliance with applicable securities laws and regulations 
and applicable NASD and FINRA rules.\90\ The Phlx represents that NOS 
intends to have in place policies related to confidentiality and the 
potential for informational advantages relating to its affiliates, 
which are intended to protect against the misuse of material non-public 
information.\91\ The Phlx represents, further, that NOS's 
responsibilities respecting applicable equity trading rules, including 
the rules governing trade reporting, trade-throughs, and short sales, 
will be documented in NOS's written policies and procedures, and that 
NOS's compliance with these policies and procedures is monitored, 
reviewed, and updated as part of NOS's regular and routine regulatory 
program.\92\
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    \90\ See Notice at note 32 and accompanying text.
    \91\ See Notice at note 33 and accompanying text. In addition, 
the Phlx notes that Phlx Rule 1080(m)(iii)(C) requires the Exchange 
to establish and maintain procedures and internal controls 
reasonably designed to adequately restrict the flow of confidential 
and proprietary information between the Phlx and NOS, and any other 
entity, including any affiliate of NOS. See Notice at note 33.
    \92\ See Notice at 78325.
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    The Phlx represents that neither the Exchange nor NOS intends to 
charge a fee for the execution of the stock or ETF component of a 
Complex Order.\93\ The Commission notes that if the Phlx or NOS decides 
in the future to charge fees for NOS's execution of the stock or ETF 
component of a Complex Order, or to modify its rules relating to NOS's 
execution of the stock or ETF component of a Complex Order, the Phlx 
would be responsible for filing the proposed fee or rule change with 
the Commission pursuant to Section 19(b) of the Act.\94\ The Commission 
notes, in addition, that NOS's execution of the stock or ETF component 
of a Complex Order is subject to exchange non-discrimination 
requirements.\95\
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    \93\ See Notice at note 47 and accompanying text. The Phlx 
notes, however, that TRF and clearing fees, not charged by Phlx or 
NOS, may result. The Phlx states that NSCC and ACT will bill firms 
directly for their use of NSCC and ACT systems, respectively. 
Further, the Phlx represents that, to the extent that NOS is billed 
by NSCC or Act, it will not pass through such fees to firms for the 
stock or ETF portion of a Complex Trade under this proposal. See 
Notice at note 47.
    \94\ See NOS Order, supra note 30, at footnote 84.
    \95\ Id.
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C. DNA Designation and Additional Definitions

    The proposal adopts a DNA designation for Complex Orders.\96\ A DNA 
Order is not COLA-eligible and will not trigger or join a COLA.\97\ The 
Commission believes that DNA Orders will provide additional flexibility 
in executing Complex Orders by allowing market participants to submit 
Complex Orders that will not trigger or join a COLA.
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    \96\ See Phlx Rule 1080, Commentary .08(a)(viii).
    \97\ Id.
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    The Commission believes that the revised definitions of cPPBO and 
cNBBO will update those definitions to reflect that the underlying 
security could be component of a Complex Order.\98\ The Commission 
believes that the changes to the definition of Complex Order Strategy 
\99\ will help to clarify that term and the role of the Phlx's system 
in assigning a strategy identifier to a Complex Order Strategy.
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    \98\ See Phlx Rule 1080, Commentary .08(a)(iv) and (vi).
    \99\ See Phlx Rule 1080, Commentary .08(a)(ii).

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[[Page 5636]]

D. Complex Order Entry, Processing, and Execution

    The Commission finds that the changes to Phlx Rule 1080, Commentary 
.08(c)(i) indicating that a Complex Order with an underlying security 
component is eligible to trade only when the underlying security is 
open for trading on its primary market, and the changes to Phlx Rule 
1080, Commentary .08(e)(vi)(A)(1) and .08(f)(iii) that indicate that 
legging may not occur, either in a COLA or against the CBOOK, when the 
underlying security is a component of a Complex Order, should help to 
clarify the operation of the Phlx's rules relating to the execution of 
Complex Orders with an underlying stock or ETF component. Similarly, 
the Commission believes that adding the term ``legging'' to Phlx Rule 
1080, Commentary .08(e)(vi)(A)(1) to refer to the activity described in 
that rule could help to clarify the rule.
    The amendment to Phlx Rule 1080, Commentary .08(e)(i)(B)(2) that 
permits the Phlx to determine the time period, which will not exceed 
ten seconds, at the end of a trading session when an order will not be 
COLA-eligible should provide the Phlx with flexibility in determining 
the time period within which the Exchange will not initiate a COLA 
during the final seconds of a trading session. The Commission notes 
that the Phlx will establish this time period in an Options Trader 
Alert.\100\
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    \100\ See Phlx Rule 1080, Commentary .08(e)(B)(2).
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    The Commission believes that modifying Phlx Rule 1080, Commentary 
.08(b)(ii) to allow SQTs, RSQTs, non-SQT ROTs, specialists, and non-
Phlx market makers on another exchange to enter Complex Orders with 
more than two options components or an underlying security component as 
Day orders, in addition to entering them as IOC orders, could encourage 
these market participants to submit Complex Orders by providing them 
with greater flexibility in entering orders.
    The Commission believes that the amendments to Phlx Rule 1080, 
Commentary .08(b)(iii) indicating that Floor Brokers using the FBMS may 
not enter DNA Orders, orders with a stock or ETF component, or orders 
with more than two legs are reasonable because, according to the Phlx, 
Floor Brokers are able to use systems other than FBMS to access Phlx XL 
II.\101\ In addition, the Commission notes that the Phlx believes that 
Floor Brokers are unlikely to need or request changes to FBMS because 
they execute more complex orders in the trading crowd than through 
FBMS.\102\
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    \101\ See Notice at 78323.
    \102\ Id.
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    The Commission believes that the changes to Phlx Rules 1080, 
Commentary .08(e)(vi)(A)(1), (f)(iii)(A), and (f)(iii)(B)(1) that place 
an SQT or RSQT quoting all components of a Complex Order on parity with 
SQTs and RSQTs quoting a single component are consistent with the Act. 
The Phlx believes that these changes will simplify the allocation 
process as PHLX XL II begins to accept more Complex Order types.\103\ 
In addition, the Phlx believes that the benefits provided by the 
current rules giving priority to SQTs and RSQTs quoting all components 
of a Complex Order are not material, and that they are not being 
realized intentionally by market participants.\104\ The Commission 
notes that under the revised rules, public customer orders will 
continue to have priority over SQTs and RSQTs.\105\
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    \103\ See Notice at note 29 and accompanying text.
    \104\ Id.
    \105\ See Phlx Rules 1014(g)(vii) and 1080, Commentary 
.08(e)(vi)(A)(1), (f)(iii)(A), and (f)(iii)(B)(1).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\106\ that the proposed rule change (File No. SR-Phlx-2010-157), as 
amended, is approved.
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    \106\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\107\
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    \107\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2127 Filed 1-31-11; 8:45 am]
BILLING CODE 8011-01-P