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]
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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).
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• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–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 (https://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’’).
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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.
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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.
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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.
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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
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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
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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’’).
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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.
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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
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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
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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.
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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
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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
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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.
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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).
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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
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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
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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).
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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.
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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
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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.
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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 https://
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.
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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
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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.
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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\
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\22\ See Phlx Rule 1080, Commentary .08(a)(ix).
\23\ See Notice at notes 22-23 and accompanying text.
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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\
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\24\ See Phlx Rule 1080, Commentary .08(a)(ix) and note 13,
supra.
\25\ See Phlx Rule 1080, Commentary .08(c)(iii)(B).
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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\
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\26\ See Phlx Rule 1080, Commentary .08(a)(i).
\27\ See Phlx Rule 1080(m)(iii).
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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.''
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\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).
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\41\ See Notice at notes 42-43 and accompanying text.
\42\ Id.
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\59\ See Phlx Rule 1080, Commentary .08(h).
\60\ Id.
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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.
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\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.
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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\
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\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.
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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.
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\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).
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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\
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\69\ See Notice at 78323.
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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\
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\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.
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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.
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\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).
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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\
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\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).
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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
