Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change To Enhance the Functionality Offered on Its Options Floor Broker Management System (“FBMS”) by, Among Other Things, Automating Functions Currently Performed by Floor Brokers, 13132-13138 [2013-04359]
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which are in the custody or control of
the clearing agency or for which it is
responsible.
The Decomp Model would implement
a number of Margin Methodology
Enhancements for index CDS
instruments, as described above, which
are already in place for single-name
CDS. The decomposition of index CDS
also would permit ICE Clear Europe to
incorporate jump-to-default risk as a
component of the risk margin associated
with index CDS. The Commission
believes that the Margin Methodology
Enhancements and the incorporation of
jump-to-default risk as a component of
the index CDS margin methodology
would result in better measurement of
the risk associated with clearing index
CDS.
The proposed rule change also
includes modifications to ICE Clear
Europe’s initial margin and CDS
Guaranty Fund methodologies. The
Guaranty Fund/IM Modification would
incorporate into the initial margin risk
model the single name that causes the
greatest loss when entering a state of
default, thus requiring Clearing
Members to collateralize a greater
portion of the loss resulting from their
default. The IM Recovery Rate
Modification would facilitate the ability
of market participants to replicate their
initial margin requirements and
evaluate the risk of their CDS clearing
portfolio. The IM Concentration Charge
Modification would allow for a
potentially more conservative
concentration requirement for large
directional CDS positions. The IM Basis
Risk Modification would capture the
risk associated with differences between
outright single-name CDS positions and
index-derived single-name CDS
positions, such that even ‘‘perfectly
hedged’’ portfolios will still attract an
initial margin requirement due to the
basis risk that exists. Finally, the
Guaranty Fund Modification would
combine a single guaranty fund
calculation for index CDS and singlename CDS positions, which takes into
account the portfolio benefits between
index and single-name positions and
incorporates the worst 2-member
uncollateralized losses coming from the
jump-to-default, spread response, basis
and interest rate stress scenario
considerations. The Commission
believes that these modifications, and
the enhancements described above,
would facilitate the safeguarding of
securities and funds in the custody or
control of ICE Clear Europe or for which
it is responsible.
After considering the proposed
changes, including each of the
representations made by ICE Clear
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Europe in the filing, the Commission
believes that these changes are
consistent with the requirements of
Section 17A(b)(3)(F) of the Act,16
including ICE Clear Europe’s obligation
to ensure that its rules are designed to
assure the safeguarding of securities and
funds in the custody or control of the
clearing agency or for which it is
responsible.
V. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 17 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,18 that the
proposed rule change (File No. SR–
ICEEU–2012–11), as modified by
Amendment No. 1, be, and hereby is,
approved.19
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–04357 Filed 2–25–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68960; File No. SR–Phlx–
2013–09]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To
Enhance the Functionality Offered on
Its Options Floor Broker Management
System (‘‘FBMS’’) by, Among Other
Things, Automating Functions
Currently Performed by Floor Brokers
February 20, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1, and Rule 19b–42 thereunder,
notice is hereby given that on February
6, 2013, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
16 15
U.S.C. 78q–1(b)(3)(F).
U.S.C. 78q–1.
18 15 U.S.C. 78s(b)(2).
19 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
20 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
17 15
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prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing with the
Commission a proposed rule change to
enhance the functionality offered on its
Options Floor Broker Management
System (‘‘FBMS’’) in a number of ways,
described in detail below. As a result of
these enhancements, Floor Brokers will
no longer execute most trades on the
Exchange’s options trading floor,
resulting in changes to a number of
rules.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposal is to
enhance the Exchange’s options
regulatory program by expanding the
tools available to Floor Brokers in order
to reduce the potential for violations of
various Exchange rules by Floor
Brokers. Specifically, under the
proposal, most Floor Broker transactions
will be executed through FBMS rather
than verbally by Floor Brokers in the
trading crowd, which should result in
fewer priority rule and trade-through
rule violations, because FBMS will
check the Exchange’s market and/or the
National Best Bid/Offer (‘‘NBBO’’) to
help prevent violations, as described
further below.
Today, Floor Brokers use FBMS for a
number of reasons. Historically, Floor
Brokers were not connected to the order
entry portals like order flow providers
are, because their business was focused
on receiving orders at the Floor Broker
booths on the trading floor and
executing such orders in person,
manually. As options trading has
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become more electronic, this has
continued to change over time, such
that the Exchange began to provide
technology to Floor Brokers, as did
other options exchanges.3 The main
driving force behind the creation of
FBMS was the Consolidated Options
Audit Trail System (‘‘COATS’’),
mandated in 2000.4 The COATS
requirements created the need for tools
to assist Floor Brokers 5 in complying
with the requirement to capture certain
options order information, including the
time of order receipt and execution,
contemporaneously with receipt and
execution.
In addition, today, Floor Brokers can
use FBMS to submit orders, including
Complex Orders, to Phlx XL, the
Exchange’s trading system rather than
executing the order in the trading
crowd. Those orders are processed just
like any other electronic order on the
Exchange, subject to the rules governing
Phlx XL, such as Rule 1080. Floor
Brokers may do so for a variety of
reasons, including that the order is far
away from the market such that the
Floor Broker would prefer to place it on
the electronic book or that there is a
contra-side order on the book with
which the order can trade.
At this time, the Exchange proposes to
expand upon FBMS functionality with
several enhancements.
Complex Calculator
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The Exchange proposes to provide
Floor Brokers with a feature called a
complex calculator. Floor Brokers
entering multi-leg option orders up to
15 legs on a net debit or net credit basis
via FBMS would receive suggested
prices for each component of the multileg order that would achieve the desired
net debit or net credit price. Such prices
would then be displayed on FBMS. The
3 See e.g., Securities Exchange Act Release Nos.
41524 (June 14, 1999) (SR–Phlx–99–11); 50070 (July
23, 2004) (SR–Phlx–2004–46); 50996 (January 7,
2005) (SR–CBOE–2004–77); and 64057 (March 8,
2011) (SR–CBOE–2011–019) at note 4.
4 See subparagraph IV.B.e(v) of the Order
Instituting Public Administrative Proceedings
Pursuant to Section 19(h)(1) of the Securities
Exchange Act of 1934, Making Findings and
Imposing Remedial Sanctions. See Securities
Exchange Act Release No. 43268 (September 11,
2000) (Requiring options exchanges to design and
implement COATS to ‘‘incorporate into the audit
trail all non-electronic orders such that the audit
trail provides an accurate, time-sequenced record of
electronic and other orders, quotations and
transactions on such respondent exchange,
beginning with the receipt of an order by such
respondent exchange and further documenting the
life of the order through the process of execution,
partial execution, or cancellation of that
order* * *’’ (‘‘Phase V’’)).
5 COATS is not just applicable to Floor Brokers
but was particularly challenging for them because
of the number of orders they executed manually.
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Floor Broker would not be required to
submit the multi-leg order at the
suggested prices; the new FBMS
functionality is intended to function as
a tool to assist Floor Brokers in
calculating the component prices and
expedite the process of handling multileg orders in the trading crowd.6
Accordingly, the Floor Broker can
override the prices and attempt to
achieve the net price using different
prices. The net debit/credit price can
also be expressed as an overall cash
value. For example, a multi-leg order to
purchase 100 of option A and sell 100
of option B could be entered with a net
debit price of $5,000. If the option legs
were trading $0.90–$1.10 and $0.45—
$0.55, respectively, the complex
calculator could generate suggested
prices of $1.00 and $0.50 [(($1.00 ¥
$0.50)*100 times)*100 options premium
multiplier = $5,000], which would
satisfy the $5,000 net debit.
When a Floor Broker enters a trading
crowd with a multi-leg order, often he
or she will simply request a market for
that order and announce a net debit or
credit price, rather than separate prices
for each component. For example, a
Floor Broker representing a two-legged
spread order to buy 10 XYZ Mar 50 calls
and sell 10 XYZ Jun 60 calls may
announce the price as a net debit of, for
example, $1.00. This means that the
purchase price for 10 XYZ Mar 50 calls
is $1.00 greater than the selling price of
10 XYZ Jun 60 calls.7 Conversely, a net
credit price of $1.00 would indicate that
the purchase price of 10 XYZ Mar 50
calls is $1.00 less than the selling price
of 10 XYZ Jun 60 calls.8
Currently, when a Floor Broker
receives a single order that has multiple
components with instructions to
execute such order on a net debit or
credit basis, the Floor Broker must first
consider prices on various different
markets, all as close to
contemporaneously as possible. He
must calculate the bid and ask of the
total net debit and credit. If the Floor
Broker is able to achieve the specified
net debit or credit based upon the thencurrent market conditions, the Floor
Broker will enter the trading crowd
(after entering all of the required
electronic audit trail information onto
6 The complex calculator functionality will not
execute orders.
7 The Floor Broker might pay, for example, $5.00
to purchase 10 XYZ Mar 50 calls, and would
receive $4.00 for the sale of 10 XYZ Jun 60 calls.
This leaves the Floor Broker with a net debit of
$1.00.
8 In this example, the Floor Broker might pay
$4.00 to purchase 10 XYZ Mar 50 calls, and would
receive $5.00 for the sale of 10 XYZ Jun 60calls.
This leaves the Floor Broker with a net credit of
$1.00.
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13133
the FBMS in accordance with Exchange
rules 9) and request a market. The
members of the trading crowd would
then make their own calculations and
respond with a net debit or credit
price.10 Next, the Floor Broker must
ascertain the current market price of
each component of the order to
determine whether or not the order can
be executed at the specified net debit or
credit price. Taking all of this into
account, he must then execute the trade
verbally in open outcry at the net debit
or credit price. Following the verbal
execution, he must consider whether
the markets for the legs of the order are
still the same as they were when he
traded the order in open outcry. Often,
those markets have changed in the small
amount of time, perhaps one second, it
took to announce and execute the trade
in open outcry. If so, when the Floor
Broker submits the trade for trade
reporting, the trade report is marked as
late or out of sequence to indicate that
the trade report is at a price outside of
the current market, even though the
trade occurred within the market at the
time.
This process can be time-consuming,
especially when the order consists of a
large number of components. It
sometimes results in missed
opportunities to trade at the market
prices that would support the specified
net debit or credit. Overall, the Floor
Broker has significant manual order
handling and post-trade responsibilities
today.
The new functionality proposed
herein is intended to expedite this
process by providing a calculation tool
in the FBMS. The tool is intended to
significantly reduce and potentially
eliminate out of sequence or late trade
reporting that often results due to the
current protracted open outcry trade
execution process. Specifically, once the
Floor Broker has submitted the required
electronic audit trail information into
FBMS, FBMS will enable the Floor
Broker to ‘‘query’’ the prices of each
component of such an order such that
the specified net debit or credit can be
achieved. The System will then
calculate the prices of each component
and display those suggested prices.
Initially, multi-leg orders with up to 15
9 See
Rules 1063(e) and (f).
trading crowd will continue to have a
reasonable time period to respond, but, over time,
that time period has become shorter, as trading
becomes more electronic, and the Exchange expects
that to be the case following these changes as well.
The Exchange will continue to provide guidance to
trading crowds regarding what is a reasonable time
period to respond, depending on a number of
factors, including market conditions and the type of
order.
10 The
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legs will be accepted.11 The new feature
will be in Rule 1063(e)(iii).12
In this way, the Floor Broker can
quickly: (i) Expose the order to the
trading crowd; (ii) ascertain whether the
order can be executed at the specified
net debit or credit, and (iii) if so, submit
the prospective prices of the
components of the order that will
achieve the specified net debit or credit
to FBMS for execution. The Exchange
believes that the new calculation
functionality will substantially increase
the speed with which Floor Brokers can
ascertain the marketability of multi-leg
orders at a specified net debit or credit
price, and should result in more
efficient executions in the trading
crowd.
Today, Floor Brokers can enter
Complex Orders 13 consisting of two
option legs into FBMS for execution
using the Complex Order functionality
of Phlx XL, pursuant to Rule
1080.08(b)(iii). The Exchange is
proposing to permit orders up to six legs
(one of which may be stock) to be
entered through FBMS.14 One-sided (not
crosses) Complex Orders are then
subject to the Exchange’ Complex Order
processing, including an auction,
placement on the Complex Order Book
and/or execution by the System. The
new complex calculator functionality
assists Floor Brokers with pricing multileg orders for representation in the
trading crowd as one-sided orders as
well as with pricing multi-leg orders for
submission for execution as a two-sided
order, as discussed further below.
Execution of Two-Sided Orders
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Phlx proposes to provide enhanced
order handling functionality to its Floor
Brokers as part of its various
enhancements to FBMS. Orders
represented in the trading crowd by a
Floor Broker must now, under this
proposal, be submitted to FBMS for
execution. Specifically, Floor Brokers
will submit orders represented in the
trading crowd as two-sided orders (or
11 Today, without a complex calculator feature,
FBMS accepts up to 20 legs. The Exchange believes
that 15 legs should be sufficient for Floor Brokers’
current business needs.
12 The Exchange is proposing to delete the
existing language of Rule 1063(e)(ii),which is
obsolete.
13 As distinguished from multi-leg orders under
Rule 1066, Complex Orders are the specific types
of orders accepted into Phlx XL’s Complex Order
process. See Phlx Rule 1080.08.
14 The Exchange is also proposing to permit Do
Not Auction (‘‘DNA’’) orders to be entered into
FBMS as one of the new enhancements to FBMS.
DNA orders are Complex Orders that are prevented
from triggering a Complex Order Live Auction or
joining one that is in progress. See Phlx Rule
1080.08(a)(viii) and (e).
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crosses).15 This is described in proposed
Rule 1063(e)(iv) and Advice C–2 (and
cross-referenced in Rule 1080.06) as
follows: FBMS is designed to execute
two-sided orders entered by Floor
Brokers for execution, including multileg orders, after representation in the
trading crowd.16 When a Floor Broker
submits a two-sided order for execution
by FBMS, the order will be executed
based on existing markets and Exchange
rules. If the order cannot be executed
due to, for example, change in the
market, the System will attempt to
execute the order a number of times for
a period of no more than one second,
which period shall be established by the
Exchange and announced by Options
Trader Alert, after which it will be
returned to the Floor Broker on the
FBMS. The Floor Broker may resubmit
the two-sided order for execution, as
long as the quotes/orders that comprise
the order have not been withdrawn.17
Floor Brokers are responsible for
handling all orders in accordance with
Exchange priority and trade-through
rules, including Rules 1014, 1033 and
1084.
The new FBMS functionality will
thereby perform automatically the
functions previously handled manually
by Floor Brokers, such as checking the
Phlx book.18 Accordingly, FBMS will
now assist Floor Brokers with this
function by ‘‘clearing the book.’’ For
example, if a Floor Broker enters a twosided order through the new FBMS and
there is an order on the book at a price
that prevents the Floor Broker’s order
from executing, FBMS will indicate to
the Floor Broker how many contracts
need to be satisfied before the Floor
Broker’s order can execute at the agreedupon price. If the Floor Broker agrees to
satisfy that order, consistent with the
order placed in his care, he can cause
FBMS to send a portion of one of his
orders to Phlx XL to trade against the
order on the book, thereby clearing it
and permitting the remainder of the
Floor Broker’s order to trade. This
functionality is optional in the sense
that the Floor Broker can decide not to
trade against the book, consistent with
15 The reason they are two-sided orders is either
that the order came in to the Floor Broker with both
sides and was handled pursuant to Rule 1064 or
that the Floor Broker represented the order to the
trading crowd, thereby finding the second side.
16 This proposal does not permit executions in a
Floor Broker booth or elsewhere, nor does it affect
how Qualified Contingent Cross orders are handled.
17 See discussion surrounding proposed Rule
1000(g) below.
18 Checking the Phlx book refers to making sure
that an order is not executed outside of Phlx’s
priority provisions which generally give priority to
the best price, and then customers at a given price.
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order instructions he has been given,19
and therefore not execute his two-sided
order at that particular price. Today, the
Floor Broker employs the same process,
albeit in two separate steps, to clear the
book, including considering whether
one side of his two-sided order can, in
effect, give up a certain number of
contracts in order for the rest of the
order to trade at that price.20 FBMS will
not similarly assist the Floor Broker
with checking and clearing away
markets if the NBBO is better at another
market, but FBMS will prevent the order
from executing through the NBBO,
consistent with Exchange rules, as
described below.
FBMS will not execute an order that
violates the priority of orders on the
book 21 or trades through the NBBO for
an option.22 Thus, sometimes, when a
Floor Broker submits an order for
execution, the order will not be
executed. One reason could be that the
price of the trade would result in a trade
through of the NBBO for that option,
which is prohibited by Rule 1084(a).
There is an exception from the trade
through prohibition for ‘‘Complex
Trades.’’ 23 If an order meets the
requirements of a Complex Trade,
FBMS will execute such order.
Another reason why an order might
not be executable by FBMS is if the
Exchange’s priority rules would not
permit an execution at a certain price,
because, for example, there is an order
on the book at that price and certain
priority rules apply.24 FBMS, before
executing an order, will validate that a
multi-leg order meets the definition of
Complex Order in Rule 1080.08 25 and
will apply a new spread priority
provision, which is the same in Rule
1080.08(c)(iii) applicable to the
Exchange’s complex order functionality
in Phlx XL. The new provision will be
in Rule 1033(i) 26 and state that, in
FBMS, an order can be executed at a
19 For example, the Floor Broker may have been
instructed to trade a certain minimum amount.
20 Of course, the Floor Broker must exercise due
diligence in the execution of the order pursuant to
Rule 155. Presumably, Floor Brokers’ clients send
them orders (rather than entering them
electronically into Phlx XL), because they desire the
order handling that a Floor Broker provides; if the
client wanted a portion of their order to trade
against the book, they could submit their order to
do so. Nothing requires the book to be cleared if the
client or Floor Broker determines not to pursue the
execution of their order at that time.
21 See Rules 1014 and 1033.
22 See Rule 1084(a).
23 Rule 1084(b)(viii).
24 Like executions of all electronic orders on Phlx
XL, all-or-none orders do not have standing and are
not taken into consideration. See Advice A–9.
25 Complex Orders must have a conforming ratio.
26 The current language of Rule 1033(i) is being
deleted, as explained below.
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total net credit or debit 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 (i) at least one option leg
is executed at a better price than
established bid or offer for that option
contract, and (ii) no option leg is
executed at a price outside of the
established bid or offer for that option
contract. For example, a multi-leg order
to purchase option A and sell option B
for a net debit of $0.50 would not be
permitted to trade if option A was
quoted as $1.00–$1.05 and option B was
quoted as $0.50–$0.55 because there are
no prices which satisfy the net debit.
However, if option A was quoted as
$0.95 bid instead of $1.00 as stipulated
above, FBMS would allow a $0.50 debit
in this strategy to trade with option
prices of $1.00 and $0.50.
If a multi-leg order does not comply
with the definition of Complex Order
because it has more than six legs, its
execution in FBMS will nevertheless be
subject to new Rule 1033(i) if it is an
order with a conforming ratio. Today,
for executions on the trading floor, Rule
1033(d), (e), (g) and (h) effectively
require one leg of a spread to be
improved for every two legs of a multileg order. Under this proposal, a
different priority provision will apply to
multi-leg orders executed through
FBMS with more than six legs than does
today on the trading floor. Rather than
requiring one leg out of every two legs
in a multi-leg order to be improved,
only one total leg needs to be improved.
This is the same as for Complex Orders
traded on Phlx XL pursuant to Rule
1080.08(c)(iii). For example, assuming
all of these options do not trade in
penny increments, and assume that the
market for option A is $1.00–$1.05,
option B is $0.50–$0.55, option C is
$0.60–$0.80 and option D is $0.20–
$0.25. Based on these markets, the
combined market for an order to buy
option A, sell option B, buy option C,
and sell option D is $0.80–$1.15. An
order to buy option A, sell option B, buy
option C, and sell option D could trade
at $1.10 with option A trading at $1.05,
option B trading at $0.50, option C
trading at $0.75 (this is the leg
improving the market), and option D
trading at $0.20. The Exchange believes
that extending the spread priority
provision that exists for Complex Orders
to orders with more than six legs
executed through FBMS is consistent
with the Act, as described further
below. The Exchange notes that other
options exchanges, such as the ISE, have
similar complex order priority
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provisions for Complex Orders that do
not limit the number of legs and require
only one leg to be improved.
In addition, an order may be subject
to special priority treatment pursuant to
Rule 1014.05. If an order is for 500
contracts or more or if one leg of a
multi-leg order is for 500 contracts or
more, then such order or individual leg
of a multi-leg order has priority over
bids/offers other than customers on the
book and crowd participants (including
other Floor Brokers representing orders
in the trading crowd). FBMS will
prevent an execution if there is a
customer order at that price; the Floor
Broker must ensure that there is no bid/
offer in the trading crowd. In the
aforementioned example where the
order is to buy option A and sell option
B for a net debit of $0.50 and the market
for option A is $1.00–$1.05 and option
B is $0.50–$0.55, if each leg of the
spread is for 500 contracts or more, then
pursuant to Rule 1014.05, each leg has
priority over existing bids/offers at that
price, except customer interest and
crowd participants. Thus, if each leg
was for 500 contracts, option A and
option B would be permitted to trade at
a net debit of $0.50 with execution
prices of $1.00 and $0.50, respectively.
The execution would not be allowed to
occur if there was customer interest at
either $1.00 in option A or $.50 in
option B.
Similarly, whether or not an order
complies with the definition of a
Complex Order, FBMS will execute
orders at split prices like can be done on
the trading floor today, consistent with
Rule 1014(g)(i)(B). Rule 1014(g)(i)(B)
provides that if a member purchases
(sells) 50 or more option contracts of a
particular series at a particular price or
prices, he shall, at the next lower
(higher) price have priority in
purchasing (selling) up to the equivalent
number of option contracts of the same
series that he purchased (sold) at the
higher (lower) price or prices, but only
if his bid (offer) is made promptly and
the purchase (sale) so effected
represents the opposite side of a
transaction with the same order or offer
(bid) as the earlier purchase or
purchases (sale or sales). When the
market has a bid/ask differential of one
minimum trading increment and the bid
and/or offer represent the quotation of
an out-of-crowd SQT or an RSQT, such
member shall have priority over such
SQT and/or RSQT with respect to both
the bid and the offer. For example, a
Floor Broker may purchase 100 options
for $5.25 when the quoted market is
$5.20–$5.30 by executing 50 contracts at
$5.30 and 50 contracts at $5.20.
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13135
Exchange rules also govern the
execution prices for multi-leg orders
where one leg is the underlying security
(stock). Rule 1033(e) provides that a
synthetic option order may be executed
at a total net credit or debit, 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. If there is
more than one option leg and stock,
Rule 1033(d) applies. 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. FBMS will validate that an order
complies with these requirements.27
As discussed above, today, when a
Floor Broker executes an order in the
trading crowd verbally, that order is
deemed executed; when the Floor
Broker is entering the execution price
into FBMS to complete the processing of
the trade, including trade reporting to
the tape, markets can change. Because
the trade has already occurred, the fact
that the Exchange’s best bid/offer
changes before the trade is reported
does not matter, as long as the trade was
at a valid price when the trade occurred.
However, the trade may appear to have
violated priority or trade through rules
to someone looking at a time-sequenced
audit trail. The Exchange’s surveillance
programs endeavor to ascertain whether
such a violation occurred. From the
Floor Broker’s perspective, the time
stamp on the order ticket is intended to
capture the time of order execution and
is the relevant time to determine
whether a violation occurred, rather
than the time of trade reporting.
Determining whether or not a violation
occurred and whether a disciplinary
process should ensue is currently a
manually-driven event; this proposal
seeks to introduce better time
sequencing and certainty about when a
trade occurred, and, to the extent
possible, cause executions through
FBMS to comply with the applicable
exchange rules.
In short, the proposed execution
functionality of FBMS should help
ensure the certainty about when a trade
27 The stock portion of such orders is handled by
the Floor Broker, not on the Exchange (off
Exchange). The Floor Broker must validate, after
representing the order in the trading crowd,
whether there are crowd participants bidding/
offering.
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occurred and what the market was at the
time, consistent with Exchange rules.
No Floor-Based Executions
One of the most significant changes
proposed herein is that most orders
handled by Floor Brokers (limited
exceptions apply) will now be executed
through FBMS and not verbally by Floor
Brokers in the trading crowd.
Accordingly, the Exchange is proposing
to amend a variety of rules applicable to
Floor Brokers to make clear that Floor
Brokers handle orders, rather than
execute them. These include Rule 155,
Rule 1033(d), (e), (f), (h) and (i), Rule
1060, Rule 1063(c) and .02, and Advices
C–1 and C–3.
In addition, the Exchange proposes to
adopt Rule 1000(f) to expressly state
that all Exchange options transactions
shall be executed in one of the following
ways, once the Exchange’s new FBMS
functionality has been operating for a
certain period to be established by the
Exchange: (I) Automatically by the
Exchange Trading System, Phlx XL,
pursuant to Rule 1080 and other
applicable options rules; (ii) by and
among members in the Exchange’s
options trading crowd neither of whom
is a Floor Broker; or (iii) through the
FBMS for trades involving at least one
Floor Broker. The rule will further state
that although Floor Brokers represent
orders in the trading crowd, Floor
Brokers are not permitted to execute
orders in the Exchange’s options trading
crowd, except when the Exchange
determines to permit manual executions
in the event of a problem with Exchange
systems, except with respect to
accommodation transactions pursuant
to Rule 1059 and FLEX trades pursuant
to Rules 1079 or 1079A, and except
where there are more than 15 legs of an
order. Accordingly, certain executions
will still occur manually in the trading
crowd and not through FBMS.
Specifically, FLEX orders will continue
to be executable by Floor Brokers in the
trading crowd pursuant to Rule 1079
and 1079A, rather than through FBMS.
This is because FBMS will not be able
to accept FLEX orders, which have
varied and complicated terms.
Similarly, accommodation transactions
(also known as cabinet trades) will
continue to be executable by Floor
Brokers in the trading crowd pursuant
to Rule 1059. Neither FLEX nor
accommodation transactions are
executed through Exchange systems
today. Floor Brokers will also be
permitted to execute orders in the
trading crowd if they are handling an
order with more than 15 legs, because
the Exchange determined to limit the
complexity of FBMS functionality and
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does not believe that many orders fall
into this category or that Floor Brokers
will be adversely affected.
Trades not involving a Floor Broker
will still be executable verbally in the
trading crowd.28 For example, a
specialist trading with a Registered
Options Trader (’’ ROT’’) will continue
to be able to do so; specialists and ROTs
do not have FBMS, because it is a tool
for Floor Brokers. The Exchange does
not expect that the number of trades
occurring manually will be significant.
The Exchange proposes to amend the
following rules to make clear that
certain orders must be executed through
the FBMS: Rule 1064(a), (b), (c) and
1064.04(h).29
Specifically, such orders are not
deemed executed upon agreement and
verbalization in the trading crowd, but
rather once entered and processed as
two-sided orders through FBMS. The
language will provide: All such orders
are not deemed executed until entered
into and executed by FBMS; bids and
offers can be withdrawn pursuant to
Rule 1000(g). As explained above, it will
be possible that FBMS will not execute
an order because market conditions
have changed, preventing the execution
from occurring, in which case FBMS
‘‘returns’’ the order to the Floor
Broker,30 who can then determine to
resubmit it. The Exchange also proposes
to amend Rule 1014(g)(vi) and Advice
F–2, which pertain to how trades are
allocated, matched and time stamped. In
order to facilitate timely tape reporting
of trades, it is the duty of certain
persons identified in these provisions to
allocate, match and time stamp trades
executed in open outcry and to submit
the matched trade tickets to an
Exchange Data Entry Technician
(‘‘DET’’) located on the trading floor
immediately upon execution. Trades
executed electronically via the XL
System are automatically trade reported
without further action required by
executing parties; these provisions will
now also state that trades executed
electronically through FBMS are also
automatically trade reported.
The Exchange also proposes to amend
Rule 1066, Certain Types of Orders
Defined, and rename it ‘‘Certain Types
28 The restriction from manual trading in Rule
1000(f) is limited to trades involving at least one
Floor Broker. See proposed Rule 1000(f)(ii).
29 Rather than making changes to Advice B–11,
which generally tracks the language of Rule 1064,
the Exchange proposes to delete it. Some Advices
have fine schedules adopted pursuant to the
Exchange’s minor rule enforcement and reporting
plan, such that they are necessary, but this one does
not.
30 The System will first attempt to execute the
order a number of times for a certain number of
seconds.
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of Floor-Based (Non-Phlx XL) Orders
Defined’’ to make clear that the order
types in the rule reflect what can be
traded on the floor. The order types that
are handled and executed automatically
by Phlx XL appear in Rule 1080. The
Exchange is also proposing introductory
language specifically stating that these
order types are eligible for entry by a
Floor Broker for execution through
FBMS and, respecting transactions
where there is no Floor Broker involved,
for execution by members in the trading
crowd. Rule 1066 is also proposed to be
amended to delete the following order
types, because FBMS will not accept
these order types: 31 Multi-part order,
delta order, market-on-close order, and
one-cancels-the-other order.32 These
order types are being deleted because
they are not easily automated and are
rarely used. Once the proposal is in full
effect, these deleted order types will not
be available on the Exchange, neither
through the PHLX XL nor on the trading
floor (including by non-Floor Brokers
such as ROTs and specialists). The
Exchange does not believe that this is a
significant change, because these are not
common order types.
The Exchange proposes to rename
‘‘Hedge Order’’ in Rule 1066(f) to
‘‘Multi-leg Order,’’ and make
corresponding changes in Rule 1033,
1063(e) and Advices C–2 and F–14. A
synthetic options order will also be recategorized as a type of multi-leg order
in Rule 1066(f)(5), rather than a separate
order type in Rule 1066(g). The
definition and description of an
Intermarket Sweep Order will be moved
from Rule 1066(i) to Rule 1080.03
because it is (and will continue to be)
only available on Phlx XL. The
definition is not changing. Rule 1066(f)
will also be amended to add three new
definitions—Spread Type Order, and
Complex Order, to help distinguish
between the multi-leg orders that also
meet the definition of Complex Order in
Rule 1080.08 from those that do not,33
and DNA Order which will now be
accepted through FBMS for all orders,
not just Complex Orders. In sum, Rule
1066, as revised, will contain all of the
order types available for open outcry
trading on the trading floor and through
FBMS; Rule 1080 will continue to
31 The Exchange is also proposing to delete Rule
1033(i), Inter-Currency Spread Priority, because
FBMS will not handle order multi-leg orders
involving two different underlying currencies; these
trades rarely occur.
32 This order type is also being deleted from Rule
1063(b).
33 A spread type order, which can only be entered
through FBMS, can have up to 15 legs, while a
Complex Order entered for handling through PHLX
XL can have up to six legs, each including the
underlying security.
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govern the order types available through
PHLX XL.
Lastly, the Exchange proposes to
adopt new Rule 1000(g) to codify how
bids and offers are made and
maintained on the trading floor, because
the Exchange believes that eliminating
most Floor Broker verbal executions
will place additional emphasis on how
long a bid/offer is in effect. Today, Rule
110 34 provides, in pertinent part, that
bids and offers must be made in an
audible tone of voice. A member shall
be considered ‘‘in’’ on a bid or offer,
while he remains at the post, unless he
shall distinctly and audibly say ‘‘out.’’
A member bidding and offering in
immediate and rapid succession shall be
deemed ‘‘in’’ until he shall say ‘‘out’’ on
either bid or offer. The Exchange
proposes to add this language to new
Rule 1000(g), Manner of Bidding and
Offering, as well as additional language
to address how a member can be ‘‘out’’
of a bid/offer when dealing with a Floor
Broker using FBMS. Specifically, a
member must say ‘‘out’’ before the Floor
Broker submits the order into the FBMS
for execution (and before each time the
Floor Broker resubmits the order).
Otherwise, once such order is submitted
and electronically executed, the quoting
member cannot withdraw his/her bid/
offer. To more fully address this aspect
of floor trading, the Exchange proposes
to state that once the trading crowd has
provided a quote, it will remain in effect
until: (A) a reasonable amount of time
has passed, or (B) there is a significant
change in the price of the underlying
security, or (C) the market given in
response to the request has been
improved. In the case of a dispute, the
term ‘‘significant change’’ will be
interpreted on a case-by-case basis by an
Options Exchange Official 35 based upon
the extent of the recent trading in the
option and, in the case of equity and
index options, in the underlying
security, and any other relevant factors.
This language is currently used in Rule
1064.02(v) to emphasize when bids/
offers are in effect, which will be
helpful to emphasize with these new
FBMS enhancements. The concepts are
not new; they are merely being codified
into the options portion of the rules.
The changes proposed herein will be
incorporated into any applicable fine
schedules under the Exchange’s minor
rule violation plan. Although the
Exchange is not adding any new fine
schedules or changing any fines, the
Exchange is proposing to add the new
34 Rule 110 is also proposed to be renamed from
‘‘Bids and Offers—Precedence’’ to Bids and Offers—
Manner,’’ to better cover its content.
35 See Rule 124.
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electronic trading requirement to
Advice C–2, Options Floor Broker
Management System, which will
continue to be subject to the existing
fine schedule. The changes to Advices
C–1, C–3 and F–14, which also have a
fine schedule, are minor. Advice C–1 is
being amended to require that a Floor
Broker ascertain the presence of at least
one ROT in the trading crowd where an
option is traded (rather than executed).
Advice C–3(c), regarding opening orders
of ROTs, is being amended to reflect
that Floor Brokers will handle rather
than execute orders. Advice F–14 is
being amended to replace the term
‘‘hedge order’’ with ‘‘multi-leg order.’’
The change to Advice F–2, Allocation,
Time Stamping, Matching and Access to
Matched Trades, results in fewer trades
being subject to it, because electronic
trades, which there will be more of, are
automatically matched and reported.
Implementation
The Exchange proposes to implement
the enhancements with a trial period of
two to four weeks, to be determined by
the Exchange, during which the new
FBMS enhancements and related rules
will operate along with the existing
FBMS and rules. The Exchange seeks to
begin implementation in February 2013
and complete it in March 2013. Thus,
Floor Brokers and their personnel will
be able to get accustomed to the new
features over a period of time, before the
old FBMS is no longer available. During
this period, Floor Brokers will still be
able to execute orders verbally in the
trading crowd and submit the execution
reports through FBMS, like they do
today. Floor Brokers will also be able to
use the new FBMS to execute trades.
The Exchange is adopting new rule
language into Rule 1000(f) to address
this trial period. The Exchange believes
that this trial period is reasonable and
should assist Floor Brokers and their
staff in learning the new features.
Conclusion
The Exchange believes that the
proposed enhancements to FBMS (and
resulting changes in priority rules) will
strengthen its regulatory program and
modernize how trading occurs on the
options trading floor. The Exchange
does not believe that the proposal will
adversely impact Floor Brokers,
specialists or ROTs significantly.
Specifically, the additional automation
should reduce the possibility of Floor
Broker violations and mistakes, which
should, in turn, reduce their regulatory
liability. Of course, there is likely to be
a period of adjustment while Floor
Brokers become accustomed to
executions occurring through the
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13137
System rather than verbally, but the
Exchange believes that the
implementation period should be
helpful. The Exchange believes that the
benefit of reduced, and in some
instances the elimination of certain
violations outweighs the potential
inconvenience of a new system where
the system, rather than the Floor Broker
executed the order.
With respect to the potential adverse
impact on specialists and ROTs, the
Exchange acknowledges that it may be
challenging for them to adapt to the new
FBMS process, because they may be
asked to make markets more quickly. As
stated above, the trading crowd will
continue to have a reasonable time
period to respond, and the Exchange
will continue to provide guidance to
trading crowds regarding what is a
reasonable time period to respond,
depending on a number of factors,
including market conditions and the
type of order. Nevertheless, with respect
to orders with multiple legs, the
challenge for specialists and ROTs will
be to respond to a Floor Broker with a
market when the Floor Broker has had
the opportunity to look at each leg and
price the whole order, whereas
specialists and ROTs first hear of the
details when the Floor Broker
announces the order in the trading
crowd. To address this, the Exchange
intends to, in providing guidance on
what is a reasonable time period to
respond before the Floor Broker can
submit an order for execution, consider
the complexity of multi-leg orders.
The Exchange does not believe that
this proposal will adversely affect
market quality on the Exchange. To the
contrary, the Exchange believes that it
should enhance market quality by
providing quicker and more reliable
confirmation of trade executions,
because automating executions of Floor
Brokered orders results in automated
trade reporting and more certainty about
which orders have been executed.
Crowd participants will benefit from
increased trade certainty and fewer
regulatory inquiries related to trades
that are reported late and or out of
sequence. Floor Brokered orders today
are require to be reported within 90
seconds, which has proven to be
challenging for multi-leg orders. The
Exchange believes that quicker reporting
and the resulting certainty about trade
executions should benefit all market
participants, including Floor Brokers,
specialists and ROTs.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
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of the Act 36 in general, and furthers the
objectives of Section 6(b)(5) of the Act 37
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest.
Specifically, the new calculation
function of FBMS is a tool for Floor
Brokers that should enhance their
ability to calculate the prices of the
components of a multi-leg order, which
should increase the speed with which
they can represent such orders, thereby
making the Exchange’s markets more
efficient, all to the benefit of the
investing public. In addition, the
Exchange believes that the requirement
to execute most Floor Broker
transactions through FBMS is a sound
one, consistent with the aforementioned
provisions, intended to reduce certain
types of rule violations and further
automate Exchange trading, without
imposing an undue burden on Floor
Brokers. For the same reasons, the new
FBMS execution functionality is also
consistent with these statutory
standards and should improve how
trading occurs on the Exchange.
The Exchange also believes that the
proposal to adopt a new FBMS priority
provision in Rule 1033(i) akin to
Complex Order priority is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest by
improving Floor Brokers’ ability to
execute multi-leg orders, to the benefit
of customers and other market
participants. Multi-leg orders are
different than regular orders and more
complicated to execute. The priority
rules applicable to ‘‘spread’’ orders on
the various exchanges balance the
difficulty of executing related orders
within existing individual markets with
the importance maintaining a priority
model that makes clear in what orders
executions occur. The Exchange does
not believe that this is a significant or
controversial change, because other
exchanges automatically execute orders
with many legs and only require one leg
to be improved.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
36 15
U.S.C. 78f(b).
37 15 U.S.C. 78f(b)(5).
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necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that these
enhancements to FBMS should result in
the Exchange’s trading floor operating in
a more efficient way, which should help
it compete with other floor-based
exchanges and help the Exchange’s
Floor Brokers compete with floor
brokers on other options exchanges. The
proposal does not impose a burden on
intra-market competition not necessary
or appropriate in furtherance of the
purposes of the Act, because it
modernizes floor trading without undue
impact on any particular segment of the
membership, as explained above.
Overall, the proposal is pro-competitive
for several reasons; in addition, to
helping Phlx Floor Brokers compete for
executions against floor brokers at other
exchanges, it also helps them be more
efficient and compete more effectively
against fully electronic executions. This,
in turn, helps the Exchange compete
against other exchanges in a deeply
competitive landscape comprised of ten
other options exchanges. In addition,
the proposal helps the Exchange
compete by ensuring the robustness of
its regulatory program, Floor Brokers’
compliance with applicable rules, and
enhancing customer protection through
further utilization of electronic tools my
members, which can be a differentiator
in attracting participants and order flow
and which should benefit customers in
the long term.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) by order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
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Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–Phlx–2013–09 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–Phlx–2013–09. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2013–09, and should be submitted on or
before March 19, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–04359 Filed 2–25–13; 8:45 am]
BILLING CODE 8011–01–P
38 17
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[Federal Register Volume 78, Number 38 (Tuesday, February 26, 2013)]
[Notices]
[Pages 13132-13138]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04359]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68960; File No. SR-Phlx-2013-09]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Enhance the Functionality Offered on
Its Options Floor Broker Management System (``FBMS'') by, Among Other
Things, Automating Functions Currently Performed by Floor Brokers
February 20, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4\2\ thereunder, notice is hereby given
that on February 6, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposed rule change
to enhance the functionality offered on its Options Floor Broker
Management System (``FBMS'') in a number of ways, described in detail
below. As a result of these enhancements, Floor Brokers will no longer
execute most trades on the Exchange's options trading floor, resulting
in changes to a number of rules.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposal is to enhance the Exchange's options
regulatory program by expanding the tools available to Floor Brokers in
order to reduce the potential for violations of various Exchange rules
by Floor Brokers. Specifically, under the proposal, most Floor Broker
transactions will be executed through FBMS rather than verbally by
Floor Brokers in the trading crowd, which should result in fewer
priority rule and trade-through rule violations, because FBMS will
check the Exchange's market and/or the National Best Bid/Offer
(``NBBO'') to help prevent violations, as described further below.
Today, Floor Brokers use FBMS for a number of reasons.
Historically, Floor Brokers were not connected to the order entry
portals like order flow providers are, because their business was
focused on receiving orders at the Floor Broker booths on the trading
floor and executing such orders in person, manually. As options trading
has
[[Page 13133]]
become more electronic, this has continued to change over time, such
that the Exchange began to provide technology to Floor Brokers, as did
other options exchanges.\3\ The main driving force behind the creation
of FBMS was the Consolidated Options Audit Trail System (``COATS''),
mandated in 2000.\4\ The COATS requirements created the need for tools
to assist Floor Brokers \5\ in complying with the requirement to
capture certain options order information, including the time of order
receipt and execution, contemporaneously with receipt and execution.
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\3\ See e.g., Securities Exchange Act Release Nos. 41524 (June
14, 1999) (SR-Phlx-99-11); 50070 (July 23, 2004) (SR-Phlx-2004-46);
50996 (January 7, 2005) (SR-CBOE-2004-77); and 64057 (March 8, 2011)
(SR-CBOE-2011-019) at note 4.
\4\ See subparagraph IV.B.e(v) of the Order Instituting Public
Administrative Proceedings Pursuant to Section 19(h)(1) of the
Securities Exchange Act of 1934, Making Findings and Imposing
Remedial Sanctions. See Securities Exchange Act Release No. 43268
(September 11, 2000) (Requiring options exchanges to design and
implement COATS to ``incorporate into the audit trail all non-
electronic orders such that the audit trail provides an accurate,
time-sequenced record of electronic and other orders, quotations and
transactions on such respondent exchange, beginning with the receipt
of an order by such respondent exchange and further documenting the
life of the order through the process of execution, partial
execution, or cancellation of that order* * *'' (``Phase V'')).
\5\ COATS is not just applicable to Floor Brokers but was
particularly challenging for them because of the number of orders
they executed manually.
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In addition, today, Floor Brokers can use FBMS to submit orders,
including Complex Orders, to Phlx XL, the Exchange's trading system
rather than executing the order in the trading crowd. Those orders are
processed just like any other electronic order on the Exchange, subject
to the rules governing Phlx XL, such as Rule 1080. Floor Brokers may do
so for a variety of reasons, including that the order is far away from
the market such that the Floor Broker would prefer to place it on the
electronic book or that there is a contra-side order on the book with
which the order can trade.
At this time, the Exchange proposes to expand upon FBMS
functionality with several enhancements.
Complex Calculator
The Exchange proposes to provide Floor Brokers with a feature
called a complex calculator. Floor Brokers entering multi-leg option
orders up to 15 legs on a net debit or net credit basis via FBMS would
receive suggested prices for each component of the multi-leg order that
would achieve the desired net debit or net credit price. Such prices
would then be displayed on FBMS. The Floor Broker would not be required
to submit the multi-leg order at the suggested prices; the new FBMS
functionality is intended to function as a tool to assist Floor Brokers
in calculating the component prices and expedite the process of
handling multi-leg orders in the trading crowd.\6\ Accordingly, the
Floor Broker can override the prices and attempt to achieve the net
price using different prices. The net debit/credit price can also be
expressed as an overall cash value. For example, a multi-leg order to
purchase 100 of option A and sell 100 of option B could be entered with
a net debit price of $5,000. If the option legs were trading $0.90-
$1.10 and $0.45--$0.55, respectively, the complex calculator could
generate suggested prices of $1.00 and $0.50 [(($1.00 - $0.50)*100
times)*100 options premium multiplier = $5,000], which would satisfy
the $5,000 net debit.
---------------------------------------------------------------------------
\6\ The complex calculator functionality will not execute
orders.
---------------------------------------------------------------------------
When a Floor Broker enters a trading crowd with a multi-leg order,
often he or she will simply request a market for that order and
announce a net debit or credit price, rather than separate prices for
each component. For example, a Floor Broker representing a two-legged
spread order to buy 10 XYZ Mar 50 calls and sell 10 XYZ Jun 60 calls
may announce the price as a net debit of, for example, $1.00. This
means that the purchase price for 10 XYZ Mar 50 calls is $1.00 greater
than the selling price of 10 XYZ Jun 60 calls.\7\ Conversely, a net
credit price of $1.00 would indicate that the purchase price of 10 XYZ
Mar 50 calls is $1.00 less than the selling price of 10 XYZ Jun 60
calls.\8\
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\7\ The Floor Broker might pay, for example, $5.00 to purchase
10 XYZ Mar 50 calls, and would receive $4.00 for the sale of 10 XYZ
Jun 60 calls. This leaves the Floor Broker with a net debit of
$1.00.
\8\ In this example, the Floor Broker might pay $4.00 to
purchase 10 XYZ Mar 50 calls, and would receive $5.00 for the sale
of 10 XYZ Jun 60calls. This leaves the Floor Broker with a net
credit of $1.00.
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Currently, when a Floor Broker receives a single order that has
multiple components with instructions to execute such order on a net
debit or credit basis, the Floor Broker must first consider prices on
various different markets, all as close to contemporaneously as
possible. He must calculate the bid and ask of the total net debit and
credit. If the Floor Broker is able to achieve the specified net debit
or credit based upon the then-current market conditions, the Floor
Broker will enter the trading crowd (after entering all of the required
electronic audit trail information onto the FBMS in accordance with
Exchange rules \9\) and request a market. The members of the trading
crowd would then make their own calculations and respond with a net
debit or credit price.\10\ Next, the Floor Broker must ascertain the
current market price of each component of the order to determine
whether or not the order can be executed at the specified net debit or
credit price. Taking all of this into account, he must then execute the
trade verbally in open outcry at the net debit or credit price.
Following the verbal execution, he must consider whether the markets
for the legs of the order are still the same as they were when he
traded the order in open outcry. Often, those markets have changed in
the small amount of time, perhaps one second, it took to announce and
execute the trade in open outcry. If so, when the Floor Broker submits
the trade for trade reporting, the trade report is marked as late or
out of sequence to indicate that the trade report is at a price outside
of the current market, even though the trade occurred within the market
at the time.
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\9\ See Rules 1063(e) and (f).
\10\ The trading crowd will continue to have a reasonable time
period to respond, but, over time, that time period has become
shorter, as trading becomes more electronic, and the Exchange
expects that to be the case following these changes as well. The
Exchange will continue to provide guidance to trading crowds
regarding what is a reasonable time period to respond, depending on
a number of factors, including market conditions and the type of
order.
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This process can be time-consuming, especially when the order
consists of a large number of components. It sometimes results in
missed opportunities to trade at the market prices that would support
the specified net debit or credit. Overall, the Floor Broker has
significant manual order handling and post-trade responsibilities
today.
The new functionality proposed herein is intended to expedite this
process by providing a calculation tool in the FBMS. The tool is
intended to significantly reduce and potentially eliminate out of
sequence or late trade reporting that often results due to the current
protracted open outcry trade execution process. Specifically, once the
Floor Broker has submitted the required electronic audit trail
information into FBMS, FBMS will enable the Floor Broker to ``query''
the prices of each component of such an order such that the specified
net debit or credit can be achieved. The System will then calculate the
prices of each component and display those suggested prices. Initially,
multi-leg orders with up to 15
[[Page 13134]]
legs will be accepted.\11\ The new feature will be in Rule
1063(e)(iii).\12\
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\11\ Today, without a complex calculator feature, FBMS accepts
up to 20 legs. The Exchange believes that 15 legs should be
sufficient for Floor Brokers' current business needs.
\12\ The Exchange is proposing to delete the existing language
of Rule 1063(e)(ii),which is obsolete.
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In this way, the Floor Broker can quickly: (i) Expose the order to
the trading crowd; (ii) ascertain whether the order can be executed at
the specified net debit or credit, and (iii) if so, submit the
prospective prices of the components of the order that will achieve the
specified net debit or credit to FBMS for execution. The Exchange
believes that the new calculation functionality will substantially
increase the speed with which Floor Brokers can ascertain the
marketability of multi-leg orders at a specified net debit or credit
price, and should result in more efficient executions in the trading
crowd.
Today, Floor Brokers can enter Complex Orders \13\ consisting of
two option legs into FBMS for execution using the Complex Order
functionality of Phlx XL, pursuant to Rule 1080.08(b)(iii). The
Exchange is proposing to permit orders up to six legs (one of which may
be stock) to be entered through FBMS.\14\ One-sided (not crosses)
Complex Orders are then subject to the Exchange' Complex Order
processing, including an auction, placement on the Complex Order Book
and/or execution by the System. The new complex calculator
functionality assists Floor Brokers with pricing multi-leg orders for
representation in the trading crowd as one-sided orders as well as with
pricing multi-leg orders for submission for execution as a two-sided
order, as discussed further below.
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\13\ As distinguished from multi-leg orders under Rule 1066,
Complex Orders are the specific types of orders accepted into Phlx
XL's Complex Order process. See Phlx Rule 1080.08.
\14\ The Exchange is also proposing to permit Do Not Auction
(``DNA'') orders to be entered into FBMS as one of the new
enhancements to FBMS. DNA orders are Complex Orders that are
prevented from triggering a Complex Order Live Auction or joining
one that is in progress. See Phlx Rule 1080.08(a)(viii) and (e).
---------------------------------------------------------------------------
Execution of Two-Sided Orders
Phlx proposes to provide enhanced order handling functionality to
its Floor Brokers as part of its various enhancements to FBMS. Orders
represented in the trading crowd by a Floor Broker must now, under this
proposal, be submitted to FBMS for execution. Specifically, Floor
Brokers will submit orders represented in the trading crowd as two-
sided orders (or crosses).\15\ This is described in proposed Rule
1063(e)(iv) and Advice C-2 (and cross-referenced in Rule 1080.06) as
follows: FBMS is designed to execute two-sided orders entered by Floor
Brokers for execution, including multi-leg orders, after representation
in the trading crowd.\16\ When a Floor Broker submits a two-sided order
for execution by FBMS, the order will be executed based on existing
markets and Exchange rules. If the order cannot be executed due to, for
example, change in the market, the System will attempt to execute the
order a number of times for a period of no more than one second, which
period shall be established by the Exchange and announced by Options
Trader Alert, after which it will be returned to the Floor Broker on
the FBMS. The Floor Broker may resubmit the two-sided order for
execution, as long as the quotes/orders that comprise the order have
not been withdrawn.\17\ Floor Brokers are responsible for handling all
orders in accordance with Exchange priority and trade-through rules,
including Rules 1014, 1033 and 1084.
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\15\ The reason they are two-sided orders is either that the
order came in to the Floor Broker with both sides and was handled
pursuant to Rule 1064 or that the Floor Broker represented the order
to the trading crowd, thereby finding the second side.
\16\ This proposal does not permit executions in a Floor Broker
booth or elsewhere, nor does it affect how Qualified Contingent
Cross orders are handled.
\17\ See discussion surrounding proposed Rule 1000(g) below.
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The new FBMS functionality will thereby perform automatically the
functions previously handled manually by Floor Brokers, such as
checking the Phlx book.\18\ Accordingly, FBMS will now assist Floor
Brokers with this function by ``clearing the book.'' For example, if a
Floor Broker enters a two-sided order through the new FBMS and there is
an order on the book at a price that prevents the Floor Broker's order
from executing, FBMS will indicate to the Floor Broker how many
contracts need to be satisfied before the Floor Broker's order can
execute at the agreed-upon price. If the Floor Broker agrees to satisfy
that order, consistent with the order placed in his care, he can cause
FBMS to send a portion of one of his orders to Phlx XL to trade against
the order on the book, thereby clearing it and permitting the remainder
of the Floor Broker's order to trade. This functionality is optional in
the sense that the Floor Broker can decide not to trade against the
book, consistent with order instructions he has been given,\19\ and
therefore not execute his two-sided order at that particular price.
Today, the Floor Broker employs the same process, albeit in two
separate steps, to clear the book, including considering whether one
side of his two-sided order can, in effect, give up a certain number of
contracts in order for the rest of the order to trade at that
price.\20\ FBMS will not similarly assist the Floor Broker with
checking and clearing away markets if the NBBO is better at another
market, but FBMS will prevent the order from executing through the
NBBO, consistent with Exchange rules, as described below.
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\18\ Checking the Phlx book refers to making sure that an order
is not executed outside of Phlx's priority provisions which
generally give priority to the best price, and then customers at a
given price.
\19\ For example, the Floor Broker may have been instructed to
trade a certain minimum amount.
\20\ Of course, the Floor Broker must exercise due diligence in
the execution of the order pursuant to Rule 155. Presumably, Floor
Brokers' clients send them orders (rather than entering them
electronically into Phlx XL), because they desire the order handling
that a Floor Broker provides; if the client wanted a portion of
their order to trade against the book, they could submit their order
to do so. Nothing requires the book to be cleared if the client or
Floor Broker determines not to pursue the execution of their order
at that time.
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FBMS will not execute an order that violates the priority of orders
on the book \21\ or trades through the NBBO for an option.\22\ Thus,
sometimes, when a Floor Broker submits an order for execution, the
order will not be executed. One reason could be that the price of the
trade would result in a trade through of the NBBO for that option,
which is prohibited by Rule 1084(a). There is an exception from the
trade through prohibition for ``Complex Trades.'' \23\ If an order
meets the requirements of a Complex Trade, FBMS will execute such
order.
---------------------------------------------------------------------------
\21\ See Rules 1014 and 1033.
\22\ See Rule 1084(a).
\23\ Rule 1084(b)(viii).
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Another reason why an order might not be executable by FBMS is if
the Exchange's priority rules would not permit an execution at a
certain price, because, for example, there is an order on the book at
that price and certain priority rules apply.\24\ FBMS, before executing
an order, will validate that a multi-leg order meets the definition of
Complex Order in Rule 1080.08 \25\ and will apply a new spread priority
provision, which is the same in Rule 1080.08(c)(iii) applicable to the
Exchange's complex order functionality in Phlx XL. The new provision
will be in Rule 1033(i) \26\ and state that, in FBMS, an order can be
executed at a
[[Page 13135]]
total net credit or debit 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 (i) at
least one option leg is executed at a better price than established bid
or offer for that option contract, and (ii) no option leg is executed
at a price outside of the established bid or offer for that option
contract. For example, a multi-leg order to purchase option A and sell
option B for a net debit of $0.50 would not be permitted to trade if
option A was quoted as $1.00-$1.05 and option B was quoted as $0.50-
$0.55 because there are no prices which satisfy the net debit. However,
if option A was quoted as $0.95 bid instead of $1.00 as stipulated
above, FBMS would allow a $0.50 debit in this strategy to trade with
option prices of $1.00 and $0.50.
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\24\ Like executions of all electronic orders on Phlx XL, all-
or-none orders do not have standing and are not taken into
consideration. See Advice A-9.
\25\ Complex Orders must have a conforming ratio.
\26\ The current language of Rule 1033(i) is being deleted, as
explained below.
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If a multi-leg order does not comply with the definition of Complex
Order because it has more than six legs, its execution in FBMS will
nevertheless be subject to new Rule 1033(i) if it is an order with a
conforming ratio. Today, for executions on the trading floor, Rule
1033(d), (e), (g) and (h) effectively require one leg of a spread to be
improved for every two legs of a multi-leg order. Under this proposal,
a different priority provision will apply to multi-leg orders executed
through FBMS with more than six legs than does today on the trading
floor. Rather than requiring one leg out of every two legs in a multi-
leg order to be improved, only one total leg needs to be improved. This
is the same as for Complex Orders traded on Phlx XL pursuant to Rule
1080.08(c)(iii). For example, assuming all of these options do not
trade in penny increments, and assume that the market for option A is
$1.00-$1.05, option B is $0.50-$0.55, option C is $0.60-$0.80 and
option D is $0.20-$0.25. Based on these markets, the combined market
for an order to buy option A, sell option B, buy option C, and sell
option D is $0.80-$1.15. An order to buy option A, sell option B, buy
option C, and sell option D could trade at $1.10 with option A trading
at $1.05, option B trading at $0.50, option C trading at $0.75 (this is
the leg improving the market), and option D trading at $0.20. The
Exchange believes that extending the spread priority provision that
exists for Complex Orders to orders with more than six legs executed
through FBMS is consistent with the Act, as described further below.
The Exchange notes that other options exchanges, such as the ISE, have
similar complex order priority provisions for Complex Orders that do
not limit the number of legs and require only one leg to be improved.
In addition, an order may be subject to special priority treatment
pursuant to Rule 1014.05. If an order is for 500 contracts or more or
if one leg of a multi-leg order is for 500 contracts or more, then such
order or individual leg of a multi-leg order has priority over bids/
offers other than customers on the book and crowd participants
(including other Floor Brokers representing orders in the trading
crowd). FBMS will prevent an execution if there is a customer order at
that price; the Floor Broker must ensure that there is no bid/offer in
the trading crowd. In the aforementioned example where the order is to
buy option A and sell option B for a net debit of $0.50 and the market
for option A is $1.00-$1.05 and option B is $0.50-$0.55, if each leg of
the spread is for 500 contracts or more, then pursuant to Rule 1014.05,
each leg has priority over existing bids/offers at that price, except
customer interest and crowd participants. Thus, if each leg was for 500
contracts, option A and option B would be permitted to trade at a net
debit of $0.50 with execution prices of $1.00 and $0.50, respectively.
The execution would not be allowed to occur if there was customer
interest at either $1.00 in option A or $.50 in option B.
Similarly, whether or not an order complies with the definition of
a Complex Order, FBMS will execute orders at split prices like can be
done on the trading floor today, consistent with Rule 1014(g)(i)(B).
Rule 1014(g)(i)(B) provides that if a member purchases (sells) 50 or
more option contracts of a particular series at a particular price or
prices, he shall, at the next lower (higher) price have priority in
purchasing (selling) up to the equivalent number of option contracts of
the same series that he purchased (sold) at the higher (lower) price or
prices, but only if his bid (offer) is made promptly and the purchase
(sale) so effected represents the opposite side of a transaction with
the same order or offer (bid) as the earlier purchase or purchases
(sale or sales). When the market has a bid/ask differential of one
minimum trading increment and the bid and/or offer represent the
quotation of an out-of-crowd SQT or an RSQT, such member shall have
priority over such SQT and/or RSQT with respect to both the bid and the
offer. For example, a Floor Broker may purchase 100 options for $5.25
when the quoted market is $5.20-$5.30 by executing 50 contracts at
$5.30 and 50 contracts at $5.20.
Exchange rules also govern the execution prices for multi-leg
orders where one leg is the underlying security (stock). Rule 1033(e)
provides that a synthetic option order may be executed at a total net
credit or debit, 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. If there is more than one
option leg and stock, Rule 1033(d) applies. 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. FBMS will validate that an order complies with
these requirements.\27\
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\27\ The stock portion of such orders is handled by the Floor
Broker, not on the Exchange (off Exchange). The Floor Broker must
validate, after representing the order in the trading crowd, whether
there are crowd participants bidding/offering.
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As discussed above, today, when a Floor Broker executes an order in
the trading crowd verbally, that order is deemed executed; when the
Floor Broker is entering the execution price into FBMS to complete the
processing of the trade, including trade reporting to the tape, markets
can change. Because the trade has already occurred, the fact that the
Exchange's best bid/offer changes before the trade is reported does not
matter, as long as the trade was at a valid price when the trade
occurred. However, the trade may appear to have violated priority or
trade through rules to someone looking at a time-sequenced audit trail.
The Exchange's surveillance programs endeavor to ascertain whether such
a violation occurred. From the Floor Broker's perspective, the time
stamp on the order ticket is intended to capture the time of order
execution and is the relevant time to determine whether a violation
occurred, rather than the time of trade reporting. Determining whether
or not a violation occurred and whether a disciplinary process should
ensue is currently a manually-driven event; this proposal seeks to
introduce better time sequencing and certainty about when a trade
occurred, and, to the extent possible, cause executions through FBMS to
comply with the applicable exchange rules.
In short, the proposed execution functionality of FBMS should help
ensure the certainty about when a trade
[[Page 13136]]
occurred and what the market was at the time, consistent with Exchange
rules.
No Floor-Based Executions
One of the most significant changes proposed herein is that most
orders handled by Floor Brokers (limited exceptions apply) will now be
executed through FBMS and not verbally by Floor Brokers in the trading
crowd. Accordingly, the Exchange is proposing to amend a variety of
rules applicable to Floor Brokers to make clear that Floor Brokers
handle orders, rather than execute them. These include Rule 155, Rule
1033(d), (e), (f), (h) and (i), Rule 1060, Rule 1063(c) and .02, and
Advices C-1 and C-3.
In addition, the Exchange proposes to adopt Rule 1000(f) to
expressly state that all Exchange options transactions shall be
executed in one of the following ways, once the Exchange's new FBMS
functionality has been operating for a certain period to be established
by the Exchange: (I) Automatically by the Exchange Trading System, Phlx
XL, pursuant to Rule 1080 and other applicable options rules; (ii) by
and among members in the Exchange's options trading crowd neither of
whom is a Floor Broker; or (iii) through the FBMS for trades involving
at least one Floor Broker. The rule will further state that although
Floor Brokers represent orders in the trading crowd, Floor Brokers are
not permitted to execute orders in the Exchange's options trading
crowd, except when the Exchange determines to permit manual executions
in the event of a problem with Exchange systems, except with respect to
accommodation transactions pursuant to Rule 1059 and FLEX trades
pursuant to Rules 1079 or 1079A, and except where there are more than
15 legs of an order. Accordingly, certain executions will still occur
manually in the trading crowd and not through FBMS. Specifically, FLEX
orders will continue to be executable by Floor Brokers in the trading
crowd pursuant to Rule 1079 and 1079A, rather than through FBMS. This
is because FBMS will not be able to accept FLEX orders, which have
varied and complicated terms. Similarly, accommodation transactions
(also known as cabinet trades) will continue to be executable by Floor
Brokers in the trading crowd pursuant to Rule 1059. Neither FLEX nor
accommodation transactions are executed through Exchange systems today.
Floor Brokers will also be permitted to execute orders in the trading
crowd if they are handling an order with more than 15 legs, because the
Exchange determined to limit the complexity of FBMS functionality and
does not believe that many orders fall into this category or that Floor
Brokers will be adversely affected.
Trades not involving a Floor Broker will still be executable
verbally in the trading crowd.\28\ For example, a specialist trading
with a Registered Options Trader ('' ROT'') will continue to be able to
do so; specialists and ROTs do not have FBMS, because it is a tool for
Floor Brokers. The Exchange does not expect that the number of trades
occurring manually will be significant.
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\28\ The restriction from manual trading in Rule 1000(f) is
limited to trades involving at least one Floor Broker. See proposed
Rule 1000(f)(ii).
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The Exchange proposes to amend the following rules to make clear
that certain orders must be executed through the FBMS: Rule 1064(a),
(b), (c) and 1064.04(h).\29\
---------------------------------------------------------------------------
\29\ Rather than making changes to Advice B-11, which generally
tracks the language of Rule 1064, the Exchange proposes to delete
it. Some Advices have fine schedules adopted pursuant to the
Exchange's minor rule enforcement and reporting plan, such that they
are necessary, but this one does not.
---------------------------------------------------------------------------
Specifically, such orders are not deemed executed upon agreement
and verbalization in the trading crowd, but rather once entered and
processed as two-sided orders through FBMS. The language will provide:
All such orders are not deemed executed until entered into and executed
by FBMS; bids and offers can be withdrawn pursuant to Rule 1000(g). As
explained above, it will be possible that FBMS will not execute an
order because market conditions have changed, preventing the execution
from occurring, in which case FBMS ``returns'' the order to the Floor
Broker,\30\ who can then determine to resubmit it. The Exchange also
proposes to amend Rule 1014(g)(vi) and Advice F-2, which pertain to how
trades are allocated, matched and time stamped. In order to facilitate
timely tape reporting of trades, it is the duty of certain persons
identified in these provisions to allocate, match and time stamp trades
executed in open outcry and to submit the matched trade tickets to an
Exchange Data Entry Technician (``DET'') located on the trading floor
immediately upon execution. Trades executed electronically via the XL
System are automatically trade reported without further action required
by executing parties; these provisions will now also state that trades
executed electronically through FBMS are also automatically trade
reported.
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\30\ The System will first attempt to execute the order a number
of times for a certain number of seconds.
---------------------------------------------------------------------------
The Exchange also proposes to amend Rule 1066, Certain Types of
Orders Defined, and rename it ``Certain Types of Floor-Based (Non-Phlx
XL) Orders Defined'' to make clear that the order types in the rule
reflect what can be traded on the floor. The order types that are
handled and executed automatically by Phlx XL appear in Rule 1080. The
Exchange is also proposing introductory language specifically stating
that these order types are eligible for entry by a Floor Broker for
execution through FBMS and, respecting transactions where there is no
Floor Broker involved, for execution by members in the trading crowd.
Rule 1066 is also proposed to be amended to delete the following order
types, because FBMS will not accept these order types: \31\ Multi-part
order, delta order, market-on-close order, and one-cancels-the-other
order.\32\ These order types are being deleted because they are not
easily automated and are rarely used. Once the proposal is in full
effect, these deleted order types will not be available on the
Exchange, neither through the PHLX XL nor on the trading floor
(including by non-Floor Brokers such as ROTs and specialists). The
Exchange does not believe that this is a significant change, because
these are not common order types.
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\31\ The Exchange is also proposing to delete Rule 1033(i),
Inter-Currency Spread Priority, because FBMS will not handle order
multi-leg orders involving two different underlying currencies;
these trades rarely occur.
\32\ This order type is also being deleted from Rule 1063(b).
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The Exchange proposes to rename ``Hedge Order'' in Rule 1066(f) to
``Multi-leg Order,'' and make corresponding changes in Rule 1033,
1063(e) and Advices C-2 and F-14. A synthetic options order will also
be re-categorized as a type of multi-leg order in Rule 1066(f)(5),
rather than a separate order type in Rule 1066(g). The definition and
description of an Intermarket Sweep Order will be moved from Rule
1066(i) to Rule 1080.03 because it is (and will continue to be) only
available on Phlx XL. The definition is not changing. Rule 1066(f) will
also be amended to add three new definitions--Spread Type Order, and
Complex Order, to help distinguish between the multi-leg orders that
also meet the definition of Complex Order in Rule 1080.08 from those
that do not,\33\ and DNA Order which will now be accepted through FBMS
for all orders, not just Complex Orders. In sum, Rule 1066, as revised,
will contain all of the order types available for open outcry trading
on the trading floor and through FBMS; Rule 1080 will continue to
[[Page 13137]]
govern the order types available through PHLX XL.
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\33\ A spread type order, which can only be entered through
FBMS, can have up to 15 legs, while a Complex Order entered for
handling through PHLX XL can have up to six legs, each including the
underlying security.
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Lastly, the Exchange proposes to adopt new Rule 1000(g) to codify
how bids and offers are made and maintained on the trading floor,
because the Exchange believes that eliminating most Floor Broker verbal
executions will place additional emphasis on how long a bid/offer is in
effect. Today, Rule 110 \34\ provides, in pertinent part, that bids and
offers must be made in an audible tone of voice. A member shall be
considered ``in'' on a bid or offer, while he remains at the post,
unless he shall distinctly and audibly say ``out.'' A member bidding
and offering in immediate and rapid succession shall be deemed ``in''
until he shall say ``out'' on either bid or offer. The Exchange
proposes to add this language to new Rule 1000(g), Manner of Bidding
and Offering, as well as additional language to address how a member
can be ``out'' of a bid/offer when dealing with a Floor Broker using
FBMS. Specifically, a member must say ``out'' before the Floor Broker
submits the order into the FBMS for execution (and before each time the
Floor Broker resubmits the order). Otherwise, once such order is
submitted and electronically executed, the quoting member cannot
withdraw his/her bid/offer. To more fully address this aspect of floor
trading, the Exchange proposes to state that once the trading crowd has
provided a quote, it will remain in effect until: (A) a reasonable
amount of time has passed, or (B) there is a significant change in the
price of the underlying security, or (C) the market given in response
to the request has been improved. In the case of a dispute, the term
``significant change'' will be interpreted on a case-by-case basis by
an Options Exchange Official \35\ based upon the extent of the recent
trading in the option and, in the case of equity and index options, in
the underlying security, and any other relevant factors. This language
is currently used in Rule 1064.02(v) to emphasize when bids/offers are
in effect, which will be helpful to emphasize with these new FBMS
enhancements. The concepts are not new; they are merely being codified
into the options portion of the rules.
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\34\ Rule 110 is also proposed to be renamed from ``Bids and
Offers--Precedence'' to Bids and Offers--Manner,'' to better cover
its content.
\35\ See Rule 124.
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The changes proposed herein will be incorporated into any
applicable fine schedules under the Exchange's minor rule violation
plan. Although the Exchange is not adding any new fine schedules or
changing any fines, the Exchange is proposing to add the new electronic
trading requirement to Advice C-2, Options Floor Broker Management
System, which will continue to be subject to the existing fine
schedule. The changes to Advices C-1, C-3 and F-14, which also have a
fine schedule, are minor. Advice C-1 is being amended to require that a
Floor Broker ascertain the presence of at least one ROT in the trading
crowd where an option is traded (rather than executed). Advice C-3(c),
regarding opening orders of ROTs, is being amended to reflect that
Floor Brokers will handle rather than execute orders. Advice F-14 is
being amended to replace the term ``hedge order'' with ``multi-leg
order.'' The change to Advice F-2, Allocation, Time Stamping, Matching
and Access to Matched Trades, results in fewer trades being subject to
it, because electronic trades, which there will be more of, are
automatically matched and reported.
Implementation
The Exchange proposes to implement the enhancements with a trial
period of two to four weeks, to be determined by the Exchange, during
which the new FBMS enhancements and related rules will operate along
with the existing FBMS and rules. The Exchange seeks to begin
implementation in February 2013 and complete it in March 2013. Thus,
Floor Brokers and their personnel will be able to get accustomed to the
new features over a period of time, before the old FBMS is no longer
available. During this period, Floor Brokers will still be able to
execute orders verbally in the trading crowd and submit the execution
reports through FBMS, like they do today. Floor Brokers will also be
able to use the new FBMS to execute trades. The Exchange is adopting
new rule language into Rule 1000(f) to address this trial period. The
Exchange believes that this trial period is reasonable and should
assist Floor Brokers and their staff in learning the new features.
Conclusion
The Exchange believes that the proposed enhancements to FBMS (and
resulting changes in priority rules) will strengthen its regulatory
program and modernize how trading occurs on the options trading floor.
The Exchange does not believe that the proposal will adversely impact
Floor Brokers, specialists or ROTs significantly. Specifically, the
additional automation should reduce the possibility of Floor Broker
violations and mistakes, which should, in turn, reduce their regulatory
liability. Of course, there is likely to be a period of adjustment
while Floor Brokers become accustomed to executions occurring through
the System rather than verbally, but the Exchange believes that the
implementation period should be helpful. The Exchange believes that the
benefit of reduced, and in some instances the elimination of certain
violations outweighs the potential inconvenience of a new system where
the system, rather than the Floor Broker executed the order.
With respect to the potential adverse impact on specialists and
ROTs, the Exchange acknowledges that it may be challenging for them to
adapt to the new FBMS process, because they may be asked to make
markets more quickly. As stated above, the trading crowd will continue
to have a reasonable time period to respond, and the Exchange will
continue to provide guidance to trading crowds regarding what is a
reasonable time period to respond, depending on a number of factors,
including market conditions and the type of order. Nevertheless, with
respect to orders with multiple legs, the challenge for specialists and
ROTs will be to respond to a Floor Broker with a market when the Floor
Broker has had the opportunity to look at each leg and price the whole
order, whereas specialists and ROTs first hear of the details when the
Floor Broker announces the order in the trading crowd. To address this,
the Exchange intends to, in providing guidance on what is a reasonable
time period to respond before the Floor Broker can submit an order for
execution, consider the complexity of multi-leg orders.
The Exchange does not believe that this proposal will adversely
affect market quality on the Exchange. To the contrary, the Exchange
believes that it should enhance market quality by providing quicker and
more reliable confirmation of trade executions, because automating
executions of Floor Brokered orders results in automated trade
reporting and more certainty about which orders have been executed.
Crowd participants will benefit from increased trade certainty and
fewer regulatory inquiries related to trades that are reported late and
or out of sequence. Floor Brokered orders today are require to be
reported within 90 seconds, which has proven to be challenging for
multi-leg orders. The Exchange believes that quicker reporting and the
resulting certainty about trade executions should benefit all market
participants, including Floor Brokers, specialists and ROTs.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b)
[[Page 13138]]
of the Act \36\ in general, and furthers the objectives of Section
6(b)(5) of the Act \37\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. Specifically, the new calculation function of FBMS is a tool
for Floor Brokers that should enhance their ability to calculate the
prices of the components of a multi-leg order, which should increase
the speed with which they can represent such orders, thereby making the
Exchange's markets more efficient, all to the benefit of the investing
public. In addition, the Exchange believes that the requirement to
execute most Floor Broker transactions through FBMS is a sound one,
consistent with the aforementioned provisions, intended to reduce
certain types of rule violations and further automate Exchange trading,
without imposing an undue burden on Floor Brokers. For the same
reasons, the new FBMS execution functionality is also consistent with
these statutory standards and should improve how trading occurs on the
Exchange.
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\36\ 15 U.S.C. 78f(b).
\37\ 15 U.S.C. 78f(b)(5).
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The Exchange also believes that the proposal to adopt a new FBMS
priority provision in Rule 1033(i) akin to Complex Order priority is
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general to protect investors and the
public interest by improving Floor Brokers' ability to execute multi-
leg orders, to the benefit of customers and other market participants.
Multi-leg orders are different than regular orders and more complicated
to execute. The priority rules applicable to ``spread'' orders on the
various exchanges balance the difficulty of executing related orders
within existing individual markets with the importance maintaining a
priority model that makes clear in what orders executions occur. The
Exchange does not believe that this is a significant or controversial
change, because other exchanges automatically execute orders with many
legs and only require one leg to be improved.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes that
these enhancements to FBMS should result in the Exchange's trading
floor operating in a more efficient way, which should help it compete
with other floor-based exchanges and help the Exchange's Floor Brokers
compete with floor brokers on other options exchanges. The proposal
does not impose a burden on intra-market competition not necessary or
appropriate in furtherance of the purposes of the Act, because it
modernizes floor trading without undue impact on any particular segment
of the membership, as explained above. Overall, the proposal is pro-
competitive for several reasons; in addition, to helping Phlx Floor
Brokers compete for executions against floor brokers at other
exchanges, it also helps them be more efficient and compete more
effectively against fully electronic executions. This, in turn, helps
the Exchange compete against other exchanges in a deeply competitive
landscape comprised of ten other options exchanges. In addition, the
proposal helps the Exchange compete by ensuring the robustness of its
regulatory program, Floor Brokers' compliance with applicable rules,
and enhancing customer protection through further utilization of
electronic tools my members, which can be a differentiator in
attracting participants and order flow and which should benefit
customers in the long term.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2013-09 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2013-09. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal offices of the Exchange.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-Phlx-2013-09,
and should be submitted on or before March 19, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04359 Filed 2-25-13; 8:45 am]
BILLING CODE 8011-01-P
