Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change Relating to the Discontinuation of the Differentiation of Price Improvement XL Orders of Less Than 50 Contracts, 52991-52994 [2013-20775]
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Federal Register / Vol. 78, No. 166 / Tuesday, August 27, 2013 / Notices
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Dated: August 22, 2013.
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Deputy Secretary.
[FR Doc. 2013–20935 Filed 8–23–13; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70242; File No. SR–Phlx–
2013–76]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change
Relating to the Discontinuation of the
Differentiation of Price Improvement
XL Orders of Less Than 50 Contracts
August 21, 2013.
tkelley on DSK3SPTVN1PROD with NOTICES
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 August
16, 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.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to
discontinue the differentiation in
subsection (n)(i)(A)(2) and subsection
(n)(i)(B)(2) of Rule 1080 (Phlx XL and
Phlx XL II) regarding Price Improvement
XL (‘‘PIXL’’) Orders that are for a size of
less than 50 contracts.3 The text of the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Exchange Act Release No. 63027 (October 1,
2010), 75 FR 62160 (October 7, 2010) (SR–Phlx–
2010–108) (order approving the PIXL electronic
price improvement program and the noted pilot
programs) (the ‘‘PIXL Filing’’).
2 17
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proposed rule change is available on the
Exchange’s Web site at https://
nasdaqomxphlx.cchwallstreet.com/
nasdaqomxphlx/phlx at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to discontinue the
differentiation in subsection (n)(i)(A)(2)
and subsection (n)(i)(B)(2) of Rule 1080
regarding PIXL Orders that are for a size
of less than 50 contracts.
The PIXL program in Rule 1080(n)
provides a price-improvement
mechanism in which a member (an
‘‘Initiating Member’’) may electronically
submit for execution an order it
represents as agent on behalf of a public
customer, broker-dealer, or any other
entity (known as the ‘‘PIXL Order’’)
against principal interest or against any
other order it represents as agent,
provided that such Initiating Member
submits the PIXL Order for electronic
execution into the one-second long PIXL
Auction (‘‘Auction’’) pursuant to the
rule. In addition, PIXL provides for the
automatic execution, under certain
conditions, of a crossing transaction
where there is a public customer order
in the same options series on each side.
Currently, subsection (n)(i)(A) of Rule
1080 states that for public customer
orders, if a PIXL Order is for 50
contracts or more, the Initiating Member
must stop the entire PIXL Order at a
price that is equal to or better than the
National Best Bid or Offer (‘‘NBBO’’) on
the opposite side of the market from the
PIXL Order, provided that such price
must be at least one minimum price
improvement increment (as determined
by the Exchange but not smaller than
one cent) better than any limit order on
the limit order book on the same side of
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52991
the market as the PIXL Order.
Subsection (n)(i)(B) states that for nonpublic customer orders (i.e., where the
order is for the account of a brokerdealer or any other person or entity that
is not a public customer), if the order is
for 50 contracts or more, the Initiating
Member must stop the entire PIXL
Order at a price that is the better of: (i)
The PBBO price improved by at least
one minimum price improvement
increment on the same side of the
market as the PIXL Order; or (ii) the
PIXL Order’s limit price (if the order is
a limit order), provided in either case
that such price is at or better than the
NBBO.
Two subsections of Rule 1080
((n)(i)(A)(2) and (n)(i)(B)(2)) currently
require, on a pilot basis expiring July 18,
2014, a separate price improvement
process for public customer and nonpublic customer PIXL Orders that are
less than 50 contracts in size.
Subsection (n)(i)(A)(2) states that if the
PIXL Order is for less than 50 contracts,
the Initiating Member must stop the
entire PIXL Order at a price that is the
better of: (i) The PBBO price on the
opposite side of the market from the
PIXL Order, improved by at least one
minimum price improvement
increment; or (ii) the PIXL Order’s limit
price (if the order is a limit order),
provided in either case that such price
is at or better than the NBBO, and at
least one price improvement increment
better than any limit order on the book
on the same side of the market as the
PIXL Order. Subsection (n)(i)(B)(2)
states that if the PIXL Order is for less
than 50 contracts, the Initiating Member
must stop the entire PIXL Order at a
price that is the better of: (i) The PBBO
price improved by at least one
minimum price improvement increment
on the same side of the market as the
PIXL Order; or (ii) the PIXL Order’s
limit price (if the order is a limit order),
provided in either case that such price
is at or better than the NBBO and at least
one price improvement increment better
than the PBBO on the opposite side of
the market from the PIXL Order.
Subsections (n)(i)(A)(2) and (n)(i)(B)(2)
are together known as the
‘‘Differentiation Provision’’.
The Exchange is proposing to
discontinue the Differentiation
Provision and the disparate treatment
for PIXL Orders for less than 50
contracts.4 As a result, all PIXL Orders
regardless of their size will be treated
the same as PIXL Orders that are 50
4 The Exchange is making conforming changes
throughout subsection (n) of Rule 1080 to delete
any rule text that differentiates PIXL procedures
based on size.
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tkelley on DSK3SPTVN1PROD with NOTICES
contracts or greater in size in current
Rule 1080(n).5 Public customers will
continue to have priority at each price
level in accordance with PHLX Rule
1080(n)(ii)(E). Consistent with PIXL
Orders of 50 contracts or greater in size,
PHLX will consider resting quotes and
orders for allocation at the end of the
Auction with all prices that improve the
stop price being considered first. At
each given price point, PHLX will
execute public customer interest in a
price/time fashion such that all public
customer interest which was resting on
the order book is satisfied before any
other interest that arrived after the
Auction was initiated. After public
customer interest at a given price point
has been satisfied, remaining contracts
will be allocated among all Exchange
quotes, orders and Auction responses in
accordance with the rules set forth in
1080(n)(ii)(E)(2) based on the manner in
which the PIXL Order was submitted.
Interest, whether resting prior to the
commencement of the Auction or
arriving during the Auction process,
will continue to be executed according
to the rules set forth in 1080(n)(ii)(E)(2).
The Exchange believes using the same
exact allocation method, as it does today
for PIXL Orders of 50 contracts or
greater, is a fair distribution because the
Initiating Order provides significant
value to the market. The Initiating
Member guarantees the PIXL Order an
execution price at the NBBO or better at
time of receipt, and is subject to market
risk while the order is exposed to other
market participants. The Initiating
Member may only improve the stop
price where they have stopped the
agency side, and may not cancel their
order once the Auction commences.
Other market participants are free to
modify or cancel their quotes and orders
at any time during the Auction. The
Exchange believes that the Initiating
Member provides an important role in
facilitating the price improvement
opportunity for market participants. The
5 This proposal refers only to eliminating
subsections (n)(i)(A)(2) and (n)(i)(B)(2) and does not
refer to or effect the provision at subsection (n)(vii),
on a pilot basis expiring July 18, 2014, regarding no
required minimum value size for orders to be
eligible for PIXL Auctions.
Pursuant to the PIXL Filing, see supra note 3, the
Exchange has provided periodic reports to the
Commission with detailed information to assist the
Commission in ascertaining the level of price
improvement attained for orders during the period
of the pilot. The Exchange believes that these
reports show the effectiveness of the PIXL program
in providing price improvement for PIXL Orders.
This proposal will not impact the pilot or any of
the pilot reports. The Exchange will continue
periodically providing the Reports to the
Commission through July 18, 2014, or as required
pursuant to the subsection (n)(vii) pilot.
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following example illustrates how the
proposed rule change would operate:
Example:
PBBO is 2.48–2.51 (60×30) (10 of the
30 on the offer is a public customer; 10
of the 30 on the offer is a market maker
(MM) offering 10; 10 of the 30 on the
offer is a resting off-floor broker dealer
order).
NBBO is 2.48–2.51 (100×100).
Under the proposed PIXL Rule with
the removal of the Differentiation
Provision, a public customer order to
buy may be entered into PIXL and
stopped at a price equal to or within a
range of 2.48–2.51. A non-public
customer order to buy may be entered
into PIXL and stopped at a price equal
to or within a range of 2.49–2.51.
Assume a public customer or nonpublic customer order to buy 45
contracts is submitted into PIXL with a
Stop Price of 2.51. The Auction will
commence with an Auction notification
being sent to market participants.
Assume, during the Auction, two
market makers (MM1 and MM2)
respond. MM1 responds to sell 10
contracts at 2.50 and MM2 responds to
sell 10 contracts at 2.51.
At the end of the Auction, the PIXL
Order will buy 10 contracts from MM1
at 2.50, leaving 35 to be allocated at the
Stop Price of 2.51.
The allocation process would
continue and 10 contracts will be
allocated to the public customer on the
book at 2.51, leaving 25 contracts to be
allocated among the Initiating Order 6
which stopped the PIXL Order at 2.51,
the two market makers offering at 2.51,
and the off-floor broker dealer order on
the offer at 2.51.
The remaining 25 contracts will be
allocated at a price of 2.51 with 10
contracts (40%) being allocated to the
Initiating Order, 8 (or 7) 7 contracts
allocated to MM and 7 (or 8, per
footnote 7) contracts allocated to MM2.
Since all of the contracts have been
allocated, the off-floor broker dealer
order on the offer at 2.51 will not be
allocated any contracts and will remain
on the book.
The Exchange believes that the
Differentiation Provision is unnecessary,
and indeed is counterproductive to the
goal of treating all PIXL Orders equally
regardless of PIXL Order size. The
Exchange believes removing the
Differentiation Provision will attract
new order flow that might not currently
be afforded any price improvement
6 As
defined in Rule 1080(n).
Rule 1014(g)(v)(E). PHLX rounds fractional
allocations (i.e. 7.5 contracts in this case)
downward, and allocates the remaining 1 contract
on a random basis among those participants of
equal priority.
7 See
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opportunity into PIXL. When PIXL was
first implemented, the Differentiation
Provision was a means to ensure some
level of price improvement for smaller
orders. Currently, PIXL is a more mature
product with a robust and seasoned
price improvement mechanism that has
the capacity to benefit all orders
regardless of their size. Moreover, the
Exchange notes that the Boston Options
Exchange (‘‘BOX’’) currently has rules
that do not differentiate price
improvement opportunities based on
the order size.8 BOX’s PIP mechanism
was recently modified 9 to commence an
auction even when there is resting
interest at the PIP start price. When a
PIP is initiated at a price equal to the
NBBO, regardless of size, the resting
quotes and orders on BOX are
considered for allocation at the end of
the auction. BOX executes interest that
existed on the BOX order book prior to
the commencement of a PIP before
executing any interest which joined
during the auction. This behavior aligns
with the BOX standard trade allocation
rules as they employ a price/time
allocation algorithm. Similar to BOX,
the PHLX proposed rule change will
allow orders of any size to initiate an
Auction at a price which is equal to or
better than the NBBO where PHLX may
have resting interest. PHLX will execute
a PIXL Order against any interest,
resting prior to the commencement of an
Auction or interest which arrived
during the Auction, in accordance with
the rules as stated and illustrated with
the example above. While this is
different than the allocation algorithm
that BOX employs, this behavior is
consistent with the allocation algorithm
established in the PHLX PIXL rules and
employed today in PIXL when an order
of 50 contracts or more is entered,
regardless of the stop price.
While the removal of the
Differentiation Provision removes the
guarantee of price improvement in a
limited instance, specifically when a
PIXL Order is for fewer than 50
contracts and PHLX is already present at
the NBBO at the commencement of the
Auction, the Exchange believes that the
proposed rule change will benefit
8 See BOX Rules Chapter V, Section 18(e). BOX
likewise operates an auction known as the PIP that
does not differentiate based on order size. Similarly
to PIXL as proposed to be amended, PIP involves
a member entering an order into an electronic
auction at a price that is at least equal to the NBBO.
See Securities Exchange Act Release Nos. 49068
(January 13, 2004), 69 FR 2775 (January 20, 2004)
(SR–BSE–2002–15) (order approving trading rules
for BOX including PIP).
9 See Securities Exchange Act Release No. 67592
(August 3, 2012), 77 FR 154 (August 9, 2012) (SR–
BOX–2012–03) (order approving rule change to
amend the PIP).
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Federal Register / Vol. 78, No. 166 / Tuesday, August 27, 2013 / Notices
customers because it will encourage the
entry of more orders into PIXL, thus it
is more likely that such orders may
receive price improvement. Similar
price improvement mechanisms on both
the ISE and BOX do not guarantee price
improvement over the NBBO today.
ISE’s PIM mechanism has no size
differentiation and only guarantees
price improvement over the ISE BBO.10
The BOX PIP mechanism allows orders
of any size to be stopped at the NBBO
or better which also does not guarantee
price improvement.
The Exchange believes that because
there is no rational need for volume
differentiation, and as there is a
competitive disadvantage to the
Exchange in continuing differentiation,
it is appropriate to discontinue the
Differentiation Provision and thereby
simplify the way PIXL operates.
This proposal would continue to
afford the same price improvement
opportunities for public customer and
non-public customer PIXL Orders as is
in operation today, but without
differentiating based on order size. By
way of example, to initiate an Auction
for public customer orders, the Initiating
Member would stop the entire PIXL
Order at a price that is equal to or better
than the NBBO on the opposite side of
the market from the PIXL Order,
provided that such price was at least
one price improvement increment (no
smaller than one cent) better than any
limit order on the limit order book on
the same side of the market as the PIXL
Order. Conversely, to initiate an
Auction for non-public customer orders
where the order is for the account of a
broker-dealer or any other person or
entity that is not a public customer, the
Initiating Member would stop the entire
PIXL Order at a price that is the better
of: (i) The PBBO price improved by at
least one minimum price improvement
increment on the same side of the
market as the PIXL Order; or (ii) the
PIXL Order’s limit price (if the order is
a limit order), provided that in either
case that such price is at or better than
the NBBO. A member would initiate a
one-second long Auction by submitting
a PIXL Order in one of three ways: (i)
A single stop price; (ii) an auto-match
price; or (iii) a not-worse-than price.
Thus, under this proposal all PIXL
Orders would be handled by current
procedures for the price improvement of
non-public and public PIXL Orders that
are of 50 contracts or greater.11
10 See Securities Exchange Act Release No. 57847
(May 21, 2008), 73 FR 104 (May 29, 2008) (SR–ISE–
2008–29) (order approving proposed rule change
relating to the PIM).
11 For a description of all PIXL procedures, see
Rule 1080(n).
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2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 12 in general, and furthers the
objectives of Section 6(b)(5) of the Act 13
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest by
creating positive, beneficial incentives
for Initiating Members to provide price
improvement opportunities to market
participants, most notably public
customers. Specifically, the Exchange
believes the proposal will result in more
orders of less than 50 contracts being
executed in PIXL, thus providing an
increased probability of price
improvement for small orders. By
removing the Differentiation Provision
market participants would be
incentivized to introduce more
customer orders to PIXL for the
opportunity to receive price
improvement. Furthermore, public
customers will continue to have priority
at each price level in accordance with
PHLX Rule 1080(n)(ii)(E). In particular,
the Exchange believes that using the
same allocation process as is used today
for PIXL Orders of 50 contracts or
greater, is fair and equitable because of
the value the Initiating Member brings
to the market place. Specifically, by
stopping the PIXL Order at or better
than the NBBO, the Initiating Member
facilitates a process that protects
investors and is in the public interest by
providing an opportunity for price
improvement. The Differentiation
Provision as it is presently constructed
assumes all broker-dealers have the
same view about the price of an options
contract. But this assumption is not
necessarily true. While the market
participant that introduces an order of
less than 50 contracts into PIXL may
only value that option at the NBBO,
another market maker participant may
be willing to price improve because
their valuation is different. These
different opinions make for a robust
price discovery system that is the
backbone of the U.S. options markets.
The Exchange believes strongly that it
should encourage such price discovery,
and the removal of the Differentiation
Provision would help to achieve this
and more generally, benefit investors by
offering more opportunities for
customers and non-customers to receive
price improvement. For these reasons,
12 15
13 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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52993
the Exchange believes that the proposal
is fair, reasonable and equitable for all
market participants.
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. To the
contrary, the Exchange is proposing to
amend Rule 1080(n) to offer
opportunities found on other options
exchanges and to further foster the price
discovery process as well as create
systems that embolden market
participants to seek out price
improvement opportunities for
customers.
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–2013–76 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.
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Federal Register / Vol. 78, No. 166 / Tuesday, August 27, 2013 / Notices
All submissions should refer to File
Number SR–Phlx–2013–76. 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 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–
2013–76, and should be submitted on or
before September 17, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–20775 Filed 8–26–13; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–70241; File No. SR–
NASDAQ–2013–109]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Modify
NASDAQ’s Optional AntiInternalization Functionality
tkelley on DSK3SPTVN1PROD with NOTICES
August 21, 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 August
16, 2013, The NASDAQ Stock Market
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
15:54 Aug 26, 2013
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
NASDAQ proposes to modify
NASDAQ’s optional anti-internalization
functionality.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaq.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASDAQ included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of those
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
VerDate Mar<15>2010
LLC (‘‘NASDAQ’’ 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.
Jkt 229001
NASDAQ is proposing to modify its
voluntary anti-internalization
functionality to provide an additional
option under that functionality. In
addition, the proposed rule change
contains certain clarifications to the text
of the rule. Anti-internalization
functionality is designed to assist
market participants in complying with
certain rules and regulations of the
Employee Retirement Income Security
Act (‘‘ERISA’’) that preclude and/or
limit broker-dealers managing accounts
governed by ERISA from trading as
principal with orders generated for
those accounts. The functionality can
also assist market participants in
avoiding execution fees that may result
from the interaction of executable buy
and sell trading interest from the same
firm. NASDAQ notes that use of the
functionality does not relieve or
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otherwise modify the duty of best
execution owed to orders received from
public customers. As such, market
participants using anti-internalization
functionality will need to take
appropriate steps to ensure that public
customer orders that do not execute
because of the use of anti-internalization
functionality ultimately receive the
same execution price (or better) they
would have originally obtained if
execution of the order was not inhibited
by the functionality.
Currently, market participants may
apply anti-internalization logic to all
quotes/orders entered through a
particular MPID, or to all orders entered
through a particular order entry port, to
which a unique group identification
modifier is then appended. In other
words, the logic may be applied on an
MPID-by-MPID, or on a port-by-port
basis.3 Currently, two forms of antiinternalization logic may be applied: (i)
if quotes/orders are equivalent in size,
both quotes/orders will be cancelled, or
if they are not equivalent in size, the
smaller will be cancelled and the size of
the larger will be reduced by the size of
the smaller; or (ii) regardless of the size
of the quotes/orders, the oldest quote/
order will be cancelled in full. The
applicable logic may be applied to an
entire MPID, or alternatively, different
logic may be applied to different order
entry ports under a particular MPID.4
In response to member input, the
proposed rule change will add an
additional form of anti-internalization
logic that a market participant could
choose to apply, under which the most
recent quote/order would be cancelled.
As with the two existing forms of antiinternalization logic, the logic could be
applied to an entire MPID, or to selected
order entry ports under a particular
MPID.5 NASDAQ believes that the
change will provide members with an
additional tool for managing the book of
3 In the proposed rule change that introduced the
ability to assign a group identification modifier
with respect to anti-internalization processing,
NASDAQ stated that the modifier may be assigned
‘‘at the port level.’’ Securities Exchange Act Release
No. 65868 (December 2, 2011), 76 FR 76795
(December 8, 2011) (SR–NASDAQ–2011–158).
However, this level of specificity was not included
in the text of Rule 4757. In addition, although the
rule indicates that designation of functionality at
the port level is an option available to the market
participant, the rule does not make it clear that in
order to make use of these options, market
participants must use NASDAQ’s OUCH order entry
protocol. Thus, the proposed rule change also adds
additional specificity to the rule text with respect
to these aspects of the anti-internalization
functionality.
4 With respect to this functionality also,
participants wishing to make designations on the
order port level must use the OUCH order entry
protocol.
5 Id.
E:\FR\FM\27AUN1.SGM
27AUN1
]]>Agencies
[Federal Register Volume 78, Number 166 (Tuesday, August 27, 2013)]
[Notices]
[Pages 52991-52994]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-20775]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70242; File No. SR-Phlx-2013-76]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change Relating to the Discontinuation of the
Differentiation of Price Improvement XL Orders of Less Than 50
Contracts
August 21, 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 August 16, 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to discontinue the differentiation in
subsection (n)(i)(A)(2) and subsection (n)(i)(B)(2) of Rule 1080 (Phlx
XL and Phlx XL II) regarding Price Improvement XL (``PIXL'') Orders
that are for a size of less than 50 contracts.\3\ The text of the
proposed rule change is available on the Exchange's Web site at https://nasdaqomxphlx.cchwallstreet.com/nasdaqomxphlx/phlx at the principal
office of the Exchange, and at the Commission's Public Reference Room.
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\3\ See Exchange Act Release No. 63027 (October 1, 2010), 75 FR
62160 (October 7, 2010) (SR-Phlx-2010-108) (order approving the PIXL
electronic price improvement program and the noted pilot programs)
(the ``PIXL Filing'').
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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 proposed rule change is to discontinue the
differentiation in subsection (n)(i)(A)(2) and subsection (n)(i)(B)(2)
of Rule 1080 regarding PIXL Orders that are for a size of less than 50
contracts.
The PIXL program in Rule 1080(n) provides a price-improvement
mechanism in which a member (an ``Initiating Member'') may
electronically submit for execution an order it represents as agent on
behalf of a public customer, broker-dealer, or any other entity (known
as the ``PIXL Order'') against principal interest or against any other
order it represents as agent, provided that such Initiating Member
submits the PIXL Order for electronic execution into the one-second
long PIXL Auction (``Auction'') pursuant to the rule. In addition, PIXL
provides for the automatic execution, under certain conditions, of a
crossing transaction where there is a public customer order in the same
options series on each side.
Currently, subsection (n)(i)(A) of Rule 1080 states that for public
customer orders, if a PIXL Order is for 50 contracts or more, the
Initiating Member must stop the entire PIXL Order at a price that is
equal to or better than the National Best Bid or Offer (``NBBO'') on
the opposite side of the market from the PIXL Order, provided that such
price must be at least one minimum price improvement increment (as
determined by the Exchange but not smaller than one cent) better than
any limit order on the limit order book on the same side of the market
as the PIXL Order. Subsection (n)(i)(B) states that for non-public
customer orders (i.e., where the order is for the account of a broker-
dealer or any other person or entity that is not a public customer), if
the order is for 50 contracts or more, the Initiating Member must stop
the entire PIXL Order at a price that is the better of: (i) The PBBO
price improved by at least one minimum price improvement increment on
the same side of the market as the PIXL Order; or (ii) the PIXL Order's
limit price (if the order is a limit order), provided in either case
that such price is at or better than the NBBO.
Two subsections of Rule 1080 ((n)(i)(A)(2) and (n)(i)(B)(2))
currently require, on a pilot basis expiring July 18, 2014, a separate
price improvement process for public customer and non-public customer
PIXL Orders that are less than 50 contracts in size. Subsection
(n)(i)(A)(2) states that if the PIXL Order is for less than 50
contracts, the Initiating Member must stop the entire PIXL Order at a
price that is the better of: (i) The PBBO price on the opposite side of
the market from the PIXL Order, improved by at least one minimum price
improvement increment; or (ii) the PIXL Order's limit price (if the
order is a limit order), provided in either case that such price is at
or better than the NBBO, and at least one price improvement increment
better than any limit order on the book on the same side of the market
as the PIXL Order. Subsection (n)(i)(B)(2) states that if the PIXL
Order is for less than 50 contracts, the Initiating Member must stop
the entire PIXL Order at a price that is the better of: (i) The PBBO
price improved by at least one minimum price improvement increment on
the same side of the market as the PIXL Order; or (ii) the PIXL Order's
limit price (if the order is a limit order), provided in either case
that such price is at or better than the NBBO and at least one price
improvement increment better than the PBBO on the opposite side of the
market from the PIXL Order. Subsections (n)(i)(A)(2) and (n)(i)(B)(2)
are together known as the ``Differentiation Provision''.
The Exchange is proposing to discontinue the Differentiation
Provision and the disparate treatment for PIXL Orders for less than 50
contracts.\4\ As a result, all PIXL Orders regardless of their size
will be treated the same as PIXL Orders that are 50
[[Page 52992]]
contracts or greater in size in current Rule 1080(n).\5\ Public
customers will continue to have priority at each price level in
accordance with PHLX Rule 1080(n)(ii)(E). Consistent with PIXL Orders
of 50 contracts or greater in size, PHLX will consider resting quotes
and orders for allocation at the end of the Auction with all prices
that improve the stop price being considered first. At each given price
point, PHLX will execute public customer interest in a price/time
fashion such that all public customer interest which was resting on the
order book is satisfied before any other interest that arrived after
the Auction was initiated. After public customer interest at a given
price point has been satisfied, remaining contracts will be allocated
among all Exchange quotes, orders and Auction responses in accordance
with the rules set forth in 1080(n)(ii)(E)(2) based on the manner in
which the PIXL Order was submitted. Interest, whether resting prior to
the commencement of the Auction or arriving during the Auction process,
will continue to be executed according to the rules set forth in
1080(n)(ii)(E)(2).
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\4\ The Exchange is making conforming changes throughout
subsection (n) of Rule 1080 to delete any rule text that
differentiates PIXL procedures based on size.
\5\ This proposal refers only to eliminating subsections
(n)(i)(A)(2) and (n)(i)(B)(2) and does not refer to or effect the
provision at subsection (n)(vii), on a pilot basis expiring July 18,
2014, regarding no required minimum value size for orders to be
eligible for PIXL Auctions.
Pursuant to the PIXL Filing, see supra note 3, the Exchange has
provided periodic reports to the Commission with detailed
information to assist the Commission in ascertaining the level of
price improvement attained for orders during the period of the
pilot. The Exchange believes that these reports show the
effectiveness of the PIXL program in providing price improvement for
PIXL Orders. This proposal will not impact the pilot or any of the
pilot reports. The Exchange will continue periodically providing the
Reports to the Commission through July 18, 2014, or as required
pursuant to the subsection (n)(vii) pilot.
---------------------------------------------------------------------------
The Exchange believes using the same exact allocation method, as it
does today for PIXL Orders of 50 contracts or greater, is a fair
distribution because the Initiating Order provides significant value to
the market. The Initiating Member guarantees the PIXL Order an
execution price at the NBBO or better at time of receipt, and is
subject to market risk while the order is exposed to other market
participants. The Initiating Member may only improve the stop price
where they have stopped the agency side, and may not cancel their order
once the Auction commences. Other market participants are free to
modify or cancel their quotes and orders at any time during the
Auction. The Exchange believes that the Initiating Member provides an
important role in facilitating the price improvement opportunity for
market participants. The following example illustrates how the proposed
rule change would operate:
Example:
PBBO is 2.48-2.51 (60x30) (10 of the 30 on the offer is a public
customer; 10 of the 30 on the offer is a market maker (MM) offering 10;
10 of the 30 on the offer is a resting off-floor broker dealer order).
NBBO is 2.48-2.51 (100x100).
Under the proposed PIXL Rule with the removal of the
Differentiation Provision, a public customer order to buy may be
entered into PIXL and stopped at a price equal to or within a range of
2.48-2.51. A non-public customer order to buy may be entered into PIXL
and stopped at a price equal to or within a range of 2.49-2.51.
Assume a public customer or non-public customer order to buy 45
contracts is submitted into PIXL with a Stop Price of 2.51. The Auction
will commence with an Auction notification being sent to market
participants.
Assume, during the Auction, two market makers (MM1 and MM2)
respond. MM1 responds to sell 10 contracts at 2.50 and MM2 responds to
sell 10 contracts at 2.51.
At the end of the Auction, the PIXL Order will buy 10 contracts
from MM1 at 2.50, leaving 35 to be allocated at the Stop Price of 2.51.
The allocation process would continue and 10 contracts will be
allocated to the public customer on the book at 2.51, leaving 25
contracts to be allocated among the Initiating Order \6\ which stopped
the PIXL Order at 2.51, the two market makers offering at 2.51, and the
off-floor broker dealer order on the offer at 2.51.
---------------------------------------------------------------------------
\6\ As defined in Rule 1080(n).
---------------------------------------------------------------------------
The remaining 25 contracts will be allocated at a price of 2.51
with 10 contracts (40%) being allocated to the Initiating Order, 8 (or
7) \7\ contracts allocated to MM and 7 (or 8, per footnote 7) contracts
allocated to MM2. Since all of the contracts have been allocated, the
off-floor broker dealer order on the offer at 2.51 will not be
allocated any contracts and will remain on the book.
---------------------------------------------------------------------------
\7\ See Rule 1014(g)(v)(E). PHLX rounds fractional allocations
(i.e. 7.5 contracts in this case) downward, and allocates the
remaining 1 contract on a random basis among those participants of
equal priority.
---------------------------------------------------------------------------
The Exchange believes that the Differentiation Provision is
unnecessary, and indeed is counterproductive to the goal of treating
all PIXL Orders equally regardless of PIXL Order size. The Exchange
believes removing the Differentiation Provision will attract new order
flow that might not currently be afforded any price improvement
opportunity into PIXL. When PIXL was first implemented, the
Differentiation Provision was a means to ensure some level of price
improvement for smaller orders. Currently, PIXL is a more mature
product with a robust and seasoned price improvement mechanism that has
the capacity to benefit all orders regardless of their size. Moreover,
the Exchange notes that the Boston Options Exchange (``BOX'') currently
has rules that do not differentiate price improvement opportunities
based on the order size.\8\ BOX's PIP mechanism was recently modified
\9\ to commence an auction even when there is resting interest at the
PIP start price. When a PIP is initiated at a price equal to the NBBO,
regardless of size, the resting quotes and orders on BOX are considered
for allocation at the end of the auction. BOX executes interest that
existed on the BOX order book prior to the commencement of a PIP before
executing any interest which joined during the auction. This behavior
aligns with the BOX standard trade allocation rules as they employ a
price/time allocation algorithm. Similar to BOX, the PHLX proposed rule
change will allow orders of any size to initiate an Auction at a price
which is equal to or better than the NBBO where PHLX may have resting
interest. PHLX will execute a PIXL Order against any interest, resting
prior to the commencement of an Auction or interest which arrived
during the Auction, in accordance with the rules as stated and
illustrated with the example above. While this is different than the
allocation algorithm that BOX employs, this behavior is consistent with
the allocation algorithm established in the PHLX PIXL rules and
employed today in PIXL when an order of 50 contracts or more is
entered, regardless of the stop price.
---------------------------------------------------------------------------
\8\ See BOX Rules Chapter V, Section 18(e). BOX likewise
operates an auction known as the PIP that does not differentiate
based on order size. Similarly to PIXL as proposed to be amended,
PIP involves a member entering an order into an electronic auction
at a price that is at least equal to the NBBO. See Securities
Exchange Act Release Nos. 49068 (January 13, 2004), 69 FR 2775
(January 20, 2004) (SR-BSE-2002-15) (order approving trading rules
for BOX including PIP).
\9\ See Securities Exchange Act Release No. 67592 (August 3,
2012), 77 FR 154 (August 9, 2012) (SR-BOX-2012-03) (order approving
rule change to amend the PIP).
---------------------------------------------------------------------------
While the removal of the Differentiation Provision removes the
guarantee of price improvement in a limited instance, specifically when
a PIXL Order is for fewer than 50 contracts and PHLX is already present
at the NBBO at the commencement of the Auction, the Exchange believes
that the proposed rule change will benefit
[[Page 52993]]
customers because it will encourage the entry of more orders into PIXL,
thus it is more likely that such orders may receive price improvement.
Similar price improvement mechanisms on both the ISE and BOX do not
guarantee price improvement over the NBBO today. ISE's PIM mechanism
has no size differentiation and only guarantees price improvement over
the ISE BBO.\10\ The BOX PIP mechanism allows orders of any size to be
stopped at the NBBO or better which also does not guarantee price
improvement.
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 57847 (May 21,
2008), 73 FR 104 (May 29, 2008) (SR-ISE-2008-29) (order approving
proposed rule change relating to the PIM).
---------------------------------------------------------------------------
The Exchange believes that because there is no rational need for
volume differentiation, and as there is a competitive disadvantage to
the Exchange in continuing differentiation, it is appropriate to
discontinue the Differentiation Provision and thereby simplify the way
PIXL operates.
This proposal would continue to afford the same price improvement
opportunities for public customer and non-public customer PIXL Orders
as is in operation today, but without differentiating based on order
size. By way of example, to initiate an Auction for public customer
orders, the Initiating Member would stop the entire PIXL Order at a
price that is equal to or better than the NBBO on the opposite side of
the market from the PIXL Order, provided that such price was at least
one price improvement increment (no smaller than one cent) better than
any limit order on the limit order book on the same side of the market
as the PIXL Order. Conversely, to initiate an Auction for non-public
customer orders where the order is for the account of a broker-dealer
or any other person or entity that is not a public customer, the
Initiating Member would stop the entire PIXL Order at a price that is
the better of: (i) The PBBO price improved by at least one minimum
price improvement increment on the same side of the market as the PIXL
Order; or (ii) the PIXL Order's limit price (if the order is a limit
order), provided that in either case that such price is at or better
than the NBBO. A member would initiate a one-second long Auction by
submitting a PIXL Order in one of three ways: (i) A single stop price;
(ii) an auto-match price; or (iii) a not-worse-than price. Thus, under
this proposal all PIXL Orders would be handled by current procedures
for the price improvement of non-public and public PIXL Orders that are
of 50 contracts or greater.\11\
---------------------------------------------------------------------------
\11\ For a description of all PIXL procedures, see Rule 1080(n).
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \12\ in general, and furthers the objectives of Section
6(b)(5) of the Act \13\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest by creating positive, beneficial incentives for Initiating
Members to provide price improvement opportunities to market
participants, most notably public customers. Specifically, the Exchange
believes the proposal will result in more orders of less than 50
contracts being executed in PIXL, thus providing an increased
probability of price improvement for small orders. By removing the
Differentiation Provision market participants would be incentivized to
introduce more customer orders to PIXL for the opportunity to receive
price improvement. Furthermore, public customers will continue to have
priority at each price level in accordance with PHLX Rule
1080(n)(ii)(E). In particular, the Exchange believes that using the
same allocation process as is used today for PIXL Orders of 50
contracts or greater, is fair and equitable because of the value the
Initiating Member brings to the market place. Specifically, by stopping
the PIXL Order at or better than the NBBO, the Initiating Member
facilitates a process that protects investors and is in the public
interest by providing an opportunity for price improvement. The
Differentiation Provision as it is presently constructed assumes all
broker-dealers have the same view about the price of an options
contract. But this assumption is not necessarily true. While the market
participant that introduces an order of less than 50 contracts into
PIXL may only value that option at the NBBO, another market maker
participant may be willing to price improve because their valuation is
different. These different opinions make for a robust price discovery
system that is the backbone of the U.S. options markets. The Exchange
believes strongly that it should encourage such price discovery, and
the removal of the Differentiation Provision would help to achieve this
and more generally, benefit investors by offering more opportunities
for customers and non-customers to receive price improvement. For these
reasons, the Exchange believes that the proposal is fair, reasonable
and equitable for all market participants.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, the Exchange
is proposing to amend Rule 1080(n) to offer opportunities found on
other options exchanges and to further foster the price discovery
process as well as create systems that embolden market participants to
seek out price improvement opportunities for customers.
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-2013-76 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.
[[Page 52994]]
All submissions should refer to File Number SR-Phlx-2013-76. 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 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-2013-76, and should be submitted on or before
September 17, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20775 Filed 8-26-13; 8:45 am]
BILLING CODE 8011-01-P
