Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rules 1064 and 1080, 24776-24779 [2014-09923]
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Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices
C. Protect Submission and Liability
Notification
Currently, the cut-off time for a Long
Member to place a ‘‘protect’’ on an open
Fail Position in CNS in order to
participate in an upcoming corporate
action or to add shares to a voluntary
corporate action is either (i) on the
business day prior to the ‘‘protect’’
expiration date, or (ii) on the business
day prior to the expiration date of the
corporate action if there is no ‘‘protect’’
for that corporate action. Failure to meet
those deadlines often results in Long
Members incurring additional costs. As
such, NSCC staff, in its discretion and
on a best efforts basis, has accepted and
processed such ‘‘protect’’ instructions
either on the ‘‘protect’’ expiration date
or on the expiration date of the
corporate action.
Upon implementation of the Proposed
Rule Change, for a fee of $500,6
Members will be permitted to place a
‘‘protect’’ on an open fail position in
CNS in order to participate in an
upcoming corporate action or to add
shares to a voluntary corporate action
either (i) on the ‘‘protect’’ expiration
date, or (ii) on the expiration date of the
corporate action if there is no ‘‘protect’’
for that corporate action. Additionally,
with this Proposed Rule Change,
Members will submit ‘‘protect’’
instructions to NSCC electronically.
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D. Final Liability and Final Protection
Notification
Today, CNS alerts Short Members of
their final assigned liability with respect
to voluntary corporate actions either (i)
on the business day after the ‘‘protect’’
expiration date for that corporate action,
or (ii) on the business day after the
expiration date of the corporate action if
there is no ‘‘protect’’ for that corporate
action.
Upon implementation of the Proposed
Rule Change, CNS will alert a Short
Member of its assigned final liability no
later than the close of business on the
same business day the final liability is
assigned to that Member by CNS. The
Proposed Rule Change will also clarify
that Long Members will be notified that
their Fail Positions in CNS will be
subject to the ‘‘protection’’ for that
corporate action no later than the close
of business on the same business day
the final ‘‘protection’’ is assigned to that
Member by CNS.
6 The Commission understands that NSCC will
propose this fee in a separate rule filing with the
Commission.
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E. SMART/Track for CNS Corporate
Actions
With this Proposed Rule Change,
Members will submit instructions to
participate in a voluntary reorganization
and access all corporate action
processing output data through SMART/
Track for CNS Corporate Actions, which
is available within NSCC’s SMART/
Track for Corporate Action Liability
Notification Service. The output data,
which is currently delivered to
Members through files and reports, will
be visible through on-line screens and
include search options and filters.
F. Restriction on Movement of Positions
Between CNS Sub-Accounts
Under the Proposed Rule Change,
when a voluntary reorganization is
being processed on a security, CNS will
no longer permit the movement of
positions in that security between nonreorganization sub-accounts (e.g., the
CNS General Account and the CNS
Fully-Paid-For Account) either (i) on the
‘‘protect’’ expiration date, or (ii) on the
expiration date of the voluntary
reorganization if there is no ‘‘protect’’
for that voluntary reorganization.
G. Additional Rule Changes
In addition to the enhancements
described above, with this Proposed
Rule Change NSCC will amend its Rules
to clarify that the Rules are drafted
assuming the processing of subject
securities with a ‘‘protect’’ period of
three days. Similarly, the table that is
currently included in the Rules
regarding this topic will be updated to
further illustrate the timeframes for
processing of subject securities with a
‘‘protect’’ period of two days or less.
III. Discussion and Commission Finding
Section 19(b)(2)(C) of the Act 7 directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and rules
and regulations thereunder applicable to
such organization. Section 17A(b)(3)(F)
of the Act 8 requires that the rules of a
clearing agency be designed to, among
other things, ‘‘promote the prompt and
accurate clearance and settlement of
securities transactions and . . . to
assure the safeguarding of securities and
funds which are in the custody or
control of the clearing agency or for
which it is responsible.’’ 9 Here, the
Commission finds the enhancements to
be implemented by the Proposed Rule
7 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
9 15 U.S.C. 78q–1(b)(3)(F).
8 15
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Change consistent with those
requirements because each change
discussed above should result in greater
efficiency and automation with respect
to the processing of corporate actions
within CNS, thus promoting the prompt
and accurate clearance and settlement of
securities transactions.
IV. 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 10 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that
proposed rule change SR–NSCC–2014–
03 be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–09925 Filed 4–30–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72027; File No. SR–Phlx–
2014–25]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend
Rules 1064 and 1080
April 25, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 16,
2014, 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 and
II 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 Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rules 1064 and 1080 to more
10 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
11 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices
specifically address the number and size
of contra-parties to a Qualified
Contingent Cross Order (‘‘QCC Order’’).
The text of the proposed rule change
is below. Proposed new language is
italicized; proposed deletions are in
brackets.
*
*
*
*
*
Rule 1064. Crossing, Facilitation and
Solicited Orders
(a)–(d) No change.
(e) A Floor Qualified Contingent Cross
Order is comprised of an originating order to
buy or sell at least 1,000 contracts, or 10,000
contracts in the case of Mini Options, that is
identified as being part of a qualified
contingent trade, as that term is defined in
subsection (3) below, coupled with a contraside order or orders totaling [to buy or sell]
an equal number of contracts.
(1)–(3) No change.
Commentary
.01–.04 No change.
*
*
*
*
*
Rule 1080. Phlx XL and Phlx XL II
(a)–(n) No change.
(o) Qualified Contingent Cross Order.
A Qualified Contingent Cross Order is
comprised of an originating order to buy or
sell at least 1,000 contracts, or 10,000
contracts in the case of Mini Options, that is
identified as being part of a qualified
contingent trade, as that term is defined in
subsection (3) below, coupled with a contraside order or orders totaling [to buy or sell]
an equal number of contracts.
(1)–(3) No change.
*
*
*
*
*
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 the
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
The purpose of the proposal is to
expand the availability of QCC orders by
permitting multiple contra-parties on a
QCC order. Under the proposal,
multiple contra-parties would be
allowed on one side (the contra-side), so
long as they total the originating QCC
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Order, which would be a single order
from a single party for at least 1,000
contracts (in addition to meeting the
other requirements of a QCC Order).
The Exchange currently permits two
types of QCC Orders. Pursuant to Rule
1064(e), A Floor Qualified Contingent
Cross Order (‘‘Floor QCC Order’’) is
comprised of an order to buy or sell at
least 1,000 contracts 3 that is identified
as being part of a qualified contingent
trade,4 coupled with a contra-side order
to buy or sell an equal number of
contracts. Floor QCC Orders are
immediately executed upon entry into
the System by an Options Floor Broker
provided that (i) no Customer Orders are
at the same price on the Exchange’s
limit order book and (ii) the price is at
or between the National Best Bid/Offer
(‘‘NBBO’’). Floor QCC Orders are
submitted into the System by Floor
Brokers on the Floor via the Floor
Broker Management System. Floor QCC
Orders are automatically rejected if they
cannot be executed.
In addition to Floor QCC Orders, Phlx
offers automated Qualified Contingent
Cross Orders (‘‘Automated QCC Order’’).
Pursuant to Rule 1080(o), an Automated
QCC Order is very similar to a Floor
QCC Order, in that it must be comprised
of an order to buy or sell at least 1,000
contracts that is identified as being part
of a qualified contingent trade, coupled
with a contra-side order to buy or sell
an equal number of contracts.
Automated QCC Orders shall only be
submitted electronically from off the
Floor to the Phlx System. Automated
QCC Orders are immediately executed
upon entry into the System by an Order
Entry Firm provided that (i) no
Customer Orders are at the same price
on the Exchange’s limit order book and
(ii) the price is at or between the NBBO.
Automated QCC Orders will be
3 In the case of Mini Options, the minimum size
is 10,000 contracts.
4 A ‘‘qualified contingent trade’’ is a transaction
consisting of two or more component orders,
executed as agent or principal, where: (a) At least
one component is an NMS Stock, as defined in Rule
600 of Regulation NMS under the Exchange Act; (b)
all components are effected with a product or price
contingency that either has been agreed to by all the
respective counterparties or arranged for by a
broker-dealer as principal or agent; (c) the execution
of one component is contingent upon the execution
of all other components at or near the same time;
(d) the specific relationship between the component
orders (e.g., the spread between the prices of the
component orders) is determined by the time the
contingent order is placed; (e) the component
orders bear a derivative relationship to one another,
represent different classes of shares of the same
issuer, or involve the securities of participants in
mergers or with intentions to merge that have been
announced or cancelled; and (f) the transaction is
fully hedged (without regard to any prior existing
position) as a result of other components of the
contingent trade.
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automatically rejected if they cannot be
executed.
Each definition of a QCC Order is
currently framed in the singular (* * *
coupled with a contra-side order
* * *), therefore, the Exchange would
like to amend its rule to permit its
members and other participants to
submit a QCC Order consisting of a
single order from a single party for at
least 1,000 contracts on the originating
or agency side and a single order or
multiple orders on the opposite, contraside (generally known as the solicited
side). Multiple contra-parties are only
permitted on one side, the contra-side,
and are not permitted on the originating
side. Currently, the contra-side to a QCC
Order is entered into the Phlx system as
a single order, even if that order consists
of multiple contra-parties who are
allocated their portion in a post-trade
allocation. Therefore, the Exchange now
proposes to modify its rules to provide
that a QCC Order must involve a single
order for a single party for at least 1,000
contracts on the originating side, but
that it may consist of a single or
multiple orders on the opposite, contraside, so long as it totals the number of
contracts on the originating side.
Furthermore, the Exchange proposes
to permit single or multiple contra-side
orders on a QCC Order with a total
number of contracts equaling the
originating order size without any size
restriction for such contra-side orders.
The Exchange believes that permitting
multiple contra-parties to QCC Orders
that total the number of contracts on the
originating side may increase liquidity
and, potentially, improve the prices at
which QCC Orders get executed. The
ability for market participants to
provide liquidity in response to large
sized orders is directly proportional to
the size and associated risk of the
resulting position. As a result, smaller
sized trades are often done at a better
price than larger sized trades, which
convey more risk. The ability to pool
together multiple market participants to
participate on the contra-side of a trade
for any size has a direct and positive
impact on the ability of those market
participants to provide the best price as
they compete to participate in the order
without being compelled to provide
liquidity with a large minimum
quantity. This concept is not unique to
large crosses. It is well understood and
observed that any product with multiple
market participants providing liquidity
offers the tightest and most liquid
market and the same applies to the
larger orders negotiated away from the
exchanges.
For instance, a 5,000 contract
originating QCC Order to buy could,
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under this proposal, be coupled with
two orders to sell 2,500 contracts each.
Similarly, a 5,000 contract originating
QCC Order to buy could, under this
proposal, be coupled with two contraside orders to sell, one for 4,500
contracts and one for 500 contracts. In
the above examples, the total of all sell
(contra-side) orders equals the size of
the originating order and the originating
order is for at least 1,000 contracts.
An area of concern has been the
protection of smaller orders, which is
why the QCC Order is limited to the
1,000 contract minimum. It is important
to note that the concern has always been
and should continue to be for the
originating order or unsolicited part of
the order that is seeking liquidity and
not the professional responders and
providers of liquidity. Allowing smaller
orders to participate on the other side
(i.e., contra-side) of QCC Orders not
only provides the best price and
opportunity for a trade to occur in a
tight and liquid market, but ensures that
the highest possible number of liquidity
providers are able to participate.
Accordingly, the proposal would benefit
both sides of a QCC trade by ensuring
a trade at the best possible price without
favoring larger participants on the
solicited side of the trade.
Under this proposal, the QCC Order
must continue to satisfy all other
requirements of a QCC Order under the
Exchange’s rules.
The Exchange will track and monitor
QCC Orders to determine which is the
originating/agency side of the order and
which is the contra-side(s) of the order
to ensure that Members are complying
with the minimum 1,000 contract size
limitation on the originating/agency
side of the QCC Order. The Exchange
will check to see if Members are
aggregating multiple orders to meet the
1,000 contract minimum on the
originating/agency side of the trade in
violation of the requirements of the rule.
The rule requires that the originating/
agency side of the trade consist of one
party who is submitting a QCC Order for
at least 1,000 contracts. The Exchange
represents that it will enforce
compliance with this portion of the rule
by checking to see if a Member breaks
up the originating/agency side of the
order in a post trade allocation to
different clearing firms, allocating less
than 1,000 contracts to a party or
multiple parties. For example, a
Member enters a QCC Order into the
system for 1,500 contracts and receives
an execution. Subsequent to the
execution, the Member allocates the
originating/agency side of the order to
two different clearing firms on a post
trade allocation basis, thereby allocating
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500 contracts to one clearing firm and
1,000 contracts to another clearing firm.
This type of transaction would not meet
the requirements of a QCC Order under
the current and proposed rule.
With regard to order entry, a Member
will have to mark the originating/agency
side as the first order in the system and
the contra-side(s) as the second. The
Exchange will monitor order entries to
ensure that Members are properly
entering QCC Orders into the system.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 5 in general, and furthers the
objectives of Section 6(b)(5) of the Act 6
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
amending the rule text to expand a QCC
Order. Specifically, because the
proposal states that multiple parties are
permitted on the contra-side, it should
provide members and participants with
certainty as to what is allowed and,
therefore, provide more opportunity to
participate in QCC trades, consistent
with the key principles behind the QCC
Order. Furthermore, because the
proposal permits a single or multiple
contra-parties without any contract size
requirement so long as they total the
originating size, it should also increase
liquidity and improve the prices at
which QCC Orders get executed and,
therefore, provide more opportunity to
participate in QCC trades, consistent
with the key principles behind the QCC
Order.
In approving QCC Orders, the
Commission has stated that ‘‘. . .
qualified contingent trades are of benefit
to the market as a whole and a
contribution to the efficient functioning
of the securities markets and the price
discovery process.’’ 7 The Commission
‘‘also has recognized that contingent
trades can be useful trading tools for
investors and other market participants,
particularly those who trade the
securities of issuers involved in
mergers, different classes of shares of
the same issuer, convertible securities,
and equity derivatives such as options
[emphasis added].’’ 8 In light of these
5 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
7 QCC Approval Order [sic] at text accompanying
footnote 115.
8 QCC Approval Order [sic] at Section III.A. citing
Securities Exchange Act Release No. 54389 (August
31, 2006), 71 FR 52829 (September 7, 2006)
(Original QCT Exemption).
6 15
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benefits, the Exchange believes that the
proposal should improve the usefulness
of the QCC Order without raising novel
regulatory issues, because the proposal
does not impact the fundamental
aspects of this order type—it merely
permits multiple contra-parties,
regardless of size, on the contra-side,
while preserving the 1,000 contract
minimum on the originating order.
Consistent with Section 6(b)(8) of the
Act, the Exchange seeks to compete
with other options exchanges for QCC
Orders involving multiple parties,
including where there are multiple
contra-parties. The Exchange believes
that this will be beneficial to
participants because allowing single or
multiple contra-parties of any size on
the contra-side should foster
competition for filling the contra-side of
a QCC Order and thereby result in
potentially better prices.
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. In fact, the
proposal is intended to relieve a burden
on competition, which results from
different exchanges interpreting their
rules differently. Among the options
exchanges, the Exchange believes that
the proposal to allow, on the contraside, a single or multiple contra-parties
without any contract size restriction so
long as they total the originating size
should foster competition for filling the
contra-side of a QCC order and thereby
result in potentially better prices for
such orders.
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
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 9 and rule 19b–
4(f)(6) thereunder.10 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
for 30 days from the date on which it
was filed, or such shorter time as the
9 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.196–4(f)(6).
10 17
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Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.11
A proposed rule change filed under
Rule 19b–4(f)(6) 12 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b4(f)(6)(iii),13 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposal may become operative
immediately upon filing. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest, as it will help eliminate
investor confusion and promote
competition among the option
exchanges.14 Therefore, the Commission
designates the proposed rule change to
be operative upon filing.
The Commission notes that, given the
differing requirements as between the
originating side and contra-side for QCC
Orders, it is essential that the Exchange
be able to clearly identify and monitor—
throughout the life of a QCC Order,
beginning at time of order entry on the
Exchange through the post-trade
allocation process—each side of the
QCC Order and ensure that the
requirements of the order type are being
satisfied including, importantly, those
relating to the originating side. The
Commission believes this to be critical
so that the Exchange can ensure that
market participants are not able to
circumvent the requirements of the QCC
Order (as amended by this proposed
rule change), each of which the
Commission continues to believe are
critical to ensuring that the QCC Order
is narrowly drawn.15 Further, the
11 17 CFR 240.19b–4(f)(6)(iii). As required under
Rule 19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
12 17 CFR 240.19b–4(f)(6).
13 17 CFR 240.19b–4(f)(6)(iii).
14 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
15 The Commission expects the Exchange to have
the capability to enable it to surveil that such
requirements are being met. Though the Exchange
has stated its ability to do so, if the Exchange is not
able to have such monitoring at any point in time,
the Commission would expect the Exchange to take
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Commission notes that the Exchange
has made certain representations
regarding its enforcement and
surveillance of its Members’ use of QCC
Orders, including, for example, not only
at the time of order entry, but through
the post-trade allocation process as well.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or 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–2014–25 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2014–25. 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
other steps to ensure that the QCC Order cannot be
improperly used. For example, if the Exchange were
not able to identify and monitor which side of a
QCC Order is the originating order, the Commission
would expect that it would require that both sides
of the QCC Order meet the more stringent
requirements of the originating side, i.e., that it be
for a single order for at least 1,000 contracts.
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24779
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 the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2014–25, and should be submitted on or
before May 22, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–09923 Filed 4–30–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72025; File No. SR–
NYSEMKT–2014–17]
Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing of
Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 2, Adopting Rule
971.1NY for an Electronic Price
Improvement Auction for Single-Leg
Options Orders
April 25, 2014.
I. Introduction
On February 21, 2014, NYSE MKT
LLC (‘‘Exchange’’ or ‘‘NYSE MKT’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to adopt new Rule 971.1NY
(‘‘Rule 971.1NY’’ or ‘‘Rule’’) to provide
for an electronic crossing mechanism
with a price improvement auction for
options trading on the Exchange, to be
referred to as the Customer Best
Execution Auction (‘‘CUBE Auction’’ or
‘‘Auction’’). The proposal also would
make related changes to certain
Exchange rules to accommodate the new
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\01MYN1.SGM
01MYN1
]]>Agencies
[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24776-24779]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09923]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72027; File No. SR-Phlx-2014-25]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Rules 1064 and 1080
April 25, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 16, 2014, 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 and II 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 Substance
of the Proposed Rule Change
The Exchange proposes to amend Rules 1064 and 1080 to more
[[Page 24777]]
specifically address the number and size of contra-parties to a
Qualified Contingent Cross Order (``QCC Order'').
The text of the proposed rule change is below. Proposed new
language is italicized; proposed deletions are in brackets.
* * * * *
Rule 1064. Crossing, Facilitation and Solicited Orders
(a)-(d) No change.
(e) A Floor Qualified Contingent Cross Order is comprised of an
originating order to buy or sell at least 1,000 contracts, or 10,000
contracts in the case of Mini Options, that is identified as being
part of a qualified contingent trade, as that term is defined in
subsection (3) below, coupled with a contra-side order or orders
totaling [to buy or sell] an equal number of contracts.
(1)-(3) No change.
Commentary
.01-.04 No change.
* * * * *
Rule 1080. Phlx XL and Phlx XL II
(a)-(n) No change.
(o) Qualified Contingent Cross Order.
A Qualified Contingent Cross Order is comprised of an
originating order to buy or sell at least 1,000 contracts, or 10,000
contracts in the case of Mini Options, that is identified as being
part of a qualified contingent trade, as that term is defined in
subsection (3) below, coupled with a contra-side order or orders
totaling [to buy or sell] an equal number of contracts.
(1)-(3) No change.
* * * * *
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposal is to expand the availability of QCC
orders by permitting multiple contra-parties on a QCC order. Under the
proposal, multiple contra-parties would be allowed on one side (the
contra-side), so long as they total the originating QCC Order, which
would be a single order from a single party for at least 1,000
contracts (in addition to meeting the other requirements of a QCC
Order).
The Exchange currently permits two types of QCC Orders. Pursuant to
Rule 1064(e), A Floor Qualified Contingent Cross Order (``Floor QCC
Order'') is comprised of an order to buy or sell at least 1,000
contracts \3\ that is identified as being part of a qualified
contingent trade,\4\ coupled with a contra-side order to buy or sell an
equal number of contracts. Floor QCC Orders are immediately executed
upon entry into the System by an Options Floor Broker provided that (i)
no Customer Orders are at the same price on the Exchange's limit order
book and (ii) the price is at or between the National Best Bid/Offer
(``NBBO''). Floor QCC Orders are submitted into the System by Floor
Brokers on the Floor via the Floor Broker Management System. Floor QCC
Orders are automatically rejected if they cannot be executed.
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\3\ In the case of Mini Options, the minimum size is 10,000
contracts.
\4\ A ``qualified contingent trade'' is a transaction consisting
of two or more component orders, executed as agent or principal,
where: (a) At least one component is an NMS Stock, as defined in
Rule 600 of Regulation NMS under the Exchange Act; (b) all
components are effected with a product or price contingency that
either has been agreed to by all the respective counterparties or
arranged for by a broker-dealer as principal or agent; (c) the
execution of one component is contingent upon the execution of all
other components at or near the same time; (d) the specific
relationship between the component orders (e.g., the spread between
the prices of the component orders) is determined by the time the
contingent order is placed; (e) the component orders bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or cancelled; and (f) the transaction is fully hedged
(without regard to any prior existing position) as a result of other
components of the contingent trade.
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In addition to Floor QCC Orders, Phlx offers automated Qualified
Contingent Cross Orders (``Automated QCC Order''). Pursuant to Rule
1080(o), an Automated QCC Order is very similar to a Floor QCC Order,
in that it must be comprised of an order to buy or sell at least 1,000
contracts that is identified as being part of a qualified contingent
trade, coupled with a contra-side order to buy or sell an equal number
of contracts. Automated QCC Orders shall only be submitted
electronically from off the Floor to the Phlx System. Automated QCC
Orders are immediately executed upon entry into the System by an Order
Entry Firm provided that (i) no Customer Orders are at the same price
on the Exchange's limit order book and (ii) the price is at or between
the NBBO. Automated QCC Orders will be automatically rejected if they
cannot be executed.
Each definition of a QCC Order is currently framed in the singular
(* * * coupled with a contra-side order * * *), therefore, the Exchange
would like to amend its rule to permit its members and other
participants to submit a QCC Order consisting of a single order from a
single party for at least 1,000 contracts on the originating or agency
side and a single order or multiple orders on the opposite, contra-side
(generally known as the solicited side). Multiple contra-parties are
only permitted on one side, the contra-side, and are not permitted on
the originating side. Currently, the contra-side to a QCC Order is
entered into the Phlx system as a single order, even if that order
consists of multiple contra-parties who are allocated their portion in
a post-trade allocation. Therefore, the Exchange now proposes to modify
its rules to provide that a QCC Order must involve a single order for a
single party for at least 1,000 contracts on the originating side, but
that it may consist of a single or multiple orders on the opposite,
contra-side, so long as it totals the number of contracts on the
originating side.
Furthermore, the Exchange proposes to permit single or multiple
contra-side orders on a QCC Order with a total number of contracts
equaling the originating order size without any size restriction for
such contra-side orders. The Exchange believes that permitting multiple
contra-parties to QCC Orders that total the number of contracts on the
originating side may increase liquidity and, potentially, improve the
prices at which QCC Orders get executed. The ability for market
participants to provide liquidity in response to large sized orders is
directly proportional to the size and associated risk of the resulting
position. As a result, smaller sized trades are often done at a better
price than larger sized trades, which convey more risk. The ability to
pool together multiple market participants to participate on the
contra-side of a trade for any size has a direct and positive impact on
the ability of those market participants to provide the best price as
they compete to participate in the order without being compelled to
provide liquidity with a large minimum quantity. This concept is not
unique to large crosses. It is well understood and observed that any
product with multiple market participants providing liquidity offers
the tightest and most liquid market and the same applies to the larger
orders negotiated away from the exchanges.
For instance, a 5,000 contract originating QCC Order to buy could,
[[Page 24778]]
under this proposal, be coupled with two orders to sell 2,500 contracts
each. Similarly, a 5,000 contract originating QCC Order to buy could,
under this proposal, be coupled with two contra-side orders to sell,
one for 4,500 contracts and one for 500 contracts. In the above
examples, the total of all sell (contra-side) orders equals the size of
the originating order and the originating order is for at least 1,000
contracts.
An area of concern has been the protection of smaller orders, which
is why the QCC Order is limited to the 1,000 contract minimum. It is
important to note that the concern has always been and should continue
to be for the originating order or unsolicited part of the order that
is seeking liquidity and not the professional responders and providers
of liquidity. Allowing smaller orders to participate on the other side
(i.e., contra-side) of QCC Orders not only provides the best price and
opportunity for a trade to occur in a tight and liquid market, but
ensures that the highest possible number of liquidity providers are
able to participate. Accordingly, the proposal would benefit both sides
of a QCC trade by ensuring a trade at the best possible price without
favoring larger participants on the solicited side of the trade.
Under this proposal, the QCC Order must continue to satisfy all
other requirements of a QCC Order under the Exchange's rules.
The Exchange will track and monitor QCC Orders to determine which
is the originating/agency side of the order and which is the contra-
side(s) of the order to ensure that Members are complying with the
minimum 1,000 contract size limitation on the originating/agency side
of the QCC Order. The Exchange will check to see if Members are
aggregating multiple orders to meet the 1,000 contract minimum on the
originating/agency side of the trade in violation of the requirements
of the rule. The rule requires that the originating/agency side of the
trade consist of one party who is submitting a QCC Order for at least
1,000 contracts. The Exchange represents that it will enforce
compliance with this portion of the rule by checking to see if a Member
breaks up the originating/agency side of the order in a post trade
allocation to different clearing firms, allocating less than 1,000
contracts to a party or multiple parties. For example, a Member enters
a QCC Order into the system for 1,500 contracts and receives an
execution. Subsequent to the execution, the Member allocates the
originating/agency side of the order to two different clearing firms on
a post trade allocation basis, thereby allocating 500 contracts to one
clearing firm and 1,000 contracts to another clearing firm. This type
of transaction would not meet the requirements of a QCC Order under the
current and proposed rule.
With regard to order entry, a Member will have to mark the
originating/agency side as the first order in the system and the
contra-side(s) as the second. The Exchange will monitor order entries
to ensure that Members are properly entering QCC Orders into the
system.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \5\ in general, and furthers the objectives of Section
6(b)(5) of the Act \6\ 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 amending the rule text to expand a QCC Order. Specifically, because
the proposal states that multiple parties are permitted on the contra-
side, it should provide members and participants with certainty as to
what is allowed and, therefore, provide more opportunity to participate
in QCC trades, consistent with the key principles behind the QCC Order.
Furthermore, because the proposal permits a single or multiple contra-
parties without any contract size requirement so long as they total the
originating size, it should also increase liquidity and improve the
prices at which QCC Orders get executed and, therefore, provide more
opportunity to participate in QCC trades, consistent with the key
principles behind the QCC Order.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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In approving QCC Orders, the Commission has stated that ``. . .
qualified contingent trades are of benefit to the market as a whole and
a contribution to the efficient functioning of the securities markets
and the price discovery process.'' \7\ The Commission ``also has
recognized that contingent trades can be useful trading tools for
investors and other market participants, particularly those who trade
the securities of issuers involved in mergers, different classes of
shares of the same issuer, convertible securities, and equity
derivatives such as options [emphasis added].'' \8\ In light of these
benefits, the Exchange believes that the proposal should improve the
usefulness of the QCC Order without raising novel regulatory issues,
because the proposal does not impact the fundamental aspects of this
order type--it merely permits multiple contra-parties, regardless of
size, on the contra-side, while preserving the 1,000 contract minimum
on the originating order.
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\7\ QCC Approval Order [sic] at text accompanying footnote 115.
\8\ QCC Approval Order [sic] at Section III.A. citing Securities
Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829
(September 7, 2006) (Original QCT Exemption).
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Consistent with Section 6(b)(8) of the Act, the Exchange seeks to
compete with other options exchanges for QCC Orders involving multiple
parties, including where there are multiple contra-parties. The
Exchange believes that this will be beneficial to participants because
allowing single or multiple contra-parties of any size on the contra-
side should foster competition for filling the contra-side of a QCC
Order and thereby result in potentially better prices.
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. In fact, the proposal is
intended to relieve a burden on competition, which results from
different exchanges interpreting their rules differently. Among the
options exchanges, the Exchange believes that the proposal to allow, on
the contra-side, a single or multiple contra-parties without any
contract size restriction so long as they total the originating size
should foster competition for filling the contra-side of a QCC order
and thereby result in potentially better prices for such orders.
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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \9\ and rule 19b-4(f)(6) thereunder.\10\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
[[Page 24779]]
Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\11\
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\9\ 15 U.S.C. 78s(b)(3)(A)(iii).
\10\ 17 CFR 240.196-4(f)(6).
\11\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\13\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Commission believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest, as it will help
eliminate investor confusion and promote competition among the option
exchanges.\14\ Therefore, the Commission designates the proposed rule
change to be operative upon filing.
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\12\ 17 CFR 240.19b-4(f)(6).
\13\ 17 CFR 240.19b-4(f)(6)(iii).
\14\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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The Commission notes that, given the differing requirements as
between the originating side and contra-side for QCC Orders, it is
essential that the Exchange be able to clearly identify and monitor--
throughout the life of a QCC Order, beginning at time of order entry on
the Exchange through the post-trade allocation process--each side of
the QCC Order and ensure that the requirements of the order type are
being satisfied including, importantly, those relating to the
originating side. The Commission believes this to be critical so that
the Exchange can ensure that market participants are not able to
circumvent the requirements of the QCC Order (as amended by this
proposed rule change), each of which the Commission continues to
believe are critical to ensuring that the QCC Order is narrowly
drawn.\15\ Further, the Commission notes that the Exchange has made
certain representations regarding its enforcement and surveillance of
its Members' use of QCC Orders, including, for example, not only at the
time of order entry, but through the post-trade allocation process as
well.
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\15\ The Commission expects the Exchange to have the capability
to enable it to surveil that such requirements are being met. Though
the Exchange has stated its ability to do so, if the Exchange is not
able to have such monitoring at any point in time, the Commission
would expect the Exchange to take other steps to ensure that the QCC
Order cannot be improperly used. For example, if the Exchange were
not able to identify and monitor which side of a QCC Order is the
originating order, the Commission would expect that it would require
that both sides of the QCC Order meet the more stringent
requirements of the originating side, i.e., that it be for a single
order for at least 1,000 contracts.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or 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-2014-25 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2014-25. 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 the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2014-25, and should be
submitted on or before May 22, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09923 Filed 4-30-14; 8:45 am]
BILLING CODE 8011-01-P
