Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Anti-Internalization Functionality for Registered Market Makers on the PHLX Options Market, 72740-72743 [2014-28646]
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72740
Federal Register / Vol. 79, No. 235 / Monday, December 8, 2014 / Notices
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing will also 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–
NYSEArca–2014–126 and should be
submitted on or before December 29,
2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–28644 Filed 12–5–14; 8:45 am]
BILLING CODE P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73719; File No. SR–Phlx–
2014–76]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Adopt AntiInternalization Functionality for
Registered Market Makers on the PHLX
Options Market
mstockstill on DSK4VPTVN1PROD with NOTICES
December 2, 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 November
28, 2014, NASDAQ OMX PHLX LLC
(‘‘Phlx,’’ ‘‘PHLX,’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
42 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Commission (‘‘Commission’’) a
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 Substance of
the Proposed Rule Change
The Exchange proposes to adopt antiinternalization functionality for
registered market makers on the PHLX
Options Market.
While these amendments are effective
upon filing, the Exchange has
designated the proposed amendments to
be operative on or before January 15,
2015.
The text of the proposed rule change
is below; proposed new language is
italicized; proposed deletions are in
brackets.
*
*
*
*
*
Rule 1080. Phlx XL and Phlx XL II
(a)–(o) No Change.
(p) Execution Protections
(1) Acceptable Trade Range.
(A) After the opening, the System will
calculate an Acceptable Trade Range to
limit the range of prices at which an
order or quote (except an All-or-none
order) will be allowed to execute. The
Acceptable Trade Range is calculated by
taking the Reference Price, plus or
minus a value to be determined by the
Exchange. (i.e., the Reference Price ¥
(x) for sell orders/quotes and the
Reference Price + (x) for buy orders/
quotes). Upon receipt of a new order/
quote, the Reference Price is the
National Best Bid (‘‘NBB’’) for sell
orders and the National Best Offer
(‘‘NBO’’) for buy orders/quotes or the
last price at which the order/quote is
posted whichever is higher for a buy
order/quote or lower for a sell order/
quote.
(B) If an order/quote reaches the outer
limit of the Acceptable Trade Range (the
‘‘Threshold Price’’) without being fully
executed, it will be posted at the
Threshold Price for a brief period, not
to exceed one second (‘‘Posting
Period’’), to allow more liquidity to be
collected, unless a Quote Exhaust has
occurred, in which case the Quote
Exhaust process in Rule 1082(a)(ii)(B)(3)
will ensue, triggering a new Reference
Price. Upon posting, either the current
Threshold Price of the order or an
updated NBB for buy orders or the NBO
for sell orders (whichever is higher for
a buy order/lower for a sell order) then
becomes the Reference Price for
calculating a new Acceptable Trade
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Range. If the order/quote remains
unexecuted, a New Acceptable Trade
Range will be calculated and the order/
quote will execute, route, or post up to
the new Acceptable Trade Range
Threshold Price, unless a member
organization has requested that their
orders be returned if posted at the outer
limit of the Acceptable Trade Range (in
which case, the order will be returned).
This process will repeat until either (i)
the order/quote is executed, cancelled,
or posted at its limit price or (ii) the
order has been subject to a configurable
number of instances of the Acceptable
Trade Range as determined by the
Exchange (in which case it will be
returned).
(C) During the Posting Period, the
Exchange will disseminate as a
quotation: (i) The Threshold Price for
the remaining size of the order
triggering the Acceptable Trade Range
and (ii) on the opposite side of the
market, the best price will be displayed
using the ‘‘non-firm’’ indicator message
in accordance with the specifications of
the network processor. Following the
Posting Period, the Exchange will return
to a normal trading state and
disseminate its best bid and offer.
(2) Anti-Internalization—Quotes and
orders entered by Specialists and
Registered Options Traders (as defined
in Rule 1014) using the same Phlx badge
will not be executed against quotes and
orders entered on the opposite side of
the market using the same badge. In
such a case, the System will cancel the
resting quote or order back to the
entering party prior to execution. This
functionality shall not apply in any
auction or with respect to complex
transactions.
(3) Order Price Protection (‘‘OPP’’).
OPP is a feature of Phlx XL that
prevents certain day limit, good til
cancelled, immediate or cancel, and allor-none orders at prices outside of preset standard limits from being accepted
by the system. OPP applies to all
options but does not apply to market
orders, stop limit orders, Intermarket
Sweep Orders or complex orders.
(A) OPP is operational each trading
day after the opening until the close of
trading, except during trading halts. The
Exchange may also temporarily
deactivate OPP from time to time on an
intraday basis at its discretion if it
determines that volatility warrants
deactivation. Members will be notified
of intraday OPP deactivation due to
volatility and any subsequent intraday
reactivation by the Exchange through
the issuance of system status messages.
(B) OPP will reject incoming orders
that exceed certain parameters
according to the following algorithm.
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(i) If the NBBO on the contra-side of
an incoming order is greater than $1.00,
orders with a limit more than 50%
through such contra-side NBBO will be
rejected by Phlx XL upon receipt. For
example, if the NBBO on the offer side
is $1.10, an order to buy options for
more than $1.65 would be rejected.
Similarly, if the NBBO on the bid side
is $1.10, an order to sell options for less
than $0.55 will be rejected.
(ii) If the NBBO on the contra-side of
an incoming order is less than or equal
to $1.00, orders with a limit more than
100% through such contra-side NBBO
will be rejected by Phlx XL upon receipt.
For example, if the NBBO on the offer
side is $1.00, an order to buy options for
more than $2.00 would be rejected.
However, if the NBBO of the bid side of
an incoming order to sell is less than or
equal to $1.00, the OPP limits set forth
above will result in all incoming sell
orders being accepted regardless of their
limit. To illustrate, if the NBBO on the
bid side is equal to $1.00, the OPP limits
provide protection such that all orders
to sell with a limit less than $0.00 would
be rejected.
(iii) For purposes of this rule, the
NBBO is defined as the PBBO for singlylisted issues.
Commentary .01–.06 No Change.
[Commentary .07—Order Price
Protection (‘‘OPP’’). OPP is a feature of
Phlx XL that prevents certain day limit,
good til cancelled, immediate or cancel,
and all-or-none orders at prices outside
of pre-set standard limits from being
accepted by the system. OPP applies to
all options but does not apply to market
orders, stop limit orders, Intermarket
Sweep Orders or complex orders.
(a) OPP is operational each trading
day after the opening until the close of
trading, except during trading halts. The
Exchange may also temporarily
deactivate OPP from time to time on an
intraday basis at its discretion if it
determines that volatility warrants
deactivation. Members will be notified
of intraday OPP deactivation due to
volatility and any subsequent intraday
reactivation by the Exchange through
the issuance of system status messages.
(b) OPP will reject incoming orders
that exceed certain parameters
according to the following algorithm.
(i) If the NBBO on the contra-side of
an incoming order is greater than $1.00,
orders with a limit more than 50%
through such contra-side NBBO will be
rejected by Phlx XL upon receipt. For
example, if the NBBO on the offer side
is $1.10, an order to buy options for
more than $1.65 would be rejected.
Similarly, if the NBBO on the bid side
is $1.10, an order to sell options for less
than $0.55 will be rejected.
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(ii) If the NBBO on the contra-side of
an incoming order is less than or equal
to $1.00, orders with a limit more than
100% through such contra-side NBBO
will be rejected by Phlx XL upon
receipt. For example, if the NBBO on
the offer side is $1.00, an order to buy
options for more than $2.00 would be
rejected. However, if the NBBO of the
bid side of an incoming order to sell is
less than or equal to $1.00, the OPP
limits set forth above will result in all
incoming sell orders being accepted
regardless of their limit. To illustrate, if
the NBBO on the bid side is equal to
$1.00, the OPP limits provide protection
such that all orders to sell with a limit
less than $0.00 would be rejected.
(iii) For purposes of this rule, the
NBBO is defined as the PBBO for singlylisted issues.]
Commentary .08—Renumbered as
Commentary .07.
Commentary .09—Renumbered as
Commentary .08.
*
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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
PHLX is proposing to provide antiinternalization (‘‘AIQ’’) functionality to
Specialists and Registered Options
Traders on the PHLX Options Market.3
Anti-internalization functionality is
widely available and has been for many
years.4 It is designed to assist market
3 See PHLX Rule 1014. The category of Specialist
and Registered Options Traders (‘‘ROTs’’) as
defined in Rule 1014 are all considered market
makers on the Exchange. This category includes the
subcategories of Streaming Quote Traders (‘‘SQTs’’),
Remote Streaming Quote Traders (‘‘RSQTs’’), and
Non-SQT ROTs, all of which have market making
obligations also defined in Rule 1014.
4 See, e.g., NASDAQ Rule 4757(a)(4), NASDAQ
Options Market Rule Chapter VI, Section 10(6),
NYSE Arca Equities Rule 7.31(qq)(2), and BATS
Rule 11.9(f)(2). PSX Rule 3307(c) governing trading
on the PHLX equity facility provides similar selfmatch prevention for equities trading.
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72741
participants in complying with certain
rules and regulations of the Employee
Retirement Income Security Act
(‘‘ERISA’’) that preclude and/or limit
managing broker-dealers of such
accounts from trading as principal with
orders generated for those accounts. It
can also assist market makers in
reducing trading costs from unwanted
executions potentially resulting from
the interaction of executable buy and
sell trading interest from the same firm
when performing the same market
making function.
Under the proposal, quotes and orders
entered by Specialists and Registered
Options Traders using the same PHLX
badge will automatically be prevented
from interacting with each other in the
System. Rather than executing quotes or
orders from the same badge, the System
will instead cancel the resting quotes
and orders back to the entering party.
PHLX uses ‘‘badges’’ to identify the
party or parties entering trades into the
System, similar to Market Participant
Identifiers (MPIDs) and other mnemonic
devices used at other exchanges.
Because firms have multiple badges
associated with multiple functions,
linking AIQ to specific badges ensures
that the functionality will be limited to
the appropriate function, as explained
in more detail below. Tying AIQ to
specific PHLX badges will also enable
market participants to carefully and
systematically target the orders that
should be prevented from interacting.
AIQ will apply in the PHLX XL
system with respect to simple orders
only; it will not apply in any auction or
with respect to complex transactions.
AIQ is difficult to apply during
auctions, and there is limited benefit in
doing so. The difficulty stems from the
need to freeze the order book and
quickly arrange and match large
quantities of orders based upon simple
instructions. Even if that could be
accomplished, there is limited benefit
because, generally speaking, auctions do
not raise the same policy concerns for
wash sales and ERISA due to the semirandom manner in which trades are
matched.5 AIQ is unnecessary with
respect to complex orders due to the
highly specialized nature of such orders
and the high level of control that market
participants exercise over complex
orders. In addition, owing to the number
of different legs involved in complex
orders, applying AIQ to complex orders
would also require freezing the book,
which market participants and PHLX
view as detrimental to the market.
Anti-internalization functionality was
requested by Specialists and Registered
5 See
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NYSE Arca Equities Rule 7.31(qq).
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Federal Register / Vol. 79, No. 235 / Monday, December 8, 2014 / Notices
Options Traders on PHLX. Antiinternalization processing is available
only to market makers and only on an
individual badge basis. Specialists and
Registered Options Traders that conduct
order entry business via alternative
badges will not be afforded the
protection of AIQ functionality with
respect to such alternative badges.
PHLX considered making AIQ
functionality available to other
participants, but rejected that approach.
Limiting AIQ to Specialists and
Registered Options Traders also helps to
maintain simplicity of System
processing.6
PHLX notes that use of the
functionality does not relieve or
otherwise modify the duty of best
execution owed to orders received from
public customers. Options market
makers generally do not display
customer orders in market making
quotations, opting instead to enter
customer orders using separate
identifiers. In the event that an options
market maker opts to include a
customer order within a market making
quotation, the market maker must take
appropriate steps to ensure that public
customer orders that do not execute due
to 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.
Finally, the Exchange is proposing to
combine several existing price
protection mechanisms in Rule 1080(p)
and to rename that subsection as
‘‘Execution Protections, [sic] PHLX
believes the rules will become clearer by
adding AIQ and moving current
Commentary .07 governing Order Price
Protection to existing Rule 1080(p)
governing the Acceptable Trade Range.
As a result, PHLX will renumber
existing Commentaries .08 and .09 as
Commentaries .07 and .08. The
proposed changes will not impact the
substance and operation of the existing
functionality of the Acceptable Trade
Range, Order Price Protection or
Commentaries .08 and .09.
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2. Statutory Basis
PHLX believes that the proposed rule
change is consistent with the provisions
of Section 6 of the Act,7 in general, and
with Section 6(b)(5) of the Act 8 in
particular, in that the proposal is
designed to prevent fraudulent and
6 If demand should arise from other participants,
PHLX will reconsider providing this functionality
to all participants at that time.
7 15 U.S.C. 78f.
8 15 U.S.C. 78f(b)(5).
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manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. Specifically, PHLX
believes that the change, which is
responsive to member input, will
facilitate transactions in securities and
perfect the mechanism of a free and
open market by providing Specialists
and Registered Options Traders with
additional functionality that will assist
them with managing the book of orders
that they submit to PHLX and the
associated execution costs.
PHLX believes the proposal is
consistent with the Act because it
provides tools for Specialists and
Registered Options Traders to comply
with existing rules against
internalization in certain circumstances.
Limiting AIQ to Specialists and
Registered Options Traders is consistent
with the Act because inadvertent
internalization is much more likely to
impact market makers than other
participants and offering AIQ more
broadly would burden the System and
provide little or no offsetting regulatory
benefit. Finally, PHLX believes that it is
reasonable to limit AIQ to simple
options orders, as opposed to complex
options and auctions, because the
execution risk is much lower with
respect to complex options and auctions
and because those functions operate
quite differently than individual orders
in simple options.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
PHLX does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
Specifically, by providing market
participants additional tools to prevent
inadvertent internalization of orders
submitted to PHLX, the change has the
potential to improve the trading
environment on the Exchange, which
will enhance PHLX’s competitiveness
with respect to other trading venues,
thereby promoting greater competition.
Moreover, the change does not burden
competition in that it will be provided
at no additional cost to members.
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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
Because the foregoing 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 Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(ii) [sic] of the Act 9 and
subparagraph (f)(6) of Rule 19b–4
thereunder.10
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–2014–76 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–2014–76. This file
9 15
U.S.C. 78s(b)(3)(a)(ii) [sic].
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
10 17
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Federal Register / Vol. 79, No. 235 / Monday, December 8, 2014 / Notices
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2014–76, and should be submitted on or
before December 29, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–28646 Filed 12–5–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73714; File No. SR–FINRA–
2014–049]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Adopt FINRA Rule
2122 (Charges for Services Performed)
in the Consolidated FINRA Rulebook
mstockstill on DSK4VPTVN1PROD with NOTICES
December 2, 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 November
21, 2014, Financial Industry Regulatory
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
Authority, Inc. (‘‘FINRA’’) 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 FINRA. FINRA has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt NASD
Rule 2430 (Charges for Services
Performed) as FINRA Rule 2122
(Charges for Services Performed)
without any substantive changes.
FINRA also proposes to update a crossreference within FINRA Rule 0150
accordingly.
Below is the text of the proposed rule
change. Proposed new language is in
italics; proposed deletions are in
brackets.
*
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*
FINRA Rules
*
*
*
*
*
0150. Application of Rules to Exempted
Securities Except Municipal Securities
(a) through (b) No Change.
(c) Unless otherwise indicated within
a particular Rule, the following FINRA
and NASD rules are applicable to
transactions in, and business activities
relating to, exempted securities, except
municipal securities, conducted by
members and associated persons:
FINRA Rules 2010, 2020, 2060, 2111,
2122, 2150, 2210, 2212, 2261, 2268,
2269, 2320(g), 3110, 3220, 3270, 4120,
4130, 4210, 4311, 4330, 4360, 4510
Series, 4530, 5160, 5210, 5220, 5230,
5310, 5340, 8110, 8120, 8210, 8310,
8311, 8312, 8320, 8330 and 9552; NASD
Rules IM–2210–2, 2340, [2430,] 2510,
3040, 3050 and 3140.
*
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*
*
*
[2430] 2122. Charges for Services
Performed
Charges, if any, for services
performed, including, but not limited to,
miscellaneous services such as
collection of monie[y]s due for
principal, dividends, or interest;
exchange or transfer of securities;
appraisals, safe-keeping or custody of
securities, and other services[,] shall be
1 15
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PO 00000
reasonable and not unfairly
discriminatory [between] among
customers.
*
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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,
FINRA 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. FINRA 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
As part of the process of developing
a new consolidated rulebook
(‘‘Consolidated FINRA Rulebook’’),4
FINRA is proposing to transfer NASD
Rule 2430 (Charges for Services
Performed) into the Consolidated
FINRA Rulebook as FINRA Rule 2122
(Charges for Services Performed)
without any substantive changes.
Proposed FINRA Rule 2122 states that
charges, if any, for services performed,
including, but not limited to,
miscellaneous services such as
collection of monies due for principal,
dividends, or interest; exchange or
transfer of securities; appraisals, safekeeping or custody of securities, and
other services shall be reasonable and
not unfairly discriminatory among
customers. Proposed FINRA Rule 2122
closely tracks the language of NASD
Rule 2430 but makes non-substantive
changes to the text of the NASD rule.5
4 The current FINRA rulebook consists of: (1)
FINRA Rules; (2) NASD Rules; and (3) rules
incorporated from New York Stock Exchange LLC
(‘‘NYSE’’) (‘‘Incorporated NYSE Rules’’) (together,
the NASD Rules and Incorporated NYSE Rules are
referred to as the ‘‘Transitional Rulebook’’). While
the NASD Rules generally apply to all FINRA
members, the Incorporated NYSE Rules apply only
to those members of FINRA that are also members
of the NYSE (‘‘Dual Members’’). The FINRA Rules
apply to all FINRA members, unless such rules
have a more limited application by their terms. For
more information about the rulebook consolidation
process, see Information Notice, March 12, 2008
(Rulebook Consolidation Process).
5 FINRA previously solicited comment on a
proposal to move NASD Rule 2430 to the
Consolidated FINRA Rulebook with substantive
changes. See Regulatory Notice 11–08 (February
2011); see also Regulatory Notice 13–07 (January
2013). Given that FINRA would like to proceed
CFR 240.19b–4(f)(6).
Frm 00123
Fmt 4703
72743
Continued
Sfmt 4703
E:\FR\FM\08DEN1.SGM
08DEN1
]]>Agencies
[Federal Register Volume 79, Number 235 (Monday, December 8, 2014)]
[Proposed Rules]
[Pages 72740-72743]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28646]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73719; File No. SR-Phlx-2014-76]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Anti-Internalization Functionality for Registered Market Makers on the
PHLX Options Market
December 2, 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 November 28, 2014, NASDAQ OMX PHLX LLC (``Phlx,'' ``PHLX,'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt anti-internalization functionality
for registered market makers on the PHLX Options Market.
While these amendments are effective upon filing, the Exchange has
designated the proposed amendments to be operative on or before January
15, 2015.
The text of the proposed rule change is below; proposed new
language is italicized; proposed deletions are in brackets.
* * * * *
Rule 1080. Phlx XL and Phlx XL II
(a)-(o) No Change.
(p) Execution Protections
(1) Acceptable Trade Range.
(A) After the opening, the System will calculate an Acceptable
Trade Range to limit the range of prices at which an order or quote
(except an All-or-none order) will be allowed to execute. The
Acceptable Trade Range is calculated by taking the Reference Price,
plus or minus a value to be determined by the Exchange. (i.e., the
Reference Price - (x) for sell orders/quotes and the Reference Price +
(x) for buy orders/quotes). Upon receipt of a new order/quote, the
Reference Price is the National Best Bid (``NBB'') for sell orders and
the National Best Offer (``NBO'') for buy orders/quotes or the last
price at which the order/quote is posted whichever is higher for a buy
order/quote or lower for a sell order/quote.
(B) If an order/quote reaches the outer limit of the Acceptable
Trade Range (the ``Threshold Price'') without being fully executed, it
will be posted at the Threshold Price for a brief period, not to exceed
one second (``Posting Period''), to allow more liquidity to be
collected, unless a Quote Exhaust has occurred, in which case the Quote
Exhaust process in Rule 1082(a)(ii)(B)(3) will ensue, triggering a new
Reference Price. Upon posting, either the current Threshold Price of
the order or an updated NBB for buy orders or the NBO for sell orders
(whichever is higher for a buy order/lower for a sell order) then
becomes the Reference Price for calculating a new Acceptable Trade
Range. If the order/quote remains unexecuted, a New Acceptable Trade
Range will be calculated and the order/quote will execute, route, or
post up to the new Acceptable Trade Range Threshold Price, unless a
member organization has requested that their orders be returned if
posted at the outer limit of the Acceptable Trade Range (in which case,
the order will be returned). This process will repeat until either (i)
the order/quote is executed, cancelled, or posted at its limit price or
(ii) the order has been subject to a configurable number of instances
of the Acceptable Trade Range as determined by the Exchange (in which
case it will be returned).
(C) During the Posting Period, the Exchange will disseminate as a
quotation: (i) The Threshold Price for the remaining size of the order
triggering the Acceptable Trade Range and (ii) on the opposite side of
the market, the best price will be displayed using the ``non-firm''
indicator message in accordance with the specifications of the network
processor. Following the Posting Period, the Exchange will return to a
normal trading state and disseminate its best bid and offer.
(2) Anti-Internalization--Quotes and orders entered by Specialists
and Registered Options Traders (as defined in Rule 1014) using the same
Phlx badge will not be executed against quotes and orders entered on
the opposite side of the market using the same badge. In such a case,
the System will cancel the resting quote or order back to the entering
party prior to execution. This functionality shall not apply in any
auction or with respect to complex transactions.
(3) Order Price Protection (``OPP''). OPP is a feature of Phlx XL
that prevents certain day limit, good til cancelled, immediate or
cancel, and all-or-none orders at prices outside of pre-set standard
limits from being accepted by the system. OPP applies to all options
but does not apply to market orders, stop limit orders, Intermarket
Sweep Orders or complex orders.
(A) OPP is operational each trading day after the opening until the
close of trading, except during trading halts. The Exchange may also
temporarily deactivate OPP from time to time on an intraday basis at
its discretion if it determines that volatility warrants deactivation.
Members will be notified of intraday OPP deactivation due to volatility
and any subsequent intraday reactivation by the Exchange through the
issuance of system status messages.
(B) OPP will reject incoming orders that exceed certain parameters
according to the following algorithm.
[[Page 72741]]
(i) If the NBBO on the contra-side of an incoming order is greater
than $1.00, orders with a limit more than 50% through such contra-side
NBBO will be rejected by Phlx XL upon receipt. For example, if the NBBO
on the offer side is $1.10, an order to buy options for more than $1.65
would be rejected. Similarly, if the NBBO on the bid side is $1.10, an
order to sell options for less than $0.55 will be rejected.
(ii) If the NBBO on the contra-side of an incoming order is less
than or equal to $1.00, orders with a limit more than 100% through such
contra-side NBBO will be rejected by Phlx XL upon receipt. For example,
if the NBBO on the offer side is $1.00, an order to buy options for
more than $2.00 would be rejected. However, if the NBBO of the bid side
of an incoming order to sell is less than or equal to $1.00, the OPP
limits set forth above will result in all incoming sell orders being
accepted regardless of their limit. To illustrate, if the NBBO on the
bid side is equal to $1.00, the OPP limits provide protection such that
all orders to sell with a limit less than $0.00 would be rejected.
(iii) For purposes of this rule, the NBBO is defined as the PBBO
for singly-listed issues.
Commentary .01-.06 No Change.
[Commentary .07--Order Price Protection (``OPP''). OPP is a feature
of Phlx XL that prevents certain day limit, good til cancelled,
immediate or cancel, and all-or-none orders at prices outside of pre-
set standard limits from being accepted by the system. OPP applies to
all options but does not apply to market orders, stop limit orders,
Intermarket Sweep Orders or complex orders.
(a) OPP is operational each trading day after the opening until the
close of trading, except during trading halts. The Exchange may also
temporarily deactivate OPP from time to time on an intraday basis at
its discretion if it determines that volatility warrants deactivation.
Members will be notified of intraday OPP deactivation due to volatility
and any subsequent intraday reactivation by the Exchange through the
issuance of system status messages.
(b) OPP will reject incoming orders that exceed certain parameters
according to the following algorithm.
(i) If the NBBO on the contra-side of an incoming order is greater
than $1.00, orders with a limit more than 50% through such contra-side
NBBO will be rejected by Phlx XL upon receipt. For example, if the NBBO
on the offer side is $1.10, an order to buy options for more than $1.65
would be rejected. Similarly, if the NBBO on the bid side is $1.10, an
order to sell options for less than $0.55 will be rejected.
(ii) If the NBBO on the contra-side of an incoming order is less
than or equal to $1.00, orders with a limit more than 100% through such
contra-side NBBO will be rejected by Phlx XL upon receipt. For example,
if the NBBO on the offer side is $1.00, an order to buy options for
more than $2.00 would be rejected. However, if the NBBO of the bid side
of an incoming order to sell is less than or equal to $1.00, the OPP
limits set forth above will result in all incoming sell orders being
accepted regardless of their limit. To illustrate, if the NBBO on the
bid side is equal to $1.00, the OPP limits provide protection such that
all orders to sell with a limit less than $0.00 would be rejected.
(iii) For purposes of this rule, the NBBO is defined as the PBBO
for singly-listed issues.]
Commentary .08--Renumbered as Commentary .07.
Commentary .09--Renumbered as Commentary .08.
* * * * *
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
PHLX is proposing to provide anti-internalization (``AIQ'')
functionality to Specialists and Registered Options Traders on the PHLX
Options Market.\3\ Anti-internalization functionality is widely
available and has been for many years.\4\ It 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 managing broker-dealers of such accounts from trading as
principal with orders generated for those accounts. It can also assist
market makers in reducing trading costs from unwanted executions
potentially resulting from the interaction of executable buy and sell
trading interest from the same firm when performing the same market
making function.
---------------------------------------------------------------------------
\3\ See PHLX Rule 1014. The category of Specialist and
Registered Options Traders (``ROTs'') as defined in Rule 1014 are
all considered market makers on the Exchange. This category includes
the subcategories of Streaming Quote Traders (``SQTs''), Remote
Streaming Quote Traders (``RSQTs''), and Non-SQT ROTs, all of which
have market making obligations also defined in Rule 1014.
\4\ See, e.g., NASDAQ Rule 4757(a)(4), NASDAQ Options Market
Rule Chapter VI, Section 10(6), NYSE Arca Equities Rule 7.31(qq)(2),
and BATS Rule 11.9(f)(2). PSX Rule 3307(c) governing trading on the
PHLX equity facility provides similar self-match prevention for
equities trading.
---------------------------------------------------------------------------
Under the proposal, quotes and orders entered by Specialists and
Registered Options Traders using the same PHLX badge will automatically
be prevented from interacting with each other in the System. Rather
than executing quotes or orders from the same badge, the System will
instead cancel the resting quotes and orders back to the entering
party. PHLX uses ``badges'' to identify the party or parties entering
trades into the System, similar to Market Participant Identifiers
(MPIDs) and other mnemonic devices used at other exchanges. Because
firms have multiple badges associated with multiple functions, linking
AIQ to specific badges ensures that the functionality will be limited
to the appropriate function, as explained in more detail below. Tying
AIQ to specific PHLX badges will also enable market participants to
carefully and systematically target the orders that should be prevented
from interacting.
AIQ will apply in the PHLX XL system with respect to simple orders
only; it will not apply in any auction or with respect to complex
transactions. AIQ is difficult to apply during auctions, and there is
limited benefit in doing so. The difficulty stems from the need to
freeze the order book and quickly arrange and match large quantities of
orders based upon simple instructions. Even if that could be
accomplished, there is limited benefit because, generally speaking,
auctions do not raise the same policy concerns for wash sales and ERISA
due to the semi-random manner in which trades are matched.\5\ AIQ is
unnecessary with respect to complex orders due to the highly
specialized nature of such orders and the high level of control that
market participants exercise over complex orders. In addition, owing to
the number of different legs involved in complex orders, applying AIQ
to complex orders would also require freezing the book, which market
participants and PHLX view as detrimental to the market.
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\5\ See NYSE Arca Equities Rule 7.31(qq).
---------------------------------------------------------------------------
Anti-internalization functionality was requested by Specialists and
Registered
[[Page 72742]]
Options Traders on PHLX. Anti-internalization processing is available
only to market makers and only on an individual badge basis.
Specialists and Registered Options Traders that conduct order entry
business via alternative badges will not be afforded the protection of
AIQ functionality with respect to such alternative badges. PHLX
considered making AIQ functionality available to other participants,
but rejected that approach. Limiting AIQ to Specialists and Registered
Options Traders also helps to maintain simplicity of System
processing.\6\
---------------------------------------------------------------------------
\6\ If demand should arise from other participants, PHLX will
reconsider providing this functionality to all participants at that
time.
---------------------------------------------------------------------------
PHLX notes that use of the functionality does not relieve or
otherwise modify the duty of best execution owed to orders received
from public customers. Options market makers generally do not display
customer orders in market making quotations, opting instead to enter
customer orders using separate identifiers. In the event that an
options market maker opts to include a customer order within a market
making quotation, the market maker must take appropriate steps to
ensure that public customer orders that do not execute due to 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.
Finally, the Exchange is proposing to combine several existing
price protection mechanisms in Rule 1080(p) and to rename that
subsection as ``Execution Protections, [sic] PHLX believes the rules
will become clearer by adding AIQ and moving current Commentary .07
governing Order Price Protection to existing Rule 1080(p) governing the
Acceptable Trade Range. As a result, PHLX will renumber existing
Commentaries .08 and .09 as Commentaries .07 and .08. The proposed
changes will not impact the substance and operation of the existing
functionality of the Acceptable Trade Range, Order Price Protection or
Commentaries .08 and .09.
2. Statutory Basis
PHLX believes that the proposed rule change is consistent with the
provisions of Section 6 of the Act,\7\ in general, and with Section
6(b)(5) of the Act \8\ in particular, in that the proposal is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. Specifically, PHLX believes
that the change, which is responsive to member input, will facilitate
transactions in securities and perfect the mechanism of a free and open
market by providing Specialists and Registered Options Traders with
additional functionality that will assist them with managing the book
of orders that they submit to PHLX and the associated execution costs.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78f.
\8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
PHLX believes the proposal is consistent with the Act because it
provides tools for Specialists and Registered Options Traders to comply
with existing rules against internalization in certain circumstances.
Limiting AIQ to Specialists and Registered Options Traders is
consistent with the Act because inadvertent internalization is much
more likely to impact market makers than other participants and
offering AIQ more broadly would burden the System and provide little or
no offsetting regulatory benefit. Finally, PHLX believes that it is
reasonable to limit AIQ to simple options orders, as opposed to complex
options and auctions, because the execution risk is much lower with
respect to complex options and auctions and because those functions
operate quite differently than individual orders in simple options.
B. Self-Regulatory Organization's Statement on Burden on Competition
PHLX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Specifically, by
providing market participants additional tools to prevent inadvertent
internalization of orders submitted to PHLX, the change has the
potential to improve the trading environment on the Exchange, which
will enhance PHLX's competitiveness with respect to other trading
venues, thereby promoting greater competition. Moreover, the change
does not burden competition in that it will be provided at no
additional cost to members.
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
Because the foregoing 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 Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(ii) [sic] of the Act \9\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\10\
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78s(b)(3)(a)(ii) [sic].
\10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
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-2014-76 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-2014-76. This file
[[Page 72743]]
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal offices of the Exchange.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-Phlx-2014-76,
and should be submitted on or before December 29, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28646 Filed 12-5-14; 8:45 am]
BILLING CODE 8011-01-P
