Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing of Proposed Rule Change To Amend Rule 1017, Openings in Options, 56733-56742 [2016-19896]
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Federal Register / Vol. 81, No. 162 / Monday, August 22, 2016 / Notices
asabaliauskas on DSK3SPTVN1PROD with NOTICES
(6) The Equity Securities in which the
Fund will invest will be listed on a U.S.
or a non-U.S. exchange.41
(7) ETFs included in the Fund will be
listed and traded in the U.S. on
registered exchanges.42
(8) The Fund will not invest in any
unsponsored Depositary Receipts.43
(9) The Fund will only invest in total
return swap agreements that have (i)
referenced assets that are exchangetraded securities or (ii) referenced
indexes that are comprised of exchangetraded securities.44
(10) While the Fund may invest in
inverse ETFs, the Fund will not invest
in leveraged or inverse leveraged (e.g.,
2X or ¥3X) ETFs.45
(11) The Fund will only enter into
transactions in OTC derivatives with
counterparties that the Adviser and/or
the Sub-Adviser reasonably believes are
capable of performing under the
applicable contract or agreement.46
(12) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid assets (calculated at
the time of investment), including Rule
144A securities deemed illiquid by the
Adviser and/or the Sub-Adviser.47
(13) The Fund will not invest in Rule
144A securities other than NonExchange-Traded Equity Securities.
Additionally, Non-Exchange-Traded
Equity Securities will not be
represented by derivative instruments.48
(14) The Fund may not invest 25% or
more of the value of its total assets in
securities of issuers in any one industry.
This restriction does not apply to (a)
obligations issued or guaranteed by the
U.S. government, its agencies or
instrumentalities or (b) securities of
other investment companies.49
(15) The Fund will invest (in the
aggregate) no more than 30% of the
value of its net assets (calculated at the
time of investment) in Principal
Derivatives and Non-Principal
Derivatives.50
(16) Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (a) The
procedures for purchases and
redemptions of Shares in creation units
41 Id.
at 33308.
at n.10.
43 Id. at 33309, n.12.
44 Id. at 33309, n.15.
45 Id. at 33308, n.10.
46 Id. at 33309.
47 Id. at 33310.
48 Id. at n.20.
49 Id. at 33310.
50 Id. at 33314.
42 Id.
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(and that Shares are not individually
redeemable); (b) Nasdaq Rule 2111A,
which imposes suitability obligations on
Nasdaq members with respect to
recommending transactions in the
Shares to customers; (c) how
information regarding the Intraday
Indicative Value and the Disclosed
Portfolio is disseminated; (d) the risks
involved in trading the Shares during
the Pre-Market and Post-Market
Sessions when an updated Intraday
Indicative Value will not be calculated
or publicly disseminated; (e) the
requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (f) trading information.
The Information Circular will also
discuss any exemptive, no-action and
interpretive relief granted by the
Commission from any rules under the
Act.51
(17) For initial and continued listing,
the Fund must be in compliance with
Rule 10A–3 under the Act.52
(18) The Fund’s investments in
derivative instruments will be made in
accordance with the 1940 Act, will be
consistent with the Fund’s investment
objective and policies, and will not be
used to seek to achieve a multiple or
inverse multiple of an index.53
(20) To limit the potential risk
associated with the Fund’s derivatives
transactions, the Fund will segregate or
‘‘earmark’’ assets determined to be
liquid by the Adviser and/or the SubAdviser in accordance with procedures
established by the Trust Board and in
accordance with the 1940 Act (or, as
permitted by applicable regulation,
enter into certain offsetting positions) to
cover its obligations under derivative
instruments. These procedures have
been adopted consistent with Section 18
of the 1940 Act and related Commission
guidance. In addition, the Fund will
include appropriate risk disclosure in
its offering documents, including
leveraging risk.54
(21) A minimum of 100,000 Shares
will be outstanding at the
commencement of trading on the
Exchange.55
The Exchange represents that all
statements and representations made in
this filing regarding (a) the description
of the portfolio, (b) limitations on
portfolio holdings or reference assets, or
(c) the applicability of Exchange rules
and surveillance procedures shall
constitute continued listing
requirements for listing the Shares on
the Exchange. In addition, the issuer has
represented to the Exchange that it will
advise the Exchange of any failure by
the Fund to comply with the continued
listing requirements, and, pursuant to
its obligations under Section 19(g)(1) of
the Act, the Exchange will monitor for
compliance with the continued listing
requirements. If the Fund is not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
the Nasdaq 5800 Series.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice, and the Exchange’s
description of the Fund. The
Commission notes that the Fund and the
Shares must comply with the initial and
continued listing criteria in Nasdaq Rule
5735 for the Shares to be listed and
traded on the Exchange.
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 56 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
IT IS THEREFORE ORDERED,
pursuant to Section 19(b)(2) of the
Act,57 that the proposed rule change
(SR–NASDAQ–2016–061), be, and it
hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.58
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–19898 Filed 8–19–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78588; File No. SR–Phlx–
2016–79]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing of
Proposed Rule Change To Amend Rule
1017, Openings in Options
August 16, 2016.
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 August 4,
2016, NASDAQ PHLX LLC (‘‘Phlx’’ or
51 Id.
56 15
52 See
57 15
17 CFR 240.10A–3.
53 See Notice, supra note 3, at 33309.
54 Id.
55 Id. at 33313.
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U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
58 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. 81, No. 162 / Monday, August 22, 2016 / Notices
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 1017, Openings in Options, as
described in detail below.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqphlx.cchwallstreet.com/
, at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to amend
its rules relating to its opening process.
This rule change proposes to amend the
current functionality of the Exchange’s
trading system (‘‘system’’) 3 regarding
the opening of trading in an option
series.
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Definitions
First, the Exchange proposes to adopt
a ‘‘Definitions’’ section as new Rule
1017(a) 4 to define several terms that are
used throughout the Rule. The new
section will state that the Exchange
conducts an electronic opening for all
3 The Exchange is replacing references to Phlx XL
II with the word ‘‘system’’ to reflect current usage.
4 The current text of Rule 1017(a) is being deleted
and replaced by proposed Rule 1017(a)(iii), as
described below.
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option series 5 traded on Phlx using its
trading system (hereinafter ‘‘system’’).6
The Exchange proposes to define the
following terms, which are described
below: ‘‘Opening Process,’’ ‘‘Opening
Price,’’ ‘‘Potential Opening Price,’’
‘‘ABBO,’’ ‘‘Phlx Electronic Market
Maker,’’ ‘‘Pre-Market BBO,’’ ‘‘Quality
Opening Market,’’ ‘‘Valid Width Quote,’’
and ‘‘Zero Bid Market.’’
The Exchange defines ‘‘Opening
Process’’ by cross-referencing Rule
1017(d).7 The Exchange defines
‘‘Opening Price’’ by cross-referencing
Rule 1017(i) and (k).8 The Exchange
defines ‘‘Potential Opening Price’’ by
cross-referencing Rule 1017(h).9 The
Exchange defines ‘‘ABBO’’ as the Away
Best Bid or Offer.10 The ABBO does not
include Phlx’s market. The Exchange
defines ‘‘market for the underlying
security’’ as either the primary listing
market or the primary volume market
(defined as the market with the most
liquidity in that underlying security for
the previous two calendar months), as
determined by the Exchange by
underlying and announced to the
membership on the Exchange’s Web
site.11 Currently, this term is defined in
Rule 1017(j) as either the primary listing
market or the primary volume market
(defined as the market with the most
liquidity in that underlying security for
the previous two calendar months), or
the first market to open the underlying
security, as determined by the Exchange
on an issue-by-issue basis and
announced to the membership on the
Exchange’s Web site. In practice, the
Exchange does not and has not
considered the first market to open in
determining the primary market for an
underlying, and therefore the new
definition will not refer to it. The
existing language in Rule 1017(j)
regarding the first market to open is thus
being deleted.
The term ‘‘Phlx Electronic Market
Makers’’ is defined as a Specialist,12
5 Rule 1017 only applies to simple (non-Complex)
orders; the opening process for Complex Orders is
described in Rule 1080.07.
6 The Exchange notes that Rule 1017 describes the
Exchange’s opening process for its electronic order
book. Rule 1017 does not apply to trading on the
Exchange’s trading floor.
7 See proposed Rule 1017(a)(i).
8 See proposed Rule 1017(a)(ii).
9 See proposed Rule 1017(a)(iii).
10 See proposed Rule 1017(a)(iv). This term is also
used in Phlx Rule 1082(a)(ii)(B)(3)(g).
11 See proposed Rule 1017(a)(v).
12 A Specialist is an Exchange member who is
registered as an options specialist pursuant to Rule
1020(a). An options Specialist includes a Remote
Specialist which is defined as an options Specialist
in one or more classes that does not have a physical
presence on an Exchange floor and that is approved
by the Exchange pursuant to Rule 501.
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Streaming Quote Trader or ‘‘SQT,’’ 13
and Remote Streaming Quote Trader or
‘‘RSQT’’ 14 who is required to submit
continuous two-sided electronic
quotations pursuant to Rule
1014(b)(ii)(D).15 Currently, Rule 1017(a)
utilizes the term ‘‘Phlx XL Participant’’
which is not as precise as the term
‘‘Phlx Electronic Market Makers’’ as it
also includes non-SQT Registered
Options Traders or ROTs.16 This is
incorrect because non-SQT ROTs cannot
submit quotes electronically and
therefore should not be subject to Rule
1017, which applies only to electronic
trading. By definition, these non-SQT
ROTs make markets verbally and thus
provide on-floor liquidity; they have
chosen not to submit quotes
electronically to the Exchange. To be
considered in the Opening Process,
orders represented by Floor Brokers
must be entered electronically.17 The
next definition is ‘‘Pre-Market BBO’’
defined as the highest bid and the
lowest offer among Valid Width
Quotes.18 The rule currently refers to
the highest bid and the lowest offer
multiple times, so defining the term is
more efficient and consistent.
References to determining the highest
quote bid and lowest quote offer are
being replaced with the new term, ‘‘PreMarket BBO’’ throughout. The term
‘‘Quality Opening Market’’ is defined as
a bid/ask differential applicable to the
best bid and offer from all Valid Width
Quotes defined in a table to be
determined by the Exchange and
published on the Exchange’s Web site.19
This definition appears in current Rule
1017(l)(v)(B) and is being deleted. Next,
a ‘‘Valid Width Quote’’ is defined as a
two-sided electronic quotation
submitted by a Phlx Electronic Market
Maker that consists of a bid/ask
differential that is compliant with Rule
13 An SQT is defined in Exchange Rule
1014(b)(ii)(A) as an ROT who has received
permission from the Exchange to generate and
submit option quotations electronically in options
to which such SQT is assigned.
14 An RSQT is defined in Exchange Rule in
1014(b)(ii)(B) as an ROT that is a member affiliated
with an RSQTO with no physical trading floor
presence who has received permission from the
Exchange to generate and submit option quotations
electronically in options to which such RSQT has
been assigned.
15 See proposed Rule 1017(a)(vi).
16 A non-SQT ROT is an ROT who is neither an
SQT nor an RSQT. See Rule 1014(b)(ii)(C).
17 See current rule 1017(c).
18 See proposed Rule 1017(a)(vii). Valid Width
Quotes is defined at proposed Rule 1017(a)(ix).
19 See proposed Rule 1017(a)(viii).
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1014(c)(i)(A)(1)(a).20 This term appears
in current Rule 1017(l)(ii) and is being
deleted. The term ‘‘Zero Bid Market’’ is
where the best bid for an options series
is zero.21 The Exchange currently uses
this concept in other rules.22
Reorganization of Certain Provisions
New rule text is being added to Rule
1017 and certain provisions are being
relocated within the rule for better
organization and understanding.
Eligible Interest
The Exchange proposes to move the
language from current Rule 1017(l)(vii)
to new Rule 1017(b), with minor
changes. Specifically, the Exchange
proposes to adopt in new paragraph (b)
a provision that eligible opening interest
includes: (i) Valid Width Quotes; (ii)
Opening Sweeps; and (iii) orders.
Specialists, SQTs, and RSQTs may
submit quotes,23 Opening Sweeps and
orders, but quotes other than Valid
Width Quotes will not be included in
the Opening Process. Non-SQT ROTs
may submit orders; provided they are
submitted electronically.24
New Rule 1017 paragraph (b) will
provide that all-or-none (‘‘AON’’)
interest 25 that can be satisfied is
considered for execution and in
determining the Opening Price
throughout the Opening Process. The
rule is currently silent on the eligibility
of AON interest on the opening, from
which it can be inferred that they are
accepted; nevertheless, the Exchange is
proposing to add this specific provision
to add detail to the rule. The Exchange
is specifically addressing AON interest
to make clear that this type of
contingency market or limit order which
would be executed in its entirety or not
at all, will be considered for execution
within the Opening, provided that this
interest can be satisfied.
Opening Sweep
Proposed new Rule 1017(b)(i)
provides that an Opening Sweep is a
one-sided electronic quotation
submitted for execution against eligible
opening trading interest in the system.26
20 See
proposed Rule 1017(a)(ix).
proposed Rule 1017(a)(x).
22 See Rule 1080(i)(A)(1) and Rule
1082(a)(ii)(B)(4)(C); a zero priced bid equates with
a Zero Bid Market.
23 Rule 1017(l)(vii) currently provides that quotes
may be submitted; the Exchange is now specifying
that these must be Valid Width Quotes, which will
be defined in proposed Rule 1017(a)(ix).
24 See note 17 above.
25 All-or-none (‘‘AON’’) means a contingency
market or limit order which is to be executed in its
entirety or not at all.
26 This rule text is currently located in current
Rule 1017(l)(vii)(A). This rule text is being relocated
with this rule change.
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21 See
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A Phlx Electronic Market Maker
assigned in a particular option may only
submit an Opening Sweep if, at the time
of entry of the Opening Sweep, that
Phlx Electronic Market Maker has
already submitted and maintained a
Valid Width Quote. All Opening
Sweeps in the affected series entered by
a Phlx Electronic Market Maker will be
cancelled immediately if that Phlx
Electronic Market Maker fails to
maintain a continuous quote with a
Valid Width Quote in the affected
series.27
Opening Sweeps may be entered at
any price with a minimum price
variation applicable to the affected
series, on either side of the market, at
single or multiple price level(s), and
may be cancelled and re-entered. A
single Phlx Electronic Market Maker
may enter multiple Opening Sweeps,
with each Opening Sweep at a different
price level. If a Phlx Electronic Market
Maker submits multiple Opening
Sweeps, the system will consider only
the most recent Opening Sweep at each
price level submitted by such Phlx
Electronic Market Maker in determining
the Opening Price. Unexecuted Opening
Sweeps will be cancelled once the
affected series is open.28 Except as
described above, most of the language
mimics current Rule 1017(l)(vii); it is
being relocated because it is more
logical to refer to the types of eligible
opening interest in the beginning of the
rule.
Proposed new Rule 1017(b)(ii)
generally tracks current Rule
1017(l)(vii)(B) in stating that the system
will aggregate the size of all eligible
interest for a particular participant
category at a particular price level for
trade allocation purposes. For example,
all Phlx Electronic Market Maker (a
participant category) quotes, Opening
Sweeps, and orders are thus aggregated
in determining the pro-rata allocation.
The proposed rule is broader than the
existing language, which is limited to
Opening Sweeps, because it includes
quotes and orders. The Exchange
believes it is appropriate to amend the
rule to expressly state that the Exchange
currently considers this interest because
there is no need to exclude quotes and
orders, which contribute liquidity just
like Opening Sweeps.
Proposed Rule 1017(c) simplifies the
current rule text to simply provide that
to be considered in the Opening
Process, orders represented by Floor
Brokers must be entered electronically.
Proposed new Rule 1017(d) is based
on existing paragraph Rule 1017(k). The
27 See
28 See
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proposed Rule 1017(b)(i)(A).
proposed Rule 1017(b)(i)(B).
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56735
Exchange seeks to organize this rule
more logically by describing when the
Opening Process can begin and adding
more detail related to specific timerelated triggers. Specifically, Phlx
Electronic Market Maker Valid Width
Quotes and Opening Sweeps may start
at 9:25 a.m. and are included in the
Opening Process. Orders may be entered
at any time before an options series
opens and are included in the Opening
Process. This proposed language adds
greater specificity to the rule regarding
the submission of orders. The 9:25 a.m.
trigger is intended to tie the option
Opening Process to quoting in the
underlying security; 29 it presumes that
option quotes submitted before any
indicative quotes have been
disseminated for the underlying security
may not be reliable or intentional.
Therefore, the Exchange has chosen a
reasonable timeframe at which to begin
utilizing option quotes, based on the
Exchange’s experience when underlying
quotes start becoming available.
Furthermore, the Opening Process for
an option series will be conducted
pursuant to paragraphs (f)–(k) on or after
9:30 a.m. if: 30 The ABBO, if any, is not
crossed; 31 and if the system has
received, within two minutes (or such
shorter time as determined by the
Exchange and disseminated to
membership on the Exchange’s Web
site) of the opening trade or quote on the
market for the underlying security in the
case of equity options or, in the case of
index options, within two minutes of
the receipt of the Opening Price in the
underlying index (or such shorter time
as determined by the Exchange and
disseminated to membership on the
Exchange’s Web site), or within two
minutes of market opening in the case
of U.S. dollar-settled FCO (or such
shorter time as determined by the
Exchange and disseminated to
membership on the Exchange’s Web
site) either:
(A) The Specialist’s Valid Width
Quote;
(B) the Valid Width Quotes of at least
two Phlx Electronic Market Makers
other than the Specialist; or
(C) if neither the Specialist’s Valid
Width Quote nor the Valid Width
Quotes of two Phlx Electronic Market
29 For purposes of this rule, the underlying
security can also be an index.
30 The new reference to 9:30 a.m. adds detail; of
course, the market cannot open before 9:30 a.m.
31 The crossed ABBO is currently referred to in
Rule 1017(l)(x), which provides that: ‘‘If at any
point during the Opening Process the ABBO
becomes crossed (e.g., 1.05 bid, 1.00 offer), the
opening process will be terminated and the
Exchange will not open the affected series. A new
opening process for the affected series will
commence at the time the ABBO is uncrossed.’’
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Federal Register / Vol. 81, No. 162 / Monday, August 22, 2016 / Notices
Makers have been submitted within
such timeframe, one Phlx Electronic
Market Maker has submitted a Valid
Width Quote.
These requirements are intended to
tie the option Opening Process to
receipt of liquidity. These requirements
are the same as those of current Rule
1017(k) and are reorganized.
In addition, the Exchange is
proposing to state in proposed Rule
1017(d)(ii) that the underlying security,
including indexes, must be open on the
primary market for a certain time period
for all options to be determined by the
Exchange. The Exchange is proposing
that the time period be no less than 100
milliseconds and no more than 5
seconds. The Exchange currently
applies a minimal delay of 500
milliseconds. This proposal is intended
to permit the price of the underlying
security to settle down and not flicker
back and forth among prices after its
opening. The Exchange is adding this
detail to Rule 1017(d)(ii). It is common
for a stock to fluctuate in price
immediately upon opening; such
volatility reflects a natural uncertainty
about the ultimate Opening Price, while
the buy and sell interest is matched. The
Exchange is proposing a range of no less
than 100 milliseconds and no more than
5 seconds in order to ensure that it has
the ability to adjust the period for which
the underlying security must be open on
the primary market. The Exchange may
determine that in periods of high/low
volatility that allowing the underlying
to be open for a longer/shorter period of
time may help to ensure more stability
in the marketplace prior to initiating the
Opening Process.
The Exchange is proposing to relocate
the obligations of Phlx Electronic
Market Makers to new paragraph (d) as
well. They are unchanged. The
Specialist assigned in a particular equity
option must enter a Valid Width Quote
not later than one minute following the
dissemination of a quote or trade by the
market for the underlying security or, in
the case of index options, following the
receipt of the Opening Price in the
underlying index. The Specialist
assigned in a particular U.S. dollarsettled FCO must enter a Valid Width
Quote not later than 30 seconds after the
announced market opening.32
Furthermore, a Phlx Electronic Market
Maker other than a Specialist that
submits a quote pursuant to Rule 1017
in any option series when the
Specialist’s quote has not been
submitted shall be required to submit
continuous, two-sided quotes in such
option series until such time as the
32 See
proposed Rule 1017(d)(iii).
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Specialist submits his/her quote, after
which the Phlx Electronic Market Maker
that submitted such quote shall be
obligated to submit quotations pursuant
to Rule 1014(b)(ii)(D). This is also
substantially unchanged.33
The Exchange is proposing to state in
Rule 1017(d)(iv) that the Opening
Process will stop and an option series
will not open if the ABBO becomes
crossed or when the requisite number of
Valid Width Quotes pursuant to Rule
1017(d)(i) are no longer present. Once
each of these conditions no longer
exists, the Opening Process in the
affected option series will start again
pursuant to Rule 1017(f)–(k). All eligible
opening interest will continue to be
considered during the Opening Process
when the process is re-started. The
Exchange is amending Rule 1017 to add
this detail, which the Exchange believes
is implied from the conditions that
trigger the Opening Process.
Overall, as explained above, new Rule
1017(d) is the same as current Rule
1017(k), except the reference at the end
of paragraph (k) to Intermarket Sweep
Orders (‘‘ISOs’’) 34 will now appear in
new subparagraph (k)(C)(3)(i) and a
reference is being added to the
Immediate-or-Cancel (‘‘IOC’’)
designation. In addition, the proposed
Rule 1017(d) is more closely tied to
specific time periods, like 9:25 a.m. for
the receipt of quote and Opening
Sweeps, and 9:30 a.m. for the beginning
of the actual Opening Process. The
proposed rule also reflects that the
ABBO cannot be crossed because it is
indicative of uncertainty in the
marketplace of where the option series
should be valued. In this case, the
Exchange will wait for the ABBO to
become uncrossed before initiating the
Opening Process to ensure that there is
stability in the marketplace in order to
assist the Exchange in determining the
Opening Price. These additions are
intended to provide additional detail to
the rule that the Exchange believes will
be helpful to the reader.
New Rule 1017(e) states that the
procedure described in this Rule may be
used to reopen an option after a trading
halt. This is currently in Rule 1017(h).
The Exchange is adding that if there is
a trading halt or pause in the underlying
security, the Opening Process will start
again irrespective of the specific times
listed in Rule 1017(d). This is because
these times relate to the normal market
opening at 9:30 a.m. Most of this
33 See
proposed Rule 1017(d)(iv).
Rule 1017(k), which is being deleted,
provides: Any order volume that is routed to away
markets pursuant to this Rule 1017 will be marked
as an ISO.
34 Current
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language is in Rule 1017 at current
paragraph (h), except the
aforementioned reference to specific
times provides additional detail.
Opening With a PBBO
New Rule 1017(f) will now be titled
‘‘Opening with a PBBO (No Trade)’’ and
provide that if there are no opening
quotes or orders that lock or cross each
other and no routable orders crossing
the ABBO, the system will open with an
opening quote by disseminating the
Exchange’s best bid and offer among
quotes and orders (‘‘PBBO’’) that exist in
the system at that time, unless the
following three conditions exist: (i) A
Zero Bid Market; (ii) no ABBO; and (iii)
no Quality Opening Market. If all of
these conditions exist, the Exchange
will calculate an Opening Quote Range
pursuant to paragraph (j) and conduct
the Price Discovery Mechanism or
‘‘PDM’’ pursuant to paragraph (k) below.
These three conditions exist in the
system today, but do not appear in Rule
1017. The existence of all three
conditions being present at the same
time is very rare. The Exchange believes
that when all three of these conditions
exist, further price discovery is
warranted to validate or perhaps update
the Potential Opening Price and to
attract additional interest to perhaps
render an opening trade possible,
because: (i) A Zero Bid Market reflects
a lack of buying interest that could
benefit from price discovery; (ii) the
lack of an ABBO means there is no
external check on the Exchange’s market
for that options series; and (iii) the lack
of a Quality Opening Market indicates
that the Exchange’s market is wide. If no
quotes or orders lock/cross each other,
nothing matches and there can be no
trade. This is the same as Rule
1017(l)(i). The Exchange believes that
when these conditions exist, it is
difficult to arrive at a reasonable and
expected price.
Further Opening Processes
If an opening did not occur pursuant
to proposed Rule 1017(f) and there are
opening Valid Width Quotes or orders
that lock or cross each other, the system
will calculate the Pre-Market BBO. This
new rule text is located in new Rule
1017(g), which is the same as current
Rule 1017(l)(ii), except the term PreMarket BBO is now specifically defined
in proposed Rule 1017(a)(vii).
Proposed new Rule 1017 (h) describes
the general concept of how the system
calculates the Potential Opening Price
under all circumstances once the
Opening Process is triggered.
Specifically, the system will take into
consideration all Valid Width Quotes,
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Opening Sweeps and orders (except
AON interest that cannot be satisfied) 35
for the option series and identify the
price at which the maximum number of
contracts can trade (‘‘maximum quantity
criterion’’). This concept of maximizing
the number of contracts that can trade
currently appears in current Rule
1017(l)(ii), and is intended to find the
most reasonable and suitable price,
relying on the maximization to reflect
the best price. However, current Rule
1017(l)(ii) states that if the Opening
Price calculation leaves no imbalance,
the Exchange will open at that price,
executing marketable trading interest, as
long as the Opening Price includes only
Exchange interest. This only occurs
under certain circumstances, which is
now explained in new Rule 1017(i).
The Exchange proposal further states
that when two or more Potential
Opening Prices would satisfy the
maximum quantity criterion and leave
no contracts unexecuted, the system
takes the highest and lowest of those
prices and takes the mid-point; if such
mid-point is not expressed as a
permitted minimum price variation, it
will be rounded to the minimum price
variation that is closest to the closing
price for the affected series from the
immediately prior trading session. If
there is no closing price from the
immediately prior trading session, the
system will round up to the minimum
price variation to determine the
Opening Price.36 This is similar to
current Rule 1017 (l)(ii)(B).
If two or more Potential Opening
Prices for the affected series would
satisfy the maximum quantity criterion
and leave contracts unexecuted, the
Opening Price will be either the lowest
executable bid or highest executable
offer of the largest sized side.37 This,
again, bases the Potential Opening Price
on the maximum quantity that is
executable. The Potential Opening Price
is limited by the away market price that
cannot be satisfied with the Exchange
routable interest.38 The Exchange does
not open with a trade that trades
through another market. The Exchange
is amending Rule 1017 to provide detail
to the rule not contemplated by the
current language. This process,
importantly, breaks a tie by considering
the largest sized side and away markets,
which are relevant to determining a fair
Opening Price.
The system applies certain boundaries
to the Potential Opening Price to help
ensure that the price is a reasonable one
proposed Rule 1017(b).
proposed Rule 1017(h)(A).
37 See proposed Rule 1017(h)(B).
38 See proposed Rule 1017(h)(C).
by identifying the quality of that price;
if a well-defined, fair price can be found
within these boundaries, the option
series can open at that price without
going through a further price discovery
mechanism. Accordingly, new Rule
1017(i),39 entitled ‘‘Opening with
Trade,’’ will state at Rule 1017(i)(A) the
Exchange will open the option series for
trading at the following Opening Price
if any of these conditions occur: (i) The
Potential Opening Price is at or within
the best of the Pre-Market BBO and the
ABBO; (ii) the Potential Opening Price
is at or within the non-zero bid ABBO
if the Pre-Market BBO is crossed; or (iii)
where there is no ABBO, the Potential
Opening Price is at or within the PreMarket BBO which is also a Quality
Opening Market.
These boundaries serve to validate the
quality of the Opening Price. This
concept is defined in current Rule
1017(l)(ii) in a limited manner, which
provides that, ‘‘If the price is within the
highest quote bid and lowest quote offer
and leaves no imbalance, the Exchange
will open at that price, executing
marketable trading interest, as long as
the opening price includes only
Exchange interest.’’ New Rule 1017(i)
provides that the Exchange will open
with a trade as long as it is within the
defined boundaries regardless of any
imbalance. The Exchange believes that
since the Opening Price can be
determined within a well-defined
boundary and not trading through other
markets, it is fair to open the market
immediately with a trade and to have
the remaining interest available to be
executed in the displayed market. Using
a boundary-based price counterbalances
opening faster at a less bounded and
perhaps less expected price and reduces
the possibility of leaving an imbalance.
If there is more than one Potential
Opening Price which meets the
conditions set forth in proposed Rule
1017(i)(A), where (1) no contracts would
be left unexecuted and (2) any value
used for the mid-point calculation
(which is described in Rule 1017(h))
that crosses either: the Pre-Market BBO
or the ABBO, then the Exchange will
open the option series for trading with
an execution and use the best price
which the Potential Opening Price
crosses as a boundary price for the
purpose of the mid-point calculation.40
The proposed rule now better explains
the boundary as well as the price basis
for the mid-point calculation for
immediate opening with a trade, which
improves the detail included in the rule.
35 See
36 See
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39 The deletion of current paragraph (i) is
discussed below.
40 See proposed Rule 1017(i)(B).
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56737
The Exchange believes that this process
is logical because it seeks to select a fair
and balanced price.
Proposed Rule 1017(j) will provide
that the system will calculate an
Opening Quote Range (‘‘OQR’’) for a
particular option series that will be
utilized in the PDM. The OQR is an
additional type of boundary beyond the
boundaries mentioned in Rule 1017 at
proposed paragraph (i). OQR is intended
to limit the Opening Price to a
reasonable, middle ground price and
thus reduce the potential for erroneous
trades during the Opening Process.
Although the Exchange applies other
boundaries such as the BBO, the OQR
is outside of that and provides a price
that can satisfy more size without
becoming unreasonable.
Specifically, to determine the
minimum value for the OQR, an
amount, as defined in a table to be
determined by the Exchange,41 will be
subtracted from the highest quote bid
among Valid Width Quotes on the
Exchange and on the away market(s), if
any, except as provided in proposed
Rule1017(j)(3) and (4).42 To determine
the maximum value for the OQR, an
amount, as defined in a table to be
determined by the Exchange, will be
added to the lowest quote offer among
Valid Width Quotes on the Exchange
and on the away market(s), if any,
except as provided in proposed Rule
1017(j)(3) and (4).43 However, if one or
more away markets have disseminated
opening quotes that are not crossed, and
there are Valid Width Quotes on the
Exchange that cross each other or that
cross away market quotes, then the
minimum value for the OQR will be the
highest quote bid among quotes on away
market(s).44 In addition, the maximum
value for the OQR will be the lowest
quote offer among quotes on away
market(s).45 And if, however, there are
opening quotes on the Exchange that
cross each other, and there is no away
market in the affected option series, the
minimum value for the OQR will be the
lowest quote bid among Valid Width
Quotes on the Exchange, and the
maximum value for the OQR will be the
highest quote offer among Valid Width
Quotes on the Exchange.46 This is the
same as existing Rule 1017(l)(iii) and
(iv), except that the new Rule 1017(j)
combines those concepts into a single
provision.
41 The table will be available on the Exchange’s
Web site.
42 See proposed Rule 1017(j)(1).
43 See proposed Rule 1017(j)(2).
44 See proposed Rule 1017(j)(3)(a).
45 See proposed Rule 1017(j)(3)(b).
46 See proposed Rule 1017(j)(4)(a) and (b).
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If there is more than one Potential
Opening Price possible where no
contracts would be left unexecuted, any
price used for the mid-point calculation
(which is described in new Rule
1017(h)) that is through the OQR will be
restricted to the OQR price on that side
of the market for the purposes of this
calculation. This, in Rule 1017(j) at new
subparagraph (5), continues the theme
of relying on both maximizing
executions and looking at the correct
side of the market to determine a fair
price.
New Rule 1017(j) (6) deals with the
situation where there is an away market
price involved. If there is more than one
Potential Opening Price possible where
no contracts would be left unexecuted
and any price used for the mid-point
calculation (which is described in new
Rule 1017(h)) is an away market price
when contracts will be routed, the
system will use the away market price
as the Potential Opening Price. Because
the system may need to route to other
markets it uses the away market price as
the Opening Price.
If non-routable interest can be
maximum executable against Exchange
interest after routable interest has been
determined by the system to satisfy the
away market, then the Potential
Opening Price is the price at which the
maximum volume, excluding the
volume which will be routed to an away
market, may be executed on the
Exchange as described in Rule 1017 at
new paragraph (h). The system will
consider routable Customer interest in
price/time priority to satisfy the away
market.47 This is consistent with the
price/time handling of Customer
interest outside of the Opening
Process.48 This continues the theme of
trying to satisfy the maximum amount
of interest during the Opening Process.
If the Exchange has not opened
pursuant to proposed Rule 1017
paragraphs (f) or (i), the Exchange will
conduct a PDM pursuant to new Rule
1017(k). The PDM is the process by
which the Exchange seeks to identify an
Opening Price having not been able to
do so following the process outlined
thus far. The principles behind the PDM
are, just like above, to satisfy the
maximum number of contracts possible
by identifying a price that may leave
unexecuted contracts. However, the
PDM applies a new, wider boundary to
identify the Opening Price and the PDM
involves seeking additional liquidity.
Currently, the price discovery
process, known as the ‘‘imbalance
process’’ in current Rule 1017, is
47 See
48 See
proposed Rule 1017(j)(7).
Rule 1014(vii) [sic].
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triggered only by unexecuted contracts
at the price at which the maximum
number of contracts can trade. Instead,
the situations in proposed Rule 1017(f)
and (j) also result in the initiation of an
imbalance process.49 The Exchange
believes that conducting the price
discovery process in these situations
protects opening orders from receiving a
random price that does not reflect the
totality of what is happening in the
markets on the opening and also further
protects opening interest from receiving
a potentially erroneous execution price
on the opening. Opening immediately
has the benefit of speed and certainty,
but that benefit must be weighed against
the quality of the execution price and
whether orders were left unexecuted.
The Exchange believes that the
proposed rule strikes an appropriate
balance.
In addition, the current rule takes
away market interest into account at the
beginning of the imbalance process,
while the proposed rule attempts to
open using Exchange interest only to
determine an Opening Price, provided
certain conditions contained in new
paragraph (i) are present to ensure
participants receive a quality execution
in the opening. This is reflected
beginning in current Rule 1017(l)(ii)(C).
The proposed rule does not consider
away market liquidity until the price
discovery process. As a result, the
Exchange might open without routing if
all of the conditions described above are
met. The Exchange believes that the
benefit of this process is a more rapid
opening with quality execution prices.
Specifically, new Rule 1017(k)(A)
provides that the system will broadcast
an Imbalance Message (which includes
the symbol, side of the imbalance
(unmatched contracts), size of matched
contracts, size of the imbalance, and
price of the affected series (which must
be within the Pre-Market BBO) to
participants, and begin an ‘‘Imbalance
Timer,’’ not to exceed three seconds.
The Imbalance Message is intended to
attract additional liquidity, much like
an auction is, using an auction message
and timer.50 The Imbalance Timer will
be for the same number of seconds for
all options traded on the Exchange. This
is the same as the existing rule, except
that the Exchange is adding more detail
to this provision, to provide that the
price in the imbalance message must be
within the Pre-Market BBO. This is
intended, as some of the other
boundaries applied in the Opening
Process, to help ensure that the price is
reasonable in light of the price
discovery needed to determine an
Opening Price.
New Rule 1017(k)(B), states that any
new interest received by the system will
update the Potential Opening Price.
This amendment adds detail to the rule.
If during or at the end of the Imbalance
Timer, the Opening Price is at or within
the OQR the Imbalance Timer will end
and the system will execute at the
Opening Price if the executions consist
of Exchange interest only without
trading through the ABBO and without
trading through the limit price(s) of
interest within OQR which is unable to
be fully executed at the Opening Price.
If no new interest comes in during the
Imbalance Timer and the Opening Price
is at or within OQR, the Exchange will
open at the end of the Imbalance Timer.
This reflects that the Exchange is
seeking to identify a price on the
Exchange without routing away, yet
which price may not trade through
another market and the quality of which
is addressed by applying the OQR
boundary.
Currently, Rule 1017(l)(vi)(B)
provides that if opening quotes,
Opening Sweeps and orders submitted
during the Imbalance Timer, or other
changes to the ABBO, would allow the
entire imbalance amount to trade at the
Exchange at or within the OQR without
trading through the ABBO, the
Imbalance Timer will end and the
system will execute at the appropriate
Opening Price. Accordingly, the current
rule takes away market prices and
volume into account at this step, while
the system functionality does not. This
is intended to foster trading on the
Exchange before routing away.
Next, current Rule 1017(l)(vi)(C) is
being reorganized with additional
detail, and introduces the process of
routing away. Provided the option series
has not opened pursuant to proposed
Rule 1017(k)(B), the system will send a
second Imbalance Message with a
Potential Opening Price that is bounded
by the OQR (without trading through
the limit price(s) of interest within OQR
which is unable to be fully executed at
the Opening Price) and includes away
market volume in the size of the
imbalance to participants; and
concurrently initiate a Route Timer, not
to exceed one second.51 The Route
49 Today, in these situations, the option series
would not open immediately. Rather an imbalance
would occur where there is unexecutable trading
interest at a certain price.
50 See COOP and COLA descriptions in Rule
1080.07.
51 The Route Timer is a brief timer that operates
as a pause before an order is routed to an away
market. The Route Timer is currently set at 200
milliseconds, which the Exchange has determined
is a reasonable time period to gather additional
interest on the Exchange before routing away. The
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Timer is intended to give Exchange
users an opportunity to respond to an
Imbalance Message before any opening
interest is routed to away markets and,
thereby, maximize trading on the
Exchange. If during the Route Timer,
interest is received by the system which
would allow the Opening Price to be
within OQR without trading through
other markets and without trading
through the limit price(s) of interest
within OQR which is unable to be fully
executed at the Opening Price, the
system will trade and the Route Timer
will end. The system will monitor
quotes received during the Route Timer
period and make ongoing corresponding
changes to the permitted OQR to reflect
them.52 This is being changed to
eliminate the requirement that there be
no imbalance, which means it is more
likely that an Opening Price will be
discovered. It also widens the boundary
of available Opening Prices, which
should similarly increase the likelihood
that an Opening Price can be
determined. The Route Timer, like the
Imbalance Timer, is intended to permit
responses to be submitted and
considered by the system in calculating
the Potential Opening Price. The system
does not route away until the Route
Timer ends.
Proposed Rule 1017(k)(C)(3) will
provide that when the Route Timer
expires, if the Potential Opening Price is
within OQR (without trading through
the limit price(s) of interest within OQR
that is unable to be fully executed at the
Opening Price), the system will
determine if the total number of
contracts displayed at better prices than
the Exchange’s Potential Opening Price
on away markets (‘‘better priced away
contracts’’) would satisfy the number of
marketable contracts available on the
Exchange. This is largely unchanged in
terms of applying the OQR as a
boundary before considering away
markets. The Exchange is adding
reference to the limit price, because the
limit price of interest within the OQR
serves as a boundary as well. This
protects the unexecuted interest and
should result in a fairer price. The
Exchange is adding rule text to state that
the Exchange will open the option by
routing and/or trading on the Exchange,
pursuant to proposed Rule
1017(k)(C)(3)(i)–(iii).
Proposed Rule 1017(k)(C)(3)(i) will
provide that if the total number of
contracts displayed at better prices than
the Exchange’s Potential Opening Price
on away markets (‘‘better priced away
contracts’’) would satisfy the number of
marketable contracts available on the
Exchange on either the buy or sell side,
the system will route all marketable
contracts on the Exchange to such better
priced away markets as ISO IOC orders,
and determine an opening PBBO that
reflects the interest remaining on the
Exchange. The system will price any
contracts routed away to other markets
at the Exchange’s Opening Price or
proposed Rule 1017(k)(C)(3)(ii) or (iii)
described hereinafter. Currently, Rule
1017 states that contracts routed away
are priced at the better away market
price. This is incorrect. Routing away at
the Exchange’s Opening Price is
intended to achieve the best possible
price available at the time the order is
received by the away market.
Proposed Rule 1017(k)(C)(3)(ii) 53 will
provide that if the total number of better
priced away contracts would not satisfy
the number of marketable contracts the
Exchange has, the system will
determine how many contracts it has
available at the Exchange Opening
Price. If the total number of better
priced away contracts plus the number
of contracts available at the Exchange
Opening Price would satisfy the number
of marketable contracts on the Exchange
on either the buy or sell side, the system
will contemporaneously route a number
of contracts that will satisfy interest at
other markets at prices better than the
Phlx Opening Price, and trade available
contracts on the Exchange at the
Exchange Opening Price. The system
will price any contracts routed to other
markets at the better of the Exchange
Opening Price or the order’s limit price
pursuant to Rule 1017(k)(vi)(C)(3)(ii)
[sic] at the better of the Exchange
Opening Price or the order’s limit price.
Currently, the rule states that the
Exchange will execute only at the
Opening Price, but in actuality the
system uses the better of the Opening
Price or the order’s limit price to route
to away markets. This continues with
the theme of maximum possible
execution of the interest in Phlx or away
markets. The addition of the reference to
the buy or sell side is intended to
provide additional detail and accuracy
to the description.54
Proposed Rule 1017(k)(C)(3)(iii) 55
will provide that if the total number of
better priced away contracts plus the
number of contracts available at the
Exchange Opening Price plus the
contracts available at other markets at
the Exchange Opening Price would
Exchange has only changed this timer a few times
over the past several years.
52 See proposed Rule 1017(k)(C)(1) and (2).
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satisfy the number of marketable
contracts the Exchange has on either the
buy or sell side, the system will
contemporaneously route a number of
contracts that will satisfy interest at
other markets at prices better than the
Exchange Opening Price (pricing any
contracts routed to other markets at the
better of the Exchange Opening Price or
the order’s limit price), trade available
contracts on the Exchange at the
Exchange Opening Price, and route a
number of contracts that will satisfy
interest at other markets at prices equal
to the Exchange Opening Price. Much of
this appears in the current rule but is
supplemented by the reference to the
order’s limit price, as discussed above.
This provision, like the existing one, is
intended to introduce routing to away
markets potentially both at a better price
than the Exchange Opening Price as
well as at the Exchange Opening Price
to access as much liquidity as possible
to maximize the number of contracts
able to be traded as part of the Opening
Process. The Exchange routes at the
better of the Exchange’s Opening Price
or the order’s limit price to first ensure
the order’s limit price is not violated.
Routing away at the Exchange’s
Opening Price is intended to achieve the
best possible price available at the time
the order is received by the away
market.
Proposed Rule 1017(k)(C)(4) 56 is
proposed to state that the system may
send up to two additional Imbalance
Messages 57 (which may occur while the
Route Timer is operating) bounded by
OQR and reflecting away market interest
in the volume. The reference to two
additional Imbalance Messages is
intended to replace in a clearer way the
current reference to repeating the
‘‘Imbalance Process’’ (a term no longer
being used in this rule) three times. The
reference to the OQR and away market
interest, again, amends the rule by
adding detail to make clear that both are
boundaries. These boundaries are
intended to assist in determining a
reasonable price at which an option
series might open.
This provision is proposed to further
state that after the Route Timer has
expired, the processes in proposed Rule
1017(k)(C)(3) will repeat (except no new
Route Timer will be initiated). No new
Route Timer is initiated because the
Exchange believes that after the Route
Timer has been initiated and
subsequently expired, no further delay
56 This
53 This
is currently subparagraph 4.
54 This addition is proposed in several places in
Rule 1017 for the same reason.
55 This is currently subparagraph 5.
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is currently subparagraph 6.
first two Imbalance Message always occur,
while the next two may or may not occur based on
whether or not the Exchange has been able to open
before repeating the Imbalance Process.
57 The
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is needed before routing contracts if at
any point thereafter the Exchange is able
to satisfy the total number of marketable
contracts the Exchange has by executing
on the Exchange and routing to other
markets.
Proposed Rule 1017(k)(vi)(C)(5)
[sic],58 entitled ‘‘Forced Opening,’’ will
describe what happens as a last resort in
order to open an options series when
the processes described above have not
resulted in an opening of the options
series. Under this process, called a
Forced Opening, after all additional
Imbalance Messages have occurred
pursuant to proposed Rule 1017(k)(4),59
the system will open as many contracts
as possible by routing to other markets
at prices better than the Exchange
Opening Price for their disseminated
size, trading available contracts on the
Exchange at the Exchange Opening
Price bounded by OQR (without trading
through the limit price(s) of interest
within OQR which is unable to be fully
executed at the Opening Price). The
system will also route contracts to other
markets at prices equal to the Exchange
Opening Price at their disseminated
size. In this situation, the system will
price any contracts routed to other
markets at the better of the Exchange
Opening Price or the order’s limit price.
Any unexecuted contracts from the
imbalance not traded or routed will be
cancelled back to the entering
participant if they remain unexecuted
and priced through the Opening Price,
unless the member that submitted the
original order has instructed the
Exchange in writing to re-enter the
remaining size, in which case the
remaining size will be automatically
submitted as a new order. Currently, the
rule provides that before the order is
cancelled back or reentered, it will be
displayed in the Exchange quote at the
Opening Price for the remaining size for
a period not to exceed ten seconds; this
does not occur since the Exchange has
set this period of time to zero seconds.
The Exchange is amending this rule to
add the boundaries of OQR and limit
prices within the OQR to provide
additional detail. A majority of this
paragraph is not being amended. These
boundaries are intended to ensure a
quality Opening Price as well as protect
the unexecutable interest entered with a
limit price which may not be able to be
fully executing at the Opening Price.
Although much of new Rule
1017(k)(vi)(C)(5) [sic] is the same as
current subparagraph (7), the Exchange
is proposing to delete the sentence that
58 This
is currently subparagraph 7.
reference to subparagraph (4) helps link
these provisions.
provides that during the display time
period, the system will disseminate, on
the opposite side of the market from
remaining unexecuted contracts: (i) A
non-firm bid for the price and size of the
next available bid(s) on the Exchange if
the imbalance is a sell imbalance, or (ii)
a non-firm offer for the price and size of
the next available offer(s) on the
Exchange if the imbalance is a buy
imbalance. This language is obsolete,
because this does not occur as there is
currently no display time period.
Proposed Rule 1017(k)(viii), currently
Rule 1017(l)(viii), as amended, provides
that the system will give priority to
market orders first in time priority, then
to resting limit orders at the Opening
Price. Market orders have priority
because they are considered to be the
most aggressively priced, consistent
with price priority. The Exchange is
proposing to amend the existing rule
text which provides that limit orders are
treated as market orders, because they
are not. The Exchange proposes to state
that limit orders are prioritized based on
their limit price and capacity
(participant type) as they are during
normal trading (outside the opening).
Accordingly, the Exchange is proposing
to amend this rule text to state that the
system will give priority to market
orders first in time, then to resting limit
orders. Further, the allocation
provisions of Rule 1014(g)(vii) will
apply.
The Exchange proposes to delete rule
text in current Rule 1017(i), which is
incorrect. It currently provides that a
limit order to buy which is at a higher
price than the price at which the option
is to be opened and a limit order to sell
which is at a lower price than the price
at which the option is to be opened,
shall be treated as market orders. The
Exchange proposes to remove this rule
text. The Exchange continues to treat
these orders as limit orders, which is
consistent with their handling during
normal trading. The Exchange does not
believe that limit orders should be
handled differently on the opening and
believes that this is consistent with
users’ expectations. Presumably, market
participants choose to enter limit orders
for the protection associated with a limit
price, and they understand that market
orders may be executed before limit
orders as a matter of priority, which is
an acceptable outcome because they are
not willing to take the risks associated
with market orders.60
The Exchange proposes to amend
Rule 1017 to add new section (k)(F)
which would provide that when an
option series opens, the system
17:13 Aug 19, 2016
Jkt 238001
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,61 in general, and furthers the
objectives of Section 6(b)(5) of the Act,62
in particular, in that it is designed to
promote just and equitable principles of
trade. Specifically, the changes to
paragraphs (a) through (e) and (g) amend
the current rule by adding details
concerning the manner in which the
Opening Process occurs in an option
series. The amendment also adds detail
to the rule and removes outdated
language. The proposed rule is also reorganized in a more logical way and
deletes ‘‘reserved’’ paragraphs, all of
which improves the readability of the
rule. For all of these reasons, paragraph
(a), which adopts the term ‘‘Opening
Process’’ to be used throughout the rule
and which defines it, along with several
other new definitions, should promote
just and equitable principles of trade.
The proposed additions to Rule
1017(b) promote just and equitable
principles of trade because the new
language spells out in greater detail
what interest is included in the Opening
Process, which, in turn, helps investors
determine what to submit. New Rule
1017(b) will specifically state that AON
interest that can be satisfied will be
considered for execution in determining
the Opening Price throughout the
Opening Process. The rule is currently
silent on the eligibility of AON interest
on the opening. It is consistent with the
Act to include AON interest on the
opening because this contingency
market or limit order will execute in its
entirety or not at all, provided that this
interest can be satisfied. The Exchange
61 15
59 The
VerDate Sep<11>2014
disseminates the price and size of the
PBBO. This amendment adds more
detail to the rule. The Exchange must
necessarily disseminate the PBBO not
just on the opening but throughout the
day.
The Exchange proposes to delete
current Rule 1017(l)(ix) which provides
for a brief delay to calculate the
opening. The current rule provides that
the period will not exceed .25 of one
second, but it has long been set at zero.
The Exchange’s technology does not
require a delay in order to open and
therefore the provision is obsolete.
The Exchange also proposes to delete
current Rule 1017(l)(x), which deals
with when the ABBO becomes crossed.
The impact of the ABBO on the
Exchange’s opening is now discussed
throughout the proposed rule and
therefore this provision is unnecessary.
60 See
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believes that AON should be included,
similar to other orders, if it can be
satisfied. This treatment is consistent
with the treatment of AON in other
market sessions.
The additions to Rule 1017(d)
regarding the 9:25 a.m. trigger and
providing that orders entered at any
time before an options series opens are
included in the Opening Process should
promote just and equitable principles of
trade, because a reasonable time period
has been selected after which eligible
interest is included balanced against
accepting as much interest as possible to
result in a robust Opening Process. The
9:25 a.m. trigger is intended to tie the
option Opening Process to quoting in
the underlying security; it presumes that
option quotes submitted before any
indicative quotes have been
disseminated for the underlying security
may not be reliable or intentional.
Therefore, the Exchange has chosen a
reasonable timeframe at which to begin
utilizing option quotes, based on the
Exchange’s experience with when
underlying quotes start becoming
available. In addition, the Exchange is
proposing to state in proposed Rule
1017(d)(ii) that the underlying security,
including indexes, must be open on the
primary market for a certain time period
for all options to be determined by the
Exchange. The Exchange is proposing
that the time period be no less than 100
milliseconds and no more than 5
seconds. The Exchange currently
applies a minimal delay of 500
milliseconds. This proposal is
consistent with the Act because it is
intended to permit the price of the
underlying security to settle down and
not flicker back and forth among prices
after its opening. It is common for a
stock to fluctuate in price immediately
upon opening; such volatility reflects a
natural uncertainty about the ultimate
Opening Price, while the buy and sell
interest is matched. The Exchange is
proposing a range of no less than 100
milliseconds and no more than 5
seconds in order to ensure that it has the
ability to adjust the period for which the
underlying security must be open on the
primary market. The Exchange may
determine that in periods of high/low
volatility that allowing the underlying
to be open for a longer/shorter period of
time may help to ensure more stability
in the marketplace prior to initiating the
Opening Process. Rule 1017(e)
specifically describes the manner in
which a trading halt would impact a
reopening process. This paragraph is
based on existing Rule 1017(h). This
rule text makes clear that a reopening is
not tied to the 9:25 a.m. time period of
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17:13 Aug 19, 2016
Jkt 238001
Rule 1017(d). This language should
promote just and equitable principles of
trade by specifically addressing the
manner in which a reopening will occur
after a trading halt.
The Exchange believes that new Rule
1017(f) promotes just and equitable
principles of trade, because the
proposed conditions involving Zero Bid
Markets, no ABBO and no Quality
Opening Market trigger the price
discovery mechanism rather than an
immediate opening in order to validate
the Opening Price against away markets
or by attracting additional interest to
address the specific condition. This is
consistent with the Act because it
should avoid opening executions in
very wide or unusual markets where an
opening execution price cannot be
validated. This process will occur if
there are no routable orders that cross
the ABBO.
Similarly, new Rule 1017(h) promotes
just and equitable principles of trade,
because it better describes how the
system calculates the Potential Opening
Price, which should provide a better
understanding of this part of the
process, which has many elements.
Once the price at which the maximum
number of contracts can be executed is
determined, applying additional criteria
promotes just and equitable principles
of trade, because it helps arrive at a
price that is logical and reasonable in
light of away markets and other interest
present in the system. Where there are
no away markets, applying the
boundary of a Quality Opening Market
promotes just and equitable principles
of trade also to help arrive at a
reasonable Opening Price. When
choosing between multiple Opening
Prices when some contracts would
remain unexecuted, using the lowest bid
or highest offer of the largest sized side
of the market promotes just and
equitable principles of trade because it
uses size as a tie breaker. The
Exchange’s method for determining the
Potential Opening Price and Opening
Price is consistent with the Act because
it seeks to arrive at reasonable price in
light of interest present in the system
and away market interest. The
Exchange’s method seeks to validate the
Opening Price and avoid opening
executions in very wide or unusual
markets where validation cannot occur.
Proposed new Rule 1017(i) promotes
just and equitable principles of trade by
establishing when the Exchange opens
immediately and which conditions are
relevant, based on the Potential Opening
Price determined in Rule 1017(h). The
rule text in Rule 1017(i) concerning
opening with a trade, is consistent with
the Act because it enables an immediate
PO 00000
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56741
opening to occur within a certain
boundary without need for the price
discovery process. The boundary
provides protections and ensures a
reasonable Opening Price. Throughout
the Opening Process, there is no
different impact to any particular
participant; executions occur at the
most reasonable price possible
regardless of participant type.
The OQR described in proposed Rule
1017(j) promotes just and equitable
principles of trade by establishing a
reasonable boundary to be applied
during the PDM. The OQR operates the
same way today and serves to provide
a level of protection for potential
opening executions. This is consistent
with the Act because OQR continues to
act as a protection for the Opening Price
because it protects away market prices
and also protects against extreme
volatility which may impact the
Opening Price.
New Rule 1017(j)(5) concerning more
than one Potential Opening Price is
consistent with the Act because it
provides price protection because it
forces the Potential Opening Price to fall
within the OQR boundary. Specifically,
the mid-point calculation balances the
price among interest participating in the
Opening when there is more than one
price at which the maximum number of
contracts could execute. Limiting the
mid-point calculation to the OQR when
a price would otherwise fall outside of
the OQR ensures the final mid-point
price will be within the protective OQR
boundary.
New Rule 1017(j)(6) deals with the
situation where there is more than one
Potential Opening Price and an away
market price involved. If there is more
than one Potential Opening Price
possible where no contracts would be
left unexecuted and any price used for
the mid-point calculation is an away
market price when contracts will be
routed, the system will use the away
market price as the Potential Opening
Price. This result is consistent with the
Act, because the system may need to
route to other markets and therefore it
uses the away market price as the
Opening Price. These boundaries serve
to validate the quality of the Opening
Price. OQR is intended to limit the
Opening Price to a reasonable, middle
ground price and thus reduce the
potential for erroneous trades during the
Opening Process. Although the
Exchange applies other boundaries such
as the Pre-Market BBO, the OQR is
outside of that and provides a price that
can maximize the number of executions
at a reasonable price. The PDM in new
Rule 1017(k) reflects what is generally
known as an imbalance process. The
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process is intended to attract liquidity to
improve the price at which an option
series will open as well as to maximize
the number of contracts that can be
executed on the opening. The Exchange
believes that this is consistent with just
and equitable principles of trade. The
Exchange is adding various references to
the applicable boundaries throughout
this paragraph, as explained above,
which should help investors receive
reasonable prices, which is the case
throughout the Opening Process. In
addition, the handling of routing on the
opening should promote just and
equitable principles of trade by
incorporating away markets into the
process in a clearer and more detailed
away. The PDM also promotes just and
equitable principles of trade by taking
into account whether all interest can be
fully executed, which helps investors by
including as much interest as possible
in the Opening Process.
The current rule takes away market
interest into account at the beginning of
the imbalance process, while the
proposed rule proposes to open using
Exchange interest only within the PreMarket BBO to determine an Opening
Price, provided certain conditions
contained in new Rule 1017(i) are
present to ensure participants receive a
quality execution in the opening. This is
reflected beginning in current Rule
1017(l)(ii)(C). It is consistent with the
Act to not consider away market
liquidity until the price discovery
process occurs because this proposed
process provides for a swift, yet
conservative opening. The Exchange is
bounded by the Pre-Market BBO when
determining an Opening Price. The
away market prices would be
considered, albeit not immediately.
The Exchange believes that amending
the rule text of current Rule 1017(l)(viii)
to describe the manner in which limit
orders are executed in comparison to
market orders promotes just and
equitable principles of trade because it
provides investors with the proper
method in which the system will
execute orders at the opening. It is
consistent with the Act to execute
market orders before limit order because
those order types are by definition at the
best price.
The Exchange believes that the
deletion of current Rule 1017(l)(ix)
promotes just and equitable principles
of trade because eliminating an obsolete
timer will provide investors with
accurate information concerning the
operation of the Exchange’s opening.
Deleting the timer is consistent with the
Act because the timer is no longer
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17:13 Aug 19, 2016
Jkt 238001
necessary and its removal results in
potentially faster processing of interest
received after the opening occurs.
Similarly, the Exchange believes that
the deletion of current Rule 1017(l)(x)
promotes just and equitable principles
of trade, because the proposed rule will
continue to describe the impact of a
crossed ABBO, but in specific parts of
the rule, where appropriate, which adds
more context and clarity to the
description of the opening. The
Exchange is not adding this concept to
the rule, rather just relocating the
concept within the rule. It is consistent
with the Act to terminate the opening
process when the ABBO becomes
crossed because it protects against
potential pricing anomalies in the
market.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The proposal
does not change the intense competition
that exists among the options markets
for options business including on the
opening. Nor does the Exchange believe
that the proposal will impose any
burden on intra-market competition; the
Opening Process involves many types of
participants and interest.
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
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–2016–79 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-2016–79. 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–
2016–79 and should be submitted on or
before September 12, 2016.
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) by order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.63
IV. Solicitation of Comments
Robert W. Errett,
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
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Deputy Secretary.
[FR Doc. 2016–19896 Filed 8–19–16; 8:45 am]
BILLING CODE 8011–01–P
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[Federal Register Volume 81, Number 162 (Monday, August 22, 2016)]
[Notices]
[Pages 56733-56742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19896]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78588; File No. SR-Phlx-2016-79]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
of Proposed Rule Change To Amend Rule 1017, Openings in Options
August 16, 2016.
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 August 4, 2016, NASDAQ PHLX LLC (``Phlx'' or
[[Page 56734]]
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 1017, Openings in Options, as
described in detail below.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to amend its rules relating to its
opening process. This rule change proposes to amend the current
functionality of the Exchange's trading system (``system'') \3\
regarding the opening of trading in an option series.
---------------------------------------------------------------------------
\3\ The Exchange is replacing references to Phlx XL II with the
word ``system'' to reflect current usage.
---------------------------------------------------------------------------
Definitions
First, the Exchange proposes to adopt a ``Definitions'' section as
new Rule 1017(a) \4\ to define several terms that are used throughout
the Rule. The new section will state that the Exchange conducts an
electronic opening for all option series \5\ traded on Phlx using its
trading system (hereinafter ``system'').\6\
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\4\ The current text of Rule 1017(a) is being deleted and
replaced by proposed Rule 1017(a)(iii), as described below.
\5\ Rule 1017 only applies to simple (non-Complex) orders; the
opening process for Complex Orders is described in Rule 1080.07.
\6\ The Exchange notes that Rule 1017 describes the Exchange's
opening process for its electronic order book. Rule 1017 does not
apply to trading on the Exchange's trading floor.
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The Exchange proposes to define the following terms, which are
described below: ``Opening Process,'' ``Opening Price,'' ``Potential
Opening Price,'' ``ABBO,'' ``Phlx Electronic Market Maker,'' ``Pre-
Market BBO,'' ``Quality Opening Market,'' ``Valid Width Quote,'' and
``Zero Bid Market.''
The Exchange defines ``Opening Process'' by cross-referencing Rule
1017(d).\7\ The Exchange defines ``Opening Price'' by cross-referencing
Rule 1017(i) and (k).\8\ The Exchange defines ``Potential Opening
Price'' by cross-referencing Rule 1017(h).\9\ The Exchange defines
``ABBO'' as the Away Best Bid or Offer.\10\ The ABBO does not include
Phlx's market. The Exchange defines ``market for the underlying
security'' as either the primary listing market or the primary volume
market (defined as the market with the most liquidity in that
underlying security for the previous two calendar months), as
determined by the Exchange by underlying and announced to the
membership on the Exchange's Web site.\11\ Currently, this term is
defined in Rule 1017(j) as either the primary listing market or the
primary volume market (defined as the market with the most liquidity in
that underlying security for the previous two calendar months), or the
first market to open the underlying security, as determined by the
Exchange on an issue-by-issue basis and announced to the membership on
the Exchange's Web site. In practice, the Exchange does not and has not
considered the first market to open in determining the primary market
for an underlying, and therefore the new definition will not refer to
it. The existing language in Rule 1017(j) regarding the first market to
open is thus being deleted.
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\7\ See proposed Rule 1017(a)(i).
\8\ See proposed Rule 1017(a)(ii).
\9\ See proposed Rule 1017(a)(iii).
\10\ See proposed Rule 1017(a)(iv). This term is also used in
Phlx Rule 1082(a)(ii)(B)(3)(g).
\11\ See proposed Rule 1017(a)(v).
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The term ``Phlx Electronic Market Makers'' is defined as a
Specialist,\12\ Streaming Quote Trader or ``SQT,'' \13\ and Remote
Streaming Quote Trader or ``RSQT'' \14\ who is required to submit
continuous two-sided electronic quotations pursuant to Rule
1014(b)(ii)(D).\15\ Currently, Rule 1017(a) utilizes the term ``Phlx XL
Participant'' which is not as precise as the term ``Phlx Electronic
Market Makers'' as it also includes non-SQT Registered Options Traders
or ROTs.\16\ This is incorrect because non-SQT ROTs cannot submit
quotes electronically and therefore should not be subject to Rule 1017,
which applies only to electronic trading. By definition, these non-SQT
ROTs make markets verbally and thus provide on-floor liquidity; they
have chosen not to submit quotes electronically to the Exchange. To be
considered in the Opening Process, orders represented by Floor Brokers
must be entered electronically.\17\ The next definition is ``Pre-Market
BBO'' defined as the highest bid and the lowest offer among Valid Width
Quotes.\18\ The rule currently refers to the highest bid and the lowest
offer multiple times, so defining the term is more efficient and
consistent. References to determining the highest quote bid and lowest
quote offer are being replaced with the new term, ``Pre-Market BBO''
throughout. The term ``Quality Opening Market'' is defined as a bid/ask
differential applicable to the best bid and offer from all Valid Width
Quotes defined in a table to be determined by the Exchange and
published on the Exchange's Web site.\19\ This definition appears in
current Rule 1017(l)(v)(B) and is being deleted. Next, a ``Valid Width
Quote'' is defined as a two-sided electronic quotation submitted by a
Phlx Electronic Market Maker that consists of a bid/ask differential
that is compliant with Rule
[[Page 56735]]
1014(c)(i)(A)(1)(a).\20\ This term appears in current Rule 1017(l)(ii)
and is being deleted. The term ``Zero Bid Market'' is where the best
bid for an options series is zero.\21\ The Exchange currently uses this
concept in other rules.\22\
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\12\ A Specialist is an Exchange member who is registered as an
options specialist pursuant to Rule 1020(a). An options Specialist
includes a Remote Specialist which is defined as an options
Specialist in one or more classes that does not have a physical
presence on an Exchange floor and that is approved by the Exchange
pursuant to Rule 501.
\13\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as an ROT
who has received permission from the Exchange to generate and submit
option quotations electronically in options to which such SQT is
assigned.
\14\ An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an
ROT that is a member affiliated with an RSQTO with no physical
trading floor presence who has received permission from the Exchange
to generate and submit option quotations electronically in options
to which such RSQT has been assigned.
\15\ See proposed Rule 1017(a)(vi).
\16\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT.
See Rule 1014(b)(ii)(C).
\17\ See current rule 1017(c).
\18\ See proposed Rule 1017(a)(vii). Valid Width Quotes is
defined at proposed Rule 1017(a)(ix).
\19\ See proposed Rule 1017(a)(viii).
\20\ See proposed Rule 1017(a)(ix).
\21\ See proposed Rule 1017(a)(x).
\22\ See Rule 1080(i)(A)(1) and Rule 1082(a)(ii)(B)(4)(C); a
zero priced bid equates with a Zero Bid Market.
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Reorganization of Certain Provisions
New rule text is being added to Rule 1017 and certain provisions
are being relocated within the rule for better organization and
understanding.
Eligible Interest
The Exchange proposes to move the language from current Rule
1017(l)(vii) to new Rule 1017(b), with minor changes. Specifically, the
Exchange proposes to adopt in new paragraph (b) a provision that
eligible opening interest includes: (i) Valid Width Quotes; (ii)
Opening Sweeps; and (iii) orders. Specialists, SQTs, and RSQTs may
submit quotes,\23\ Opening Sweeps and orders, but quotes other than
Valid Width Quotes will not be included in the Opening Process. Non-SQT
ROTs may submit orders; provided they are submitted electronically.\24\
---------------------------------------------------------------------------
\23\ Rule 1017(l)(vii) currently provides that quotes may be
submitted; the Exchange is now specifying that these must be Valid
Width Quotes, which will be defined in proposed Rule 1017(a)(ix).
\24\ See note 17 above.
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New Rule 1017 paragraph (b) will provide that all-or-none (``AON'')
interest \25\ that can be satisfied is considered for execution and in
determining the Opening Price throughout the Opening Process. The rule
is currently silent on the eligibility of AON interest on the opening,
from which it can be inferred that they are accepted; nevertheless, the
Exchange is proposing to add this specific provision to add detail to
the rule. The Exchange is specifically addressing AON interest to make
clear that this type of contingency market or limit order which would
be executed in its entirety or not at all, will be considered for
execution within the Opening, provided that this interest can be
satisfied.
---------------------------------------------------------------------------
\25\ All-or-none (``AON'') means a contingency market or limit
order which is to be executed in its entirety or not at all.
---------------------------------------------------------------------------
Opening Sweep
Proposed new Rule 1017(b)(i) provides that an Opening Sweep is a
one-sided electronic quotation submitted for execution against eligible
opening trading interest in the system.\26\ A Phlx Electronic Market
Maker assigned in a particular option may only submit an Opening Sweep
if, at the time of entry of the Opening Sweep, that Phlx Electronic
Market Maker has already submitted and maintained a Valid Width Quote.
All Opening Sweeps in the affected series entered by a Phlx Electronic
Market Maker will be cancelled immediately if that Phlx Electronic
Market Maker fails to maintain a continuous quote with a Valid Width
Quote in the affected series.\27\
---------------------------------------------------------------------------
\26\ This rule text is currently located in current Rule
1017(l)(vii)(A). This rule text is being relocated with this rule
change.
\27\ See proposed Rule 1017(b)(i)(A).
---------------------------------------------------------------------------
Opening Sweeps may be entered at any price with a minimum price
variation applicable to the affected series, on either side of the
market, at single or multiple price level(s), and may be cancelled and
re-entered. A single Phlx Electronic Market Maker may enter multiple
Opening Sweeps, with each Opening Sweep at a different price level. If
a Phlx Electronic Market Maker submits multiple Opening Sweeps, the
system will consider only the most recent Opening Sweep at each price
level submitted by such Phlx Electronic Market Maker in determining the
Opening Price. Unexecuted Opening Sweeps will be cancelled once the
affected series is open.\28\ Except as described above, most of the
language mimics current Rule 1017(l)(vii); it is being relocated
because it is more logical to refer to the types of eligible opening
interest in the beginning of the rule.
---------------------------------------------------------------------------
\28\ See proposed Rule 1017(b)(i)(B).
---------------------------------------------------------------------------
Proposed new Rule 1017(b)(ii) generally tracks current Rule
1017(l)(vii)(B) in stating that the system will aggregate the size of
all eligible interest for a particular participant category at a
particular price level for trade allocation purposes. For example, all
Phlx Electronic Market Maker (a participant category) quotes, Opening
Sweeps, and orders are thus aggregated in determining the pro-rata
allocation. The proposed rule is broader than the existing language,
which is limited to Opening Sweeps, because it includes quotes and
orders. The Exchange believes it is appropriate to amend the rule to
expressly state that the Exchange currently considers this interest
because there is no need to exclude quotes and orders, which contribute
liquidity just like Opening Sweeps.
Proposed Rule 1017(c) simplifies the current rule text to simply
provide that to be considered in the Opening Process, orders
represented by Floor Brokers must be entered electronically.
Proposed new Rule 1017(d) is based on existing paragraph Rule
1017(k). The Exchange seeks to organize this rule more logically by
describing when the Opening Process can begin and adding more detail
related to specific time-related triggers. Specifically, Phlx
Electronic Market Maker Valid Width Quotes and Opening Sweeps may start
at 9:25 a.m. and are included in the Opening Process. Orders may be
entered at any time before an options series opens and are included in
the Opening Process. This proposed language adds greater specificity to
the rule regarding the submission of orders. The 9:25 a.m. trigger is
intended to tie the option Opening Process to quoting in the underlying
security; \29\ it presumes that option quotes submitted before any
indicative quotes have been disseminated for the underlying security
may not be reliable or intentional. Therefore, the Exchange has chosen
a reasonable timeframe at which to begin utilizing option quotes, based
on the Exchange's experience when underlying quotes start becoming
available.
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\29\ For purposes of this rule, the underlying security can also
be an index.
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Furthermore, the Opening Process for an option series will be
conducted pursuant to paragraphs (f)-(k) on or after 9:30 a.m. if: \30\
The ABBO, if any, is not crossed; \31\ and if the system has received,
within two minutes (or such shorter time as determined by the Exchange
and disseminated to membership on the Exchange's Web site) of the
opening trade or quote on the market for the underlying security in the
case of equity options or, in the case of index options, within two
minutes of the receipt of the Opening Price in the underlying index (or
such shorter time as determined by the Exchange and disseminated to
membership on the Exchange's Web site), or within two minutes of market
opening in the case of U.S. dollar-settled FCO (or such shorter time as
determined by the Exchange and disseminated to membership on the
Exchange's Web site) either:
---------------------------------------------------------------------------
\30\ The new reference to 9:30 a.m. adds detail; of course, the
market cannot open before 9:30 a.m.
\31\ The crossed ABBO is currently referred to in Rule
1017(l)(x), which provides that: ``If at any point during the
Opening Process the ABBO becomes crossed (e.g., 1.05 bid, 1.00
offer), the opening process will be terminated and the Exchange will
not open the affected series. A new opening process for the affected
series will commence at the time the ABBO is uncrossed.''
---------------------------------------------------------------------------
(A) The Specialist's Valid Width Quote;
(B) the Valid Width Quotes of at least two Phlx Electronic Market
Makers other than the Specialist; or
(C) if neither the Specialist's Valid Width Quote nor the Valid
Width Quotes of two Phlx Electronic Market
[[Page 56736]]
Makers have been submitted within such timeframe, one Phlx Electronic
Market Maker has submitted a Valid Width Quote.
These requirements are intended to tie the option Opening Process
to receipt of liquidity. These requirements are the same as those of
current Rule 1017(k) and are reorganized.
In addition, the Exchange is proposing to state in proposed Rule
1017(d)(ii) that the underlying security, including indexes, must be
open on the primary market for a certain time period for all options to
be determined by the Exchange. The Exchange is proposing that the time
period be no less than 100 milliseconds and no more than 5 seconds. The
Exchange currently applies a minimal delay of 500 milliseconds. This
proposal is intended to permit the price of the underlying security to
settle down and not flicker back and forth among prices after its
opening. The Exchange is adding this detail to Rule 1017(d)(ii). It is
common for a stock to fluctuate in price immediately upon opening; such
volatility reflects a natural uncertainty about the ultimate Opening
Price, while the buy and sell interest is matched. The Exchange is
proposing a range of no less than 100 milliseconds and no more than 5
seconds in order to ensure that it has the ability to adjust the period
for which the underlying security must be open on the primary market.
The Exchange may determine that in periods of high/low volatility that
allowing the underlying to be open for a longer/shorter period of time
may help to ensure more stability in the marketplace prior to
initiating the Opening Process.
The Exchange is proposing to relocate the obligations of Phlx
Electronic Market Makers to new paragraph (d) as well. They are
unchanged. The Specialist assigned in a particular equity option must
enter a Valid Width Quote not later than one minute following the
dissemination of a quote or trade by the market for the underlying
security or, in the case of index options, following the receipt of the
Opening Price in the underlying index. The Specialist assigned in a
particular U.S. dollar-settled FCO must enter a Valid Width Quote not
later than 30 seconds after the announced market opening.\32\
---------------------------------------------------------------------------
\32\ See proposed Rule 1017(d)(iii).
---------------------------------------------------------------------------
Furthermore, a Phlx Electronic Market Maker other than a Specialist
that submits a quote pursuant to Rule 1017 in any option series when
the Specialist's quote has not been submitted shall be required to
submit continuous, two-sided quotes in such option series until such
time as the Specialist submits his/her quote, after which the Phlx
Electronic Market Maker that submitted such quote shall be obligated to
submit quotations pursuant to Rule 1014(b)(ii)(D). This is also
substantially unchanged.\33\
---------------------------------------------------------------------------
\33\ See proposed Rule 1017(d)(iv).
---------------------------------------------------------------------------
The Exchange is proposing to state in Rule 1017(d)(iv) that the
Opening Process will stop and an option series will not open if the
ABBO becomes crossed or when the requisite number of Valid Width Quotes
pursuant to Rule 1017(d)(i) are no longer present. Once each of these
conditions no longer exists, the Opening Process in the affected option
series will start again pursuant to Rule 1017(f)-(k). All eligible
opening interest will continue to be considered during the Opening
Process when the process is re-started. The Exchange is amending Rule
1017 to add this detail, which the Exchange believes is implied from
the conditions that trigger the Opening Process.
Overall, as explained above, new Rule 1017(d) is the same as
current Rule 1017(k), except the reference at the end of paragraph (k)
to Intermarket Sweep Orders (``ISOs'') \34\ will now appear in new
subparagraph (k)(C)(3)(i) and a reference is being added to the
Immediate-or-Cancel (``IOC'') designation. In addition, the proposed
Rule 1017(d) is more closely tied to specific time periods, like 9:25
a.m. for the receipt of quote and Opening Sweeps, and 9:30 a.m. for the
beginning of the actual Opening Process. The proposed rule also
reflects that the ABBO cannot be crossed because it is indicative of
uncertainty in the marketplace of where the option series should be
valued. In this case, the Exchange will wait for the ABBO to become
uncrossed before initiating the Opening Process to ensure that there is
stability in the marketplace in order to assist the Exchange in
determining the Opening Price. These additions are intended to provide
additional detail to the rule that the Exchange believes will be
helpful to the reader.
---------------------------------------------------------------------------
\34\ Current Rule 1017(k), which is being deleted, provides: Any
order volume that is routed to away markets pursuant to this Rule
1017 will be marked as an ISO.
---------------------------------------------------------------------------
New Rule 1017(e) states that the procedure described in this Rule
may be used to reopen an option after a trading halt. This is currently
in Rule 1017(h). The Exchange is adding that if there is a trading halt
or pause in the underlying security, the Opening Process will start
again irrespective of the specific times listed in Rule 1017(d). This
is because these times relate to the normal market opening at 9:30 a.m.
Most of this language is in Rule 1017 at current paragraph (h), except
the aforementioned reference to specific times provides additional
detail.
Opening With a PBBO
New Rule 1017(f) will now be titled ``Opening with a PBBO (No
Trade)'' and provide that if there are no opening quotes or orders that
lock or cross each other and no routable orders crossing the ABBO, the
system will open with an opening quote by disseminating the Exchange's
best bid and offer among quotes and orders (``PBBO'') that exist in the
system at that time, unless the following three conditions exist: (i) A
Zero Bid Market; (ii) no ABBO; and (iii) no Quality Opening Market. If
all of these conditions exist, the Exchange will calculate an Opening
Quote Range pursuant to paragraph (j) and conduct the Price Discovery
Mechanism or ``PDM'' pursuant to paragraph (k) below. These three
conditions exist in the system today, but do not appear in Rule 1017.
The existence of all three conditions being present at the same time is
very rare. The Exchange believes that when all three of these
conditions exist, further price discovery is warranted to validate or
perhaps update the Potential Opening Price and to attract additional
interest to perhaps render an opening trade possible, because: (i) A
Zero Bid Market reflects a lack of buying interest that could benefit
from price discovery; (ii) the lack of an ABBO means there is no
external check on the Exchange's market for that options series; and
(iii) the lack of a Quality Opening Market indicates that the
Exchange's market is wide. If no quotes or orders lock/cross each
other, nothing matches and there can be no trade. This is the same as
Rule 1017(l)(i). The Exchange believes that when these conditions
exist, it is difficult to arrive at a reasonable and expected price.
Further Opening Processes
If an opening did not occur pursuant to proposed Rule 1017(f) and
there are opening Valid Width Quotes or orders that lock or cross each
other, the system will calculate the Pre-Market BBO. This new rule text
is located in new Rule 1017(g), which is the same as current Rule
1017(l)(ii), except the term Pre-Market BBO is now specifically defined
in proposed Rule 1017(a)(vii).
Proposed new Rule 1017 (h) describes the general concept of how the
system calculates the Potential Opening Price under all circumstances
once the Opening Process is triggered. Specifically, the system will
take into consideration all Valid Width Quotes,
[[Page 56737]]
Opening Sweeps and orders (except AON interest that cannot be
satisfied) \35\ for the option series and identify the price at which
the maximum number of contracts can trade (``maximum quantity
criterion''). This concept of maximizing the number of contracts that
can trade currently appears in current Rule 1017(l)(ii), and is
intended to find the most reasonable and suitable price, relying on the
maximization to reflect the best price. However, current Rule
1017(l)(ii) states that if the Opening Price calculation leaves no
imbalance, the Exchange will open at that price, executing marketable
trading interest, as long as the Opening Price includes only Exchange
interest. This only occurs under certain circumstances, which is now
explained in new Rule 1017(i).
---------------------------------------------------------------------------
\35\ See proposed Rule 1017(b).
---------------------------------------------------------------------------
The Exchange proposal further states that when two or more
Potential Opening Prices would satisfy the maximum quantity criterion
and leave no contracts unexecuted, the system takes the highest and
lowest of those prices and takes the mid-point; if such mid-point is
not expressed as a permitted minimum price variation, it will be
rounded to the minimum price variation that is closest to the closing
price for the affected series from the immediately prior trading
session. If there is no closing price from the immediately prior
trading session, the system will round up to the minimum price
variation to determine the Opening Price.\36\ This is similar to
current Rule 1017 (l)(ii)(B).
---------------------------------------------------------------------------
\36\ See proposed Rule 1017(h)(A).
---------------------------------------------------------------------------
If two or more Potential Opening Prices for the affected series
would satisfy the maximum quantity criterion and leave contracts
unexecuted, the Opening Price will be either the lowest executable bid
or highest executable offer of the largest sized side.\37\ This, again,
bases the Potential Opening Price on the maximum quantity that is
executable. The Potential Opening Price is limited by the away market
price that cannot be satisfied with the Exchange routable interest.\38\
The Exchange does not open with a trade that trades through another
market. The Exchange is amending Rule 1017 to provide detail to the
rule not contemplated by the current language. This process,
importantly, breaks a tie by considering the largest sized side and
away markets, which are relevant to determining a fair Opening Price.
---------------------------------------------------------------------------
\37\ See proposed Rule 1017(h)(B).
\38\ See proposed Rule 1017(h)(C).
---------------------------------------------------------------------------
The system applies certain boundaries to the Potential Opening
Price to help ensure that the price is a reasonable one by identifying
the quality of that price; if a well-defined, fair price can be found
within these boundaries, the option series can open at that price
without going through a further price discovery mechanism. Accordingly,
new Rule 1017(i),\39\ entitled ``Opening with Trade,'' will state at
Rule 1017(i)(A) the Exchange will open the option series for trading at
the following Opening Price if any of these conditions occur: (i) The
Potential Opening Price is at or within the best of the Pre-Market BBO
and the ABBO; (ii) the Potential Opening Price is at or within the non-
zero bid ABBO if the Pre-Market BBO is crossed; or (iii) where there is
no ABBO, the Potential Opening Price is at or within the Pre-Market BBO
which is also a Quality Opening Market.
---------------------------------------------------------------------------
\39\ The deletion of current paragraph (i) is discussed below.
---------------------------------------------------------------------------
These boundaries serve to validate the quality of the Opening
Price. This concept is defined in current Rule 1017(l)(ii) in a limited
manner, which provides that, ``If the price is within the highest quote
bid and lowest quote offer and leaves no imbalance, the Exchange will
open at that price, executing marketable trading interest, as long as
the opening price includes only Exchange interest.'' New Rule 1017(i)
provides that the Exchange will open with a trade as long as it is
within the defined boundaries regardless of any imbalance. The Exchange
believes that since the Opening Price can be determined within a well-
defined boundary and not trading through other markets, it is fair to
open the market immediately with a trade and to have the remaining
interest available to be executed in the displayed market. Using a
boundary-based price counterbalances opening faster at a less bounded
and perhaps less expected price and reduces the possibility of leaving
an imbalance.
If there is more than one Potential Opening Price which meets the
conditions set forth in proposed Rule 1017(i)(A), where (1) no
contracts would be left unexecuted and (2) any value used for the mid-
point calculation (which is described in Rule 1017(h)) that crosses
either: the Pre-Market BBO or the ABBO, then the Exchange will open the
option series for trading with an execution and use the best price
which the Potential Opening Price crosses as a boundary price for the
purpose of the mid-point calculation.\40\ The proposed rule now better
explains the boundary as well as the price basis for the mid-point
calculation for immediate opening with a trade, which improves the
detail included in the rule. The Exchange believes that this process is
logical because it seeks to select a fair and balanced price.
---------------------------------------------------------------------------
\40\ See proposed Rule 1017(i)(B).
---------------------------------------------------------------------------
Proposed Rule 1017(j) will provide that the system will calculate
an Opening Quote Range (``OQR'') for a particular option series that
will be utilized in the PDM. The OQR is an additional type of boundary
beyond the boundaries mentioned in Rule 1017 at proposed paragraph (i).
OQR is intended to limit the Opening Price to a reasonable, middle
ground price and thus reduce the potential for erroneous trades during
the Opening Process. Although the Exchange applies other boundaries
such as the BBO, the OQR is outside of that and provides a price that
can satisfy more size without becoming unreasonable.
Specifically, to determine the minimum value for the OQR, an
amount, as defined in a table to be determined by the Exchange,\41\
will be subtracted from the highest quote bid among Valid Width Quotes
on the Exchange and on the away market(s), if any, except as provided
in proposed Rule1017(j)(3) and (4).\42\ To determine the maximum value
for the OQR, an amount, as defined in a table to be determined by the
Exchange, will be added to the lowest quote offer among Valid Width
Quotes on the Exchange and on the away market(s), if any, except as
provided in proposed Rule 1017(j)(3) and (4).\43\ However, if one or
more away markets have disseminated opening quotes that are not
crossed, and there are Valid Width Quotes on the Exchange that cross
each other or that cross away market quotes, then the minimum value for
the OQR will be the highest quote bid among quotes on away
market(s).\44\ In addition, the maximum value for the OQR will be the
lowest quote offer among quotes on away market(s).\45\ And if, however,
there are opening quotes on the Exchange that cross each other, and
there is no away market in the affected option series, the minimum
value for the OQR will be the lowest quote bid among Valid Width Quotes
on the Exchange, and the maximum value for the OQR will be the highest
quote offer among Valid Width Quotes on the Exchange.\46\ This is the
same as existing Rule 1017(l)(iii) and (iv), except that the new Rule
1017(j) combines those concepts into a single provision.
---------------------------------------------------------------------------
\41\ The table will be available on the Exchange's Web site.
\42\ See proposed Rule 1017(j)(1).
\43\ See proposed Rule 1017(j)(2).
\44\ See proposed Rule 1017(j)(3)(a).
\45\ See proposed Rule 1017(j)(3)(b).
\46\ See proposed Rule 1017(j)(4)(a) and (b).
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[[Page 56738]]
If there is more than one Potential Opening Price possible where no
contracts would be left unexecuted, any price used for the mid-point
calculation (which is described in new Rule 1017(h)) that is through
the OQR will be restricted to the OQR price on that side of the market
for the purposes of this calculation. This, in Rule 1017(j) at new
subparagraph (5), continues the theme of relying on both maximizing
executions and looking at the correct side of the market to determine a
fair price.
New Rule 1017(j) (6) deals with the situation where there is an
away market price involved. If there is more than one Potential Opening
Price possible where no contracts would be left unexecuted and any
price used for the mid-point calculation (which is described in new
Rule 1017(h)) is an away market price when contracts will be routed,
the system will use the away market price as the Potential Opening
Price. Because the system may need to route to other markets it uses
the away market price as the Opening Price.
If non-routable interest can be maximum executable against Exchange
interest after routable interest has been determined by the system to
satisfy the away market, then the Potential Opening Price is the price
at which the maximum volume, excluding the volume which will be routed
to an away market, may be executed on the Exchange as described in Rule
1017 at new paragraph (h). The system will consider routable Customer
interest in price/time priority to satisfy the away market.\47\ This is
consistent with the price/time handling of Customer interest outside of
the Opening Process.\48\ This continues the theme of trying to satisfy
the maximum amount of interest during the Opening Process.
---------------------------------------------------------------------------
\47\ See proposed Rule 1017(j)(7).
\48\ See Rule 1014(vii) [sic].
---------------------------------------------------------------------------
If the Exchange has not opened pursuant to proposed Rule 1017
paragraphs (f) or (i), the Exchange will conduct a PDM pursuant to new
Rule 1017(k). The PDM is the process by which the Exchange seeks to
identify an Opening Price having not been able to do so following the
process outlined thus far. The principles behind the PDM are, just like
above, to satisfy the maximum number of contracts possible by
identifying a price that may leave unexecuted contracts. However, the
PDM applies a new, wider boundary to identify the Opening Price and the
PDM involves seeking additional liquidity.
Currently, the price discovery process, known as the ``imbalance
process'' in current Rule 1017, is triggered only by unexecuted
contracts at the price at which the maximum number of contracts can
trade. Instead, the situations in proposed Rule 1017(f) and (j) also
result in the initiation of an imbalance process.\49\ The Exchange
believes that conducting the price discovery process in these
situations protects opening orders from receiving a random price that
does not reflect the totality of what is happening in the markets on
the opening and also further protects opening interest from receiving a
potentially erroneous execution price on the opening. Opening
immediately has the benefit of speed and certainty, but that benefit
must be weighed against the quality of the execution price and whether
orders were left unexecuted. The Exchange believes that the proposed
rule strikes an appropriate balance.
---------------------------------------------------------------------------
\49\ Today, in these situations, the option series would not
open immediately. Rather an imbalance would occur where there is
unexecutable trading interest at a certain price.
---------------------------------------------------------------------------
In addition, the current rule takes away market interest into
account at the beginning of the imbalance process, while the proposed
rule attempts to open using Exchange interest only to determine an
Opening Price, provided certain conditions contained in new paragraph
(i) are present to ensure participants receive a quality execution in
the opening. This is reflected beginning in current Rule
1017(l)(ii)(C). The proposed rule does not consider away market
liquidity until the price discovery process. As a result, the Exchange
might open without routing if all of the conditions described above are
met. The Exchange believes that the benefit of this process is a more
rapid opening with quality execution prices.
Specifically, new Rule 1017(k)(A) provides that the system will
broadcast an Imbalance Message (which includes the symbol, side of the
imbalance (unmatched contracts), size of matched contracts, size of the
imbalance, and price of the affected series (which must be within the
Pre-Market BBO) to participants, and begin an ``Imbalance Timer,'' not
to exceed three seconds. The Imbalance Message is intended to attract
additional liquidity, much like an auction is, using an auction message
and timer.\50\ The Imbalance Timer will be for the same number of
seconds for all options traded on the Exchange. This is the same as the
existing rule, except that the Exchange is adding more detail to this
provision, to provide that the price in the imbalance message must be
within the Pre-Market BBO. This is intended, as some of the other
boundaries applied in the Opening Process, to help ensure that the
price is reasonable in light of the price discovery needed to determine
an Opening Price.
---------------------------------------------------------------------------
\50\ See COOP and COLA descriptions in Rule 1080.07.
---------------------------------------------------------------------------
New Rule 1017(k)(B), states that any new interest received by the
system will update the Potential Opening Price. This amendment adds
detail to the rule. If during or at the end of the Imbalance Timer, the
Opening Price is at or within the OQR the Imbalance Timer will end and
the system will execute at the Opening Price if the executions consist
of Exchange interest only without trading through the ABBO and without
trading through the limit price(s) of interest within OQR which is
unable to be fully executed at the Opening Price. If no new interest
comes in during the Imbalance Timer and the Opening Price is at or
within OQR, the Exchange will open at the end of the Imbalance Timer.
This reflects that the Exchange is seeking to identify a price on the
Exchange without routing away, yet which price may not trade through
another market and the quality of which is addressed by applying the
OQR boundary.
Currently, Rule 1017(l)(vi)(B) provides that if opening quotes,
Opening Sweeps and orders submitted during the Imbalance Timer, or
other changes to the ABBO, would allow the entire imbalance amount to
trade at the Exchange at or within the OQR without trading through the
ABBO, the Imbalance Timer will end and the system will execute at the
appropriate Opening Price. Accordingly, the current rule takes away
market prices and volume into account at this step, while the system
functionality does not. This is intended to foster trading on the
Exchange before routing away.
Next, current Rule 1017(l)(vi)(C) is being reorganized with
additional detail, and introduces the process of routing away. Provided
the option series has not opened pursuant to proposed Rule 1017(k)(B),
the system will send a second Imbalance Message with a Potential
Opening Price that is bounded by the OQR (without trading through the
limit price(s) of interest within OQR which is unable to be fully
executed at the Opening Price) and includes away market volume in the
size of the imbalance to participants; and concurrently initiate a
Route Timer, not to exceed one second.\51\ The Route
[[Page 56739]]
Timer is intended to give Exchange users an opportunity to respond to
an Imbalance Message before any opening interest is routed to away
markets and, thereby, maximize trading on the Exchange. If during the
Route Timer, interest is received by the system which would allow the
Opening Price to be within OQR without trading through other markets
and without trading through the limit price(s) of interest within OQR
which is unable to be fully executed at the Opening Price, the system
will trade and the Route Timer will end. The system will monitor quotes
received during the Route Timer period and make ongoing corresponding
changes to the permitted OQR to reflect them.\52\ This is being changed
to eliminate the requirement that there be no imbalance, which means it
is more likely that an Opening Price will be discovered. It also widens
the boundary of available Opening Prices, which should similarly
increase the likelihood that an Opening Price can be determined. The
Route Timer, like the Imbalance Timer, is intended to permit responses
to be submitted and considered by the system in calculating the
Potential Opening Price. The system does not route away until the Route
Timer ends.
---------------------------------------------------------------------------
\51\ The Route Timer is a brief timer that operates as a pause
before an order is routed to an away market. The Route Timer is
currently set at 200 milliseconds, which the Exchange has determined
is a reasonable time period to gather additional interest on the
Exchange before routing away. The Exchange has only changed this
timer a few times over the past several years.
\52\ See proposed Rule 1017(k)(C)(1) and (2).
---------------------------------------------------------------------------
Proposed Rule 1017(k)(C)(3) will provide that when the Route Timer
expires, if the Potential Opening Price is within OQR (without trading
through the limit price(s) of interest within OQR that is unable to be
fully executed at the Opening Price), the system will determine if the
total number of contracts displayed at better prices than the
Exchange's Potential Opening Price on away markets (``better priced
away contracts'') would satisfy the number of marketable contracts
available on the Exchange. This is largely unchanged in terms of
applying the OQR as a boundary before considering away markets. The
Exchange is adding reference to the limit price, because the limit
price of interest within the OQR serves as a boundary as well. This
protects the unexecuted interest and should result in a fairer price.
The Exchange is adding rule text to state that the Exchange will open
the option by routing and/or trading on the Exchange, pursuant to
proposed Rule 1017(k)(C)(3)(i)-(iii).
Proposed Rule 1017(k)(C)(3)(i) will provide that if the total
number of contracts displayed at better prices than the Exchange's
Potential Opening Price on away markets (``better priced away
contracts'') would satisfy the number of marketable contracts available
on the Exchange on either the buy or sell side, the system will route
all marketable contracts on the Exchange to such better priced away
markets as ISO IOC orders, and determine an opening PBBO that reflects
the interest remaining on the Exchange. The system will price any
contracts routed away to other markets at the Exchange's Opening Price
or proposed Rule 1017(k)(C)(3)(ii) or (iii) described hereinafter.
Currently, Rule 1017 states that contracts routed away are priced at
the better away market price. This is incorrect. Routing away at the
Exchange's Opening Price is intended to achieve the best possible price
available at the time the order is received by the away market.
Proposed Rule 1017(k)(C)(3)(ii) \53\ will provide that if the total
number of better priced away contracts would not satisfy the number of
marketable contracts the Exchange has, the system will determine how
many contracts it has available at the Exchange Opening Price. If the
total number of better priced away contracts plus the number of
contracts available at the Exchange Opening Price would satisfy the
number of marketable contracts on the Exchange on either the buy or
sell side, the system will contemporaneously route a number of
contracts that will satisfy interest at other markets at prices better
than the Phlx Opening Price, and trade available contracts on the
Exchange at the Exchange Opening Price. The system will price any
contracts routed to other markets at the better of the Exchange Opening
Price or the order's limit price pursuant to Rule 1017(k)(vi)(C)(3)(ii)
[sic] at the better of the Exchange Opening Price or the order's limit
price. Currently, the rule states that the Exchange will execute only
at the Opening Price, but in actuality the system uses the better of
the Opening Price or the order's limit price to route to away markets.
This continues with the theme of maximum possible execution of the
interest in Phlx or away markets. The addition of the reference to the
buy or sell side is intended to provide additional detail and accuracy
to the description.\54\
---------------------------------------------------------------------------
\53\ This is currently subparagraph 4.
\54\ This addition is proposed in several places in Rule 1017
for the same reason.
---------------------------------------------------------------------------
Proposed Rule 1017(k)(C)(3)(iii) \55\ will provide that if the
total number of better priced away contracts plus the number of
contracts available at the Exchange Opening Price plus the contracts
available at other markets at the Exchange Opening Price would satisfy
the number of marketable contracts the Exchange has on either the buy
or sell side, the system will contemporaneously route a number of
contracts that will satisfy interest at other markets at prices better
than the Exchange Opening Price (pricing any contracts routed to other
markets at the better of the Exchange Opening Price or the order's
limit price), trade available contracts on the Exchange at the Exchange
Opening Price, and route a number of contracts that will satisfy
interest at other markets at prices equal to the Exchange Opening
Price. Much of this appears in the current rule but is supplemented by
the reference to the order's limit price, as discussed above. This
provision, like the existing one, is intended to introduce routing to
away markets potentially both at a better price than the Exchange
Opening Price as well as at the Exchange Opening Price to access as
much liquidity as possible to maximize the number of contracts able to
be traded as part of the Opening Process. The Exchange routes at the
better of the Exchange's Opening Price or the order's limit price to
first ensure the order's limit price is not violated. Routing away at
the Exchange's Opening Price is intended to achieve the best possible
price available at the time the order is received by the away market.
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\55\ This is currently subparagraph 5.
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Proposed Rule 1017(k)(C)(4) \56\ is proposed to state that the
system may send up to two additional Imbalance Messages \57\ (which may
occur while the Route Timer is operating) bounded by OQR and reflecting
away market interest in the volume. The reference to two additional
Imbalance Messages is intended to replace in a clearer way the current
reference to repeating the ``Imbalance Process'' (a term no longer
being used in this rule) three times. The reference to the OQR and away
market interest, again, amends the rule by adding detail to make clear
that both are boundaries. These boundaries are intended to assist in
determining a reasonable price at which an option series might open.
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\56\ This is currently subparagraph 6.
\57\ The first two Imbalance Message always occur, while the
next two may or may not occur based on whether or not the Exchange
has been able to open before repeating the Imbalance Process.
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This provision is proposed to further state that after the Route
Timer has expired, the processes in proposed Rule 1017(k)(C)(3) will
repeat (except no new Route Timer will be initiated). No new Route
Timer is initiated because the Exchange believes that after the Route
Timer has been initiated and subsequently expired, no further delay
[[Page 56740]]
is needed before routing contracts if at any point thereafter the
Exchange is able to satisfy the total number of marketable contracts
the Exchange has by executing on the Exchange and routing to other
markets.
Proposed Rule 1017(k)(vi)(C)(5) [sic],\58\ entitled ``Forced
Opening,'' will describe what happens as a last resort in order to open
an options series when the processes described above have not resulted
in an opening of the options series. Under this process, called a
Forced Opening, after all additional Imbalance Messages have occurred
pursuant to proposed Rule 1017(k)(4),\59\ the system will open as many
contracts as possible by routing to other markets at prices better than
the Exchange Opening Price for their disseminated size, trading
available contracts on the Exchange at the Exchange Opening Price
bounded by OQR (without trading through the limit price(s) of interest
within OQR which is unable to be fully executed at the Opening Price).
The system will also route contracts to other markets at prices equal
to the Exchange Opening Price at their disseminated size. In this
situation, the system will price any contracts routed to other markets
at the better of the Exchange Opening Price or the order's limit price.
Any unexecuted contracts from the imbalance not traded or routed will
be cancelled back to the entering participant if they remain unexecuted
and priced through the Opening Price, unless the member that submitted
the original order has instructed the Exchange in writing to re-enter
the remaining size, in which case the remaining size will be
automatically submitted as a new order. Currently, the rule provides
that before the order is cancelled back or reentered, it will be
displayed in the Exchange quote at the Opening Price for the remaining
size for a period not to exceed ten seconds; this does not occur since
the Exchange has set this period of time to zero seconds. The Exchange
is amending this rule to add the boundaries of OQR and limit prices
within the OQR to provide additional detail. A majority of this
paragraph is not being amended. These boundaries are intended to ensure
a quality Opening Price as well as protect the unexecutable interest
entered with a limit price which may not be able to be fully executing
at the Opening Price.
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\58\ This is currently subparagraph 7.
\59\ The reference to subparagraph (4) helps link these
provisions.
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Although much of new Rule 1017(k)(vi)(C)(5) [sic] is the same as
current subparagraph (7), the Exchange is proposing to delete the
sentence that provides that during the display time period, the system
will disseminate, on the opposite side of the market from remaining
unexecuted contracts: (i) A non-firm bid for the price and size of the
next available bid(s) on the Exchange if the imbalance is a sell
imbalance, or (ii) a non-firm offer for the price and size of the next
available offer(s) on the Exchange if the imbalance is a buy imbalance.
This language is obsolete, because this does not occur as there is
currently no display time period.
Proposed Rule 1017(k)(viii), currently Rule 1017(l)(viii), as
amended, provides that the system will give priority to market orders
first in time priority, then to resting limit orders at the Opening
Price. Market orders have priority because they are considered to be
the most aggressively priced, consistent with price priority. The
Exchange is proposing to amend the existing rule text which provides
that limit orders are treated as market orders, because they are not.
The Exchange proposes to state that limit orders are prioritized based
on their limit price and capacity (participant type) as they are during
normal trading (outside the opening). Accordingly, the Exchange is
proposing to amend this rule text to state that the system will give
priority to market orders first in time, then to resting limit orders.
Further, the allocation provisions of Rule 1014(g)(vii) will apply.
The Exchange proposes to delete rule text in current Rule 1017(i),
which is incorrect. It currently provides that a limit order to buy
which is at a higher price than the price at which the option is to be
opened and a limit order to sell which is at a lower price than the
price at which the option is to be opened, shall be treated as market
orders. The Exchange proposes to remove this rule text. The Exchange
continues to treat these orders as limit orders, which is consistent
with their handling during normal trading. The Exchange does not
believe that limit orders should be handled differently on the opening
and believes that this is consistent with users' expectations.
Presumably, market participants choose to enter limit orders for the
protection associated with a limit price, and they understand that
market orders may be executed before limit orders as a matter of
priority, which is an acceptable outcome because they are not willing
to take the risks associated with market orders.\60\
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\60\ See Rule 1014(g)(vii).
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The Exchange proposes to amend Rule 1017 to add new section (k)(F)
which would provide that when an option series opens, the system
disseminates the price and size of the PBBO. This amendment adds more
detail to the rule. The Exchange must necessarily disseminate the PBBO
not just on the opening but throughout the day.
The Exchange proposes to delete current Rule 1017(l)(ix) which
provides for a brief delay to calculate the opening. The current rule
provides that the period will not exceed .25 of one second, but it has
long been set at zero. The Exchange's technology does not require a
delay in order to open and therefore the provision is obsolete.
The Exchange also proposes to delete current Rule 1017(l)(x), which
deals with when the ABBO becomes crossed. The impact of the ABBO on the
Exchange's opening is now discussed throughout the proposed rule and
therefore this provision is unnecessary.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\61\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\62\ in particular, in that it is designed to
promote just and equitable principles of trade. Specifically, the
changes to paragraphs (a) through (e) and (g) amend the current rule by
adding details concerning the manner in which the Opening Process
occurs in an option series. The amendment also adds detail to the rule
and removes outdated language. The proposed rule is also re-organized
in a more logical way and deletes ``reserved'' paragraphs, all of which
improves the readability of the rule. For all of these reasons,
paragraph (a), which adopts the term ``Opening Process'' to be used
throughout the rule and which defines it, along with several other new
definitions, should promote just and equitable principles of trade.
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\61\ 15 U.S.C. 78f(b).
\62\ 15 U.S.C. 78f(b)(5).
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The proposed additions to Rule 1017(b) promote just and equitable
principles of trade because the new language spells out in greater
detail what interest is included in the Opening Process, which, in
turn, helps investors determine what to submit. New Rule 1017(b) will
specifically state that AON interest that can be satisfied will be
considered for execution in determining the Opening Price throughout
the Opening Process. The rule is currently silent on the eligibility of
AON interest on the opening. It is consistent with the Act to include
AON interest on the opening because this contingency market or limit
order will execute in its entirety or not at all, provided that this
interest can be satisfied. The Exchange
[[Page 56741]]
believes that AON should be included, similar to other orders, if it
can be satisfied. This treatment is consistent with the treatment of
AON in other market sessions.
The additions to Rule 1017(d) regarding the 9:25 a.m. trigger and
providing that orders entered at any time before an options series
opens are included in the Opening Process should promote just and
equitable principles of trade, because a reasonable time period has
been selected after which eligible interest is included balanced
against accepting as much interest as possible to result in a robust
Opening Process. The 9:25 a.m. trigger is intended to tie the option
Opening Process to quoting in the underlying security; it presumes that
option quotes submitted before any indicative quotes have been
disseminated for the underlying security may not be reliable or
intentional. Therefore, the Exchange has chosen a reasonable timeframe
at which to begin utilizing option quotes, based on the Exchange's
experience with when underlying quotes start becoming available. In
addition, the Exchange is proposing to state in proposed Rule
1017(d)(ii) that the underlying security, including indexes, must be
open on the primary market for a certain time period for all options to
be determined by the Exchange. The Exchange is proposing that the time
period be no less than 100 milliseconds and no more than 5 seconds. The
Exchange currently applies a minimal delay of 500 milliseconds. This
proposal is consistent with the Act because it is intended to permit
the price of the underlying security to settle down and not flicker
back and forth among prices after its opening. It is common for a stock
to fluctuate in price immediately upon opening; such volatility
reflects a natural uncertainty about the ultimate Opening Price, while
the buy and sell interest is matched. The Exchange is proposing a range
of no less than 100 milliseconds and no more than 5 seconds in order to
ensure that it has the ability to adjust the period for which the
underlying security must be open on the primary market. The Exchange
may determine that in periods of high/low volatility that allowing the
underlying to be open for a longer/shorter period of time may help to
ensure more stability in the marketplace prior to initiating the
Opening Process. Rule 1017(e) specifically describes the manner in
which a trading halt would impact a reopening process. This paragraph
is based on existing Rule 1017(h). This rule text makes clear that a
reopening is not tied to the 9:25 a.m. time period of Rule 1017(d).
This language should promote just and equitable principles of trade by
specifically addressing the manner in which a reopening will occur
after a trading halt.
The Exchange believes that new Rule 1017(f) promotes just and
equitable principles of trade, because the proposed conditions
involving Zero Bid Markets, no ABBO and no Quality Opening Market
trigger the price discovery mechanism rather than an immediate opening
in order to validate the Opening Price against away markets or by
attracting additional interest to address the specific condition. This
is consistent with the Act because it should avoid opening executions
in very wide or unusual markets where an opening execution price cannot
be validated. This process will occur if there are no routable orders
that cross the ABBO.
Similarly, new Rule 1017(h) promotes just and equitable principles
of trade, because it better describes how the system calculates the
Potential Opening Price, which should provide a better understanding of
this part of the process, which has many elements. Once the price at
which the maximum number of contracts can be executed is determined,
applying additional criteria promotes just and equitable principles of
trade, because it helps arrive at a price that is logical and
reasonable in light of away markets and other interest present in the
system. Where there are no away markets, applying the boundary of a
Quality Opening Market promotes just and equitable principles of trade
also to help arrive at a reasonable Opening Price. When choosing
between multiple Opening Prices when some contracts would remain
unexecuted, using the lowest bid or highest offer of the largest sized
side of the market promotes just and equitable principles of trade
because it uses size as a tie breaker. The Exchange's method for
determining the Potential Opening Price and Opening Price is consistent
with the Act because it seeks to arrive at reasonable price in light of
interest present in the system and away market interest. The Exchange's
method seeks to validate the Opening Price and avoid opening executions
in very wide or unusual markets where validation cannot occur.
Proposed new Rule 1017(i) promotes just and equitable principles of
trade by establishing when the Exchange opens immediately and which
conditions are relevant, based on the Potential Opening Price
determined in Rule 1017(h). The rule text in Rule 1017(i) concerning
opening with a trade, is consistent with the Act because it enables an
immediate opening to occur within a certain boundary without need for
the price discovery process. The boundary provides protections and
ensures a reasonable Opening Price. Throughout the Opening Process,
there is no different impact to any particular participant; executions
occur at the most reasonable price possible regardless of participant
type.
The OQR described in proposed Rule 1017(j) promotes just and
equitable principles of trade by establishing a reasonable boundary to
be applied during the PDM. The OQR operates the same way today and
serves to provide a level of protection for potential opening
executions. This is consistent with the Act because OQR continues to
act as a protection for the Opening Price because it protects away
market prices and also protects against extreme volatility which may
impact the Opening Price.
New Rule 1017(j)(5) concerning more than one Potential Opening
Price is consistent with the Act because it provides price protection
because it forces the Potential Opening Price to fall within the OQR
boundary. Specifically, the mid-point calculation balances the price
among interest participating in the Opening when there is more than one
price at which the maximum number of contracts could execute. Limiting
the mid-point calculation to the OQR when a price would otherwise fall
outside of the OQR ensures the final mid-point price will be within the
protective OQR boundary.
New Rule 1017(j)(6) deals with the situation where there is more
than one Potential Opening Price and an away market price involved. If
there is more than one Potential Opening Price possible where no
contracts would be left unexecuted and any price used for the mid-point
calculation is an away market price when contracts will be routed, the
system will use the away market price as the Potential Opening Price.
This result is consistent with the Act, because the system may need to
route to other markets and therefore it uses the away market price as
the Opening Price. These boundaries serve to validate the quality of
the Opening Price. OQR is intended to limit the Opening Price to a
reasonable, middle ground price and thus reduce the potential for
erroneous trades during the Opening Process. Although the Exchange
applies other boundaries such as the Pre-Market BBO, the OQR is outside
of that and provides a price that can maximize the number of executions
at a reasonable price. The PDM in new Rule 1017(k) reflects what is
generally known as an imbalance process. The
[[Page 56742]]
process is intended to attract liquidity to improve the price at which
an option series will open as well as to maximize the number of
contracts that can be executed on the opening. The Exchange believes
that this is consistent with just and equitable principles of trade.
The Exchange is adding various references to the applicable boundaries
throughout this paragraph, as explained above, which should help
investors receive reasonable prices, which is the case throughout the
Opening Process. In addition, the handling of routing on the opening
should promote just and equitable principles of trade by incorporating
away markets into the process in a clearer and more detailed away. The
PDM also promotes just and equitable principles of trade by taking into
account whether all interest can be fully executed, which helps
investors by including as much interest as possible in the Opening
Process.
The current rule takes away market interest into account at the
beginning of the imbalance process, while the proposed rule proposes to
open using Exchange interest only within the Pre-Market BBO to
determine an Opening Price, provided certain conditions contained in
new Rule 1017(i) are present to ensure participants receive a quality
execution in the opening. This is reflected beginning in current Rule
1017(l)(ii)(C). It is consistent with the Act to not consider away
market liquidity until the price discovery process occurs because this
proposed process provides for a swift, yet conservative opening. The
Exchange is bounded by the Pre-Market BBO when determining an Opening
Price. The away market prices would be considered, albeit not
immediately.
The Exchange believes that amending the rule text of current Rule
1017(l)(viii) to describe the manner in which limit orders are executed
in comparison to market orders promotes just and equitable principles
of trade because it provides investors with the proper method in which
the system will execute orders at the opening. It is consistent with
the Act to execute market orders before limit order because those order
types are by definition at the best price.
The Exchange believes that the deletion of current Rule 1017(l)(ix)
promotes just and equitable principles of trade because eliminating an
obsolete timer will provide investors with accurate information
concerning the operation of the Exchange's opening. Deleting the timer
is consistent with the Act because the timer is no longer necessary and
its removal results in potentially faster processing of interest
received after the opening occurs.
Similarly, the Exchange believes that the deletion of current Rule
1017(l)(x) promotes just and equitable principles of trade, because the
proposed rule will continue to describe the impact of a crossed ABBO,
but in specific parts of the rule, where appropriate, which adds more
context and clarity to the description of the opening. The Exchange is
not adding this concept to the rule, rather just relocating the concept
within the rule. It is consistent with the Act to terminate the opening
process when the ABBO becomes crossed because it protects against
potential pricing anomalies in the market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposal does not change
the intense competition that exists among the options markets for
options business including on the opening. Nor does the Exchange
believe that the proposal will impose any burden on intra-market
competition; the Opening Process involves many types of participants
and interest.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2016-79 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-2016-79. 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-2016-79 and should be
submitted on or before September 12, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\63\
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\63\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19896 Filed 8-19-16; 8:45 am]
BILLING CODE 8011-01-P
