Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing of Proposed Rule Change To Adopt a New Exception in Exchange Rule 1000(f) for Sub-MPV Split-Priced Orders, 56724-56728 [2016-19899]
Download as PDF
<![CDATA[
56724
Federal Register / Vol. 81, No. 162 / Monday, August 22, 2016 / Notices
and Redemption Instruments will be
valued in the same manner as those
Portfolio Instruments currently held by
the Funds. Applicants also seek relief
from the prohibitions on affiliated
transactions in section 17(a) to permit a
Fund to sell its shares to and redeem its
shares from a Fund of Funds, and to
engage in the accompanying in-kind
transactions with the Fund of Funds.2
The purchase of Creation Units by a
Fund of Funds directly from a Fund will
be accomplished in accordance with the
policies of the Fund of Funds and will
be based on the NAVs of the Funds.
9. Section 6(c) of the Act permits the
Commission to exempt any persons or
transactions from any provision of the
Act if such exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities, or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
Section 17(b) of the Act authorizes the
Commission to grant an order
permitting a transaction otherwise
prohibited by section 17(a) if it finds
that (a) the terms of the proposed
transaction are fair and reasonable and
do not involve overreaching on the part
of any person concerned; (b) the
proposed transaction is consistent with
the policies of each registered
investment company involved; and (c)
the proposed transaction is consistent
with the general purposes of the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Robert W. Errett,
Deputy Secretary.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
2 The requested relief would apply to direct sales
of shares in Creation Units by a Fund to a Fund of
Funds and redemptions of those shares. Applicants,
moreover, are not seeking relief from section 17(a)
for, and the requested relief will not apply to,
transactions where a Fund could be deemed an
Affiliated Person, or a Second-Tier Affiliate, of a
Fund of Funds because an Adviser or an entity
controlling, controlled by or under common control
with an Adviser provides investment advisory
services to that Fund of Funds.
Jkt 238001
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing of
Proposed Rule Change To Adopt a
New Exception in Exchange Rule
1000(f) for Sub-MPV Split-Priced
Orders
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 3,
2016, NASDAQ PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to adopt a
new exception in Rule 1000(f)
permitting Floor Brokers to execute
certain split price orders in the trading
crowd rather than electronically through
the Options Floor Broker Management
System, as described in detail below.
The text of the proposed rule change
is set forth below. Proposed new
language is underlined.
*
*
*
*
*
NASDAQ PHLX Rules
*
*
*
*
*
*
*
Options Rules
*
*
Rule 1000. Applicability, Definitions
and References
BILLING CODE 8011–01–P
17:13 Aug 19, 2016
[Release No. 34–78593; File No. SR–Phlx–
2016–82]
*
[FR Doc. 2016–19900 Filed 8–19–16; 8:45 am]
VerDate Sep<11>2014
SECURITIES AND EXCHANGE
COMMISSION
(a)–(e) No change.
(f) All Exchange options transactions
shall be executed in one of the following
ways[, once the Exchange’s new Options
Floor Broker Management System
functionality has been operating for a
certain period to be established by the
Exchange]:
(i) Automatically by the Exchange
Trading System pursuant to Rule 1080
and other applicable options rules;
(ii) by and among members in the
Exchange’s options trading crowd none
of whom is a Floor Broker; or
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00148
Fmt 4703
Sfmt 4703
(iii) through the Options Floor Broker
Management System for trades
involving at least one Floor Broker.
Although Floor Brokers may represent
orders in the trading crowd, Floor
Brokers are not permitted to execute
orders in the Exchange’s options trading
crowd, except as follows:
(A) The Exchange may determine to
permit executions otherwise than in
accordance with subparagraphs (i)—(iii)
above respecting an option or all
options in the event of a problem with
Exchange systems.
(B) In addition, Floor Brokers can
execute orders in the options trading
crowd pursuant to Rule 1059,
Accommodation Transactions (cabinet
trades), and Rule 1079, FLEX Equity,
Index and Currency Options.
(C) Multi-leg orders with more than
15 legs can be executed in the trading
crowd.
(D) The following split price orders
that, due to FBMS system limitations,
require manual calculation:
(I) simple orders not expressed in the
applicable minimum increment (‘‘subMPV’’) and that cannot be evenly split
into two whole numbers to create a
price at the midpoint of the minimum
increment; and
(II) complex and multi-leg orders with
at least one option leg with an oddnumbered volume that must trade at a
sub-MPV price or one leg that qualifies
under (I) above.
Surveillance staff must approve all
executions submitted under this Rule
1000(f)(iii) to validate that each abides
by applicable priority and trade through
rules, and that rounding of prices is
used only where necessary to execute
the trade at the MPV, and only to the
benefit of a customer order or, where
multiple customers’ orders are involved,
for the customer order that is earliest in
time.
(g) No change.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
E:\FR\FM\22AUN1.SGM
22AUN1
Federal Register / Vol. 81, No. 162 / Monday, August 22, 2016 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposal is to
provide an exception to the mandatory
use of the Floor Broker Management
System (‘‘FBMS’’) pursuant to Rule
1000(f) to permit Floor Brokers to
execute certain split price orders in the
trading crowd rather than electronically
and to facilitate these transactions.
Through the use of a surveillance
process to verify that the conditions of
the exception are met, the Exchange will
ensure that the proposed exception is
used only rarely.
Development of FBMS System
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Until April 1, 2016, the Exchange
operated two Options Floor Broker
Management Systems concurrently on
the options trading floor: the original
Floor Broker Management System
operating since 2005 (‘‘FBMS 1’’); 3 and
the enhanced Floor Broker Management
System (‘‘FBMS 2’’). After March 31,
2016, FBMS 1 was retired and Floor
Brokers were required to use FBMS 2.
FBMS 2 was launched in March 2014
in order to prevent certain types of
violations and enhance order handling
protections. Currently, with FBMS 2, all
options transactions on the Exchange
involving at least one Floor Broker are
required to be executed by FBMS 2 as
opposed to being executed by the Floor
Broker in the trading crowd.4 All orders
must continue to be represented in the
trading crowd, but the negotiation and
agreement that occurs in the trading
crowd does not result in a final trade,
but rather a ‘‘meeting of the minds’’ that
is then submitted through FBMS 2 for
execution in the matching engine.
The Exchange received approval to
implement FBMS 2 as of June 1, 2013,5
and delayed its implementation until
July 2013,6 until September 2013,7 until
3 Under FBMS 1, orders were executed in the
trading crowd by the Floor Broker and that
execution was recorded in FBMS 1, which enabled
the Exchange to electronically process the order in
terms of trade reporting and clearing. If a trade that
occurred in the trading crowd fails to give priority
to an order on the book, for example, such violation
is addressed by the Exchange’s surveillance and
enforcement programs after the fact.
4 Securities Exchange Act Release No. 69471
(April 29, 2013), 78 FR 26096 (May 3, 2013) (SR–
Phlx–2013–09).
5 Id.
6 Securities Exchange Act Release No. 69811
(June 20, 2013), 78 FR 38422 (June 26, 2013) (SR–
Phlx–2013–67).
7 Securities Exchange Act Release No. 70141
(August 8, 2013), 78 FR 49565 (August 14, 2013)
(SR–Phlx–2013–83).
VerDate Sep<11>2014
17:13 Aug 19, 2016
Jkt 238001
56725
December 2013,8 and until March
2014.9 Implementation began on March
7, 2014, with FBMS 2 operating
concurrently with FBMS 1. FBMS 2 has
been made available to all Floor Brokers
in all options and, on March 31, 2016,
FBMS 1 was retired.10 As a result,
FBMS 2 is the only system currently in
use.
The Exchange has contracted with a
third-party to build an alternative
system (‘‘FBMS 3’’) to replace FBMS 2.
The Exchange had intended to
implement FBMS 3 by November 3,
2015, and then by March 2016, but,
based on recent estimates from the
third-party entity, it will be ready by
November 30, 2016.11 Despite the
delays in launching FBMS 3, the new
system is still needed to reduce the
occurrence of latencies and
abnormalities that have occurred with
FBMS 2 that has affected multiple firms
multiple times per week. The Exchange
is committed to distributing a nextgeneration product in the form of FBMS
3.
Beginning last year, the Exchange
explained the state of FBMS 3 to
Commission staff in the spirit of sharing
the context around the delay and the
Exchange’s then-current thoughts about
deployment going forward. The
Commission’s notice of filing and
immediate effectiveness of the proposed
rule change extending the operation of
FBMS 1 until March 31, 2016 stated that
until FBMS 3 becomes available, the
Exchange would continue to operate
FBMS 1 and FBMS 2 concurrently and
that all Floor Brokers may use either
FBMS. Although that was the
Exchange’s intent at the time, the
Exchange did not intend to tie the
retirement of FBMS 1 to the deployment
of FBMS 3; the availability of FBMS 1
until FBMS 3 became available was a
likely assumption, but not the only
possible outcome.
Despite the possibility that FBMS 2
may experience some latency or
potential glitches, the Exchange
determined in its regulatory discretion
to retire FBMS 1 and not seek an
extension of the rule permitting the
concurrent operation of FBMS 1 and
FBMS 2, a determination the Exchange
announced on March 14, 2016.12
Specifically, the Exchange believed that
the regulatory and other benefits of
exclusively using FBMS 2 across the
trading floor should no longer be
delayed. The electronic protections
associated with the Commission’s
Market Access Rule 13 requirements are
available on FBMS 2 (but not FBMS 1)
such that the Exchange concluded this
was a key reason to require the use of
FBMS 2. The Floor Brokers themselves
benefit from using FBMS 2 because they
avoid certain violations, process
complicated multi-leg orders more
quickly and manage their orders,
overall, better. The FBMS 3 delay and
the importance of the Exchange’s
compliance record changed the
situation such that the Exchange
determined to let the permission to
operate FBMS 1 expire.14 FBMS 1 has
not operated since March 31, 2016.
8 Securities Exchange Act Release No. 70629
(October 8, 2013), 78 FR 62852 (October 22, 2013)
(SR–Phlx–2013–100).
9 Securities Exchange Act Release No. 71212
(December 31, 2013), 79 FR 888 (January 7, 2014)
(SR–Phlx–2013–129).
10 See Securities Exchange Act Release Nos.
72135 (May 9, 2014), 79 FR 27966 (May 15, 2014)
(SR–Phlx–2014–33). Accordingly, the Exchange
proposes to delete language from the first sentence
of Rule 1000(f) that refers to the continued
operation of FBMS 1. Nevertheless, the Exchange
delayed the retirement of FBMS 1 until September
1, 2014, November 3, 2014, November 3, 2015, and,
most recently, until April 1, 2016. See also
Securities Exchange Act Release Nos. 72135 (May
9, 2014), 79 FR 27966 (May 15, 2014) (SR–Phlx–
2014–33); 73246 (September 29, 2014), 79 FR 59874
(October 3, 2014) (SR–Phlx–2014–59); 73586
(November 13, 2014), 79 FR 68931 (November 19,
2014) (SR–Phlx–2014–71); and 67187 (October 19,
2015), 80 FR 64462 (October 23, 2015) (SR–Phlx–
2015–80).
11 Before FBMS 3 becomes available, the
Exchange will provide notice in the form of an
options circular to the Floor Broker community
establishing a schedule for training and a
reasonable implementation period. The Exchange
does not expect that this will be a long or difficult
transition from FBMS 2 to FBMS 3 because the
functionality is the same and the interface to the
Floor Broker is as well; the principal differences lie
in the background, involving the architecture that
is the backbone of the system.
Proposal
PO 00000
Frm 00149
Fmt 4703
Sfmt 4703
The Exchange proposes to adopt a
new exception to the mandatory use of
FBMS to execute trades for the
processing of split-price orders.
Currently, Rule 1000(f) provides that all
Exchange options transactions shall be
executed in one of the following ways:
(i) Automatically by the Exchange
Trading System pursuant to Rule 1080
and other applicable options rules;
(ii) by and among members in the
Exchange’s options trading crowd none
of whom is a Floor Broker; or
(iii) through the Options Floor Broker
Management System for trades
involving at least one Floor Broker.
Although Floor Brokers may represent
orders in the trading crowd, Floor
Brokers are not permitted to execute
orders in the Exchange’s options trading
crowd.
12 https://www.nasdaqtrader.com/
MicroNews.aspx?id=OTA2016-8.
13 17 CFR 240.15c3–5.
14 See note 10 above.
E:\FR\FM\22AUN1.SGM
22AUN1
asabaliauskas on DSK3SPTVN1PROD with NOTICES
56726
Federal Register / Vol. 81, No. 162 / Monday, August 22, 2016 / Notices
There are currently three exceptions
to Rule 1000(f)(iii) that permit
executions otherwise than in
accordance with subparagraphs (i)–(iii)
above. The first, under subparagraph
(A), applies to executions respecting an
option or all options in the event of a
problem with Exchange systems. In
addition, under subparagraph (B), Floor
Brokers can execute orders in the
options trading crowd pursuant to Rule
1059, Accommodation Transactions
(cabinet trades), and Rule 1079, FLEX
Equity, Index and Currency Options.
Finally, under subparagraph (C), Multileg orders with more than 15 legs can be
executed in the trading crowd. These
three exceptions in (A)–(C) have been
narrowly crafted to address specific
situations, such as the complexity of a
trade involving more than 15 legs. Each
time a Floor Broker invokes an
exception to Rule 1000(f), the Floor
Broker is required by Rule 1063(e)(ii) to
record the information required by Rule
1063(e)(i) on paper trade tickets, and
may not represent an order for
execution that has not been time
stamped with the time of entry on the
trading floor; such trade tickets must be
time stamped upon the execution of
such an order.
Creation of Split-Price Orders. The
Exchange first recognized the
complexity of the split-price order in
2005 when it filed to create an
exception from existing priority rules
for split-price orders under Rule
1014(g)(i)(B).15 The purpose behind the
split-price priority exception was ‘‘to
bring about the execution of large
orders, which by virtue of their size and
the need to execute them at multiple
prices may be difficult to execute
without a limited exception to the
priority rules.’’ The proposed exception
allows a member effecting a trade that
betters the market to have priority on
the balance of that trade at the next
pricing increment, even if there are
orders in the book at the same price.
Floor Brokers that avail themselves of
the split-price priority rule are obligated
to ensure compliance with Section 11(a)
of the Act.16
Today, split-price orders are
processed via either FBMS 2 or paper
ticket. If the split-price order is evenly
split and requires simple calculations to
determine the number of contracts at
two price points, the order is handled
through FBMS 2. If the split-price order
15 Securities Exchange Act Release No. 51820
(June 10, 2005), 70 FR 35759 (June 21, 2005) (SR–
Phlx–2005–028) (pilot approval). See also
Securities Exchange Act Release No. 55993 (June
29, 2007), 72 FR 37301 (July 9, 2007) (SR–Phlx–
2007–044) (permanent approval).
16 Id.
VerDate Sep<11>2014
17:13 Aug 19, 2016
Jkt 238001
computation is more complicated,
involving non-even integers and sub
MPV price points, the surveillance staff
declare an FBMS 2 system
malfunction—in accordance with PHLX
Rules 1000(f)(iii)(A) and 1063(e)(ii)—
and allow the floor broker to utilize a
paper ticket and oral execution of the
split-price order in the trading crowd.
The Exchange believes that the
treatment of split-price orders under
Rule 1000(f) should be made clearer.
Therefore, the Exchange proposes to
add an additional exception to Rule
1000(f)(iii), also narrowly crafted to
reflect the complexities of executing
split-price orders. Specifically, pursuant
to proposed Rule 1000(f)(iii)(D), the
following split price orders that require,
due to a system limitation, a manual
calculation to determine specific
volumes at different prices can be
executed in the trading crowd: (I)
Simple orders with a price not
expressed in the applicable minimum
increment (‘‘sub-MPV’’) 17 and that
cannot be evenly split into two whole
numbers to create a price at the
midpoint of the minimum increment;
and (II) complex and multi-leg orders
with at least one option leg with an oddnumbered volume that must trade at a
sub-MPV price or one leg that qualifies
under (I) above, thereby requiring the
Floor Broker to determine the specific
volumes to trade at each price.
Surveillance staff must approve any
such executions in open outcry to
validate that such execution abides by
applicable priority and trade through
rules.
The proposed exception is similar to
the existing exceptions in that it permits
additional time when there is a system
problem or when needed for the entry
and completion of complicated trades.
Here, the additional time provided by
the proposed exception is needed when
a split-price trade calculation is
complicated or requires contracts be
rounded in favor of the customer due to
the fact that it requires manual
intervention. If, at the end of the manual
calculation, the Floor Broker is able to
input the determined split prices into
FBMS 2 he may do so; otherwise he may
use paper tickets. The use of a paper
ticket will be necessary where, for
example, the NBBO has moved and the
trade no longer complies with the
applicable trade through restrictions.
Even if the Floor Broker is unable to use
FBMS 2 to complete the entry of the
split-price trade, the Floor Broker must
still enter the order information into
FBMS 2 for audit trail purposes.
17 See
PO 00000
Nasdaq Rule 1034.
Frm 00150
Fmt 4703
Sfmt 4703
The Surveillance staff will oversee
Floor Brokers’ use of the proposed
exception as it does today under the
current exceptions. Currently, when a
Floor Broker states that there is a
problem with the FBMS system, the
Floor Broker will continue to input the
order into FBMS (to the extend order
entry functionality is accessible) and
continue to announce the order in the
trading crowd. Surveillance staff,
knowing that the Floor Broker stated
that he is experiencing a system
problem or limitation will attempt to
confirm the system problem with
Exchange Operations staff. If
Surveillance staff is able to confirm that
FBMS has a performance problem,
Surveillance staff will approve the use
of a paper trade ticket and oral
consummation of a transaction in the
trading crowd that is contingent on
Surveillance staff’s additional
confirmation that the trade complies
with the time and price priority rules of
the Exchange—a ‘‘pending trade.’’
If the pending trade complies with the
time and price priority rules of the
Exchange, the trade is approved and
determined to have occurred at the time
it would have occurred in the trading
crowd but for the system problem or
limitation. If the pending trade does not
comply with the time and price priority
rules of the Exchange, the Surveillance
staff will inform the applicable trading
crowd participants that the pending
trade does not comply with Exchange
rules and not permit the trade to occur.
This manual process performed by the
Surveillance staff parallels the
electronic process performed within the
Exchange matching engine when FBMS
is able to process a trade. The delay
attributable to this manual surveillance
process does not change the time of
trade execution, which is set at the time
the trade would have occurred in the
trading crowd.
With respect to simple orders, if a
Floor Broker attempts to execute a
customer order to sell 357 contracts in
symbol XYZ (with a Minimum Price
Variation increment of $0.05) at a price
of $0.11 by way of split price execution,
the floor broker must perform a manual
calculation. As a result of FBMS 2 being
unable to calculate the number of
contracts to split to determine a net
price of at least $0.11, the floor broker
will manually enter 285 contracts @
$0.10 and 72 contracts @ $0.15 to arrive
at an execution price as close as
possible to an $0.11 ($0.110084 in this
case) aggregate price for the 357
contracts ensuring that, when
applicable, the customer side of the
trade benefits from the difference
between the $0.11 limit and the actual
E:\FR\FM\22AUN1.SGM
22AUN1
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 81, No. 162 / Monday, August 22, 2016 / Notices
average price. This example would
qualify for the proposed exception
because it is a sub-MPV price (not in
$0.05 increments) and cannot be evenly
split to obtain the desired aggregate
price.18
With respect to complex and multi-leg
orders, consider the following example:
A Floor Broker receives a two legged
call spread in XYZ (with a Minimum
Price Variation increment of $0.05) to
sell 456 contracts of leg A @ $1.23 and
buy 229 contracts of leg B @ $0.50.
Because a Floor Broker is restricted to
trading in not less than the permitted
MPV increments, the Floor Broker will
need to manually calculate to trade 274
contracts of leg A @ $1.25 and 182
contracts of leg A @ $1.20. This equals
a net price on leg A of $1.23004. This
is the closest achievable net price that
is at least equal to the limit price of the
Floor Broker’s client without breaking
the limit price. This would qualify
because the Floor Broker will need to
determine at which of the price points
the additional contract will trade, given
that the odd number of contracts cannot
be split evenly across two price points.
Another example involving a simple
order is if a Floor Broker has a customer
order to buy 479 GOOG May 440 calls
for $3.67: GOOG has a Minimum Price
Variation of $0.10 in trades over $3.00
so the Floor Broker will need to
determine the calculation that will
amount to a price closest to $3.67;
namely, 70% of 479 equals 335.3 but
335.3 is a non-round number and the
customer buying the volume entered at
the lower price gets a price that is
rounded up while the volume at the
higher price is rounded down so as to
offer an advantage to the customer.19
The result is 335 at $3.70 and 144 at
$3.60. Since the customer is buying, the
volume at the lower price of 3.60 gets
rounded up to offer the advantage of
rounding to the customer. This
transaction would qualify for the
exception because the simple order is
for a sub-MPV price and cannot be
evenly split.
Under this proposal, Surveillance
staff must validate that split-price
executions abide by all applicable
priority and trade through rules using
the time of execution recorded by the
Floor Broker (and separately confirmed
by Surveillance staff) on the paper order
ticket. Referring back to a prior example
18 The exemption would not apply where an
order for 500 contracts could be traded at a split
price of .125 by splitting it into two lots of 250
contracts at .10 and 250 contracts at .15.
19 Under Proposed Rule 1000(f)(iii)(D), Exchange
surveillance staff would be required to validate the
use of price rounding to ensure that it is necessary
and to the benefit of the customer.
VerDate Sep<11>2014
17:13 Aug 19, 2016
Jkt 238001
involving a simple customer order to
execute 357 contracts in symbol XYZ
(with a Minimum Price Variation
increment of $0.05) at $0.11 (285
contracts @ $0.10/72 contracts @ $0.15),
if FBMS 2 is unable to determine the
correct number of contracts to split to
derive the net price of $0.11, the Floor
Broker, upon confirmation and approval
of the Surveillance staff, can verbally
execute the order and Surveillance staff
would capture the verbal execution time
of the pending transaction and
determine if the Floor Broker
established priority over the bids and/or
offers based on the documented verbal
execution time. If the market was $0.05
bid and $0.15 offer, Surveillance staff
would approve this transaction because
the Floor Broker established priority
over the $0.15 offers by trading more
contracts at the better price of $0.10.
However, if the market was $0.10 bid
and $0.20 offer, On-Floor Surveillance
staff would not approve this transaction
because the Floor Broker did not
establish priority over the $0.10 bids by
trading the greater number of contracts
at the inferior price. Finally, if the
market was $0.10 bid and $0.15 offer
(with no public customer orders on
either side of the market), On-Floor
Surveillance staff would approve this
transaction because the Floor Broker
would have priority over the noncustomer book (bids/offers) given that
customer orders always have priority
pursuant to Rule 1014(g)(i)(A).
In conclusion, the Exchange believes
that certain split-price orders warrant an
exception from the requirement that the
order be executed by FBMS. First, the
exception is needed because FBMS is
not currently programmed to perform
the calculations associated with split
prices not at the minimum price
variation. Accordingly, the Floor Broker
must do so manually, which can be time
consuming; by the time the calculation
is made, the market may have changed
such that FBMS would return the order
to the Floor Broker unexecuted. Second,
heightened surveillance will be
imposed. Under the proposal, the
execution would occur on the trading
floor in open outcry as a pending
transaction. The transaction is
completed only upon validation from
Surveillance staff, based on the market
prices at the time of execution. The
proposal clarifies the need for a manual
handling of the execution for these
complicated split price trades, rather
than leaving ambiguous the question of
whether a split-price trade amounts to
an FBMS system problem. This proposal
does not change what is considered by
the Exchange as a FBMS system
PO 00000
Frm 00151
Fmt 4703
Sfmt 4703
56727
problem, but rather clearly sets forth a
defined system limitation for a splitprice order with specific characteristics.
2. Statutory Basis
The Exchange believes that the
proposed exception is consistent with
Section 6(b) of the Act,20 in general, and
furthers the objectives of Section 6(b)(5)
of the Act,21 in particular, in that it is
designed to promote just and equitable
principles of trade and to protect
investors and the public interest by
permitting split-price trades, which are
complicated, to be executed in the
trading crowd, which should, in turn,
result in a greater likelihood that such
orders are properly executed. FBMS 2
cannot calculate these particular prices,
as described in the examples above.
The Exchange believes that the
proposed exception is consistent with
the Act because it is narrowly tailored
to permit a small number of beneficial
trades. As stated earlier, the
Commission has recognized the
importance of split-price trades because
they permit the execution of large
blocks, even permitting a limited
exception to priority rules. Although
FBMS was designed to enhance
compliance to the greatest extent
possible, FBMS does not have the
capability to calculate and process
certain split-price trades. If an exception
was denied, Floor Brokers’ ability to
execute these large, split-price trades
that benefit the market would be
substantially impaired.
Additionally, Exchange surveillance
is well-designed to protect customer
when the exception is used. As set forth
above, every split-price trade that
invokes the proposed exception will
require approval by Exchange
surveillance staff in order to validate
compliance with applicable priority and
trade through rules. Additionally, all
relevant trade data will be recorded on
both paper tickets and in the FBMS
system in order to ensure a proper audit
trail for T+1 surveillance. Finally, to the
extent the exception permits rounding
of prices, rounding is required to occur
in the customer’s favor, a result that is
itself consistent with the Act.
The proposal is not unfairly
discriminatory because it applies to all
Floor Brokers the same way. Nor is it
unfairly discriminatory with respect to
market participants other than Floor
Brokers because only Floor Brokers use
FBMS 2.
20 15
21 15
E:\FR\FM\22AUN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
22AUN1
56728
Federal Register / Vol. 81, No. 162 / Monday, August 22, 2016 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that the proposal
should allow it to compete with other
floor-based exchanges and help the
Exchange’s Floor Brokers compete with
floor brokers on other options exchanges
by accommodating another type of
complicated order. Through the use of
a surveillance process to verify that the
conditions of the exception are met, the
Exchange will ensure that the exception
is used only rarely.
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:
asabaliauskas on DSK3SPTVN1PROD with NOTICES
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 No. SR–
Phlx–2016–82 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File No.
SR–Phlx–2016–82. This file number
should be included on the subject line
if email is used. To help the
VerDate Sep<11>2014
17:13 Aug 19, 2016
Jkt 238001
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
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 No. SR–Phlx–2016–
82, and should be submitted on or
before September 12, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–19899 Filed 8–19–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78587; File No. SR–
NYSEArca–2016–87]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Designation of a
Longer Period for Commission Action
on a Proposed Rule Change, as
Modified by Amendment No. 1, To List
and Trade Shares of the First Trust
Horizon Managed Volatility Domestic
ETF and the First Trust Horizon
Managed Volatility Developed
International ETF Under NYSE Arca
Equities Rule 8.600
August 16, 2016.
On June 16, 2016, NYSE Arca, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
22 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00152
Fmt 4703
Sfmt 4703
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
list and trade shares of the First Trust
Horizon Managed Volatility Domestic
ETF and the First Trust Horizon
Managed Volatility Developed
International ETF. The proposed rule
change was published for comment in
the Federal Register on July 6, 2016.3
On July 18, 2016, the Exchange
submitted Amendment No. 1 to the
proposed rule change.4 The Commission
received no comment letters on the
proposed rule change.
Section 19(b)(2) of the Act 5 provides
that, within 45 days of the publication
of notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is August 20,
2016. The Commission is extending this
45-day time period.
The Commission finds that it is
appropriate to designate a longer period
within which to take action on the
proposed rule change so that it has
sufficient time to consider the proposed
rule change. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,6 designates October
4, 2016, as the date by which the
Commission shall either approve or
disapprove or institute proceedings to
determine whether to disapprove the
proposed rule change (File Number SR–
NYSEArca–2016–87), as modified by
Amendment No. 1.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–19895 Filed 8–19–16; 8:45 am]
BILLING CODE 8011–01–P
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 78191
(June 29, 2016), 81 FR 44056.
4 Amendment No. 1 replaced and superseded the
original filing in its entirety. Amendment No. 1 is
available at https://www.sec.gov/comments/srnysearca-2016-87/nysearca201687-1.pdf.
5 15 U.S.C. 78s(b)(2).
6 Id.
7 17 CFR 200.30–3(a)(31).
2 17
E:\FR\FM\22AUN1.SGM
22AUN1
]]>Agencies
[Federal Register Volume 81, Number 162 (Monday, August 22, 2016)]
[Notices]
[Pages 56724-56728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19899]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78593; File No. SR-Phlx-2016-82]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
of Proposed Rule Change To Adopt a New Exception in Exchange Rule
1000(f) for Sub-MPV Split-Priced Orders
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 3, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III, below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to adopt a new exception in Rule 1000(f)
permitting Floor Brokers to execute certain split price orders in the
trading crowd rather than electronically through the Options Floor
Broker Management System, as described in detail below.
The text of the proposed rule change is set forth below. Proposed
new language is underlined.
* * * * *
NASDAQ PHLX Rules
* * * * *
Options Rules
* * * * *
Rule 1000. Applicability, Definitions and References
(a)-(e) No change.
(f) All Exchange options transactions shall be executed in one of
the following ways[, once the Exchange's new Options Floor Broker
Management System functionality has been operating for a certain period
to be established by the Exchange]:
(i) Automatically by the Exchange Trading System pursuant to Rule
1080 and other applicable options rules;
(ii) by and among members in the Exchange's options trading crowd
none of whom is a Floor Broker; or
(iii) through the Options Floor Broker Management System for trades
involving at least one Floor Broker. Although Floor Brokers may
represent orders in the trading crowd, Floor Brokers are not permitted
to execute orders in the Exchange's options trading crowd, except as
follows:
(A) The Exchange may determine to permit executions otherwise than
in accordance with subparagraphs (i)--(iii) above respecting an option
or all options in the event of a problem with Exchange systems.
(B) In addition, Floor Brokers can execute orders in the options
trading crowd pursuant to Rule 1059, Accommodation Transactions
(cabinet trades), and Rule 1079, FLEX Equity, Index and Currency
Options.
(C) Multi-leg orders with more than 15 legs can be executed in the
trading crowd.
(D) The following split price orders that, due to FBMS system
limitations, require manual calculation:
(I) simple orders not expressed in the applicable minimum increment
(``sub-MPV'') and that cannot be evenly split into two whole numbers to
create a price at the midpoint of the minimum increment; and
(II) complex and multi-leg orders with at least one option leg with
an odd-numbered volume that must trade at a sub-MPV price or one leg
that qualifies under (I) above.
Surveillance staff must approve all executions submitted under this
Rule 1000(f)(iii) to validate that each abides by applicable priority
and trade through rules, and that rounding of prices is used only where
necessary to execute the trade at the MPV, and only to the benefit of a
customer order or, where multiple customers' orders are involved, for
the customer order that is earliest in time.
(g) No change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 56725]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposal is to provide an exception to the
mandatory use of the Floor Broker Management System (``FBMS'') pursuant
to Rule 1000(f) to permit Floor Brokers to execute certain split price
orders in the trading crowd rather than electronically and to
facilitate these transactions. Through the use of a surveillance
process to verify that the conditions of the exception are met, the
Exchange will ensure that the proposed exception is used only rarely.
Development of FBMS System
Until April 1, 2016, the Exchange operated two Options Floor Broker
Management Systems concurrently on the options trading floor: the
original Floor Broker Management System operating since 2005 (``FBMS
1''); \3\ and the enhanced Floor Broker Management System (``FBMS 2'').
After March 31, 2016, FBMS 1 was retired and Floor Brokers were
required to use FBMS 2.
---------------------------------------------------------------------------
\3\ Under FBMS 1, orders were executed in the trading crowd by
the Floor Broker and that execution was recorded in FBMS 1, which
enabled the Exchange to electronically process the order in terms of
trade reporting and clearing. If a trade that occurred in the
trading crowd fails to give priority to an order on the book, for
example, such violation is addressed by the Exchange's surveillance
and enforcement programs after the fact.
---------------------------------------------------------------------------
FBMS 2 was launched in March 2014 in order to prevent certain types
of violations and enhance order handling protections. Currently, with
FBMS 2, all options transactions on the Exchange involving at least one
Floor Broker are required to be executed by FBMS 2 as opposed to being
executed by the Floor Broker in the trading crowd.\4\ All orders must
continue to be represented in the trading crowd, but the negotiation
and agreement that occurs in the trading crowd does not result in a
final trade, but rather a ``meeting of the minds'' that is then
submitted through FBMS 2 for execution in the matching engine.
---------------------------------------------------------------------------
\4\ Securities Exchange Act Release No. 69471 (April 29, 2013),
78 FR 26096 (May 3, 2013) (SR-Phlx-2013-09).
---------------------------------------------------------------------------
The Exchange received approval to implement FBMS 2 as of June 1,
2013,\5\ and delayed its implementation until July 2013,\6\ until
September 2013,\7\ until December 2013,\8\ and until March 2014.\9\
Implementation began on March 7, 2014, with FBMS 2 operating
concurrently with FBMS 1. FBMS 2 has been made available to all Floor
Brokers in all options and, on March 31, 2016, FBMS 1 was retired.\10\
As a result, FBMS 2 is the only system currently in use.
---------------------------------------------------------------------------
\5\ Id.
\6\ Securities Exchange Act Release No. 69811 (June 20, 2013),
78 FR 38422 (June 26, 2013) (SR-Phlx-2013-67).
\7\ Securities Exchange Act Release No. 70141 (August 8, 2013),
78 FR 49565 (August 14, 2013) (SR-Phlx-2013-83).
\8\ Securities Exchange Act Release No. 70629 (October 8, 2013),
78 FR 62852 (October 22, 2013) (SR-Phlx-2013-100).
\9\ Securities Exchange Act Release No. 71212 (December 31,
2013), 79 FR 888 (January 7, 2014) (SR-Phlx-2013-129).
\10\ See Securities Exchange Act Release Nos. 72135 (May 9,
2014), 79 FR 27966 (May 15, 2014) (SR-Phlx-2014-33). Accordingly,
the Exchange proposes to delete language from the first sentence of
Rule 1000(f) that refers to the continued operation of FBMS 1.
Nevertheless, the Exchange delayed the retirement of FBMS 1 until
September 1, 2014, November 3, 2014, November 3, 2015, and, most
recently, until April 1, 2016. See also Securities Exchange Act
Release Nos. 72135 (May 9, 2014), 79 FR 27966 (May 15, 2014) (SR-
Phlx-2014-33); 73246 (September 29, 2014), 79 FR 59874 (October 3,
2014) (SR-Phlx-2014-59); 73586 (November 13, 2014), 79 FR 68931
(November 19, 2014) (SR-Phlx-2014-71); and 67187 (October 19, 2015),
80 FR 64462 (October 23, 2015) (SR-Phlx-2015-80).
---------------------------------------------------------------------------
The Exchange has contracted with a third-party to build an
alternative system (``FBMS 3'') to replace FBMS 2. The Exchange had
intended to implement FBMS 3 by November 3, 2015, and then by March
2016, but, based on recent estimates from the third-party entity, it
will be ready by November 30, 2016.\11\ Despite the delays in launching
FBMS 3, the new system is still needed to reduce the occurrence of
latencies and abnormalities that have occurred with FBMS 2 that has
affected multiple firms multiple times per week. The Exchange is
committed to distributing a next-generation product in the form of FBMS
3.
---------------------------------------------------------------------------
\11\ Before FBMS 3 becomes available, the Exchange will provide
notice in the form of an options circular to the Floor Broker
community establishing a schedule for training and a reasonable
implementation period. The Exchange does not expect that this will
be a long or difficult transition from FBMS 2 to FBMS 3 because the
functionality is the same and the interface to the Floor Broker is
as well; the principal differences lie in the background, involving
the architecture that is the backbone of the system.
---------------------------------------------------------------------------
Beginning last year, the Exchange explained the state of FBMS 3 to
Commission staff in the spirit of sharing the context around the delay
and the Exchange's then-current thoughts about deployment going
forward. The Commission's notice of filing and immediate effectiveness
of the proposed rule change extending the operation of FBMS 1 until
March 31, 2016 stated that until FBMS 3 becomes available, the Exchange
would continue to operate FBMS 1 and FBMS 2 concurrently and that all
Floor Brokers may use either FBMS. Although that was the Exchange's
intent at the time, the Exchange did not intend to tie the retirement
of FBMS 1 to the deployment of FBMS 3; the availability of FBMS 1 until
FBMS 3 became available was a likely assumption, but not the only
possible outcome.
Despite the possibility that FBMS 2 may experience some latency or
potential glitches, the Exchange determined in its regulatory
discretion to retire FBMS 1 and not seek an extension of the rule
permitting the concurrent operation of FBMS 1 and FBMS 2, a
determination the Exchange announced on March 14, 2016.\12\
Specifically, the Exchange believed that the regulatory and other
benefits of exclusively using FBMS 2 across the trading floor should no
longer be delayed. The electronic protections associated with the
Commission's Market Access Rule \13\ requirements are available on FBMS
2 (but not FBMS 1) such that the Exchange concluded this was a key
reason to require the use of FBMS 2. The Floor Brokers themselves
benefit from using FBMS 2 because they avoid certain violations,
process complicated multi-leg orders more quickly and manage their
orders, overall, better. The FBMS 3 delay and the importance of the
Exchange's compliance record changed the situation such that the
Exchange determined to let the permission to operate FBMS 1 expire.\14\
FBMS 1 has not operated since March 31, 2016.
---------------------------------------------------------------------------
\12\ https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2016-8.
\13\ 17 CFR 240.15c3-5.
\14\ See note 10 above.
---------------------------------------------------------------------------
Proposal
The Exchange proposes to adopt a new exception to the mandatory use
of FBMS to execute trades for the processing of split-price orders.
Currently, Rule 1000(f) provides that all Exchange options transactions
shall be executed in one of the following ways:
(i) Automatically by the Exchange Trading System pursuant to Rule
1080 and other applicable options rules;
(ii) by and among members in the Exchange's options trading crowd
none of whom is a Floor Broker; or
(iii) through the Options Floor Broker Management System for trades
involving at least one Floor Broker. Although Floor Brokers may
represent orders in the trading crowd, Floor Brokers are not permitted
to execute orders in the Exchange's options trading crowd.
[[Page 56726]]
There are currently three exceptions to Rule 1000(f)(iii) that
permit executions otherwise than in accordance with subparagraphs (i)-
(iii) above. The first, under subparagraph (A), applies to executions
respecting an option or all options in the event of a problem with
Exchange systems. In addition, under subparagraph (B), Floor Brokers
can execute orders in the options trading crowd pursuant to Rule 1059,
Accommodation Transactions (cabinet trades), and Rule 1079, FLEX
Equity, Index and Currency Options. Finally, under subparagraph (C),
Multi-leg orders with more than 15 legs can be executed in the trading
crowd. These three exceptions in (A)-(C) have been narrowly crafted to
address specific situations, such as the complexity of a trade
involving more than 15 legs. Each time a Floor Broker invokes an
exception to Rule 1000(f), the Floor Broker is required by Rule
1063(e)(ii) to record the information required by Rule 1063(e)(i) on
paper trade tickets, and may not represent an order for execution that
has not been time stamped with the time of entry on the trading floor;
such trade tickets must be time stamped upon the execution of such an
order.
Creation of Split-Price Orders. The Exchange first recognized the
complexity of the split-price order in 2005 when it filed to create an
exception from existing priority rules for split-price orders under
Rule 1014(g)(i)(B).\15\ The purpose behind the split-price priority
exception was ``to bring about the execution of large orders, which by
virtue of their size and the need to execute them at multiple prices
may be difficult to execute without a limited exception to the priority
rules.'' The proposed exception allows a member effecting a trade that
betters the market to have priority on the balance of that trade at the
next pricing increment, even if there are orders in the book at the
same price. Floor Brokers that avail themselves of the split-price
priority rule are obligated to ensure compliance with Section 11(a) of
the Act.\16\
---------------------------------------------------------------------------
\15\ Securities Exchange Act Release No. 51820 (June 10, 2005),
70 FR 35759 (June 21, 2005) (SR-Phlx-2005-028) (pilot approval). See
also Securities Exchange Act Release No. 55993 (June 29, 2007), 72
FR 37301 (July 9, 2007) (SR-Phlx-2007-044) (permanent approval).
\16\ Id.
---------------------------------------------------------------------------
Today, split-price orders are processed via either FBMS 2 or paper
ticket. If the split-price order is evenly split and requires simple
calculations to determine the number of contracts at two price points,
the order is handled through FBMS 2. If the split-price order
computation is more complicated, involving non-even integers and sub
MPV price points, the surveillance staff declare an FBMS 2 system
malfunction--in accordance with PHLX Rules 1000(f)(iii)(A) and
1063(e)(ii)--and allow the floor broker to utilize a paper ticket and
oral execution of the split-price order in the trading crowd. The
Exchange believes that the treatment of split-price orders under Rule
1000(f) should be made clearer.
Therefore, the Exchange proposes to add an additional exception to
Rule 1000(f)(iii), also narrowly crafted to reflect the complexities of
executing split-price orders. Specifically, pursuant to proposed Rule
1000(f)(iii)(D), the following split price orders that require, due to
a system limitation, a manual calculation to determine specific volumes
at different prices can be executed in the trading crowd: (I) Simple
orders with a price not expressed in the applicable minimum increment
(``sub-MPV'') \17\ and that cannot be evenly split into two whole
numbers to create a price at the midpoint of the minimum increment; and
(II) complex and multi-leg orders with at least one option leg with an
odd-numbered volume that must trade at a sub-MPV price or one leg that
qualifies under (I) above, thereby requiring the Floor Broker to
determine the specific volumes to trade at each price. Surveillance
staff must approve any such executions in open outcry to validate that
such execution abides by applicable priority and trade through rules.
---------------------------------------------------------------------------
\17\ See Nasdaq Rule 1034.
---------------------------------------------------------------------------
The proposed exception is similar to the existing exceptions in
that it permits additional time when there is a system problem or when
needed for the entry and completion of complicated trades. Here, the
additional time provided by the proposed exception is needed when a
split-price trade calculation is complicated or requires contracts be
rounded in favor of the customer due to the fact that it requires
manual intervention. If, at the end of the manual calculation, the
Floor Broker is able to input the determined split prices into FBMS 2
he may do so; otherwise he may use paper tickets. The use of a paper
ticket will be necessary where, for example, the NBBO has moved and the
trade no longer complies with the applicable trade through
restrictions. Even if the Floor Broker is unable to use FBMS 2 to
complete the entry of the split-price trade, the Floor Broker must
still enter the order information into FBMS 2 for audit trail purposes.
The Surveillance staff will oversee Floor Brokers' use of the
proposed exception as it does today under the current exceptions.
Currently, when a Floor Broker states that there is a problem with the
FBMS system, the Floor Broker will continue to input the order into
FBMS (to the extend order entry functionality is accessible) and
continue to announce the order in the trading crowd. Surveillance
staff, knowing that the Floor Broker stated that he is experiencing a
system problem or limitation will attempt to confirm the system problem
with Exchange Operations staff. If Surveillance staff is able to
confirm that FBMS has a performance problem, Surveillance staff will
approve the use of a paper trade ticket and oral consummation of a
transaction in the trading crowd that is contingent on Surveillance
staff's additional confirmation that the trade complies with the time
and price priority rules of the Exchange--a ``pending trade.''
If the pending trade complies with the time and price priority
rules of the Exchange, the trade is approved and determined to have
occurred at the time it would have occurred in the trading crowd but
for the system problem or limitation. If the pending trade does not
comply with the time and price priority rules of the Exchange, the
Surveillance staff will inform the applicable trading crowd
participants that the pending trade does not comply with Exchange rules
and not permit the trade to occur. This manual process performed by the
Surveillance staff parallels the electronic process performed within
the Exchange matching engine when FBMS is able to process a trade. The
delay attributable to this manual surveillance process does not change
the time of trade execution, which is set at the time the trade would
have occurred in the trading crowd.
With respect to simple orders, if a Floor Broker attempts to
execute a customer order to sell 357 contracts in symbol XYZ (with a
Minimum Price Variation increment of $0.05) at a price of $0.11 by way
of split price execution, the floor broker must perform a manual
calculation. As a result of FBMS 2 being unable to calculate the number
of contracts to split to determine a net price of at least $0.11, the
floor broker will manually enter 285 contracts @ $0.10 and 72 contracts
@ $0.15 to arrive at an execution price as close as possible to an
$0.11 ($0.110084 in this case) aggregate price for the 357 contracts
ensuring that, when applicable, the customer side of the trade benefits
from the difference between the $0.11 limit and the actual
[[Page 56727]]
average price. This example would qualify for the proposed exception
because it is a sub-MPV price (not in $0.05 increments) and cannot be
evenly split to obtain the desired aggregate price.\18\
---------------------------------------------------------------------------
\18\ The exemption would not apply where an order for 500
contracts could be traded at a split price of .125 by splitting it
into two lots of 250 contracts at .10 and 250 contracts at .15.
---------------------------------------------------------------------------
With respect to complex and multi-leg orders, consider the
following example: A Floor Broker receives a two legged call spread in
XYZ (with a Minimum Price Variation increment of $0.05) to sell 456
contracts of leg A @ $1.23 and buy 229 contracts of leg B @ $0.50.
Because a Floor Broker is restricted to trading in not less than the
permitted MPV increments, the Floor Broker will need to manually
calculate to trade 274 contracts of leg A @ $1.25 and 182 contracts of
leg A @ $1.20. This equals a net price on leg A of $1.23004. This is
the closest achievable net price that is at least equal to the limit
price of the Floor Broker's client without breaking the limit price.
This would qualify because the Floor Broker will need to determine at
which of the price points the additional contract will trade, given
that the odd number of contracts cannot be split evenly across two
price points.
Another example involving a simple order is if a Floor Broker has a
customer order to buy 479 GOOG May 440 calls for $3.67: GOOG has a
Minimum Price Variation of $0.10 in trades over $3.00 so the Floor
Broker will need to determine the calculation that will amount to a
price closest to $3.67; namely, 70% of 479 equals 335.3 but 335.3 is a
non-round number and the customer buying the volume entered at the
lower price gets a price that is rounded up while the volume at the
higher price is rounded down so as to offer an advantage to the
customer.\19\ The result is 335 at $3.70 and 144 at $3.60. Since the
customer is buying, the volume at the lower price of 3.60 gets rounded
up to offer the advantage of rounding to the customer. This transaction
would qualify for the exception because the simple order is for a sub-
MPV price and cannot be evenly split.
---------------------------------------------------------------------------
\19\ Under Proposed Rule 1000(f)(iii)(D), Exchange surveillance
staff would be required to validate the use of price rounding to
ensure that it is necessary and to the benefit of the customer.
---------------------------------------------------------------------------
Under this proposal, Surveillance staff must validate that split-
price executions abide by all applicable priority and trade through
rules using the time of execution recorded by the Floor Broker (and
separately confirmed by Surveillance staff) on the paper order ticket.
Referring back to a prior example involving a simple customer order to
execute 357 contracts in symbol XYZ (with a Minimum Price Variation
increment of $0.05) at $0.11 (285 contracts @ $0.10/72 contracts @
$0.15), if FBMS 2 is unable to determine the correct number of
contracts to split to derive the net price of $0.11, the Floor Broker,
upon confirmation and approval of the Surveillance staff, can verbally
execute the order and Surveillance staff would capture the verbal
execution time of the pending transaction and determine if the Floor
Broker established priority over the bids and/or offers based on the
documented verbal execution time. If the market was $0.05 bid and $0.15
offer, Surveillance staff would approve this transaction because the
Floor Broker established priority over the $0.15 offers by trading more
contracts at the better price of $0.10. However, if the market was
$0.10 bid and $0.20 offer, On-Floor Surveillance staff would not
approve this transaction because the Floor Broker did not establish
priority over the $0.10 bids by trading the greater number of contracts
at the inferior price. Finally, if the market was $0.10 bid and $0.15
offer (with no public customer orders on either side of the market),
On-Floor Surveillance staff would approve this transaction because the
Floor Broker would have priority over the non-customer book (bids/
offers) given that customer orders always have priority pursuant to
Rule 1014(g)(i)(A).
In conclusion, the Exchange believes that certain split-price
orders warrant an exception from the requirement that the order be
executed by FBMS. First, the exception is needed because FBMS is not
currently programmed to perform the calculations associated with split
prices not at the minimum price variation. Accordingly, the Floor
Broker must do so manually, which can be time consuming; by the time
the calculation is made, the market may have changed such that FBMS
would return the order to the Floor Broker unexecuted. Second,
heightened surveillance will be imposed. Under the proposal, the
execution would occur on the trading floor in open outcry as a pending
transaction. The transaction is completed only upon validation from
Surveillance staff, based on the market prices at the time of
execution. The proposal clarifies the need for a manual handling of the
execution for these complicated split price trades, rather than leaving
ambiguous the question of whether a split-price trade amounts to an
FBMS system problem. This proposal does not change what is considered
by the Exchange as a FBMS system problem, but rather clearly sets forth
a defined system limitation for a split-price order with specific
characteristics.
2. Statutory Basis
The Exchange believes that the proposed exception is consistent
with Section 6(b) of the Act,\20\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\21\ in particular, in that it
is designed to promote just and equitable principles of trade and to
protect investors and the public interest by permitting split-price
trades, which are complicated, to be executed in the trading crowd,
which should, in turn, result in a greater likelihood that such orders
are properly executed. FBMS 2 cannot calculate these particular prices,
as described in the examples above.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed exception is consistent
with the Act because it is narrowly tailored to permit a small number
of beneficial trades. As stated earlier, the Commission has recognized
the importance of split-price trades because they permit the execution
of large blocks, even permitting a limited exception to priority rules.
Although FBMS was designed to enhance compliance to the greatest extent
possible, FBMS does not have the capability to calculate and process
certain split-price trades. If an exception was denied, Floor Brokers'
ability to execute these large, split-price trades that benefit the
market would be substantially impaired.
Additionally, Exchange surveillance is well-designed to protect
customer when the exception is used. As set forth above, every split-
price trade that invokes the proposed exception will require approval
by Exchange surveillance staff in order to validate compliance with
applicable priority and trade through rules. Additionally, all relevant
trade data will be recorded on both paper tickets and in the FBMS
system in order to ensure a proper audit trail for T+1 surveillance.
Finally, to the extent the exception permits rounding of prices,
rounding is required to occur in the customer's favor, a result that is
itself consistent with the Act.
The proposal is not unfairly discriminatory because it applies to
all Floor Brokers the same way. Nor is it unfairly discriminatory with
respect to market participants other than Floor Brokers because only
Floor Brokers use FBMS 2.
[[Page 56728]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes that the
proposal should allow it to compete with other floor-based exchanges
and help the Exchange's Floor Brokers compete with floor brokers on
other options exchanges by accommodating another type of complicated
order. Through the use of a surveillance process to verify that the
conditions of the exception are met, the Exchange will ensure that the
exception is used only rarely.
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 No. SR-Phlx-2016-82 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-Phlx-2016-82. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal 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 No. SR-Phlx-2016-82, and should be
submitted on or before September 12, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
---------------------------------------------------------------------------
\22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19899 Filed 8-19-16; 8:45 am]
BILLING CODE 8011-01-P
