Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Proposed Rule Change To Amend Rules 1000, 1064, and 1069 To Allow for the Snapshot Functionality of the Floor Based Management System to be Used for All Orders, 49596-49599 [2018-21365]
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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Notices
Dated at Rockville, Maryland, this 27th day
of September 2018.
For the Nuclear Regulatory Commission.
Andrea Kock,
Deputy Director, Division of
Decommissioning, Uranium Recovery and
Waste Programs, Office of Nuclear Material
Safety and Safeguards.
[FR Doc. 2018–21429 Filed 10–1–18; 8:45 am]
BILLING CODE 7590–01–P
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[NRC–2018–0001]
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amozie on DSK3GDR082PROD with NOTICES1
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[FR Doc. 2018–21527 Filed 9–28–18; 11:15 am]
BILLING CODE 7590–01–P
SECURITIES AND EXCHANGE
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[Release No. 34–84290; File No. SR–Phlx–
2018–59]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing of
Proposed Rule Change To Amend
Rules 1000, 1064, and 1069 To Allow
for the Snapshot Functionality of the
Floor Based Management System to be
Used for All Orders
September 26, 2018.
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
September 18, 2018, Nasdaq PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘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
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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
Exchange Rules 1000, 1064, and 1069 to
allow for the Snapshot functionality of
the Floor Based Management System
(‘‘FBMS’’) to be used for all orders.
The text of the proposed rule change
is available on the Exchange’s website 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
On October 30, 2017, the Commission
approved the Exchange’s proposal to
establish the ‘‘Snapshot’’ functionality
within the Floor Broker Management
System (now known as the ‘‘Floor Based
Management System’’ or ‘‘FBMS’’).3 On
July 17, 2018, the Commission approved
another Exchange proposal to expand
the availability of Snapshot to
Registered Options Traders (‘‘ROTs’’)
and Specialists.4
As set forth in Rule 1069, Snapshot
allows a Floor Broker, ROT, or
Specialist, at the time when they
‘‘provisionally execute’’ 5 a trade in the
3 Securities Exchange Act Release No. 34–81980
(Oct. 30, 2017), 82 FR 51313 (Nov. 3, 2017) (the
‘‘Snapshot Approval Order’’). As described in
Exchange Rule 1063, FBMS is the electronic system
that enables members to submit option orders
represented or negotiated on the Exchange trading
floor (the ‘‘Floor’’) to the Exchange’s Trading
System for execution and reporting to the
consolidated tape. FBMS also facilitates the
creation of an electronic audit trail for such orders.
4 Securities Exchange Act Release No. 34–83656
(July 17, 2018), 83 FR 34899 (July 23, 2018).
5 A ‘‘provisional execution’’ occurs in the trading
crowd when either (i) the participants to a trade
reach a verbal agreement in the trading crowd as to
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trading crowd, to capture and record the
market conditions that prevailed at the
time of the provisional execution.6 Once
a member triggers a Snapshot by
pressing a button on FBMS, the member
has up to 30 seconds to use the
information captured by the Snapshot
for purposes of entering the terms of the
provisionally-executed trade into FBMS
and submitting the trade to the Trading
System. After 30 seconds, a Snapshot
expires and can no longer be used to
capture the market that existed at the
time when it was taken. When a trade
that is subject to a valid Snapshot is
submitted to the Trading System, the
trade will execute only to the extent that
it is consistent with applicable priority
and trade-through rules based upon the
prevailing market at the time of the
Snapshot. The Trading System will
reject a trade subject to a Snapshot if it
would violate trade-through or priority
rules. Whenever a Snapshot becomes
invalid due to expiration, rejection by
the Trading System, or cancellation in
anticipation of expiration or rejection, a
member may take a new Snapshot that
reflects the market prevailing at the time
the new Snapshot is taken, provided
that the member first re-announces the
trade to the trading crowd and reaches
a new agreement as to the terms of the
trade.
Snapshot exists to provide members
with a means of mitigating risks that are
inherent in a Floor-based options
trading environment. In particular,
Snapshot mitigates the risk that market
conditions will shift between the time
when members provisionally execute
trades on the Floor in open outcry and
the time when they enter such trades
into FBMS and submit them to the
Trading System for execution. This risk
exists because, even with the advent of
FBMS, which is the Exchange’s
electronic Floor order entry system, a
member still must manually enter the
terms of a trade into FBMS prior to
submission to the Trading System. This
manual process can take several seconds
or more to complete, depending upon
the complexity of the trade. The
Exchange notes that this manual process
is not required when trading in an allelectronic environment, such that
Snapshot also serves the purpose of
rendering Floor trading venues more
competitive with electronic venues.
When the Exchange developed
Snapshot, it made certain design
choices, in coordination with the
Commission, to mitigate the risk that
Snapshot could be subject to overuse or
abuse. For example, the Exchange
limited the time period during which a
Snapshot remains valid to 30 seconds.
Moreover, once a Snapshot expires, a
member may take a new Snapshot only
after it re-announces the trade to the
trading crowd and reaches a new
agreement regarding its terms.
Additionally, a member may have only
one Snapshot outstanding across all
option classes and series at a time. The
Exchange also prohibits members from
triggering Snapshot to obtain favorable
priority or trade-through conditions or
to improperly avoid unfavorable priority
or trade-through conditions, and it
surveils the market for proper use of
Snapshot, both on a post-trade and a
real-time basis.7
Finally, to mitigate the risk of
Snapshot overuse, the Exchange
initially limited its applicability only to
multi-leg orders and simple orders
involving options on exchange traded
funds (‘‘ETFs’’) that are included in the
Options Penny Pilot. The Exchange
limited Snapshot to these two categories
of orders because they presented the
most immediately compelling use cases
for Snapshot.8
Snapshot became available for use by
Floor Brokers on December 4, 2017 and
it recently became available to ROTs
and Specialists. Since the Exchange first
introduced Snapshot, it has monitored
when Snapshot has been used and the
frequency of such uses. Such
monitoring reveals that concerns
regarding the prospective misuse and
abuse of Snapshot were greatly
overstated. In fact, Snapshot was
utilized only 24 times (21 times in
executed trades, 3 times in rejected
trades) over the course of eight months
(December 2017–July 2018). In four of
the terms of the trade, or (ii) a Floor Broker
announces a cross in accordance with Phlx Rule
1064(a). See Rule 1069(a)(i)(A).
6 Snapshot records the time when a member
triggers the functionality and the prevailing market
conditions for an options class or series, which
includes all information required to determine
compliance with priority and trade through
requirements, including the Away Best Bid and
Offer, the Exchange Best Bid and Offer, customer
orders at the top of the Exchange book, and the best
bid and offer of all-or-none orders. See Rule
1069(a). The market conditions captured by
Snapshot are derived from the same real-time
market information that exists in the Trading
System.
7 Conduct that would constitute a violation
includes repeated instances in which members
permit valid Snapshots to expire without
submitting associated trades to the Trading System
for verification and reporting to the Consolidated
Tape, as well as repeated instances in which a
member waits longer than is reasonably necessary
to submit a trade subject to a Snapshot to the
Trading System for execution.
8 Snapshot Approval Order, supra, at 51315
(These types of orders were at ‘‘heightened risk of
failing to execute when market conditions change
between the time when Floor Brokers and
participants in the crowd agree upon the terms of
the trade and the time when the Trading System
receives the trade for verification and execution.’’).
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49597
these eight months, it was not used at
all. In the other four months in which
Snapshot was used, it was used
(successfully or otherwise) only once
more than 10 times in a month and
otherwise, no more than six times in a
month.
To improve the competitive position
of the Exchange Floor relative to other
venues, the Exchange now proposes to
broaden the applicability of Snapshot to
all orders. The Exchange believes that
this proposal will make Snapshot
simpler, more consistent, and useful in
more circumstances than it is now.
Moreover, the Exchange believes that its
experience with Snapshot demonstrates
that it can accommodate this proposal
while continuing to systematically
enforce trade-through and priority rules
and without materially raising the risk
that Snapshot will be overused or
abused. The existing design controls
that mitigate such risks will continue to
apply, and if Surveillance—which will
continue monitor Snapshot usage
closely—detects a significant uptick in
improper usage, then the Exchange will
evaluate whether additional controls are
appropriate.
The Exchange expects to begin
making Snapshot available for all orders
before the end of the fourth quarter of
2018. The Exchange will notify
members via an Options Trader Alert, to
be posted on the Exchange’s website, at
least seven calendar days prior to the
date when Snapshot will be available
for expanded use.
Lastly, the Exchange proposes to
remove from Rules 1000 and 1064
language that announced the initial
launch of the Snapshot functionality in
Q4 2017. This language is no longer
required as Snapshot is operational.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 9 in general, and furthers the
objectives of Section 6(b)(5) of the Act 10
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and to protect investors and the
public interest.
Snapshot promotes just and equitable
principles of trade and serves the
interests of investors and the public by
increasing the likelihood that investors
will be able to execute their orders and
do so in line with their expectations and
needs. Similarly, Snapshot mitigates the
risk that the Trading System will reject
9 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
10 15
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a trade due to a change in market
conditions that occurs between the time
when the parties negotiate a lawful and
valid trade on the Floor and the time
when the Trading System receives it.
The proposal to expand the
applicability of Snapshot to all orders
will broaden the scope of such
protections.
The expansion of Snapshot to all
orders will also help Snapshot to better
achieve its intended purpose of
rendering the Exchange Floor more
competitive with other trading venues at
which the Exchange observes trade
executions occurring seconds or even
minutes after verifications occur, but on
trading terms that existed as of the time
of verification.
The Exchange believes that it is
consistent with the Act to broaden the
applicability of Snapshot to all option
orders traded on the Exchange Floor.
Although multi-leg orders and simple
orders in options on Options Penny
Pilot ETFs were perhaps the most
immediately compelling use cases for
Snapshot, they are by no means the only
use cases for the functionality. Indeed,
all options orders that are negotiated on
the Exchange Floor are subject to the
same risk of market movement, to
varying extents, from the time of their
negotiation in open outcry to the time
of their submission to the Trading
System. For all of these orders,
Snapshot will help to mitigate this risk.
Enabling members to provisionally
execute all categories of options on the
Floor (using Snapshot when needed),
rather than execute them in the Trading
System, will not adversely impact
investors or the quality of the market
due to the controls that the Exchange
proposes on the circumstances in which
members may use Snapshot. In fact, the
proposal will protect investors and the
public interest by improving members’
ability to execute orders negotiated on
the Floor while continuing to ensure
that all priority and trade through rules
are systematically enforced.
Moreover, this proposal is consistent
with Rule 611 of Regulation NMS,11
which requires the Exchange to
establish policies and procedures that
are reasonably designed to prevent
trade-throughs of protected quotations.
Presently, the Exchange verifies that a
proposed trade complies with the tradethrough and priority rules as of the time
when the Trading System receives the
trade from FBMS; if the trade complies,
then the Trading System executes the
trade and reports it to the consolidated
tape. However, the proposal would
serve as an exception to this practice. It
11 12
CFR 242.611 [sic].
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would permit members, upon reaching
a meeting of the minds in the trading
crowd regarding the terms of a trade, to
take a Snapshot that provisionally
executes the trade on the Floor. When
the member submits the trade to the
Trading System using Snapshot, the
Trading System will verify that the
provisionally executed trade complied
with the trade-through and priority
rules as of the time of its execution—i.e.,
the time when the crowd agreed to the
terms of the trade and Snapshot was
taken—rather than at the time when the
Trading System receives the trade. If the
Trading System determines that the
provisionally executed trade complied
with the trade-through and priority
rules, then it will report the trade to the
Consolidated Tape. If, however, the
Trading System determines that the
provisionally executed trade was noncompliant with the trade-through and
priority rules as of the time when the
Snapshot was taken, then it will reject
the trade. In other words, even though
the proposal will change the time of
execution of a trade for purposes of
verifying compliance with the tradethrough and priority rules, the
automated compliance verification
process will otherwise be unchanged
and will still apply to systematically
prevent any violation of the tradethrough and priority rules for all trades,
including those utilizing Snapshot.
Finally, the Exchange’s proposal
accomplishes the above in a manner
that: (1) Continues to provide automated
and verifiable enforcement of applicable
trade-through and priority rules; (2) is
documented in writing and transparent;
(3) provides for trade reporting to occur
in a timely fashion, even for the most
complex trades, and within a 30 second
time frame that is far less than the
maximum 90 second reporting period
allowable; and (4) imposes surveillance
and responsible limitations upon
Snapshot that ensure appropriate usage
and prevents violations and abuse.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
In fact, the proposal is procompetitive for several reasons. The
Exchange believes that the Snapshot
feature will result in the Exchange’s
Floor operating more efficiently, which
will help it compete with other floorbased exchanges.
Moreover, the proposal helps the
Exchange compete by ensuring the
robustness of its regulatory program,
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ensuring members’ compliance with
that program, and by enhancing
Customer protections through further
utilization of electronic tools by
members. The Exchange considers all of
these things to be differentiators in
attracting participants and order flow.
Finally, the proposal does not impose
an unreasonable burden on intramarket
competition because the Exchange
would make Snapshot available for use
for all orders by all members that trade
on the Options Floor.
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–2018–59 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–2018–59. 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 website (https://www.sec.gov/
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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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–Phlx–2018–59 and should
be submitted on or before October 23,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–21365 Filed 10–1–18; 8:45 am]
BILLING CODE 8011–01–P
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SECURITIES AND EXCHANGE
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Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Amendment No. 1 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment No. 1, To Modify the
Listing Requirements Contained in
Listing Rule 5635(d) To Change the
Definition of Market Value for
Purposes of the Shareholder Approval
Rule and Eliminate the Requirement
for Shareholder Approval of Issuances
at a Price Less Than Book Value but
Greater Than Market Value
I. Introduction
On January 30, 2018, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ or the
‘‘Exchange’’) filed with the Securities
12 17
CFR 200.30–3(a)(12).
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 82702
(February 13, 2018), 83 FR 7269 (February 20, 2018)
(‘‘Notice’’).
4 See Letters to Brent J. Fields, Secretary,
Commission, from Michael A. Adelstein, Partner,
Kelley Drye & Warren LLP, dated February 28, 2018
(‘‘Kelley Drye Letter’’); Penny Somer-Greif, Chair,
and Gregory T. Lawrence, Vice-Chair, Committee on
Securities Law of the Business Law Section of the
Maryland State Bar Association, dated March 13,
2018 (‘‘MSBA Letter’’); and Greg Rodgers, Latham
Watkins, dated March 14, 2018 (‘‘Latham Watkins
Letter’’).
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 82994,
83 FR 15441 (April 10, 2018). The Commission
designated May 21, 2018, as the date by which it
should approve, disapprove, or institute
proceedings to determine whether to disapprove the
proposed rule change.
7 See Securities Exchange Act Release No. 83294,
83 FR 24379 (May 25, 2018) (‘‘Order Instituting
Proceedings’’). The Commission designated August
19, 2018, as the date by which the Commission
shall approve or disapprove the proposed rule
change.
8 See Letter to Brent J. Fields, Secretary,
Commission, from Arnold Golub, Vice President
and Deputy General Counsel, Nasdaq, Inc., dated
July 18, 2018 (‘‘Nasdaq Response Letter’’).
9 See Securities Exchange Act Release No. 83865,
83 FR 42545 (August 22, 2018). The Commission
2 17
[Release No. 34–84287; File No. SR–
NASDAQ–2018–008]
September 26, 2018.
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
modify the listing requirements
contained in Nasdaq Rule 5635(d) to
(1) change the definition of market value
for purposes of shareholder approval
under Nasdaq Rule 5635(d); (2)
eliminate the requirement for
shareholder approval of issuances at a
price less than book value but greater
than market value; and (3) make other
conforming changes. The proposed rule
change was published for comment in
the Federal Register on February 20,
2018.3 The Commission received three
comments on the proposed rule
change.4 On April 4, 2018, pursuant to
Section 19(b(2) of the Act,5 the
Commission designated a longer period
within which to either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.6
On May 21, 2018, the Commission
instituted proceedings under Section
19(b)(2)(B) of the Act to determine
whether to approve or disapprove the
proposed rule change.7 The Commission
thereafter received a response to the
Order Instituting Proceedings from the
Exchange.8 On August 16, 2018, the
Commission designated a longer period
for Commission action on the
proceedings to determine whether to
approve or disapprove the proposed
rule change.9 On August 16, 2018, the
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49599
Exchange filed Amendment No. 1 to the
proposed rule change.10 The
Commission is publishing notice of the
filing of Amendment No. 1 to solicit
comment from interested persons and is
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
II. Description of the Proposal, as
Modified by Amendment No. 1
The Exchange has proposed to amend
Nasdaq Rule 5635(d) to modify the
circumstances in which shareholder
approval is required for issuances of
securities in private placement
transactions. Currently, under Nasdaq
Rule 5635(d), the Exchange requires a
Nasdaq-listed company to obtain
shareholder approval prior to the
issuance of securities in connection
with a private placement transaction
(i.e., a transaction other than a public
offering 11) involving: (1) The sale,
issuance, or potential issuance by the
company of common stock (or securities
convertible into or exercisable for
common stock) at a price less than the
greater of book or market value which,
together with sales by officers, directors,
or Substantial Shareholders 12 of the
company, equals 20% or more of
common stock or 20% or more of the
voting power outstanding before the
issuance; or (2) the sale, issuance, or
potential issuance by the company of
common stock (or securities convertible
into or exercisable for common stock)
equal to 20% or more of the common
stock or 20% or more of the voting
power outstanding before the issuance
for less than the greater of book or
market value of the stock.13 As
extended the date by which the Commission shall
approve or disapprove the proposed rule change to
October 18, 2018.
10 In Amendment No. 1, the Exchange clarified
that: (i) In the new definition of ‘‘Minimum Price,’’
the closing price (as reflected on Nasdaq.com) is
measured immediately preceding the signing of the
binding agreement, and (ii) a private placement is
a transaction other than a public offering.
Amendment No. 1 is available at https://
www.sec.gov/comments/sr-nasdaq-2018-008/
nasdaq2018008-4223952-172984.pdf.
11 See Nasdaq Rule IM–5635–3 (Definition of a
Public Offering).
12 An interest consisting of less than either 5% of
the number of shares of common stock or 5% of the
voting power outstanding of a Company or party
will not be considered a substantial interest or
cause the holder of such interest to be regarded as
a ‘‘Substantial Shareholder.’’ See Nasdaq Rule
5635(e)(3).
13 See Nasdaq Rule 5635(d). The Commission
notes that Nasdaq Rule 5635 also requires
shareholder approval under Nasdaq Rules 5635(a),
(b), and (c) for issuances involving an acquisition
of stock or assets of another company, a change of
control, and equity compensation. Nasdaq is not
proposing to amend these other shareholder
approval provisions in its proposal.
E:\FR\FM\02OCN1.SGM
02OCN1
]]>Agencies
[Federal Register Volume 83, Number 191 (Tuesday, October 2, 2018)]
[Notices]
[Pages 49596-49599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21365]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84290; File No. SR-Phlx-2018-59]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change To Amend Rules 1000, 1064, and 1069 To Allow
for the Snapshot Functionality of the Floor Based Management System to
be Used for All Orders
September 26, 2018.
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 September 18, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Exchange Rules 1000, 1064, and 1069
to allow for the Snapshot functionality of the Floor Based Management
System (``FBMS'') to be used for all orders.
The text of the proposed rule change is available on the Exchange's
website 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
On October 30, 2017, the Commission approved the Exchange's
proposal to establish the ``Snapshot'' functionality within the Floor
Broker Management System (now known as the ``Floor Based Management
System'' or ``FBMS'').\3\ On July 17, 2018, the Commission approved
another Exchange proposal to expand the availability of Snapshot to
Registered Options Traders (``ROTs'') and Specialists.\4\
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\3\ Securities Exchange Act Release No. 34-81980 (Oct. 30,
2017), 82 FR 51313 (Nov. 3, 2017) (the ``Snapshot Approval Order'').
As described in Exchange Rule 1063, FBMS is the electronic system
that enables members to submit option orders represented or
negotiated on the Exchange trading floor (the ``Floor'') to the
Exchange's Trading System for execution and reporting to the
consolidated tape. FBMS also facilitates the creation of an
electronic audit trail for such orders.
\4\ Securities Exchange Act Release No. 34-83656 (July 17,
2018), 83 FR 34899 (July 23, 2018).
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As set forth in Rule 1069, Snapshot allows a Floor Broker, ROT, or
Specialist, at the time when they ``provisionally execute'' \5\ a trade
in the
[[Page 49597]]
trading crowd, to capture and record the market conditions that
prevailed at the time of the provisional execution.\6\ Once a member
triggers a Snapshot by pressing a button on FBMS, the member has up to
30 seconds to use the information captured by the Snapshot for purposes
of entering the terms of the provisionally-executed trade into FBMS and
submitting the trade to the Trading System. After 30 seconds, a
Snapshot expires and can no longer be used to capture the market that
existed at the time when it was taken. When a trade that is subject to
a valid Snapshot is submitted to the Trading System, the trade will
execute only to the extent that it is consistent with applicable
priority and trade-through rules based upon the prevailing market at
the time of the Snapshot. The Trading System will reject a trade
subject to a Snapshot if it would violate trade-through or priority
rules. Whenever a Snapshot becomes invalid due to expiration, rejection
by the Trading System, or cancellation in anticipation of expiration or
rejection, a member may take a new Snapshot that reflects the market
prevailing at the time the new Snapshot is taken, provided that the
member first re-announces the trade to the trading crowd and reaches a
new agreement as to the terms of the trade.
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\5\ A ``provisional execution'' occurs in the trading crowd when
either (i) the participants to a trade reach a verbal agreement in
the trading crowd as to the terms of the trade, or (ii) a Floor
Broker announces a cross in accordance with Phlx Rule 1064(a). See
Rule 1069(a)(i)(A).
\6\ Snapshot records the time when a member triggers the
functionality and the prevailing market conditions for an options
class or series, which includes all information required to
determine compliance with priority and trade through requirements,
including the Away Best Bid and Offer, the Exchange Best Bid and
Offer, customer orders at the top of the Exchange book, and the best
bid and offer of all-or-none orders. See Rule 1069(a). The market
conditions captured by Snapshot are derived from the same real-time
market information that exists in the Trading System.
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Snapshot exists to provide members with a means of mitigating risks
that are inherent in a Floor-based options trading environment. In
particular, Snapshot mitigates the risk that market conditions will
shift between the time when members provisionally execute trades on the
Floor in open outcry and the time when they enter such trades into FBMS
and submit them to the Trading System for execution. This risk exists
because, even with the advent of FBMS, which is the Exchange's
electronic Floor order entry system, a member still must manually enter
the terms of a trade into FBMS prior to submission to the Trading
System. This manual process can take several seconds or more to
complete, depending upon the complexity of the trade. The Exchange
notes that this manual process is not required when trading in an all-
electronic environment, such that Snapshot also serves the purpose of
rendering Floor trading venues more competitive with electronic venues.
When the Exchange developed Snapshot, it made certain design
choices, in coordination with the Commission, to mitigate the risk that
Snapshot could be subject to overuse or abuse. For example, the
Exchange limited the time period during which a Snapshot remains valid
to 30 seconds. Moreover, once a Snapshot expires, a member may take a
new Snapshot only after it re-announces the trade to the trading crowd
and reaches a new agreement regarding its terms. Additionally, a member
may have only one Snapshot outstanding across all option classes and
series at a time. The Exchange also prohibits members from triggering
Snapshot to obtain favorable priority or trade-through conditions or to
improperly avoid unfavorable priority or trade-through conditions, and
it surveils the market for proper use of Snapshot, both on a post-trade
and a real-time basis.\7\
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\7\ Conduct that would constitute a violation includes repeated
instances in which members permit valid Snapshots to expire without
submitting associated trades to the Trading System for verification
and reporting to the Consolidated Tape, as well as repeated
instances in which a member waits longer than is reasonably
necessary to submit a trade subject to a Snapshot to the Trading
System for execution.
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Finally, to mitigate the risk of Snapshot overuse, the Exchange
initially limited its applicability only to multi-leg orders and simple
orders involving options on exchange traded funds (``ETFs'') that are
included in the Options Penny Pilot. The Exchange limited Snapshot to
these two categories of orders because they presented the most
immediately compelling use cases for Snapshot.\8\
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\8\ Snapshot Approval Order, supra, at 51315 (These types of
orders were at ``heightened risk of failing to execute when market
conditions change between the time when Floor Brokers and
participants in the crowd agree upon the terms of the trade and the
time when the Trading System receives the trade for verification and
execution.'').
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Snapshot became available for use by Floor Brokers on December 4,
2017 and it recently became available to ROTs and Specialists. Since
the Exchange first introduced Snapshot, it has monitored when Snapshot
has been used and the frequency of such uses. Such monitoring reveals
that concerns regarding the prospective misuse and abuse of Snapshot
were greatly overstated. In fact, Snapshot was utilized only 24 times
(21 times in executed trades, 3 times in rejected trades) over the
course of eight months (December 2017-July 2018). In four of these
eight months, it was not used at all. In the other four months in which
Snapshot was used, it was used (successfully or otherwise) only once
more than 10 times in a month and otherwise, no more than six times in
a month.
To improve the competitive position of the Exchange Floor relative
to other venues, the Exchange now proposes to broaden the applicability
of Snapshot to all orders. The Exchange believes that this proposal
will make Snapshot simpler, more consistent, and useful in more
circumstances than it is now. Moreover, the Exchange believes that its
experience with Snapshot demonstrates that it can accommodate this
proposal while continuing to systematically enforce trade-through and
priority rules and without materially raising the risk that Snapshot
will be overused or abused. The existing design controls that mitigate
such risks will continue to apply, and if Surveillance--which will
continue monitor Snapshot usage closely--detects a significant uptick
in improper usage, then the Exchange will evaluate whether additional
controls are appropriate.
The Exchange expects to begin making Snapshot available for all
orders before the end of the fourth quarter of 2018. The Exchange will
notify members via an Options Trader Alert, to be posted on the
Exchange's website, at least seven calendar days prior to the date when
Snapshot will be available for expanded use.
Lastly, the Exchange proposes to remove from Rules 1000 and 1064
language that announced the initial launch of the Snapshot
functionality in Q4 2017. This language is no longer required as
Snapshot is operational.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \9\ in general, and furthers the objectives of Section
6(b)(5) of the Act \10\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and to protect investors and the public interest.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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Snapshot promotes just and equitable principles of trade and serves
the interests of investors and the public by increasing the likelihood
that investors will be able to execute their orders and do so in line
with their expectations and needs. Similarly, Snapshot mitigates the
risk that the Trading System will reject
[[Page 49598]]
a trade due to a change in market conditions that occurs between the
time when the parties negotiate a lawful and valid trade on the Floor
and the time when the Trading System receives it. The proposal to
expand the applicability of Snapshot to all orders will broaden the
scope of such protections.
The expansion of Snapshot to all orders will also help Snapshot to
better achieve its intended purpose of rendering the Exchange Floor
more competitive with other trading venues at which the Exchange
observes trade executions occurring seconds or even minutes after
verifications occur, but on trading terms that existed as of the time
of verification.
The Exchange believes that it is consistent with the Act to broaden
the applicability of Snapshot to all option orders traded on the
Exchange Floor. Although multi-leg orders and simple orders in options
on Options Penny Pilot ETFs were perhaps the most immediately
compelling use cases for Snapshot, they are by no means the only use
cases for the functionality. Indeed, all options orders that are
negotiated on the Exchange Floor are subject to the same risk of market
movement, to varying extents, from the time of their negotiation in
open outcry to the time of their submission to the Trading System. For
all of these orders, Snapshot will help to mitigate this risk. Enabling
members to provisionally execute all categories of options on the Floor
(using Snapshot when needed), rather than execute them in the Trading
System, will not adversely impact investors or the quality of the
market due to the controls that the Exchange proposes on the
circumstances in which members may use Snapshot. In fact, the proposal
will protect investors and the public interest by improving members'
ability to execute orders negotiated on the Floor while continuing to
ensure that all priority and trade through rules are systematically
enforced.
Moreover, this proposal is consistent with Rule 611 of Regulation
NMS,\11\ which requires the Exchange to establish policies and
procedures that are reasonably designed to prevent trade-throughs of
protected quotations. Presently, the Exchange verifies that a proposed
trade complies with the trade-through and priority rules as of the time
when the Trading System receives the trade from FBMS; if the trade
complies, then the Trading System executes the trade and reports it to
the consolidated tape. However, the proposal would serve as an
exception to this practice. It would permit members, upon reaching a
meeting of the minds in the trading crowd regarding the terms of a
trade, to take a Snapshot that provisionally executes the trade on the
Floor. When the member submits the trade to the Trading System using
Snapshot, the Trading System will verify that the provisionally
executed trade complied with the trade-through and priority rules as of
the time of its execution--i.e., the time when the crowd agreed to the
terms of the trade and Snapshot was taken--rather than at the time when
the Trading System receives the trade. If the Trading System determines
that the provisionally executed trade complied with the trade-through
and priority rules, then it will report the trade to the Consolidated
Tape. If, however, the Trading System determines that the provisionally
executed trade was non-compliant with the trade-through and priority
rules as of the time when the Snapshot was taken, then it will reject
the trade. In other words, even though the proposal will change the
time of execution of a trade for purposes of verifying compliance with
the trade-through and priority rules, the automated compliance
verification process will otherwise be unchanged and will still apply
to systematically prevent any violation of the trade-through and
priority rules for all trades, including those utilizing Snapshot.
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\11\ 12 CFR 242.611 [sic].
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Finally, the Exchange's proposal accomplishes the above in a manner
that: (1) Continues to provide automated and verifiable enforcement of
applicable trade-through and priority rules; (2) is documented in
writing and transparent; (3) provides for trade reporting to occur in a
timely fashion, even for the most complex trades, and within a 30
second time frame that is far less than the maximum 90 second reporting
period allowable; and (4) imposes surveillance and responsible
limitations upon Snapshot that ensure appropriate usage and prevents
violations and abuse.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
In fact, the proposal is pro-competitive for several reasons. The
Exchange believes that the Snapshot feature will result in the
Exchange's Floor operating more efficiently, which will help it compete
with other floor-based exchanges.
Moreover, the proposal helps the Exchange compete by ensuring the
robustness of its regulatory program, ensuring members' compliance with
that program, and by enhancing Customer protections through further
utilization of electronic tools by members. The Exchange considers all
of these things to be differentiators in attracting participants and
order flow.
Finally, the proposal does not impose an unreasonable burden on
intramarket competition because the Exchange would make Snapshot
available for use for all orders by all members that trade on the
Options Floor.
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 [email protected]. Please include
File Number SR-Phlx-2018-59 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-2018-59. 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 website (https://www.sec.gov/
[[Page 49599]]
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 website
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. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2018-59 and should be
submitted on or before October 23, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
Eduardo A. Aleman,
Assistant Secretary.
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\12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-21365 Filed 10-1-18; 8:45 am]
BILLING CODE 8011-01-P
