Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a Proposed Rule Change Relating to Anticipatory Hedging, 50131-50132 [2018-21586]
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Federal Register / Vol. 83, No. 193 / Thursday, October 4, 2018 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84311; File No. SR–Phlx–
2018–55]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Order Approving a
Proposed Rule Change Relating to
Anticipatory Hedging
September 28, 2018.
I. Introduction
On August 3, 2018, Nasdaq PHLX LLC
(‘‘Exchange’’ or ‘‘Phlx’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change
amending Phlx’s Rule 1064(d), relating
to anticipatory hedging of crossing,
facilitation, and solicited orders. The
proposed rule change was published for
comment in the Federal Register on
August 16, 2018.3 The Commission
received no comment letters on the
proposed rule change. This order
approves the proposed rule change.
II. Description of the Proposed Rule
Change
The Exchange has proposed to amend
Phlx Rule 1064(d), governing
anticipatory hedging relating to
crossing, facilitation, and solicitation
orders. Specifically, the Exchange has
proposed to lower the eligibility size for
the ‘‘tied hedge’’ exception to the
anticipatory hedging prohibition from
500 contracts to 50 contracts per order 4
for options on the Nasdaq 100 Index,
including options with nonstandard
expiration dates (‘‘NDX’’ and ‘‘NDXP’’).5
The tied hedge exception eligibility size
for all other options orders will remain
at 500 contracts per order.6
Phlx Rule 1064(d) governing
anticipatory hedging prohibits member
organizations and associated persons of
members and member organizations
who have knowledge of the material
terms and conditions of a solicited,
facilitated, or crossed order that is to be
imminently executed from entering,
based on such knowledge, an order to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 83826
(Aug. 10, 2018), 83 FR 40797 (‘‘Notice’’).
4 See Proposed Phlx Rule 1064(d)(iii)(A).
5 NDX represents A.M.-settled options on the
Nasdaq 100® Index. NDXP represent P.M.-settled
options on the Nasdaq 100® Index.
6 See Proposed Phlx Rule 1064(d)(iii)(A).
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buy or sell the underlying security, an
option for the same underlying security,
or any related instrument 7 until certain
conditions set forth in the rule are met.8
Specifically, the order may only be
entered when (i) the terms and
conditions of the order and any changes
in the terms of the order that the
member, member organization, or
associated person has knowledge of are
disclosed to the trading crowd, or (ii)
the trade can no longer reasonably be
considered imminent in view of the
passage of time since the order was
received.
Phlx Rule 1064(d)(iii) sets forth an
exception to this rule, known as the
‘‘tied hedge’’ exception. Under such
exception, a member or member
organization is not prohibited from
buying or selling a stock, security
futures, or future position following the
receipt of an option order, including a
complex order, but prior to announcing
such order to the trading crowd,
provided that the option order is in a
class designated as eligible for ‘‘tied
hedge’’ transactions,9 as determined by
the Exchange, and is within the
designated tied hedge eligibility size
parameters, also determined by the
Exchange and which may not be smaller
than 500 contracts per order.10
The Exchange now proposes to lower
the minimum tied hedge eligibility size
threshold for NDX and NDXP, from 500
contracts to 50 contracts. The Exchange
asserts that this smaller eligibility size
for NDX and NDXP is appropriate
because the index value for NDX and
NDXP is high as compared to other
securities instruments and would
reduce the minimum notional value
required for a trade to be eligible for the
tied hedge exception.
The Exchange also proposes to amend
Phlx Rule 1066 to delete the term ‘‘Phlx
XL’’ and replace it with the term
‘‘System.’’ 11 It also proposes to amend
an incorrect cross-reference to the tied
hedge exception, Commentary .04 to
Phlx Rule 1064, and replace it with the
7 See Phlx Rule 1064(d)(ii), which states that an
order to buy or sell a ‘‘related instrument’’ means,
in reference to an index option, an order to buy or
sell securities comprising 10% or more of the
component securities in the index or an order to
buy or sell a futures contract on an economically
equivalent index.
8 See Phlx Rule 1064(d).
9 See Phlx Rule 1064(d)(iii)(C)–(H).
10 See Phlx Rule 1064(d)(iii)(A). The rule also
provides that there shall be no aggregation of
multiple orders to satisfy the size parameters.
11 See Proposed Phlx Rule 1066. See also Phlx
Rule 1000(b)(45) (defining ‘‘System’’).
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Fmt 4703
Sfmt 4703
50131
correct cross-reference, Rule
1064(d)(iii).12
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act 13 and the rules and regulations
thereunder applicable to a national
securities exchange.14 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,15 which requires that
the rules of an exchange be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
When adopting the tied-hedge
exception, Phlx described the provision
as a limited exception that remained in
keeping with the original design of the
anticipatory hedging prohibition,16
while responding to increased trading in
the over-the-counter market and
changes in the marketplace that favored
volatility trading strategies.17 The
Exchange explained that the primary
purpose of the 500 contracts minimum
eligibility size provision of the tied
hedge exception was to limit the use of
the tied hedge procedures to larger
orders that might benefit from the
member’s or member organization’s
ability to execute a facilitating hedge.18
12 See
Proposed Phlx Rule 1066(f)(4).
U.S.C. 78f.
14 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
15 15 U.S.C. 78f(b)(5).
16 The Exchange stated that when it originally
adopted the anticipatory hedging prohibition, it
believed the prohibition was necessary to prevent
members and associated persons from using
undisclosed, non-public information about
imminent solicited options transactions to trade in
advance of persons represented in the options
crowd. See Notice, supra note 3, at 40798. See also
Securities Exchange Act Release No. 44740 (August
23, 2001), 66 FR 45721 (August 29, 2001) (SR–Phlx–
2001–61).
17 See Securities Exchange Act Release No. 61066
(November 25, 2009), 74 FR 63162 (December 2,
2009) (SR–Phlx–2009–98).
18 Id.
13 15
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50132
Federal Register / Vol. 83, No. 193 / Thursday, October 4, 2018 / Notices
As noted above, the Exchange asserts
that a lower tied hedge minimum
eligibility size is appropriate for options
on the Nasdaq 100 Index because the
index value for NDX and NDXP is high
compared to the index values of other
security instruments, adding that a size
of 50 contracts for NDX is still
considered a large size order given
NDX’s higher notional value.19 To
illustrate the high notional value of
options on the Nasdaq 100 Index, Phlx
stated that based on the index value, the
multiplier, and the premium value, the
current 500 minimum contract size
parameter would require an NDX
options transaction with a premium of
approximately $6.5 million in order to
qualify for the rule’s tied hedge
exception.20
The Commission believes that the
reduced tied hedge eligibility size
requirement of 50 contracts for options
on the Nasdaq 100 Index is in line with
the original intent of the provision, as it
will continue to be limited to larger
orders, given the relatively higher index
value and notional value of NDX and
NDXP.21 While the reduction in the
minimum size requirement may allow
more transactions to qualify for the tied
hedge exception, the Commission
believes that the proposed change is
narrow in scope as it relates only to
options in NDX and NDXP and will
continue to provide only a limited
exception for larger orders meeting the
conditions of the rule.22
The Commission also finds that the
non-substantive changes to Phlx Rule
1066 are designed to protect investors
and the public interest by adding clarity
and transparency to the rules.
For the reasons noted above, the
Commission finds that the proposed
rule change is consistent with the Act.
19 See
Notice, supra note 3, at 40798–99.
Notice, supra note 3, at 40798.
21 See Notice, supra note 3, at 40798–99. The
Commission also notes that the Exchange
represented that it conducts surveillance in
connection with anticipatory hedging. Specifically,
the Exchange represented that it conducts on-floor
surveillance to ensure both the stock and option
components of the trade were exposed in open
outcry and that the trading crowd had a reasonable
opportunity to participate in the transaction. The
Exchange asserted that it also conducts post-trade
surveillance. The Exchange also noted that prior to
entering tied hedge orders on behalf of customers,
the member or member organization must deliver
to the customer a written notification informing the
customer that his order may be executed using the
Exchange’s tied hedge procedures. See Phlx Rule
1064(d)(iii)(G).
22 The Commission notes that the Exchange
represented that tied hedge transactions do not
occur with great frequency on the Exchange’s
trading floor. Id.
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IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,23 that the
proposed rule change (SR–Phlx–2018–
55) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–21586 Filed 10–3–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84320; File No. SR–IEX–
2018–19]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend Rule
2.160 Related to the Qualification and
Registration Requirements for
Associated Persons of a Member and
To Delete Rule 2.150 Which is Obsolete
September 28, 2018.
Pursuant to Section 19(b)(1)1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on
September 25, 2018, the Investors
Exchange LLC (‘‘IEX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Pursuant to the provisions of Section
19(b)(1) under the Securities Exchange
Act of 1934 (‘‘Act’’),4 and Rule 19b–4
thereunder,5 IEX is filing with the
Commission a proposed rule change to
amend IEX Rule 2.160 to (i) harmonize
IEX rules with certain Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) rules related to qualification
and registration requirements for
associated persons of a Member 6 which
23 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
4 15 U.S.C. 78s(b)(1).
5 17 CRF 240.19b–4.
6 ‘‘Person Associated with a Member’’ or
‘‘Associated Person of a Member’’ mean [sic] any
24 17
PO 00000
Frm 00070
Fmt 4703
Sfmt 4703
are pending effectiveness; (ii) specify
when associated persons of a Member
are required to be registered with the
Exchange; and (iii) delete Rule 2.150
related to a temporary membership
application process and waive-in, which
is obsolete. The Exchange has
designated this rule change as ‘‘noncontroversial’’ under Section 19(b)(3)(A)
of the Act 7 and provided the
Commission with the notice required by
Rule 19b–4(f)(6) thereunder.8
The text of the proposed rule change
is available at the Exchange’s website at
www.iextrading.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 the
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 statement [sic] may be
examined at the places specified in Item
IV below. The self-regulatory
organization has prepared summaries,
set forth in Sections A, B, and C below,
of the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to amend
Rule 2.160 to (i) harmonize with certain
FINRA rules related to qualification and
registration requirements for associated
persons of a Member which are pending
effectiveness; (ii) specify when
associated persons of a Member are
required to be registered with the
Exchange; and (iii) delete Rule 2.150
related to a temporary membership
application process and waive-in, which
is obsolete. Each proposed change is
described below.
partner, officer, director, or branch manager of a
Member (or person occupying a similar status or
performing similar functions), any person directly
or indirectly controlling, controlled by, or under
common control with such Member, or any
employee of such Member, except that any person
associated with a Member whose functions are
solely clerical or ministerial shall not be included
in the meaning of such term for purposes of these
Rules. See IEX Rule 1.160(y). See also 15 U.S.C.
78c(a)(18).
7 15 U.S.C. 78s(b)(3)(A).
8 17 CFR 240.19b–4.
E:\FR\FM\04OCN1.SGM
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]]>Agencies
[Federal Register Volume 83, Number 193 (Thursday, October 4, 2018)]
[Notices]
[Pages 50131-50132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21586]
[[Page 50131]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84311; File No. SR-Phlx-2018-55]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a
Proposed Rule Change Relating to Anticipatory Hedging
September 28, 2018.
I. Introduction
On August 3, 2018, Nasdaq PHLX LLC (``Exchange'' or ``Phlx'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change amending
Phlx's Rule 1064(d), relating to anticipatory hedging of crossing,
facilitation, and solicited orders. The proposed rule change was
published for comment in the Federal Register on August 16, 2018.\3\
The Commission received no comment letters on the proposed rule change.
This order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 83826 (Aug. 10,
2018), 83 FR 40797 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange has proposed to amend Phlx Rule 1064(d), governing
anticipatory hedging relating to crossing, facilitation, and
solicitation orders. Specifically, the Exchange has proposed to lower
the eligibility size for the ``tied hedge'' exception to the
anticipatory hedging prohibition from 500 contracts to 50 contracts per
order \4\ for options on the Nasdaq 100 Index, including options with
nonstandard expiration dates (``NDX'' and ``NDXP'').\5\ The tied hedge
exception eligibility size for all other options orders will remain at
500 contracts per order.\6\
---------------------------------------------------------------------------
\4\ See Proposed Phlx Rule 1064(d)(iii)(A).
\5\ NDX represents A.M.-settled options on the Nasdaq
100[supreg] Index. NDXP represent P.M.-settled options on the Nasdaq
100[supreg] Index.
\6\ See Proposed Phlx Rule 1064(d)(iii)(A).
---------------------------------------------------------------------------
Phlx Rule 1064(d) governing anticipatory hedging prohibits member
organizations and associated persons of members and member
organizations who have knowledge of the material terms and conditions
of a solicited, facilitated, or crossed order that is to be imminently
executed from entering, based on such knowledge, an order to buy or
sell the underlying security, an option for the same underlying
security, or any related instrument \7\ until certain conditions set
forth in the rule are met.\8\ Specifically, the order may only be
entered when (i) the terms and conditions of the order and any changes
in the terms of the order that the member, member organization, or
associated person has knowledge of are disclosed to the trading crowd,
or (ii) the trade can no longer reasonably be considered imminent in
view of the passage of time since the order was received.
---------------------------------------------------------------------------
\7\ See Phlx Rule 1064(d)(ii), which states that an order to buy
or sell a ``related instrument'' means, in reference to an index
option, an order to buy or sell securities comprising 10% or more of
the component securities in the index or an order to buy or sell a
futures contract on an economically equivalent index.
\8\ See Phlx Rule 1064(d).
---------------------------------------------------------------------------
Phlx Rule 1064(d)(iii) sets forth an exception to this rule, known
as the ``tied hedge'' exception. Under such exception, a member or
member organization is not prohibited from buying or selling a stock,
security futures, or future position following the receipt of an option
order, including a complex order, but prior to announcing such order to
the trading crowd, provided that the option order is in a class
designated as eligible for ``tied hedge'' transactions,\9\ as
determined by the Exchange, and is within the designated tied hedge
eligibility size parameters, also determined by the Exchange and which
may not be smaller than 500 contracts per order.\10\
---------------------------------------------------------------------------
\9\ See Phlx Rule 1064(d)(iii)(C)-(H).
\10\ See Phlx Rule 1064(d)(iii)(A). The rule also provides that
there shall be no aggregation of multiple orders to satisfy the size
parameters.
---------------------------------------------------------------------------
The Exchange now proposes to lower the minimum tied hedge
eligibility size threshold for NDX and NDXP, from 500 contracts to 50
contracts. The Exchange asserts that this smaller eligibility size for
NDX and NDXP is appropriate because the index value for NDX and NDXP is
high as compared to other securities instruments and would reduce the
minimum notional value required for a trade to be eligible for the tied
hedge exception.
The Exchange also proposes to amend Phlx Rule 1066 to delete the
term ``Phlx XL'' and replace it with the term ``System.'' \11\ It also
proposes to amend an incorrect cross-reference to the tied hedge
exception, Commentary .04 to Phlx Rule 1064, and replace it with the
correct cross-reference, Rule 1064(d)(iii).\12\
---------------------------------------------------------------------------
\11\ See Proposed Phlx Rule 1066. See also Phlx Rule 1000(b)(45)
(defining ``System'').
\12\ See Proposed Phlx Rule 1066(f)(4).
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act \13\ and the
rules and regulations thereunder applicable to a national securities
exchange.\14\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\15\ which
requires that the rules of an exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78f.
\14\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
When adopting the tied-hedge exception, Phlx described the
provision as a limited exception that remained in keeping with the
original design of the anticipatory hedging prohibition,\16\ while
responding to increased trading in the over-the-counter market and
changes in the marketplace that favored volatility trading
strategies.\17\ The Exchange explained that the primary purpose of the
500 contracts minimum eligibility size provision of the tied hedge
exception was to limit the use of the tied hedge procedures to larger
orders that might benefit from the member's or member organization's
ability to execute a facilitating hedge.\18\
---------------------------------------------------------------------------
\16\ The Exchange stated that when it originally adopted the
anticipatory hedging prohibition, it believed the prohibition was
necessary to prevent members and associated persons from using
undisclosed, non-public information about imminent solicited options
transactions to trade in advance of persons represented in the
options crowd. See Notice, supra note 3, at 40798. See also
Securities Exchange Act Release No. 44740 (August 23, 2001), 66 FR
45721 (August 29, 2001) (SR-Phlx-2001-61).
\17\ See Securities Exchange Act Release No. 61066 (November 25,
2009), 74 FR 63162 (December 2, 2009) (SR-Phlx-2009-98).
\18\ Id.
---------------------------------------------------------------------------
[[Page 50132]]
As noted above, the Exchange asserts that a lower tied hedge
minimum eligibility size is appropriate for options on the Nasdaq 100
Index because the index value for NDX and NDXP is high compared to the
index values of other security instruments, adding that a size of 50
contracts for NDX is still considered a large size order given NDX's
higher notional value.\19\ To illustrate the high notional value of
options on the Nasdaq 100 Index, Phlx stated that based on the index
value, the multiplier, and the premium value, the current 500 minimum
contract size parameter would require an NDX options transaction with a
premium of approximately $6.5 million in order to qualify for the
rule's tied hedge exception.\20\
---------------------------------------------------------------------------
\19\ See Notice, supra note 3, at 40798-99.
\20\ See Notice, supra note 3, at 40798.
---------------------------------------------------------------------------
The Commission believes that the reduced tied hedge eligibility
size requirement of 50 contracts for options on the Nasdaq 100 Index is
in line with the original intent of the provision, as it will continue
to be limited to larger orders, given the relatively higher index value
and notional value of NDX and NDXP.\21\ While the reduction in the
minimum size requirement may allow more transactions to qualify for the
tied hedge exception, the Commission believes that the proposed change
is narrow in scope as it relates only to options in NDX and NDXP and
will continue to provide only a limited exception for larger orders
meeting the conditions of the rule.\22\
---------------------------------------------------------------------------
\21\ See Notice, supra note 3, at 40798-99. The Commission also
notes that the Exchange represented that it conducts surveillance in
connection with anticipatory hedging. Specifically, the Exchange
represented that it conducts on-floor surveillance to ensure both
the stock and option components of the trade were exposed in open
outcry and that the trading crowd had a reasonable opportunity to
participate in the transaction. The Exchange asserted that it also
conducts post-trade surveillance. The Exchange also noted that prior
to entering tied hedge orders on behalf of customers, the member or
member organization must deliver to the customer a written
notification informing the customer that his order may be executed
using the Exchange's tied hedge procedures. See Phlx Rule
1064(d)(iii)(G).
\22\ The Commission notes that the Exchange represented that
tied hedge transactions do not occur with great frequency on the
Exchange's trading floor. Id.
---------------------------------------------------------------------------
The Commission also finds that the non-substantive changes to Phlx
Rule 1066 are designed to protect investors and the public interest by
adding clarity and transparency to the rules.
For the reasons noted above, the Commission finds that the proposed
rule change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-Phlx-2018-55) be, and hereby
is, approved.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78s(b)(2).
\24\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21586 Filed 10-3-18; 8:45 am]
BILLING CODE 8011-01-P
