Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Proposed Rule Change Relating to the Allocation and Prioritization of Automatically Executed Trades, 23595-23607 [2019-10643]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 99 (Wednesday, May 22, 2019)]
[Notices]
[Pages 23595-23607]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10643]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85876; File No. SR-Phlx-2019-20]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change Relating to the Allocation and Prioritization 
of Automatically Executed Trades

May 16, 2019.
    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 May 15, 2019, 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.
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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 reserve Rule 1014(g)(vii) and (viii), 
which describes the allocation of automatically executed trades, and 
adopt a new Rule 1089 and title that rule ``Electronic Execution 
Priority and Processing in the System.''
    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
    The Exchange proposes to remove the current rule text describing 
the allocation of automatically executed trades from Phlx Rule 
1014(g)(vii) and (viii) \3\ and, in its place, adopt new Phlx Rule 1089 
titled ``Electronic Execution Priority and Processing in the System.'' 
This relocated new proposed rule would describe in greater detail the 
manner in which Phlx will process, prioritize and allocate transactions 
in the System.\4\

[[Page 23596]]

The Exchange will explain this process as a timeline. The current Phlx 
rule describes the allocation process in a general fashion indicating 
how different market participants may be allocated. The proposed new 
rule would sequentially describe the manner in which an order would be 
allocated in the System, including the allocation method, rounding and 
all potential allocation scenarios. The proposed rule explains the 
order in which market participants will be allocated. The Exchange 
believes that the new proposed rule text would be more easily 
understood. The proposal codifies the Exchange's current practices 
while adding more explicit language to the rule text. In adopting Rule 
1089, the Exchange proposes to model the format of the rule on Nasdaq 
BX, Inc.'s (``BX'') ``Book Processing'' rule at Chapter VI, Section 10.
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    \3\ The Exchange proposes to reserve Phlx Rule 1014(g)(vii) and 
(viii).
    \4\ The term ``System'' shall mean the automated system for 
order execution and trade reporting owned and operated by the 
Exchange which comprises: (A) An order execution service that 
enables members to automatically execute transactions in System 
Securities; and provides members with sufficient monitoring and 
updating capability to participate in an automated execution 
environment; (B) a trade reporting service that submits ``locked-
in'' trades for clearing to a registered clearing agency for 
clearance and settlement; transmits last-sale reports of 
transactions automatically to the Options Price Reporting Authority 
(``OPRA'') for dissemination to the public and industry; and 
provides participants with monitoring and risk management 
capabilities to facilitate participation in a ``locked-in'' trading 
environment; and (C) the data feeds described at Rule 1070. See Phlx 
Rule 1000(b)(45).
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Proposed Amendments to Current Practice
    This proposal codifies the Exchange's current allocation 
methodology. Phlx is not proposing to amend its current electronic 
allocation process, except in one specific circumstance. The Exchange 
proposes herein to amend the current allocation a Specialist is 
entitled to receive when a Specialist is also the Directed Registered 
Option Trader (``DROT''). In the situation where the Specialist is the 
DROT, the proposal provides that the Specialist would be entitled to 
the greater of: (1) The Enhanced Specialist Priority; (2) the 
allocation for Orders of 5 contracts or fewer (``Entitlement for Orders 
of 5 contracts or fewer'') or (3) the DROT allocation. Specifically, 
this proposal would amend the current practice of allocating Orders of 
5 contracts or fewer. Today, a Specialist is only entitled to 
allocation for Orders of 5 contracts or fewer when such order is 
received and such order is either not a Directed Order or is a Directed 
Order for 5 contracts or fewer, but the DROT is not quoting at the 
Exchange's price. If the DROT is also the Specialist, then the 
Specialist is only be entitled to receive the DROT allocation of 40% 
rather than the full size of the allocation of the Order for 5 
contracts or fewer. This is explained below in greater detail within 
this proposal. The Exchange notes that the other functionality 
described in this proposal reflects current practice.
Proposed Rule 1089
    Today, Rule 1014(g)(vii) provides that after public customer market 
and marketable limit orders have been executed, trades automatically 
executed in such options shall be allocated automatically in the 
following manner:

    (A) If the specialist, an SQT, RSQT or a non-SQT ROT that has 
placed a limit order on the limit order book (``Phlx XL 
Participant'') is quoting alone at the disseminated price and their 
quote is not matched by another Phlx XL participant prior to 
execution, such Phlx XL Participant shall be entitled to receive a 
number of contracts up to the size associated with his/her 
quotation.
    (B) Parity. Quotations entered electronically by the specialist, 
an RSQT or an SQT that do not cause an order resting on the limit 
order book to become due for execution may be matched at any time by 
quotations entered electronically by the specialist and/or other 
SQTs and RSQTs, and by ROT limit orders and shall be deemed to be on 
parity, subject to the requirement that orders of controlled 
accounts must yield priority to customer orders as set forth in Rule 
1014(g)(i)(A).

    The Exchange proposes new rule text at proposed Rule 1089(a) which 
would state that the Exchange would apply a Size Pro-Rata execution 
algorithm \5\ to electronic orders, unless otherwise specified. The 
Exchange's proposal also provides that ``The System shall execute 
trading interest within the System in price priority, meaning it will 
execute all trading interest at the best price level within the System 
before executing trading interest at the next best price. If the result 
is not a whole number, it will be rounded down to the nearest whole 
number, unless otherwise specified. Generally, and as described in this 
proposal below, the Exchange would execute interest in price priority 
at each level of priority separately, other than Public Customers,\6\ 
unless otherwise specified.\7\ Public Customers would continue to 
retain priority over other market participants. For purposes of this 
rule, a Public Customer shall be defined as a person or entity that is 
not a broker or dealer in securities.\8\
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    \5\ The Exchange describes Size Pro-Rata Priority at proposed 
Rule 1089(a) to mean resting orders and quotes in the order book are 
prioritized according to price. If there are two or more resting 
orders or quotes at the same price, the System allocates contracts 
from an incoming order or quote to resting orders and quotes 
proportionally according to size, based on the total number of 
contracts available to be executed at that price.
    \6\ Public Customer orders have a different priority as compared 
to other market participants. Orders are allocated such that the 
highest bid and lowest offer shall have priority, except that Public 
Customer orders have priority over non-Public Customer orders at the 
same price, provided the Public Customer order is executable. If 
there are two or more Public Customer orders for the same options 
series at the same price, priority shall be afforded to such Public 
Customer orders in the sequence in which an order is received by the 
System.
    \7\ For example, Size Pro-Rata allocation is applied to market 
maker priority and separately for all other remaining interest. On 
Phlx, market makers include Specialists and Registered Options 
Traders (``ROTs'') (which includes Streaming Quote Traders 
(``SQTs'') and Remote Streaming Quote Traders (``RSQTs'')) and floor 
market makers. A Specialist is an Exchange member who is registered 
as an options specialist. See Phlx Rule 1020(a). A ROT is a regular 
member or a foreign currency options participant of the Exchange who 
has received permission from the Exchange to trade in options for 
his own account. An SQT is an ROT who has received permission from 
the Exchange to generate and submit option quotations electronically 
in options to which such SQT is assigned. An SQT may only submit 
such quotations while such SQT is physically present on the floor of 
the Exchange. An SQT may only trade in a market making capacity in 
classes of options in which the SQT is assigned. An RSQT is an ROT 
that is a member affiliated with an RSQT with no physical trading 
floor presence who has received permission from the Exchange to 
generate and submit option quotations electronically in options to 
which such RSQT has been assigned. A qualified RSQT may function as 
a Remote Specialist upon Exchange approval. A floor market maker is 
known as a non-SQT ROT in Rule 1014(b)(ii)(C). A non-SQT ROT is an 
ROT who is neither an SQT nor an RSQT.
    \8\ Professionals are separately defined at Phlx Rule 
1000(b)(14) and not included in the definition of a Public Customer.
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    Proposed Rule 1089(a)(1)(A) describes priority overlays. The 
Exchange proposes to state within proposed Rule 1089(a)(1) that ``No 
participant shall be entitled to receive a number of contracts that is 
greater than the displayed size \9\ that is associated with their 
quotation or order.'' Current Rule 1014(g)(vii)(A) provides the same 
restriction for market making participants. Also, current Rule 
1014(g)(vii)(B)(1)(e) generally provides for this size limitation for 
purposes of allocation.
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    \9\ The Exchange notes that All-or-None Orders are eligible for 
execution, but remain non-displayed and are not part of Phlx's best 
bid or offer. An All-or-None Order is a limit or market order that 
is to be executed in its entirety or not at all.
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    Today, the Exchange allocates contracts utilizing a Public Customer 
Priority Size Pro-Rata allocation model. Public Customer contracts are 
allocated first in Price-Time priority at a given price level.\10\ 
After all Public Customer contracts have been allocated, Specialist 
electronic orders/quotes are allocated utilizing a Size Pro-Rata 
allocation model \11\ or the DROT Priority is applied.\12\ Orders for 5 
contracts or

[[Page 23597]]

fewer are separately considered for allocation to the Specialist or as 
remaining contracts as specified in the proposed rule text.\13\ ROT 
priority is applied after Public Customer and Specialist/DROT interest 
is handled.\14\ Remaining interest is allocated to broker dealer orders 
\15\ utilizing a Size Pro-Rata allocation model, which includes orders 
of all market participants, excluding Public Customers and Specialists 
because they have already been allocated. The Exchange also accounts 
for odd lot allocation and rounding within this rule. Each step is 
described below in greater detail along with proposed new language. The 
Exchange believes that its proposed allocation language within Rule 
1089 is consistent with the Act because it brings greater transparency 
to the Exchange's rules. The Exchange believes the proposed rule will 
protect investors and the public interest by providing clear 
expectations on the manner in which interest will be electronically 
allocated within Phlx's System.
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    \10\ Price-Time allocations are filled among Public Customer 
orders in time priority as described below in this Purpose section. 
See Rule 1014(g)(vii).
    \11\ The Specialist allocation or Enhanced Specialist Priority 
is described below in the Purpose section. See Rule 
1014(g)(vii)(B)(1)(c). See also DROT priority at Rule 1014(g)(viii).
    \12\ A Specialist or ROT that receives a Directed Order is a 
DROT as defined above. The term ``Directed Order'' means any order 
(other than a stop or stop-limit order as defined in Rule 1066) to 
buy or sell which has been directed to a particular specialist, 
Remote Streaming Quote Trader or ``RSQT'', or Streaming Quote Trader 
or ``SQT'' by an Order Flow Provider. See Phlx Rule 1068.
    \13\ See Phlx Rule 1014(g)(vii)(B)(1)(a) and (b).
    \14\ See Phlx Rule 1014(g)(vii)(B).
    \15\ See Phlx Rule 1014(g)(vi)(B)(1)(d). The term ``off-floor 
broker-dealer order'' means an order delivered from off the floor of 
the Exchange by or on behalf of a broker-dealer for the proprietary 
account(s) of such broker-dealer, including an order for a market 
maker located on an exchange or trading floor other than the 
Exchange's trading floor delivered for the proprietary account(s) of 
such market maker. See Phlx Rule 1000(b)(50).
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Public Customer Priority
    As is the case today, Public Customer orders are always allocated 
first at a given price. Public Customer orders will continue to have 
priority over non-Public Customer interest at the same price, provided 
the Public Customer order is an executable order.\16\ If there are two 
or more Public Customer orders for the same options series at the same 
price, priority shall be afforded to such Public Customer orders in the 
sequence in which they are received by the System.\17\
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    \16\ An executable order would be for example a non-contingent 
order or a contingent order that can have its contingency satisfied. 
The Phlx contingency orders, which are non-displayed, are 
exclusively: (i) All-or-none orders; and (ii) stop orders. An all-
or-none order is a limit or market order that is to be executed in 
its entirety or not at all. A stop order is a limit or market order 
to buy or sell at a limit price when a trade or quote on the 
Exchange for a particular option contract reaches a specified price. 
A stop-market or stop-limit order shall not be triggered by a trade 
that is reported late or out of sequence or by a complex order 
trading with another complex order.
    \17\ See proposed Phlx Rule 1089(a)(1)(A).
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    Currently, Public Customer priority is described at Rule 
1014(g)(vii). The current rule text simply states, ``After public 
customer market and marketable limit orders have been executed, trades 
automatically executed in such options shall be allocated automatically 
in the following manner. . . .'' The manner in which Public Customer 
orders are allocated is not being amended; it is simply restated for 
clarity.\18\ As noted within proposed Rule 1089(a)(1)(A), a Public 
Customer order does not include a Professional Order.\19\ The Exchange 
believes that it is consistent with the protection of investors and the 
public interest to allocate Public Customer orders ahead of all other 
interest. Public Customer liquidity benefits all market participants by 
providing opportunities for order interaction.
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    \18\ Proposed Rule 1089(a)(1)(A) states, ``Public Customer 
Priority: The highest bid and lowest offer shall have priority 
except that Public Customer orders shall have priority over non-
Public Customer interest at the same price, provided the Public 
Customer order is an executable order. If there are two or more 
Public Customer orders for the same options series at the same 
price, priority shall be afforded to such Public Customer orders in 
the sequence in which they are received by the System. For purposes 
of this rule a Public Customer shall be defined as a person or 
entity that is not a broker or dealer in securities. Professionals 
are separately defined at Phlx Rule 1000(b)(14) and not included in 
the definition of a Public Customer.''
    \19\ The term Professional means any person or entity that (i) 
is not a broker or dealer in securities, and (ii) places more than 
390 orders in listed options per day on average during a calendar 
month for its own beneficial account(s). A professional will be 
treated in the same manner as an off-floor broker-dealer for 
purposes of Rules 1014(g) (except with respect to all-or-none 
orders, which will be treated like customer orders, except that 
orders submitted pursuant to Phlx Rule 1080(n) for the beneficial 
account(s) of professionals with an all-or-none designation will be 
treated in the same manner as off-floor broker-dealer orders), 
1033(e), 1064.02 (except professional orders will be considered 
customer orders subject to facilitation), 1080(n) and 1080.07 as 
well as Options Floor Procedure Advices B-6 and F-5. Member 
organizations must indicate whether orders are for professionals. 
See Phlx Rule 1000(b)(14).
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Enhanced Specialist Participation
    The proposed rule describes how Specialists will be specifically 
allocated. Current Rule 1014(g)(vii)(B)(1)(c) describes Enhanced 
Specialist Participation as follows, ``For options subject to the 
Enhanced Specialist Participation as set forth in Rule 1014(g)(ii), the 
specialist shall be entitled to receive a number of contracts (not to 
exceed the size of the specialist's quote) that is the greater of the 
amount he would be entitled to receive pursuant to Rule 1014(g)(ii), or 
the amount he would otherwise receive pursuant to the operation of the 
algorithm. . . .''
    The Exchange notes that in proposed Rule 1089(a)(1)(B), the 
allocation described in current Rule 1014(g)(vii)(B)(1)(c) is being 
amended to permit the Specialist to receive the greater of the 3 
allocations proposed within Rule 1089(a)(1)(B)(i) as noted at the 
beginning of the Purpose section. Today, after all Public Customer 
orders have been fully executed, provided the Specialist's quote is at 
the better of the internal PBBO,\20\ excluding all-or-none orders \21\ 
that cannot be satisfied, or the NBBO the Specialist may be afforded a 
participation entitlement. As is the case today, the Specialist shall 
not be entitled to receive a number of contracts that is greater than 
the displayed size associated with such Specialist.\22\ The Exchange's 
current rule specifically notes that the Specialist is entitled to the 
Enhanced Specialist Enhancement if quoting at the disseminated 
price.\23\ The proposed rule adds more granularity to the current rule 
text with respect to the price at which the quote may execute. The 
Exchange's proposed rule provides, ``After all Public Customer orders 
have been fully executed, provided the Specialist's quote is at the 
better of the internal PBBO, excluding all-or-none orders that cannot 
be satisfied, or the NBBO, the Specialist may be afforded a 
participation entitlement.'' The Exchange notes that a quote will not 
be executed at a price that trades through another market or displayed 
at a price that would lock or cross another market.\24\ Certain Phlx 
contingency orders are non-displayed and are

[[Page 23598]]

exclusively: (i) All-or-None Orders and (ii) stop orders \25\ 
(collectively ``Non-Displayed Contingency Orders''). These Non-
Displayed Contingency Orders are not protected orders generally. An 
All-or-None Order would not be protected, unless the size of the 
contingency may be satisfied.\26\ Similar to other markets, a stop 
order would be unprotected until such order is triggered. The Exchange 
notes that these Non-Displayed Contingency Orders are distinct from 
other order types. The ``NBBO'' is the best Protected Bid and Protected 
Offer as defined in the Options Order Protection and Locked/Crossed 
Markets Plan; Protected Bids and Protected Offers that are displayed at 
a price but available on the Exchange at a better non-displayed price 
shall be included in the NBBO at their better non-displayed price for 
purposes of this rule.\27\ Rule 1083(o) defines a ``Protected Bid'' or 
``Protected Offer'' as a Bid or Offer in an options series, 
respectively, that: (i) is disseminated pursuant to the OPRA Plan; \28\ 
and (ii) is the Best Bid or Best Offer, respectively, displayed by an 
Eligible Exchange. Non-Displayed Contingency Orders are not 
disseminated to OPRA and not part of the displayed PBBO. The Exchange 
proposes to note that the Order Book may include a Non-Displayed 
Contingency Order with a price that is better than the displayed NBBO 
(``internal PBBO''). The Exchange therefore proposes to note that the 
Specialist's quote must be at the better of the internal PBBO or the 
NBBO. This rule text will make clear that the Specialist must quote at 
the best price. Further, with respect to locked and crossed markets, 
certain orders are repriced on Phlx because the order locks or crosses 
the ABBO.\29\ The System will automatically re-price that order from 
its one minimum price variation inferior to the original away best bid/
offer price to one minimum trading increment away from the new away 
best bid/offer price or its original limit price.\30\ Therefore, the 
Exchange may have a quote or order that will not be displayed at its 
actual better price.
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    \20\ The words ``internal PBBO'' refer to the actual better 
price of an order resting on Phlx's order book that is not 
displayed, but available for execution.
    \21\ An All-or None Order may only be submitted by a public 
customer. All-or-None Orders are non-displayed and non-routable. 
All-or-None Orders are executed in price-time priority among all 
public customer orders if the size contingency can be met. The 
Acceptable Trade Range protection in Rule 1099(a) is not applied to 
All-Or-None Orders. See Phlx Rule 1078.
    \22\ See proposed Rule 1089(a)(1)(B).
    \23\ Current Rule 1014(vii)(A) provides, ``If the specialist, an 
SQT, RSQT or a non-SQT ROT that has placed a limit order on the 
limit order book (``Phlx XL Participant'') is quoting alone at the 
disseminated price and their quote is not matched by another Phlx XL 
participant prior to execution, such Phlx XL Participant shall be 
entitled to receive a number of contracts up to the size associated 
with his/her quotation.''
    \24\ The Exchange notes that ISO orders may be routed pursuant 
to Rule 1083(h). An ``Intermarket Sweep Order'' or ``ISO'' order is 
defined within Phlx Rule 1083(h) as a limit order for an options 
series that meets the following requirements: (i) When routed to an 
Eligible Exchange, the order is identified as an ISO; (ii) 
Simultaneously with the routing of the order, one or more additional 
ISOs, as necessary, are routed to execute against the full displayed 
size of any Protected Bid, in the case of a limit order to sell, or 
any Protected Offer, in the case of a limit order to buy, for the 
options series with a price that is superior to the limit price of 
the ISO, with such additional orders also marked as ISOs.
    \25\ A stop order is a limit or market order to buy or sell at a 
limit price when a trade or quote on the Exchange for a particular 
option contract reaches a specified price. A stop-market or stop-
limit order shall not be triggered by a trade that is reported late 
or out of sequence or by a complex order trading with another 
complex order.
    \26\ A ``Protected Bid'' or ``Protected Offer'' means a Bid or 
Offer in an options series, respectively, that: (i) Is disseminated 
pursuant to the Options Price Reporting Authority (``OPRA'') Plan; 
and (ii) Is the Best Bid or Best Offer, respectively, displayed by 
an Eligible Exchange. See Phlx Rule 1083(o). Phlx Rule 1083 defines 
a ``Protected Bid'' or ``Protected Offer'' as a Bid or Offer in an 
options series, respectively, that: (i) is disseminated pursuant to 
the Options Price Reporting Authority (``OPRA'') Plan; and (ii) is 
the Best Bid or Best Offer, respectively, displayed by an Eligible 
Exchange. Once triggered, stop orders are treated as any other 
disseminated orders and would be displayed on OPRA.
    \27\ See Reg. NMS Rule 600(a)(42). National best bid and 
national best offer means, with respect to quotations for an NMS 
security, the best bid and best offer for such security that are 
calculated and disseminated on a current and continuing basis by a 
plan processor pursuant to an effective national market system plan; 
provided, that in the event two or more market centers transmit to 
the plan processor pursuant to such plan identical bids or offers 
for an NMS security, the best bid or best offer (as the case may be) 
shall be determined by ranking all such identical bids or offers (as 
the case may be) first by size (giving the highest ranking to the 
bid or offer associated with the largest size), and then by time 
(giving the highest ranking to the bid or offer received first in 
time).
    \28\ ``OPRA Plan'' means the plan filed with the SEC pursuant to 
Section 11Aa(1)(C)(iii) of the Act, approved by the SEC and declared 
effective as of January 22, 1976, as from time to time amended.
    \29\ ABBO shall mean the away best bid or offer.
    \30\ See Phlx Rule 1093(a)(iii)(A), (B)(4), (C)(4).
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    Specialist Participation Entitlements are applied throughout the 
trading day as well as during the Opening Process,\31\ except that, the 
entitlement for orders of 5 contracts or fewer shall only apply after 
the Opening Process and shall not apply to auctions. The allocation for 
Orders of 5 contracts or fewer will be separately described below. The 
Exchange is adding clarifying language to provide more detail to the 
current rule as to Enhanced Specialist Priority.
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    \31\ See proposed Rule 1089(a)(1)(D). The Opening Process is 
described within Rule 1017.
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    Proposed Rule 1089(a)(1)(B)(i) provides, that when the Specialist 
is at the same price as an SQT, RSQT or non-SQT ROT and the number of 
contracts is greater than 5, the Specialist shall receive the greater 
of: (i) 60% of remaining interest if there is one other ROT at that 
price; (ii) 40% of remaining interest if there are two other ROTs at 
that price; or 30% of remaining interest if there are more than two 
other ROTs at that price (the ``Specialist Participation 
Entitlement''); or the Specialist's Size Pro-Rata share under 
subparagraph (a)(1)(E) (``ROT Priority''); or the Directed ROT 
(``DROT'') participation entitlement, if any, set forth in subparagraph 
(a)(1)(C) to proposed Rule 1089 below (if the order is a Directed Order 
\32\ and the Specialist is also the DROT) (``DROT Priority'').
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    \32\ See note 12 above.
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    The addition of proposed Rule 1089(a)(1)(B)(i)(c), which describes 
allocation when a Specialist is also DROT, is a proposed change to the 
current practice; the remainder of the rule reflects current practice. 
Today, Rule 1014(g)(vii)(B)(1)(c) only provides that the Specialist 
could obtain the Specialist Participation Entitlement or the ROT 
Priority. With this proposal, if the Specialist is the DROT, the 
proposal provides that the Specialist would be entitled to the greater 
of; (1) the Enhanced Specialist Priority; (2) the allocation for Orders 
of 5 contracts or fewer (``Entitlement for Orders of 5 contracts or 
fewer); or (3) the DROT allocation. Specifically, this proposal would 
amend the current practice of allocating Orders of 5 contracts or 
fewer. Today, a Specialist is only entitled to Orders of 5 contracts or 
fewer when such order is received and the order is either not a 
Directed Order or is a Directed Order for 5 contracts or fewer, but the 
DROT is not quoting at the Exchange's price. If the DROT is also the 
Specialist, then the Specialist is only entitled to receive the DROT 
allocation of 40% rather than the full size of the 5 lot allocation.
    Finally, the Exchange proposes to note that, ``When the Specialist 
is also the DROT the Specialist/DROT does not participate in the ROT 
Priority at (a)(i)(E).'' This removal of volume is described in current 
Rule 1014(g)(viii)(B)(2).\33\ The Exchange notes that after the DROT 
Priority is applied, the System excludes the Specialist/DROT from the 
total number of contracts that is utilized (denominator) in calculating 
the ROT Priority in Rule 1089(a)(1)(E).
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    \33\ (2) (a) A Directed RSQT or SQT (where applicable) shall be 
allocated a number of contracts that is the greater of the 
proportion of the aggregate size at the NBBO associated with such 
Directed SQT or RSQT's quote, the specialist's quote, other SQT and 
RSQT quotes, and non-SQT ROT limit orders entered on the book via 
electronic interface at the disseminated price represented by the 
size of the Directed RSQT or SQT's quote at the NBBO, or (b) 40% of 
the remaining contracts. (c) Thereafter, the specialist, SQTs and 
RSQTs (excluding the Directed SQT or RSQT) quoting at the 
disseminated price, and non-SQT ROTs that have placed limit orders 
on the limit order book via electronic interface at the Exchange's 
disseminated price, shall be allocated a number of contracts 
according to the following formula:
    Equal percentage based on the Number of SQTs, RSQTs, specialist 
and Non-SQT ROTs quoting or with limit orders at BBO (Component A) + 
Pro rata percentage based on size of SQT, RSQT, specialist and Non-
SQT quotes and limit orders (Component B) x Remaining Order Size
    Where:
    Component A: The percentage to be used for Component A shall be 
an equal percentage, derived by dividing 100 by the number of SQTs, 
RSQTs (other than the Directed SQT or RSQT) specialist and non-SQTs 
quoting or with limit orders at the BBO.
    Component B: Size Pro Rata Allocation. The percentage to be used 
for Component B of the allocation algorithm formula is that 
percentage that the size of each SQT, RSQT RSQTs (other than the 
Directed SQT or RSQT), specialist or non-SQT ROT's quote or limit 
order at the best price represents relative to the total number of 
contracts in the disseminated quote.

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[[Page 23599]]

Example Number 1:
ABBO = 1.00-1.10
PBBO = 1.00-1.10

    Orders/Quotes entered into Trading System in the following order of 
receipt:

Specialist: 1.00 bid (10 contracts)-1.10 offer (15 contracts)
Public Customer A: 5 contracts offered at 1.10
Firm: 5 contracts offered at 1.10
ROT 1: 1.00 bid (10 contracts)-1.10 offer (20 contracts)
ROT 2: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
Public Customer B: 2 contracts offered at 1.10
Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Public Customer A trading 5 contracts, 
Public Customer B trading 2 contracts, Specialist trading 11 contracts 
(15/45 * 33 remaining), ROT1 trading 14 contracts (20/45 * 33 = 15.67 
rounded down), ROT2 trading 7 contracts (10/45 * 33 = 7.33 rounded 
down), and then Specialist receiving an additional 1 lot based on 
random assignment.
    Specialist Participation Entitlement would result in Public 
Customer A trading 5 contracts, Public Customer B trading 2 contracts, 
and Specialist trading 40% of remaining 33 contracts = 13 (13.2 rounded 
down); then Size Pro-Rata for remaining with ROT1 trading 13 contracts 
(20/30 * 20 = 13.33 rounded down) and ROT2 trading 6 contracts (10/30 * 
20 = 6.67 rounded down) and Specialist trading an additional 1 lot 
based on random assignment.
    The Specialist Participation Entitlement would prevail in this 
example, pursuant to proposed Rule 1089(A)(1)(ii)(1), because the 
Specialist Participation Enhancement receives greater allocation.
Example Number 2
ABBO = 1.00-1.10
PBBO = 1.00-1.10

    Orders/Quotes entered into Trading System in the following order of 
receipt:

ROT 1: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
Public Customer A: 10 contracts offered at 1.10
Firm: 15 offered at 1.10
Specialist: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
ROT 2: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
Public Customer B: 10 contracts offered at 1.10
Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Public Customer A trading 10 contracts, 
Public Customer B trading 10 contracts, Specialist trading 6 contracts 
(10/30 * 20 remaining rounded down), ROT1 trading 6 contracts (10/30 * 
20 = 6.67 rounded down), ROT2 trading 6 contracts (10/30 * 20 = 6.67 
rounded down), and then ROT1 and Specialist each receiving an 
additional 1 lot based on random assignment.
    Specialist Participation Entitlement would result in Public 
Customer A trading 10 contracts, Public Customer B trading 10 
contracts, and Specialist trading 40% of remaining 20 contracts = 8; 
then normal pro rata resumes with ROT1 and ROT2 each being allocated 6 
contracts.
    Pursuant to proposed Rule 1089(A)(1)(ii)(1), the Specialist 
Participation Entitlement would prevail in this example because the 
Specialist Participation Entitlement receives greater allocation.
Example Number 3
ABBO = 1.00-1.10
PBBO = 1.00-1.10

    Orders/Quotes entered into Trading System in the following order of 
receipt:

ROT 1: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
Firm: 25 contracts offered at 1.10
Specialist: 1.00 bid (10 contracts)-1.10 offer (20 contracts)
ROT 2: 1.00 bid (5 contracts)-1.10 offer (10 contracts)
ROT 3 1.00 bid (10 contracts)--1.10 offer (20 contracts)
Public Customer B: 2 contracts offered at 1.10
Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Public Customer B trading 2 contracts, 
ROT1 trading 6 contracts (10/60 * 38 = 6.33 rounded down), Specialist 
trading 12 (20/60 * 38 = 12.67 rounded down), ROT2 trading 6 contracts 
(10/60 * 38 = 6.33 rounded down), and ROT3 trading 12 contracts (20/60 
* 38 = 12.67 rounded down) and then ROT1 and Specialist each trading an 
additional 1 contract by random assignment.
    Specialist Participation Entitlement would result in Public 
Customer B trading 2 contracts and Specialist trading 30% of remaining 
38 contracts = 11 (11.4 rounded down); then normal pro rata resumes and 
ROT1 trades 6 contracts (10/40 * 27 = 6.75 rounded down), ROT2 trades 6 
(10/40 * 27 = 6.75 rounded down), and ROT3 trades 13 contracts (20/40 * 
27 = 13.5 rounded down) and ROT1 and Specialist each trade an 
additional 1 lot by random assignment.
    Pursuant to proposed Rule 1089(A)(1)(ii)(1), the Specialist 
Participation Entitlement would prevail in this example because the 
Specialist Participation Entitlement receives greater allocation.
Rounding
    Current Rule 1014(g)(vii) does not address the manner in which the 
System handles rounding. The Exchange proposes to memorialize the 
manner in which rounding will be handled in proposed Rule 
1089(a)(1)(C)(i). Phlx rounds down to the nearest integer with one 
exception which is described below.
    The Exchange proposes to state within proposed Rule 
1089(a)(1)(C)(i), with respect to a DROT, ``If rounding would result in 
an allocation of less than one contract, the DROT shall receive one 
contract.'' The Exchange notes that when allocating pursuant to 
proposed Rule 1089(a)(1)(C), a DROT is entitled to a percentage 
allocation based on the method described within proposed Rule 
1089(a)(1)(C)(i). As stated above, DROT volume does not participate in 
the ROT Priority at (a)(1)(E). The Exchange notes that for example if 
there is 1 contract to be allocated at 40% pursuant to proposed Rule 
1089(a)(1)(C)(i)(a) the DROT would receive a full contract because the 
result would yield a fractional amount of less than one contract. The 
Exchange notes that this provision only applies where the full 
allocation is less than one contract; thereby not applying to 
remainders. This aforementioned allocation of a full contract (1 
contract) when rounding yields a fractional amount of less than one 
contract only applies when allocating pursuant to DROT Priority and 
does not apply with respect to the Specialist Participation Entitlement 
or the Specialist entitlement for Orders of 5 contracts or fewer. The 
Exchange believes that the proposed rounding permits the DROT to 
receive an allocation where there is a possibility that a fractional 
share would otherwise yield no allocation to the DROT where the DROT 
was quoting at the NBBO. The Exchange believes that this methodology is 
consistent with the Act because the Exchange seeks to reward the 
Directed Market Maker for bringing order flow to the Exchange. The 
Exchange notes that while the Specialist will be rounded down, the 
Specialist is entitled to Orders of 5 Contracts or fewer, provided the 
Specialist is quoting at the NBBO and no higher interest is present. 
Also, the Specialist volume is entitled to participate in the ROT

[[Page 23600]]

Priority as proposed in Rule 1089(a)(1)(E).
    The Exchange believes that otherwise rounding down uniformly is 
consistent with the Act because it provides for the equitable 
allocation of contracts among the Exchange's market participants. The 
Exchange proposes to provide market participants with transparency as 
to the number of contracts that they are entitled to receive as the 
result of rounding. Further, the Exchange believes that this 
methodology produces an equitable outcome during allocation that is 
consistent with the protection of investors and the public interest 
because all market participants are aware of the methodology that will 
be utilized to calculate outcomes for allocation purposes.
Examples With Rounding and Remainders
Example Number 1
    Presume an order of 200 contracts is being allocated in the 
Exchange's Order Book. Allocation will first occur with Public Customer 
orders at the best price filled in time priority, since Public 
Customers always have priority on the Exchange. Presume there are 63 
contracts remaining after Public Customer orders are filled. Assume no 
Specialist is present thus ROTs would be allocated next pursuant to 
Rule 1089 in Size Pro-Rata fashion. Presume 5 ROTs are at the best 
price and the allocation of the remaining 63 contracts, after Public 
Customer orders have been satisfied, is as follows:

ROT A 1.10 (30) x 1.20 (30)--25.2 rounded down to 25 contracts
ROT B 1.10 (15) x 1.20 (15)--12.6 rounded down to 12 contracts
ROT C 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts
ROT D 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts
ROT E 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts

    After this Size Pro-Rata allocation, 2 contracts remain to be 
allocated. Presume for this trading day these ROTs are assigned the 
following order of assignment: First is ROT A, second is ROT B, third 
is ROT C, fourth is ROT D and fifth is ROT E. The 2 remaining contracts 
would be allocated as follows:

ROT A 1.10 (30) x 1.20 (30)--1 contract
ROT B 1.10 (15) x 1.20 (15)--1 contract
ROT C 1.10 (10) x 1.20 (10)--zero
ROT D 1.10 (10) x 1.20 (10)--zero
ROT E 1.10 (10) x 1.20 (10)--zero

    The next order which results in contracts remaining after the Size 
Pro-Rata allocation to ROTs will have such remaining contracts 
allocated one at a time beginning with ROT C since he was next in line 
based on that trading day's order of assignment, provided ROT C is at 
the best price with remaining interest.
Example Number 2
    Presume an order of 200 contracts is being allocated in the 
Exchange's Order Book. Presume all Public Customer orders and ROT 
interest that was at the best price have been filled and there are 9 
contracts remaining to be executed.
    Broker-dealers would be allocated next pursuant to Rule 1089 in a 
Size Pro-Rata fashion. Presume 3 broker-dealers are at the best price 
and their interest had arrived in the following order. The allocation 
of the remaining 9 contracts is as follows:

Broker-dealer C 1.10 (5) x 1.20 (5)--4.09 contracts rounded down to 4
Broker-dealer B 1.10 (3) x 1.20 (3)--2.45 contracts rounded down to 2
Broker-dealer A 1.10 (3) x 1.20 (3)--2.45 contracts rounded down to 2

    After this Size Pro-Rata allocation, there remains one contract to 
be allocated. This residual contract will be allocated in time priority 
as follows:

Broker-dealer C 1.10 (5) x 1.20 (5)--1 contract
Broker-dealer B 1.10 (3) x 1.20 (3)--zero
Broker-dealer A 1.10 (3) x 1.20 (3)--zero
Parity
    Current Rule 1014(g)(vii)(B) includes a parity concept. 
Specifically, current Rule 1014(g)(vii)(B) states, ``[q]uotations 
entered electronically by the specialist, an RSQT or an SQT that do not 
cause an order resting on the limit order book to become due for 
execution may be matched at any time by quotations entered 
electronically by the specialist and/or other SQTs and RSQTs, and by 
ROT limit orders and shall be deemed to be on parity, subject to the 
requirement that orders of controlled accounts must yield priority to 
customer orders as set forth in Rule 1014(g)(i)(A).'' The Exchange 
believes that the parity provision is unnecessary if the proposed rule 
is approved because the Exchange has drafted the rule to describe the 
order in which allocations will occur among different classes of market 
participants. The proposed rule is intended to provide a timeline 
approach to the manner in which the System will consider each group of 
market participant and allocate accordingly. The priority for ROTs and 
Specialists in current Rule 1014(g)(vii)(A) is described differently 
than proposed within proposed Rule 1089, however the priority treatment 
remains unchanged from how the System functions today. The outline of 
the new rule describes the manner in which the System will allocate 
orders to various market participants based on a Size Pro-Rata model. 
The Exchange notes that the concept of priority is detailed within each 
section when describing similarly situated market participants. The 
Exchange believes that removing the rule text related to parity from 
the proposed rule is consistent with the Act because while the Exchange 
is not specifically describing parity within the proposed rule, the 
Exchange will allocate based on parity as described in more detail 
within the specific allocations provided for within the proposed rule.
DROT Priority
    As noted herein, a Specialist or ROT who receives a Directed Order 
is a ``DROT'' with respect to that Directed Order.\34\ Today, the 
Exchange allocates Directed Orders first to Public Customers orders. 
After all Public Customer orders have been fully executed, upon receipt 
of a Directed Order pursuant to Rule 1068, provided the DROT's quote or 
market maker order is at the better of the internal PBBO excluding all-
or-none orders that cannot be satisfied, or the NBBO,\35\ the DROT

[[Page 23601]]

receives a participation entitlement (``DROT Priority''). DROT 
participation entitlements will be permitted only after the Opening 
Process. When the DROT is at the same price as an SQT, RSQT or non-SQT 
ROT (collectively ``ROTs''), pursuant to the DROT participation 
entitlement, the DROT shall receive, with respect to a Directed Order, 
the greater of: (a) 40% of remaining interest; or (b) the DROT's Size 
Pro-Rata share under subparagraph (a)(1)(E) (``ROT Priority''); or (c) 
the Specialist Participation Entitlement in subparagraph (a)(1)(B), if 
the DROT is also the Specialist. When a DROT Priority is applied, the 
DROT does not participate in the ROT Priority at (a)(i)(E) as 
illustrated in example number 4 below as described in this proposal.
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    \34\ The term ``Directed Order'' means any order (other than a 
stop or stop-limit order as defined in Rule 1066) to buy or sell 
which has been directed to a particular Specialist, RSQT, or SQT by 
an Order Flow Provider, as defined below. To qualify as a Directed 
Order, an order must be delivered to the Exchange via the System. 
See Rule 1068(a)(i)(A). When the Exchange's disseminated price is 
the NBBO at the time of receipt of the Directed Order, and the 
Directed Specialist, SQT or RSQT is quoting at the Exchange's best 
price, the Directed Order shall be automatically executed and 
allocated in accordance with Rule 1014(g)(viii). See Rule 
1068(a)(ii). When the Exchange's disseminated price is the NBBO, and 
the quotation disseminated by the Directed Specialist, RSQT, or SQT 
on the opposite side of the market from the Directed Order is 
inferior to the NBBO at the time of receipt of the Directed Order, 
the Directed Order shall be automatically executed and allocated to 
those quotations and orders at the NBBO in accordance with Exchange 
Rule 1014(g)(vii). See Rule 1068(a)(iii). If the Exchange's 
disseminated price is not the NBBO at the time of receipt of the 
Directed Order, the Directed Order shall be handled in accordance 
with Exchange rules. See Rule 1068(a)(iv).
    \35\ The ``NBBO'' is the best Protected Bid and Protected Offer 
as defined in the Options Order Protection and Locked/Crossed 
Markets Plan; Protected Bids and Protected Offers that are displayed 
at a price but available on the Exchange at a better non-displayed 
price shall be included in the NBBO at their better non-displayed 
price for purposes of this rule. See Reg. NMS Rule 600(a)(42). 
National best bid and national best offer means, with respect to 
quotations for an NMS security, the best bid and best offer for such 
security that are calculated and disseminated on a current and 
continuing basis by a plan processor pursuant to an effective 
national market system plan; provided, that in the event two or more 
market centers transmit to the plan processor pursuant to such plan 
identical bids or offers for an NMS security, the best bid or best 
offer (as the case may be) shall be determined by ranking all such 
identical bids or offers (as the case may be) first by size (giving 
the highest ranking to the bid or offer associated with the largest 
size), and then by time (giving the highest ranking to the bid or 
offer received first in time).
---------------------------------------------------------------------------

    Current Rule 1014(g)(viii) describes the manner in which Directed 
Orders are allocated. Directed Orders (as defined in Rule 
1080(l)(i)(A)) other than Directed Complex Orders that are executed 
electronically shall be automatically allocated as follows:

    (A) First, to customer limit orders resting on the limit order 
book at the execution price. (B) Thereafter, contracts remaining in 
the Directed Order, if any, shall be allocated automatically as 
follows: (1) The Directed Specialist (where applicable), shall be 
allocated a number of contracts that is the greater of: (a) the 
proportion of the aggregate size at the NBBO associated with such 
Directed Specialist's quote, SQT and RSQT quotes, and non-SQT ROT 
limit orders entered on the book at the disseminated price 
represented by the size of the Directed Specialist's quote; (b) the 
Enhanced Specialist Participation as described in Rule 1014(g)(ii); 
or (c) 40% of the remaining contracts.
* * * * *
    (2) (a) A Directed RSQT or SQT (where applicable) shall be 
allocated a number of contracts that is the greater of the 
proportion of the aggregate size at the NBBO associated with such 
Directed SQT or RSQT's quote, the specialist's quote, other SQT and 
RSQT quotes, and non- SQT ROT limit orders entered on the book via 
electronic interface at the disseminated price represented by the 
size of the Directed RSQT or SQT's quote at the NBBO, or (b) 40% of 
the remaining contracts.

    As is the case today, if there are multiple quotes or orders \36\ 
for the same DROT at the same price \37\ which are at the better of the 
internal PBBO, excluding all-or-none orders that cannot be satisfied, 
or the NBBO when the Directed Order is received, the DROT participation 
entitlement applies only to the DROT quote or order which has the 
highest priority.\38\ The DROT quote or order that received the 
Directed Order may not receive any further allocation of the Directed 
Order, except as described in the ROT Priority section within proposed 
Rule 1080(a)(1)(E). If rounding would result in an allocation of less 
than one contract, the DROT shall receive one contract.
---------------------------------------------------------------------------

    \36\ A member may have multiple DROT quotes or orders submitted 
into the System.
    \37\ There may be multiple DROTs within the same member 
organization, for example multiple SQTs or RSQTs at Firm A.
    \38\ Orders are time-stamped and quotes receive an order 
assignment for that trading day.
---------------------------------------------------------------------------

    As is the case today, if the DROT Priority is not awarded at the 
time of receipt of the Directed Order pursuant to Rule 1063, no DROT 
priority will apply and the order will be handled as though it were not 
a Directed Order for the remainder of the life of the order.\39\ The 
Exchange is not amending the DROT Priority. The proposed rule text 
reflects current practice. As is the case today, under no circumstances 
would the DROT quote receive an allocation of greater than 40% of an 
order at a price at which they receive a directed entitlement.
---------------------------------------------------------------------------

    \39\ See Phlx Rule 1068(a)(iv).
---------------------------------------------------------------------------

    Below are some examples of DROT Participation Entitlement under 
Size Pro-Rata Algorithm. Examples 1 through 3 below illustrate the 
manner in which a DROT will be allocated pursuant to the Size Pro-Rata 
model.
Example Number 1
Assume a Specialist is assigned and the DROT is not the Specialist.

ABBO = 1.00-1.10
PBBO = 1.00-1.10 comprised of the following in order of receipt:
    Specialist: 1.00 (10)-1.10 (15)
    Public Customer A: 5 offered at 1.10
    Firm: 5 offered at 1.10
    DROT: 1.00 (10)-1.10 (20)
    ROT1: 1.00 (10)-1.10 (10)
    Public Customer B: 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts

    Determination of Allocation:
    Size Pro-Rata would result in Public Customer A trading 5, Public 
Customer B trading 2, DROT trading 14 contracts due to rounding 
down(20/45 * 33), Specialist trading 11 due to rounding down (15/25 * 
19) ROT1 trading 7 (10/25 * 19), and then Specialist receiving the 
residual 1 lot based on random assignment.
    DROT Priority would result in Public Customer A trading 5, Public 
Customer B trading 2, and DROT trading 40% of remaining 33 = 13 (13.2 
rounded down); then normal Size Pro-Rata for remaining with the 
Specialist trading 12 (15/25 * 20) and ROT1 trading 8 (10/25 * 20).
    The Specialist Participation Entitlement would not be calculated 
since the Specialist is not the DROT.
    In this example, the Size Pro-Rata allocation would prevail since 
the DROT would receive the greater allocation this way.
Example Number 2
    Assume that no Specialist is present.

ABBO = 1.00-1.10
PBBO = 1.00-1.10
    DROT: 1.00 (10)-1.10 (15)
    Public Customer A: 5 offered at 1.10
    Firm: 5 offered at 1.10
    ROT1: 1.00 (10)-1.10 (20)
    ROT2: 1.00 (10)-1.10 (10)
    Public Customer B: 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts

    Determination of Allocation:
    Size Pro-Rata would result in Public Customer A trading 5, Public 
Customer B trading 2, DROT trading 11 (15/45 * 33 remaining), ROT1 
trading 14 (20/30 * 22 = 14.67 rounded down), ROT2 trading 7 (10/30 * 
22 = 7.33 rounded down), and the DROT receiving the residual 1 lot 
based on random assignment.
    DROT Priority would result in Public Customer A trading 5, Public 
Customer B trading 2, and DROT trading 40% of remaining 33 = 13 (13.2 
rounded down); then normal Size Pro-Rata for remaining with ROT1 
trading 13 (20/30 * 20 = 13.33 rounded down) and ROT2 trading 6 (10/30 
* 20 = 6.67 rounded down), and the DROT receiving the residual 1 lot 
based on random assignment.
    The Specialist Participation Entitlement would not be calculated 
since the Specialist is not the DROT.
    In this example, the DROT Priority would prevail since the DROT 
would receive the greater allocation this way.
Example Number 3
    Assume that the DROT is also the Specialist.

ABBO = 1.00-1.10
PBBO = 1.00-1.10 comprised of the following in order of receipt:
    DROT/Specialist: 1.00 (10)-1.10 (15)
    Public Customer A: 5 offered at 1.10
    Firm: 5 offered at 1.10
    ROT1: 1.00 (10)--1.10 (30)
    Public Customer B: 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts

    Determination of Allocation:

[[Page 23602]]

    Size Pro-Rata would result in Public Customer A trading 5, Public 
Customer B trading 2, DROT/Specialist trading 11 (15/45 * 33 
remaining), ROT1 trading 22 remaining contracts.
    DROT Priority would result in Public Customer A trading 5, Public 
Customer B trading 2, and DROT/Specialist trading 40% of remaining 33 = 
13 (13.2 rounded down); then Size Pro-Rata for remaining with ROT1 
trading full size of 20.
    The Specialist Participation Entitlement would result in Public 
Customer A trading 5, Public Customer B trading 2, and DROT/Specialist 
entitled to 60% of remaining 33 = 19 (19.8 rounded down) but capped at 
his size of 15 thus trading 15; then normal Size Pro-Rata for remaining 
with ROT1 trading 18.
    In this example, the Specialist Participation Entitlement would 
prevail since the DROT is the Specialist and would receive a greater 
allocation this way.
Example Number 4
    Assume that the DROT is also the Specialist.
    Scenario 3:

ABBO = 1.00 - 1.10
PBBO = 1.00 - 1.10 comprised of the following in order of receipt:
    ROT1: 31 contracts offered at 1.10
    ROT2: 7 contracts offered at 1.10
    DROT: 51 contracts offered at 1.10
Contra-side Directed Order to pay 1.10 for 63 contracts
DROT gets Size Pro Rata allocation of 36 contracts (51/89 of 63 = 36.1 
rounded down [better than 40% Directed/Specialist allocation = 25.2 
contracts])
(ROT1 gets 31/38 of 27 = 22.02 rounded down to 22)
ROT2 gets 4 contracts (7/38 of 27 = 4.97 rounds down to 4)
Odd lot of 1 contract goes to whoever is 1st in odd lot priority

    In this example, the DROT received the Size Pro Rata allocation, 
which was the greater of the entitlements pursuant to proposed Rule 
1089(a)(1)(C). The DROT volume would be excluded from ROT priority in 
1089(a)(1)(E).
Entitlement for Orders of 5 Contracts or Fewer
    Current Rule 1014(g)(vii)(B)(1)(a) contains the following language 
for Orders of 5 contracts or fewer:

orders for 5 contracts or fewer shall be allocated first to the 
specialist, provided, however, that on a quarterly basis, the 
Exchange will evaluate what percentage of the volume executed on the 
Exchange is comprised of orders for 5 contracts or fewer allocated 
to specialists, and will reduce the size of the orders included in 
this provision if such percentage is over 25%. In order to be 
entitled to receive the 5 contract or fewer order preference set 
forth in this sub-paragraph (B)(1)(a), the specialist must be 
quoting at the Exchange's disseminated price, and shall not be 
entitled to receive a number of contracts that is greater than the 
size that is associated with its quote. If the specialist is not 
quoting at the Exchange's disseminated price at the time of 
execution, orders for 5 contracts or fewer shall be allocated to 
Phlx XL Participants on parity as set forth in paragraph (b) below.

    The provision for Orders of 5 contracts or fewer is carried over 
into new proposed Rule 1089(a)(1)(D). The Exchange proposes to provide 
the Entitlement for Orders of 5 contracts or fewer shall be allocated 
to the Specialist as described below. The allocation may only apply 
after the Opening Process and shall not apply to auctions. A Specialist 
is not entitled to receive a number of contracts that is greater than 
the size that is associated with its quote. On a quarterly basis, the 
Exchange will evaluate what percentage of the volume executed on the 
Exchange is comprised of orders for 5 contracts or fewer allocated to 
Specialists, and will reduce the size of the orders included in this 
provision if such percentage is over 25%.\40\
---------------------------------------------------------------------------

    \40\ The Exchange monitors the percentage of the volume for 
Orders of 5 contracts or fewer executed on the Exchange on a 
quarterly basis.

    (i) A Specialist is entitled to priority with respect to Orders 
of 5 contracts or fewer, including when the Specialist is also the 
DROT, if the Specialist has a quote at the better of the internal 
PBBO, excluding all-or-none orders that cannot be satisfied, or the 
NBBO, with no other Public Customer or DROT interest with a higher 
priority.
    (ii) If the Specialist's quote is at the better of the internal 
PBBO, excluding all-or-none orders that cannot be satisfied, or the 
NBBO, with other Public Customer (including when the Specialist is 
also the DROT) or other DROT interest with a higher priority at the 
time of execution, a Specialist is not entitled to priority with 
respect to Orders of 5 contracts or fewer, however the Specialist is 
eligible to receive such contracts pursuant to Rule 1089(a)(1)(E); 
thereafter orders will be allocated pursuant to Rule 1089(a)(1)(F).

    In order to be entitled to receive Orders for 5 contracts or fewer, 
the Specialist's quote must be at the better of the internal PBBO, 
excluding all-or-none orders that cannot be satisfied, or the NBBO with 
no other Public Customer or DROT interest which has a higher priority. 
If the Specialist is quoting at the better of the internal PBBO, 
excluding all-or-none orders that cannot be satisfied, or the NBBO with 
other Public Customer or DROT interest present which has a higher 
priority at the time of execution, a Specialist is not entitled to 
priority with respect to Orders of 5 contracts or fewer, however the 
Specialist is eligible to receive such contracts pursuant to ROT 
Priority as described in Rule 1089(a)(1)(E), thereafter orders will be 
allocated pursuant to Rule 1089(a)(1)(F).
    With this proposal, the Specialist would be entitled to the entire 
allocation of the Order of 5 contracts or fewer where the Specialist is 
also the DROT and the Specialist receives the Directed Order and has a 
quote at the best price (described as the better of the internal PBBO 
or the NBBO) at the time the Directed Order was received. This means 
that no other interest, including Public Customer or DROT interest is 
present with a higher priority, if the Specialist is to receive the 
allocation. If, for example, a Public Customer is resting at the NBBO 
at the time of execution, a Specialist is not entitled to priority with 
respect to Orders of 5 contracts or fewer. The Exchange believes that 
this proposed change is consistent with the Act because the Specialist 
will not be entitled to priority with respect to allocation of Orders 
of 5 contracts or fewer because there is interest present with a higher 
priority or because the Specialist is not quoting at the NBBO. In these 
situations, the Specialist will receive the ROT Priority, and be 
treated on par with other ROTs, pursuant to proposed Rule 
1089(a)(1)(E). This Entitlement for Orders of 5 contracts or fewer 
shall only apply after the Opening Process and shall not apply to 
auctions.\41\
---------------------------------------------------------------------------

    \41\ For example, the Exchange's PIXL auction and the Opening 
Process would not be subject to proposed Rule 1089(A)(1)(ii)(2). The 
Opening Process is explained in Phlx Rule 1017.
---------------------------------------------------------------------------

Elimination of Current Rule Text
    Current Rule 1014(g)(vii)(B)(1)(b) provides that:

    Respecting orders for greater than 5 contracts (regardless of 
whether the specialist is quoting at the Exchange's disseminated 
price), or orders for 5 contracts or fewer when the specialist is 
not quoting at the Exchange's disseminated price, inbound electronic 
orders shall be allocated pursuant to the following allocation 
algorithm:

[[Page 23603]]

[GRAPHIC] [TIFF OMITTED] TN22MY19.036

Where:

Component A: The percentage to be used for Component A shall be an 
equal percentage, derived by dividing 100 by the number of Phlx XL 
participants quoting at the BBO.
Component B: Size Pro Rata Allocation. The percentage to be used for 
Component B of the allocation algorithm formula is that percentage 
that the size of each Phlx XL Participant's quote at the best price 
represents relative to the total number of contracts in the 
disseminated quote.
Final Weighting: The final weighting formula for equity options, 
which shall be determined by a three-member special committee of the 
Board of Directors, chaired by the President of the Exchange, and 
two Directors (the ``Special Committee''), and apply uniformly 
across all equity options, shall be a weighted average of the 
percentages derived for Components A and B multiplied by the size of 
the incoming order. Initially, the weighting of components A and B 
shall be equal, represented mathematically by the formula: 
(Component A Percentage + Component B Percentage)/2) * incoming 
order size.
The final weighting formula for index options and options on 
Exchange Traded Fund Shares (as defined in Rule 1000(b)(42) shall be 
established by the Special Committee. The final weighting formula 
for options on U.S. dollar-settled foreign currency options shall be 
established by a three- member special committee of the Board of 
Directors, chaired by the President of the Exchange, and two 
Governors. The final weighting formula may vary by product. Changes 
made to the percentage weightings of Components A and B shall be 
announced to the membership on the Exchange's website at least one 
day before implementation of the change.

    The Exchange proposes to replace the formula described within Rule 
1014(g)(vii)(B)(1)(b) with a more streamlined description of the manner 
in which interest is allocated, and the sequence of that allocation 
within the System. At this time, the Exchange proposes to eliminate the 
formula, the weighting process and the ability to determine values for 
the weighting and simply state that it will apply a Size Pro-Rata 
execution algorithm to electronic orders.\42\ The Exchange notes that 
the method in which Phlx applies Size Pro-Rata allocation is not 
changing, only the manner in which this allocation is described in the 
rule text. Today, the Exchange utilizes a calculation to describe what 
the Exchange seeks to express today within proposed Rule 1089. Today, 
all resting orders and quotes in the order book are prioritized 
according to price. If there are two or more resting orders or quotes 
at the same price, the System allocates contracts from an incoming 
order or quote to resting orders and quotes proportionally according to 
size, based on the total number of contracts available and to be 
executed at that price. Proposed Rule 1089 describes the how interest 
is allocated among market participants and the manner in which 
allocation occurs. The Exchange's current rule does not order the rule 
as a timeline to explain the order in which allocation is occurring. 
Also, specificity is lacking in the current rule, which the Exchange is 
proposing to add within proposed Rule 1089.
---------------------------------------------------------------------------

    \42\ Phlx offers both an electronic and floor model for the 
execution of options transactions. Floor transactions are subject to 
Phlx Rule 1014(g)(v).
---------------------------------------------------------------------------

    Today, as noted above, Directed Orders are first allocated to 
Public Customers, then to the Directed Specialist as specified in Rule 
1014(g)(viii)(A) and (B).\43\ The Exchange today applies a Size Pro-
Rata execution algorithm to electronic orders, as described herein, 
other than Public Customers, including for Directed Orders. Currently, 
Rule 1014(g)(viii)(B)(1) and (2) describes the allocation algorithm 
utilizing a formula to explain the manner in which SQTs and RSQTs 
quoting at the disseminated price, and non-SQT ROTs that have placed 
limit orders on the limit order book via electronic interface at the 
Exchange's disseminated price shall be allocated contracts:
---------------------------------------------------------------------------

    \43\ Phlx Rule 1014(g)(viii)(B) currently states that after 
Public Customer limit orders resting on the book are allocated, the 
contracts remaining in the Directed Order, if any, shall be 
allocated automatically as follows: (1) The Directed Specialist 
(where applicable), shall be allocated a number of contracts that is 
the greater of: (a) The proportion of the aggregate size at the NBBO 
associated with such Directed Specialist's quote, SQT and RSQT 
quotes, and non-SQT ROT limit orders entered on the book at the 
disseminated price represented by the size of the Directed 
Specialist's quote; (b) the Enhanced Specialist Participation as 
described in Rule 1014(g)(ii); or (c) 40% of the remaining 
contracts.

Equal percentage based on the Number of SQTs, RSQTs and Non-SQT ROTs 
quoting or with limit orders at BBO (Component A)+ Pro rata percentage 
based on size of SQT, RSQT and Non-SQT quotes and limit orders 
---------------------------------------------------------------------------
(Component B) x Remaining Order Size

    Current Rule 1014(g)(viii)(B)(1) and (2) describes the weighting. 
The Exchange proposes to eliminate this formula and process for setting 
the final weighting and instead utilize the allocation rule text 
described herein, which the Exchange believes provides more clarity and 
consistency to the manner in which the allocation method is described 
for Directed Orders.
ROT Priority
    Current Rule 1014(g)(vii)(A) provides that ``if the specialist, an 
SQT, RSQT or a non-SQT ROT that has placed a limit order on the limit 
order book (``Phlx XL Participant'') is quoting alone at the 
disseminated price and their quote is not matched by another Phlx XL 
participant prior to execution, such Phlx XL Participant shall be 
entitled to receive a number of contracts up to the size associated 
with his/her quotation.''
    The Exchange notes that it is not amending the manner in which ROTs 
are allocated. Proposed Rule 1089(a)(1)(E) describes ROT Priority. 
After all Public Customer orders have been fully executed at a given 
price, provided the Public Customer order is an executable order, and 
Specialist Participation Entitlement or DROT Priority are applied, if 
applicable, remaining ROT interest shall have priority over all other 
orders at the same price. If there are two or more ROT quotes or orders 
for the same options series at the same price, those shall be executed 
based on the Size Pro-Rata execution algorithm. As noted herein, the 
Exchange would not include DROT volume if the DROT Priority applied.
Odd Lot Allocation
    The Exchange proposes to indicate the manner in which remaining 
contracts are allocated among market participants within proposed Rule

[[Page 23604]]

1080(a)(1)(F). The Odd Lot Allocation is not codified in the current 
rule. The Exchange proposes to describe the handling of odd lots by 
stating that remaining contracts shall be allocated among equally 
priced ROTs, by random assignment of ROTs, each trading day in 
accordance with the trading day's order assignment, provided the ROT is 
at the price at which the order is being traded. Specifically, the 
Exchange proposes to state, if there are contracts remaining after ROT 
Priority is applied, such contracts shall be allocated by randomly 
assigning all ROTs (including the Specialist or DROT) an order of 
allocation each trading day, and allocating orders, quotes and sweeps 
in accordance with the trading day's order assignment, provided the 
ROT, DROT or Specialist is at the best price at which the order, quote 
or sweep is being traded.\44\
---------------------------------------------------------------------------

    \44\ Phlx has a random approach for allocating remainders to 
ROTs.
---------------------------------------------------------------------------

    Specifically, with respect to the proposed new text regarding Odd 
Lot Allocation, the Exchange utilizes a round robin approach to the 
allocation. This allocation methodology for ROTs exists today on Phlx. 
Rule text similar to that proposed herein is codified within the Price 
Improvement XL \45\ or ``PIXL'' rule to describe this approach.\46\ If 
remaining shares result from the allocation of simple interest among 
equally priced ROTs, remaining shares are allocated by daily random 
assignments of ROTs. Each ROT is assigned an order of allocation, each 
trading day. Trading interest is allocated in accordance with the 
trading day's order assignment, provided the ROT is at the best price 
at which the order, quote or sweep is being traded. The assignment 
continues throughout the trading day for each allocation, picking up 
where it dropped off from the last allocation, provided the ROT is 
entitled to an allocation. There is no new priority being introduced, 
rather the Exchange is allocating remaining contracts to ROTs after ROT 
Priority is applied pursuant to proposed Rule 1089(a)(1)(E) before 
considering other remaining interest of lower priority pursuant to 
proposed Rule 1089(a)(1)(G).
---------------------------------------------------------------------------

    \45\ PIXL\SM\ is the Exchange's price improvement mechanism 
known as Price Improvement XL or PIXL. See Phlx Rule 1087.
    \46\ PIXL rules provides, ``. . .Where the allocation of 
contracts results in remaining amounts, the number of contracts to 
be allocated shall be rounded down to the nearest integer. If 
rounding would result in an allocation of less than one contract, 
then one contract will be allocated to the Initiating Member only if 
the Initiating Member did not otherwise receive an allocation. If 
there are contracts remaining, such contracts shall be allocated for 
simple interest after rounding by randomly assigning all ROTs an 
order of allocation each trading day, and allocating orders, quotes 
and sweeps in accordance with the trading day's order assignment, 
provided the ROT is at the best price at which the order, quote or 
sweep is being traded, except with respect to Complex Orders, which 
allocation is described in Phlx Rule 1098. In the event that there 
are remaining contracts to be allocated for interest after rounding, 
such remaining contacts will be allocated in time priority, provided 
the off-floor broker-dealers are at the best price at which the 
order is being traded. Remaining shares will be allocated in time 
priority for Complex Orders . . .'' See Phlx Rule 1087(b)(5)(B)(vi).
---------------------------------------------------------------------------

    The Exchange believes that this method results in a fair and 
equitable allocation of contracts to these market participants because 
each trading day the Exchange creates a new order of assignment to 
allocate ROTs and that order provides an independent method to assign 
evenly among ROTs. Also, each trading day that assignment changes so 
that no one ROT would have the ability to receive a greater allocation 
than another ROT. The Exchange believes that the allocation of odd lots 
among ROTs is consistent with the Act because it provides for the 
equitable allocation of contracts among the Exchange's market 
participants. Specifically, with respect to the allocation method for 
odd lots for ROTs, this random assignment is basically a round robin 
approach to the allocation. The Exchange believes that this method 
results in a fair and equitable allocation of contracts to these market 
participants because each trading day the Exchange creates a new order 
of assignment to allocate ROTs and that order provides an independent 
method to assign evenly among ROTs. Also, each trading day that 
assignment changes so that no one ROT would have the ability to receive 
a greater allocation than another ROT. The Exchange believes that its 
assignment method is not subject to gaming since it is random and 
therefore complies with the Act because it is aimed at the protection 
of investors. Also, this rule change will provide market participants 
with transparency as to the number of contracts that they are entitled 
to receive as the result of the allocation of odd lots.
All Other Remaining Interest
    Current Rule 1014(g)(vii)(B)(1)(d) provides, with respect to 
Broker-Dealer Orders: \47\

    \47\ As this rule applies to electronic allocations, the 
Exchange proposes to change references to ``Off Floor Broker 
Dealers'' to simply ``Broker Dealers.''
---------------------------------------------------------------------------

    If any contracts remain to be allocated after the Phlx XL 
Participants have received their respective allocations, off-floor 
broker-dealers (as defined in Rule 1080(b)(i)(C)) that have placed 
limit orders on the limit order book which represent the Exchange's 
disseminated price shall be entitled to receive a number of 
contracts that is the proportion of the aggregate size associated 
with off-floor broker-dealer limit orders on the limit order book at 
the disseminated price represented by the size of the limit order 
they have placed on the limit order book. Such off-floor broker-
dealers shall not be entitled to receive a number of contracts that 
is greater than the size that is associated with each such limit 
order.

    Proposed Rule 1089(a)(1)(G) provides, with respect to all other 
remaining interest, if there are contracts remaining after all ROT 
interest has been fully executed, such contracts shall be executed 
based on the Size Pro-Rata execution algorithm. In the event that there 
are remaining contracts to be allocated for interest after rounding, 
which includes orders of all remaining market participants, such 
remaining contracts will be allocated in time priority provided the 
interest is at the best price at which the order is being traded. This 
provision would apply to any remaining market participant that has not 
been previously allocated pursuant to proposed Rule 1089(a)(1)(A)-(F). 
This practice of allocation is not being amended; rather the rule text 
is being amended to make the current practice clear.
    The Exchange believes that this proposed new text that addresses 
allocation of remaining contracts, which is being applied uniformly to 
all remaining market participants, is consistent with the Act because 
it provides for the equitable allocation of contracts among the 
Exchange's market participants of similar priority. This method is 
consistent with the Act because it relies simply on time priority, an 
accepted method of allocation utilized by many options exchange to 
prioritize orders.
    Below are examples representing consecutive executions and 
allocations within the Order Book that demonstrate rounding and the Odd 
Lot Allocation of remaining shares.
Example Number 1
    Presume an order of 200 contracts is being allocated in the 
Exchange's Order Book. Allocation will first occur with Public Customer 
orders at the best price filled in time priority, since Public 
Customers always have priority on the Exchange. Presume there are 63 
contracts remaining after Public Customer orders are filled. ROTs would 
be allocated next in Size Pro-Rata fashion. Presume 5 ROTs are at the 
best price and the allocation of the remaining 63 contracts, after 
Public Customer orders have been satisfied, is as follows:


[[Page 23605]]


ROT A 1.10(30) x 1.20 (30)--25.2 rounded down to 25 contracts
ROT B 1.10(15) x 1.20 (15)--12.6 rounded down to 12 contracts
ROT C 1.10(10) x 1.20 (10)--8.4 rounded down to 8 contracts
ROT D 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts
ROT E 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts

    After this Size Pro-Rata allocation, 2 contracts remain to be 
allocated. Presume for this trading day these ROTs are assigned the 
following order of assignment: First is ROT A, second is ROT B, third 
is ROT C, fourth is ROT D and fifth is ROT E. The 2 remaining contracts 
would be allocated as follows:

ROT A 1.10(30) x 1.20 (30)--1 contract
ROT B 1.10(15) x 1.20 (15)--1 contract
ROT C 1.10(10) x 1.20 (10)--zero
ROT D 1.10 (10) x 1.20 (10)--zero
ROT E 1.10 (10) x 1.20 (10)--zero

    The next order which results in contracts remaining after the Size 
Pro-Rata allocation to ROTs will have such remaining contracts 
allocated one at a time beginning with ROT C since he was next in line 
based on that trading day's order of assignment, provided ROT C is at 
the best price with remaining interest.
Example Number 2
    Presume an order of 200 contracts is being allocated in the 
Exchange's Order Book. Presume all Public Customer orders and ROT 
interest that was at the best price have been filled and there are 9 
contracts remaining to be executed.
    Remaining interest would be allocated next in a Size Pro-Rata 
fashion. Presume 3 broker-dealers are at the best price and their 
interest had arrived in the following order. The allocation of the 
remaining 9 contracts is as follows:

Broker-dealer C 1.10 (5) x 1.20 (5)--4.09 contracts rounded down to 4
Broker-dealer B 1.10 (3) x 1.20 (3)--2.45 contracts rounded down to 2
Broker-dealer A 1.10 (3) x 1.20 (3)--2.45 contracts rounded down to 2

    After this Size Pro-Rata allocation, there remains one contract to 
be allocated. This residual contract will be allocated in time priority 
as follows:

Broker-dealer C 1.10 (5) x 1.20 (5)--1 contract
Broker-dealer B 1.10 (3) x 1.20 (3)--zero
Broker-dealer A 1.10 (3) x 1.20 (3)--zero

    Finally, the Exchange proposes to note at proposed Rule 1089(a)(2), 
``A market maker is entitled only to an Enhanced Specialist Allocation 
pursuant to Rule 1089(a)(1)(B) or the Entitlement for Orders of 5 
contracts or fewer pursuant to Rule 1089(a)(1)(D) on a quote or the 
DROT Priority pursuant to Rule 1089(a)(1)(C) on a quote or market maker 
order.'' The Exchange notes that Specialists submit quotes at the NBBO 
to be allocated the Enhanced Specialist Allocation pursuant to proposed 
Rule 1089(a)(1)(B) or the Entitlement for Orders of 5 contracts or 
fewer pursuant to Rule 1089(a)(1)(D), while a DROT may submit either a 
quote or market maker order at the NBBO to be entitled to DROT Priority 
pursuant to proposed Rule 1089(a)(1)(C).\48\ The Exchange believes the 
proposed rule will make clear what type of interest may receive an 
enhanced allocation.
---------------------------------------------------------------------------

    \48\ This includes orders of market makers in options series in 
which the market maker is assigned on Phlx.
---------------------------------------------------------------------------

Other Sections Being Eliminated
    Rule 1014(g)(vii)(B)(1)(e) provides, ``No Phlx XL Participant shall 
be entitled to receive a number of contracts that is greater than the 
size that is associated with their quotation or limit order.'' This 
concept is expressed within proposed Rule 1089 throughout the proposed 
rule text rather than in a lone standing rule. The Exchange believes 
that this additional language is no longer necessary because this 
concept is embedded in the new proposed language.
    Rule 1014(g)(vii)(B)(2) entitled ``No Split-Price Executions,'' 
provides, ``If the size associated with a market order or an electronic 
quotation to be executed is received for a greater number of contracts 
than the Exchange's disseminated size, the portion of such an order or 
quotation executed automatically at the Exchange's disseminated size 
shall be allocated automatically in accordance with Rule 1014(g)(vii). 
Contracts remaining in such an order shall be represented by the 
specialist and handled in accordance with Exchange Rules.'' The 
Exchange notes that this language is obsolete and not in effect today. 
The Exchange does not permit any manual handling of orders; rather the 
orders will be allocated the same as all other trading interest. The 
Exchange believes that it is consistent with the Act and the protection 
of investors and the public interest to eliminate this obsolete 
language to provide clarity to members as to the manner in which the 
System allocates trades.
    Current Rule 1014(g)(vii)(B)(3) provides, ``Notwithstanding the 
first sentence of Rule 1014(g)(i), neither Rule 119(a)-(d) and (f), nor 
Rule 120 (insofar as it incorporates those provisions by reference) 
shall apply to the allocation of automatically executed trades.'' The 
Exchange notes that Rules 119 and 120 will be disconnected from the 
electronic allocation model. The Exchange is proposing to create a new 
Rule 1089 for electronic allocation, as compared to floor allocation. 
Proposed Phlx Rule 1089 will not rely on concepts of controlled 
accounts or parity and therefore the application to Rules 119 and 120 
is unnecessary. The proposed Rule 1089 is structured to indicate the 
manner in which market participants will be allocated in reference to 
each other in a more streamlined manner. The Exchange believes that 
deleting this rule text is consistent with the Act, specifically the 
protection of investors and the public interest because this rule text 
does not serve to describe in a clear manner the method in which the 
Exchange would allocate electronic transactions.
Cross-References
    The Exchange is proposing to amend the references to Rule 1014 in 
Rule 1082, Commentary .02 and .03 to update the references to the new 
proposed rule.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \49\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \50\ 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, in general to protect investors and the public 
interest, by providing more specificity within proposed Rule 1089 
regarding the manner in which the Exchange allocates. The Exchange's 
proposal seeks to protect investors and the public interest by 
providing greater transparency as to the sequence in which allocation 
occurs as it relates to various market participants. The Exchange is 
memorializing its current practice within proposed new Rule 1089 with 
one amendment proposed herein.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78f(b).
    \50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Entitlement for Orders of 5 Contracts or Fewer
    The Exchange's proposed amendment to permit the Specialist, who is 
also the DROT, to be allocated the entire Order of 5 contracts or 
fewer, provided the Specialist has a quote at the better of the 
internal PBBO, excluding all-or-none orders that cannot be satisfied, 
or the NBBO, with no other Public Customer or DROT interest with a 
higher priority,

[[Page 23606]]

is consistent with the Act. As is the case today, the Specialist, who 
is also the DROT must continue to have (1) a Directed Order directed to 
him/herself; (2) a quote or order at the better of the internal PBBO 
(excluding all-or-none orders which cannot be satisfied) or NBBO at the 
time the Directed Order was received; and (3) no other interest, 
including Public Customer and DROT interest, present with a higher 
priority. The proposed amendment continues to provide Public Customers 
with the highest priority in that the Specialist would not be entitled 
to the allocation of Orders of 5 contracts or fewer in the event that 
other interest was present with a higher priority. If, for example, a 
Public Customer order is resting at the NBBO at the time of execution, 
a Specialist is not entitled to priority with respect to Orders of 5 
contracts or fewer. The Exchange believes that this proposed change is 
consistent with the Act because the Specialist will not be entitled to 
priority with respect to Orders of 5 lot allocation if there is 
interest of higher priority resting at the Exchange's disseminated best 
price or if the Specialist is not quoting at the NBBO. In these 
situations, the Specialist would be entitled to be allocated pursuant 
to ROT Priority on par with other ROTs, pursuant to proposed Rule 
1089(a)(1)(E).
    The Exchange notes that Specialists, unlike other market 
participants, have obligations in the marketplace. Specialists are 
required to submit Valid Width Quotes during the Opening Process 
pursuant to Phlx Rule 1017. Further, Specialists have heightened 
quoting obligations pursuant to Phlx Rule 1081. In contrast to 
Specialists, DROTs have no quoting obligations during the Opening 
Process and must quote with a heightened Directed SQT/RSQT quoting 
obligation only during the period in which they receive a Directed 
Order in any option in which they are assigned and shall be considered 
a Directed SQT or Directed RSQT until such time as they are no longer 
directed pursuant to Rule 1081(c)(ii)(C).

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 does not believe 
the proposed change will cause any unnecessary burden on intra-market 
competition because all Exchange members may apply to be either 
Specialists or ROTs and, presuming all requirements are met, would be 
entitled to receive participation entitlements provided they receive 
direct orders and those orders are executed by those DROTs.
    With respect to rounding, all rounding is down to the nearest 
integer, unless otherwise specified. The Exchange does not believe that 
the proposal to round all remaining contracts down to the nearest 
integer imposes an undue burden on competition because the Exchange 
will uniformly round in this matter.
    With respect to allocating remaining contracts, the Exchange does 
not believe that the proposal to allocate remaining contracts for ROTs 
by random assignment creates an undue burden on competition because the 
method results in a fair and equitable allocation of shares to these 
market participants. The Exchange does not believe that allocating 
remaining contracts to off-floor broker-dealers in time priority 
creates an undue burden on competition because the method will be 
applied uniformly among these participants.
    Permitting Specialists to receive an allocation over ROTs when the 
Specialist is the DROT does not create an undue burden on competition 
because today Phlx permits the Specialist to be ahead of ROTs generally 
within its allocation method. Specialists have higher quoting 
obligations as compared to ROTs (90% versus 60% of the series in which 
assigned).\51\
---------------------------------------------------------------------------

    \51\ See Phlx Rule 1081.
---------------------------------------------------------------------------

    The Exchange's proposed amendment to permit the Specialist, who is 
also the DROT, to be allocated the entire Order of 5 contracts or fewer 
provided the Specialist's quote is at the better of the internal PBBO 
(excluding all-or-none orders which cannot be satisfied) or NBBO does 
not create an undue burden on inter-market competition because the 
ability to become a Directed ROT is available to all market maker 
participants including Specialists. Further, the Exchange does not 
believe the proposal will negatively impact quote competition on Phlx 
and create an unfair burden on competition. Directed Orders are 
allocated based on the competitive bidding of market participants. A 
DROT must have a quote or market maker order at the NBBO at the time 
the order is received to capitalize on the DROT entitlement. Also, 
other options markets permit this type of allocation today.\52\ This 
proposal does not create an undue burden on intra-market competition 
because all members may compete for order flow by contributing to price 
and size discovery for the entire market. Further, Specialists must 
enter orders that assume the risk of trading with all participants at 
NBBO without knowing the details of the particular order. Specialists 
are incentivized to aggressively quote at the NBBO with this proposal 
to the benefit of all market participants, while maintaining their 
quoting obligations.\53\ The Exchange believes the proposal will 
encourage greater order flow to be sent to the Exchange through 
Directed Orders and that this increased order flow will benefit all 
market participants on Phlx. The Exchange is not limiting the class of 
market participants that receive a Directed Order, any ROT may apply to 
receive Directed Orders.
---------------------------------------------------------------------------

    \52\ See BX Chapter VI, Section 10.
    \53\ See Phlx Rule 1081.
---------------------------------------------------------------------------

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-2019-20 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-2019-20. This file

[[Page 23607]]

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/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-2019-20 and 
should be submitted on or before June 12, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10643 Filed 5-21-19; 8:45 am]
 BILLING CODE 8011-01-P