
[Federal Register: August 30, 2010 (Volume 75, Number 167)]
[Notices]               
[Page 53008-53010]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30au10-131]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62759; File No. SR-Phlx-2010-111]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
a Change to the Automated Opening System

August 23, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on August 9, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 1017, Openings in Options, to 
reflect a system change to (i) modify the manner in which the PHLX 
XL[reg] automated options trading system \3\ calculates the Opening 
Quote Range for an options series during the automated opening process, 
and (ii) terminate the opening process when away markets become crossed 
during the opening process. A new opening process for the affected 
series would commence at the time the Away Best Bid/Offer (``ABBO'') is 
uncrossed.
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    \3\ This proposal refers to ``PHLX XL'' as the Exchange's 
automated options trading system. In May 2009 the Exchange enhanced 
the system and adopted corresponding rules referring to the system 
as ``Phlx XL II.'' See Securities Exchange Act Release No. 59995 
(May 28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). The 
Exchange intends to submit a separate technical proposed rule change 
that would change all references to the system from ``Phlx XL II'' 
to ``PHLX XL'' for branding purposes.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com, on the Commission's Web site 
at http://www.sec.gov, 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 self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to change the manner in 
which the PHLX XL[supreg] automated options trading system calculates 
the Opening Quote Range (``OQR'') in an options series during the 
automated opening process. The OQR is a price range outside of which 
the Exchange will not open an option series. The proposal also reflects 
new system functionality to state that if, at any point during the 
opening process the ABBO becomes crossed (e.g., 1.05 bid, 1.00 offer), 
the opening process will be terminated and the Exchange will not open 
the affected series. A new opening process for the affected series will 
commence at the time the ABBO is uncrossed.
OQR
    Currently, the PHLX XL system calculates the OQR for a particular 
series based upon the lowest quote bid on the Exchange and the highest 
quote offer on the Exchange among quotes that are compliant with the 
bid/ask differentials set forth in Rule 1014(c)(i)(A)(1)(a) (``valid 
width quotes''.) \4\ To determine the minimum value for the OQR, an 
amount, as defined in a table determined by the Exchange, is subtracted 
from the lowest quote bid. To determine the maximum value for the OQR, 
an amount, as defined in a table determined by the Exchange, is added 
to the highest quote offer. Quotes that are not valid width quotes and 
quotes that are outside of the OQR are not included in the Exchange's 
automated opening process.
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    \4\ Rule 1014(c)(i)(A)(1)(a) permits bid/ask differentials of no 
more than $.25 between the bid and the offer for each option 
contract for which the prevailing bid is less than $2; no more than 
$.40 where the prevailing bid is $2 or more but less than $5; no 
more than $.50 where the prevailing bid is $5 or more but less than 
$10; no more than $.80 where the prevailing bid is $10 or more but 
less than $20; and no more than $1 where the prevailing bid is $20 
or more, provided that, in the case of equity options, the bid/ask 
differentials stated above shall not apply to in-the-money series 
where the market for the underlying security is wider than the 
differentials set forth above. For such series, the bid/ask 
differentials may be as wide as the quotation for the underlying 
security on the primary market, or its decimal equivalent rounded up 
to the nearest minimum increment. The Exchange may establish 
differences other than the above for one or more series or classes 
of options.
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    The Exchange proposes to modify the PHLX XL system and Exchange 
Rule 1017(l) to reflect the new manner in which the PHLX XL system 
calculates the OQR under certain circumstances. The manner in which the 
PHLX XL system calculates the OQR will depend upon whether there is a 
valid ABBO on markets other than the PHLX.
    As stated above, the PHLX XL system currently calculates a lowest 
bid and highest offer to use as a reference price on which to calculate 
the OQR. Under the proposal, Rule 1017(l)(ii) would be modified to 
state that a highest bid and lowest offer will be used when there are 
opening quotes \5\ or orders on the Exchange that lock or cross each 
other and there is no imbalance \6\ at the Exchange's opening price. 
The purpose of this provision is to tighten the range of allowable 
opening prices and enable the system to open a series by using PHLX 
quotes when there are opening trades that will leave no imbalance.
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    \5\ The PHLX XL system will consider only opening valid width 
quotes on the Exchange in its determination of the highest quote bid 
and lowest quote offer.
    \6\ An ``imbalance'' occurs where there is unexecutable trading 
interest at a certain price. See Exchange Rule 1017(l)(ii)(A).
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    The PHLX XL system currently calculates the OQR without regard to 
away market(s) in the affected series. The Exchange proposes to modify 
this provision by enabling the PHLX XL system to consider the away 
market(s) in the affected series when calculating the OQR. Under the 
proposal, Rule 1017(l)(iii) would be modified to address the situation 
where there is an imbalance at the price at which the maximum number of 
contracts can trade that is also at or within the highest quote bid and 
lowest quote offer, and one or more away markets have disseminated 
opening quotes in the affected series. In this situation, the PHLX XL 
system will calculate an OQR based upon valid width quotes received by 
the Exchange and quotes that are disseminated by the away market(s).
    In this situation, to determine the minimum value for the OQR, an

[[Page 53009]]

amount, as defined in a table to be determined by the Exchange,\7\ will 
be subtracted from the highest quote bid among valid width quotes on 
the Exchange and on the away market(s). Under the current method, the 
minimum value of the OQR is determined by subtracting the amount in the 
table from the lowest bid on the Exchange only. To determine the 
maximum value for the OQR, an amount, as defined in a table to be 
determined by the Exchange, will be added to the lowest quote offer 
among valid width quotes on the Exchange and on the away market(s). 
Under the current method, the maximum value of the OQR is determined by 
adding the amount in the table to the highest bid on the Exchange only. 
This new method of calculating the OQR is intended to narrow the OQR, 
and to consider better-priced away markets' quotations in determining 
the reference price from which to calculate the OQR. The Exchange 
believes that this should result in higher quality executions at the 
opening of trading.
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    \7\ The Exchange maintains the OQR table on its Web site. 
Changes to the OQR table are communicated to members by way of an 
Options Trader Alert (``OTA'') posted on the Web site.
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    Proposed new Rule 1017(l)(iii)(A)(3) addresses the situation where 
there are away markets and the PHLX opening market is crossed or 
crosses away markets. If one or more away markets have disseminated 
opening quotes that are not crossed, and there are valid width quotes 
on the Exchange that cross each other or that cross away market quotes, 
the minimum value for the OQR will be the highest quote bid among 
quotes on away market(s). The maximum value for the OQR will be the 
lowest quote offer among quotes on away market(s). The purpose of this 
provision is to maintain market efficiency at the opening of trading 
when the PHLX market is crossed but there are away markets that the 
system can use as the OQR. The PHLX XL system will not add to the 
lowest away offer or subtract from the highest away bid in this 
situation in order to prevent an opening trade that would be through 
the ABBO.
    Proposed new Rule 1017(l)(iv) addresses the situation where there 
is an imbalance at the price at which the maximum number of contracts 
can trade that is also at or within the highest quote bid and lowest 
quote offer, and no away markets have disseminated opening quotes in 
the affected series.\8\ In this situation, to determine the minimum 
value for the OQR, an amount, as defined in a table to be determined by 
the Exchange, will be subtracted from the highest quote bid among valid 
width quotes on the Exchange only. To determine the maximum value for 
the OQR, an amount, as defined in a table to be determined by the 
Exchange, will be added to the lowest quote offer among valid width 
quotes on the Exchange only.
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    \8\ This condition could be due to system issues, order 
imbalances, and other factors that would cause an away market not to 
disseminate an opening quote. This section of the proposed rule 
would also apply to issues that are singly listed on PHLX, in which 
case there is no other market that could quote in the affected 
series.
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    Proposed new Rule 1017(l)(iv)(A)(3) addresses the situation where 
there is an imbalance and there are opening quotes on the Exchange that 
cross each other, and there is no away market in the affected series. 
In this situation, the minimum value for the OQR will be the lowest 
quote bid among valid width quotes on the Exchange, and the maximum 
value for the OQR will be the highest quote offer among valid width 
quotes on the Exchange. The purpose of this provision is to maintain 
market efficiency at the opening of trading when there is an imbalance, 
and when the PHLX market is crossed but there are no away markets that 
the system can consider as the OQR. The PHLX XL system will not add to 
the highest quote offer on the Exchange or subtract from the lowest 
quote bid on the Exchange in order to ensure that the OQR is as narrow 
as possible when there are opening quotes on the PHLX that cross each 
other.
Crossed ABBO During the Opening Process
    Proposed new Rule 1017(l)(ix) provides that if, at any point during 
the opening process the ABBO becomes crossed, the opening process will 
be terminated and the Exchange will not open the affected series. A new 
opening process for the affected series will commence at the time the 
ABBO is uncrossed. The purpose of this provision is to ensure that the 
PHLX XL system does not route contracts that cannot be executed on the 
PHLX to away markets that may be disseminating incorrect prices that 
cross another market, thus protecting investors in general from 
entering into executions at incorrect prices.
Technical Re-Numbering Amendment
    The Exchange proposes to re-number existing rules 1017(l)(iv)--
(vii) to reflect the insertion of new proposed Rule 1017(i)(iv). There 
are no proposed substantive amendments to these existing rules.
Deployment
    Although the proposed rule change is effective upon filing, the 
Exchange anticipates that it will deploy the new PHLX XL functionality 
described herein on or around September 15, 2010.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. Specifically, the Exchange believes that the proposal 
benefits customers by improving prices and market efficiency at the 
opening of trading.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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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.

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

    The proposed rule change effects a change in an existing order-
entry or trading system of a self-regulatory organization that: (i) 
Does not significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not have the effect of limiting the access to or 
availability of the system. Therefore, the proposal is effective upon 
filing pursuant to Section 19(b)(3)(A) \11\ of the Act and subparagraph 
(f)(5) of Rule 19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(5).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the

[[Page 53010]]

public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Act.

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 (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2010-111 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2010-111. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2010-111 and should be 
submitted on or before September 20, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-21473 Filed 8-27-10; 8:45 am]
BILLING CODE 8010-01-P

