
[Federal Register Volume 77, Number 27 (Thursday, February 9, 2012)]
[Notices]
[Pages 6828-6831]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2923]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66315; File No. SR-Phlx-2012-12]


 Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating To 
Exchange Disseminated Quotations

February 3, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on January 25, 2012, NASDAQ OMX 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 1082, Firm Quotations, 
by modifying Exchange Rules 1017, Openings in Options, and 1082, Firm 
Quotations, to describe the manner in which the PHLX XL[supreg] 
automated options trading system \3\ will disseminate quotations when 
(i) there is an ``Opening Imbalance'' (as described below) in a 
particular series, and (ii) there is a ``Quote Exhaust'' quote 
condition (as described below) present in a particular series.
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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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    In addition, the current rules describing the Exchange's 
disseminated quotations during an Opening Imbalance and a Quote Exhaust 
condition are subject to a pilot scheduled to expire February 29, 2012. 
The Exchange proposes to discontinue the pilot and to adopt the 
proposed new rules on a permanent basis.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

    In its filing with the Commission, the 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to establish a quote 
condition in which one side of an option quotation (bid or offer) 
disseminated by the Exchange will be designated as non-firm during an 
``Opening Imbalance'' or a ``Quote Exhaust'' while the opposite side of 
the market from the ``non-firm'' bid or offer remains firm for the 
Exchange's disseminated price and size. The proposed rule would not be 
effective on a pilot basis. The Exchange is proposing that this rule 
change would be effective on a permanent basis.\4\
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    \4\ The Exchange has previously indicated its intention to 
implement the non-firm bid or offer functionality. See, e.g., 
Securities Exchange Act Release No. 65670 (November 2, 2011), 76 FR 
69308 (November 8, 2011) (SR-Phlx-2011-144).
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Background
    In June, 2009, the Exchange added several significant enhancements 
to its automated options trading platform (now known as PHLX XL), and 
adopted rules to reflect those enhancements.\5\ As part of the system 
enhancements, the Exchange proposed to disseminate a ``non-firm'' quote 
condition on a bid or offer whose size is exhausted in certain 
situations. The non-exhausted side of the Exchange's disseminated 
quotation

[[Page 6829]]

would remain firm at its disseminated price up to its disseminated 
size. At the time, however, the Options Price Reporting Authority 
(``OPRA'') only disseminated option quotations for which both sides of 
the quotation were marked ``non-firm.'' OPRA did not have the ability 
to disseminate a ``non-firm'' condition for one side of a quotation 
while the other side of the quotation remained firm.
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    \5\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
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    Accordingly, the Exchange proposed, on a pilot basis, to 
disseminate quotations in such a circumstance with a (i) a bid price of 
$0.00, with a size of one contract if the remaining size is a seller, 
or (ii) an offer price of $200,000, with a size of one contract if the 
remaining size is a buyer.
    The Exchange subsequently modified the manner in which the PHLX XL 
system disseminated quotes when one side of the quote was exhausted but 
the opposite side still had marketable size at the disseminated price, 
as described in detail below.\6\
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    \6\ See Securities Exchange Act Release No. 63024 (September 30, 
2010), 75 FR 61799 (October 6, 2010) (SR-Phlx-2010-134).
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    On October 7, 2010, the U.S. options exchanges, as participants in 
the OPRA Plan, voted to make technological changes that would enable 
OPRA to support a one-sided non-firm quote condition. These 
technological changes presented the opportunity for OPRA and the 
participants to design, test, and deploy modifications to their 
systems, and to disseminate this quote condition to quotation vendors, 
that will support the one-sided non-firm quote condition.
    On November 9, 2010, OPRA submitted to the Commission, for 
immediate effectiveness, an amendment to the Plan for Reporting of 
Consolidated Options Last Sale Reports and Quotation Information (the 
``OPRA Plan'').\7\ The amendment made identical changes to Section 4.04 
of OPRA's Data Recipient Interface Specification and Section 4.15 of 
its Participant Interface Specification (both Specifications are 
collectively referred to herein as the ``OPRA Spec''), which govern the 
format in which options market information is input to and disseminated 
from the OPRA Processor, in order to add message type codes specifying 
that either the bid side or the offer side, but not both sides, of a 
quotation is not firm.\8\ OPRA also made a conforming change to 
Appendix D of the OPRA Spec describing Best Bid and Offer (BBO) 
calculations.
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    \7\ See Securities Exchange Act Release No. 63400 (November 30, 
2010), 75 FR 76058 (December 7, 2010) (SR-OPRA-2010-04).
    \8\ Specifically, a quote with a notation of ``X'' would 
indicate that the disseminated offer is not firm (and the 
disseminated bid is firm); a quote with a notation of ``Y'' would 
indicate that the disseminated bid is not firm (and the disseminated 
offer is firm).
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    Pursuant to the amendment to the OPRA Plan (and the conforming 
amendments cited above), the Exchange now proposes to adopt, on a 
permanent basis, rules describing the PHLX XL system's disseminated 
quotations during an Opening Imbalance and during a Quote Exhaust 
condition.
Opening Imbalance
    An Opening Imbalance occurs when all opening marketable size cannot 
be completely executed at or within an established Opening Quote Range 
(``OQR'') for the affected series.\9\ Currently, Exchange Rule 
1017(l)(vi)(C)(7) states that any unexecuted contracts from the opening 
imbalance not traded or routed are displayed in the Exchange quote at 
the opening price for a period not to exceed ten seconds. After such 
period, contracts that remain unexecuted are cancelled back to the 
entering participant, unless the member that submitted the original 
order has instructed the Exchange in writing to re-enter the remaining 
size, in which case the remaining size will be automatically submitted 
as a new order. During this display time period, the PHLX XL system 
disseminates a bid price of $0.00, with a size of one contract [sic] if 
the imbalance is a sell imbalance, or an offer price of $0.00, with a 
size of zero contracts if the imbalance is a buy imbalance.
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    \9\ Where there is an imbalance at the price at which the 
maximum number of contracts can trade that is also at or within the 
lowest quote bid and highest quote offer, the PHLX XL system will 
calculate an OQR for a particular series, outside of which the PHLX 
XL system will not execute. See Exchange Rule 1017(l)(iii) and (iv).
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    The Exchange proposes to amend Rule 1017(l)(vi)(C)(7) to reflect 
the new manner in which the Exchange will disseminate quotations during 
the Opening Imbalance display period. Specifically, during this display 
time period, the PHLX XL system will disseminate, on the opposite side 
of the market from remaining unexecuted contracts: (i) A non-firm bid 
for the price and size of the next available bid(s) on the Exchange if 
the imbalance is a sell imbalance, or (ii) a non-firm offer for the 
price and size of the next available offer(s) on the Exchange if the 
imbalance is a buy imbalance.\10\ The purpose of this provision is to 
indicate that the Exchange has exhausted all marketable interest, at or 
within the OQR, on one side of the market during the opening process 
yet has remaining unexecuted contracts on the opposite side of the 
market that are firm at the disseminated price and size.
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    \10\ If there are multiple bids or offers at the Exchange's next 
available price, the PHLX XL system will disseminate a bid or offer 
for the aggregate size on the Exchange at such price. See supra note 
8.
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Quote Exhaust
    Quote Exhaust occurs when the market at a particular price level on 
the Exchange includes a quote, and such market is exhausted by an 
inbound contra-side quote or order (``initiating quote or order''), and 
following such exhaustion, contracts remain to be executed from the 
initiating quote or order.\11\
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    \11\ See Exchange Rule 1082(a)(ii)(B)(3).
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    Rather than immediately executing at the next available price, the 
PHLX XL system employs a timer (a ``Quote Exhaust Timer''), not to 
exceed one second, in order to allow market participants to refresh 
their quotes. During the Quote Exhaust Timer, PHLX XL currently 
disseminates the ``Reference Price'' (the most recent execution price) 
for the remaining size, provided that such price does not lock an away 
market, in which case, the Exchange currently disseminates a bid and 
offer that is one Minimum Price Variation (``MPV'') from the away 
market price. During the Quote Exhaust Timer, the Exchange 
disseminates, on the opposite side of the market from the remaining 
contracts: (i) A bid price of $0.00, with a size of zero contracts if 
the remaining size is a seller, or (ii) an offer price of $0.00, with a 
size of zero contracts if the remaining size is a buyer.
    The Exchange proposes to amend Rules 1082(a)(ii)(B)(3)(b), 
1082(a)(ii)(B)(3)(g)(iv)(A)(3), 1082(a)(ii)(B)(3)(g)(iv)(A)(4), 
1082(a)(ii)(B)(3)(g)(iv)(B)(2), and 1082(a)(ii)(B)(3)(g)(iv)(C) to 
reflect the new manner in which the Exchange will disseminate 
quotations during a Quote Exhaust condition. Specifically, during Quote 
Exhaust, the PHLX XL system will disseminate, on the opposite side of 
the market from remaining unexecuted contracts: (i) A non-firm bid for 
the price and size of the next available bid(s) on the Exchange if the 
remaining size is a seller, or (ii) a non-firm offer for the price and 
size of the next available offer(s) on the Exchange if the remaining 
size is a buyer.\12\ The purpose of this provision is to indicate that 
the Exchange has exhausted all marketable quotations on one side of the 
market yet

[[Page 6830]]

has remaining unexecuted contracts on the opposite side of the market 
that are firm at the disseminated price and size.
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    \12\ Just as with an Opening Imbalance, if there are multiple 
bids or offers at the Exchange's next available price, the PHLX XL 
system will disseminate a bid or offer for the aggregate size on the 
Exchange at such price. See supra note 8.
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    Current Rule 1082(a)(ii)(B)(3)(g)(vi) describes what the PHLX XL 
system does if, after trading at the PHLX and/or routing, there are 
unexecuted contracts from the initiating order that are still 
marketable. In this situation, remaining contracts are posted for a 
period of time not to exceed 10 seconds and then cancelled after such 
period of time has elapsed, unless the member that submitted the 
original order has instructed the Exchange in writing to re-enter the 
remaining size, in which case the remaining size will be automatically 
submitted as a new order. Currently, during the up to 10 second time 
period, the Exchange disseminates, on the opposite side of the market 
from remaining unexecuted contracts: (i) A bid price of $0.00, with a 
size of zero contracts if the remaining size is a seller, or (ii) an 
offer price of $0.00, with a size of zero contracts if the remaining 
size is a buyer.
    The Exchange proposes to amend Rule 1082(a)(ii)(B)(3)(g)(vi) to 
reflect the new manner in which the Exchange will disseminate 
quotations during the up to 10 second time period. Specifically, during 
the up to 10 second time period, the PHLX XL system will disseminate, 
on the opposite side of the market from remaining unexecuted contracts: 
(i) A non-firm bid for the price and size of the next available bid(s) 
on the Exchange if the remaining size is a seller, or (ii) a non-firm 
offer for the price and size of the next available offer(s) on the 
Exchange if the remaining size is a buyer. The purpose of this 
provision is to indicate that the Exchange has exhausted all marketable 
quotations on one side of the market, yet has remaining unexecuted 
contracts on the opposite side of the market that are firm at the 
disseminated price and size.
Discontinuation of Current Pilot
    The current rules describing the Exchange's disseminated quotations 
during an Opening Imbalance and a Quote Exhaust condition are subject 
to a pilot scheduled to expire February 29, 2012. The Exchange proposes 
to discontinue the pilot and to adopt the proposed new rules on a 
permanent basis.
Implementation
    The Exchange intends to implement the proposed changes to Rules 
1017 and 1082 on March 1, 2012.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \14\ 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.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange further believes that the proposal is consistent with 
the SEC Quote Rule's provisions regarding non-firm quotations.\15\ 
Specifically, Rule 602(a)(3)(i) provides that if, at any time a 
national securities exchange is open for trading, the exchange 
determines, pursuant to rules approved by the Commission, that the 
level of trading activities or the existence of unusual market 
conditions is such that the exchange is incapable of collecting, 
processing, and making available to vendors the data for a subject 
security required to be made available in a manner that accurately 
reflects the current state of the market on such exchange, such 
exchange shall immediately notify all specified persons of that 
determination and, upon such notification, the exchange is relieved of 
its obligations under paragraphs (a)(1) and (2) of Rule 602 relating to 
collecting and disseminating quotations, subject to certain other 
provisions of Rule 602(a)(3).
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    \15\ See 17 CFR 242.602(a)(3)(i) and (ii).
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    By disseminating a non-firm bid (offer), together with a firm offer 
(bid) in certain situations delineated above, the Exchange believes 
that it is adequately communicating that it is non-firm on the affected 
side of the market in compliance with the Quote Rule.
    The proposed rule change promotes just and equitable principles of 
trade by informing investors that one side of the Exchange's 
disseminated quotation is exhausted and therefore non-firm, thus 
providing transparency to investors. This also removes impediments to 
and perfects the mechanism of a free and open market and a national 
market system by providing information to market participants who may 
be in the process of determining where to send their orders for 
execution. The proposed rule change protects investors and the public 
interest because it provides accurate information to the investing 
public concerning the Exchange's disseminated market.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) \17\ 
thereunder.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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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 public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2012-12 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission,

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100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2012-12. This file 
number should be included on the subject line if email is used.
    To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (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 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 offices 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-2012-12, and should be submitted on or before March 
1, 2012
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2923 Filed 2-8-12; 8:45 am]
BILLING CODE 8011-01-P


