
[Federal Register Volume 78, Number 52 (Monday, March 18, 2013)]
[Notices]
[Pages 16723-16726]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06150]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69118; File No. SR-Phlx-2013-20]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt New 
Exchange Rule 1047(f) and (g) for Limit Up/Limit Down Situations

March 12, 2013.
    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 February 28, 2013, 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 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: (i) Adopt new Exchange Rule 1047(f) to 
provide for how the Exchange proposes to treat orders in response to 
the Regulation NMS Plan to Address Extraordinary Market Volatility; and 
(ii) adopt new Exchange Rule 1047(g) to codify that the Exchange shall 
halt trading in all options overlying NMS stocks when the equities 
markets initiate a market-wide trading halt due to extraordinary market 
volatility.
    The text of the proposed rule change is below; proposed new 
language is in italics.
* * * * *

Rule 1047. Trading Rotations, Halts and Suspensions

    (a)-(e) No change.
    (f) This paragraph shall be in effect during a pilot period to 
coincide with the pilot period for the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS, as it may be 
amended from time to time (``LULD Plan''). Capitalized terms used in 
this paragraph shall have the same meaning as provided for in the LULD 
Plan. During a Limit State and Straddle State in the Underlying NMS 
stock:
    (i) The Exchange will not open an affected option.

[[Page 16724]]

    (ii) After the opening, the Exchange shall reject Market Orders, as 
defined in Rule 1066(a) (including Complex Orders, as defined in Rule 
1080.08), and shall notify Participants of the reason for such 
rejection. The Exchange shall cancel Complex Orders that are Market 
Orders residing in the Phlx XL System if they are about to be executed 
by the Phlx XL System.
    (iii) After the opening, the Exchange shall elect Stop Orders, as 
defined in Rule 1066(c)(1), and, because they become Market Orders, 
shall cancel them back and notify Participants of the reason for such 
rejection.
    (g) The Exchange shall halt trading in all options whenever the 
equities markets initiate a market-wide trading halt commonly known as 
a circuit breaker in response to extraordinary market conditions.
    * * * Commentary:
    .01-.03 No change.
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes: (i) To adopt Exchange Rule 1047(f) to 
provide for how the Exchange will treat orders in response to the 
Regulation NMS Plan to Address Extraordinary Market Volatility (the 
``Plan''), which is applicable to all NMS stocks, as defined in 
Regulation NMS Rule 600(b)(47); and (ii) to adopt Exchange Rule 1047(g) 
to codify that the Exchange shall halt trading in all options when the 
equities markets initiate a market-wide trading halt due to 
extraordinary market volatility. The Exchange proposes to adopt new 
Rule 1047(f) for a pilot period that coincides with the pilot period 
for the Plan.
Background
    Since May 6, 2010, when the markets experienced excessive 
volatility in an abbreviated time period, i.e., the ``flash crash,'' 
the equities exchanges and the Financial Industry Regulatory Authority 
(``FINRA'') have implemented market-wide measures designed to restore 
investor confidence by reducing the potential for excessive market 
volatility. The measures adopted include pilot plans for stock-by-stock 
trading pauses,\3\ related changes to the equities market clearly 
erroneous execution rules,\4\ and more stringent equities market maker 
quoting requirements.\5\ On May 31, 2012, the Commission approved the 
Plan, as amended, on a one-year pilot basis.\6\ In addition, the 
Commission approved changes to the equities market-wide circuit breaker 
rules on a pilot basis to coincide with the pilot period for the 
Plan.\7\
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    \3\ See e.g., Exchange Rule 3100.
    \4\ See e.g., Exchange Rule 3312.
    \5\ See e.g., NASDAQ Rule 4613.
    \6\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving 
the Plan on a Pilot Basis).
    \7\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
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    The Plan is designed to prevent trades in individual NMS stocks 
from occurring outside of specified Price Bands.\8\ As described more 
fully below, the requirements of the Plan are coupled with Trading 
Pauses to accommodate more fundamental price moves (as opposed to 
erroneous trades or momentary gaps in liquidity). All trading centers 
in NMS stocks, including both those operated by Participants and those 
operated by members of Participants, are required to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with the requirements specified in the 
Plan.
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    \8\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
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    As set forth in more detail in the Plan, Price Bands consisting of 
a Lower Price Band and an Upper Price Band for each NMS Stock are 
calculated by the Processors.\9\ When the National Best Bid (Offer) is 
below (above) the Lower (Upper) Price Band, the Processors shall 
disseminate such National Best Bid (Offer) with an appropriate flag 
identifying it as unexecutable. When the National Best Bid (Offer) is 
equal to the Upper (Lower) Price Band, the Processors shall distribute 
such National Best Bid (Offer) with an appropriate flag identifying it 
as a Limit State Quotation.\10\ All trading centers in NMS stocks must 
maintain written policies and procedures that are reasonably designed 
to prevent the display of offers below the Lower Price Band and bids 
above the Upper Price Band for NMS stocks. Notwithstanding this 
requirement, the Processor shall display an offer below the Lower Price 
Band or a bid above the Upper Price Band, but with a flag that it is 
non-executable. Such bids or offers shall not be included in the 
National Best Bid or National Best Offer calculations.\11\ Trading in 
an NMS stock immediately enters a Limit State if the National Best 
Offer (Bid) equals but does not cross the Lower (Upper) Price Band.\12\ 
Trading for an NMS stock exits a Limit State if, within 15 seconds of 
entering the Limit State, all Limit State Quotations were executed or 
canceled in their entirety. If the market does not exit a Limit State 
within 15 seconds, then the Primary Listing Exchange would declare a 
five-minute trading pause pursuant to Section VII of the Plan, which 
would be applicable to all markets trading the security.\13\ In 
addition, the Plan defines a Straddle State as when the National Best 
Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS 
stock is not in a Limit State. For example, assume the Lower Price Band 
for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS 
stock would be in a Straddle State if the National Best Bid were below 
$9.50, and therefore unexecutable, and the National Best Offer were 
above $9.50 (including a National Best Offer that could be above 
$10.50). If an NMS stock is in a Straddle State and trading in that 
stock deviates from normal trading characteristics, the Primary Listing 
Exchange may declare a trading pause for that NMS stock if such Trading 
Pause would support the Plan's goal to address extraordinary market 
volatility.
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    \9\ See Section V(A) of the Plan.
    \10\ See Section VI(A) of the Plan.
    \11\ See Section VI(A)(3) of the Plan.
    \12\ See Section VI(B)(1) of the Plan.
    \13\ The primary listing market would declare a Trading Pause in 
an NMS stock; upon notification by the primary listing market, the 
Processor would disseminate this information to the public. No 
trades in that NMS stock could occur during the trading pause, but 
all bids and offers may be displayed. See Section VII(A) of the 
Plan.
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Proposed Rule 1047(f)
Openings
    The Exchange proposes to adopt new Exchange Rule 1047(f) to provide 
for how the Exchange shall treat orders and quotes in options overlying 
NMS stocks when the Plan is in effect. First, the Exchange proposes to 
adopt new

[[Page 16725]]

subparagraph (i) to provide for how the Exchange shall treat the 
opening rotation. The opening in an option will not commence in the 
event that the underlying NMS stock is open, but has entered into a 
Limit State or Straddle State. If this occurs, the opening will only 
commence and complete if the underlying NMS stock stays out of a Limit 
or Straddle State. Accordingly, new Rule 1047(f)(i) will provide that 
the Exchange will not open an affected option. As a result, if an 
opening process is occurring, it will cease and then start the opening 
process from the beginning once the Limit State or Straddle State is no 
longer occurring. If a Limit State or Straddle State occurs after an 
option opens, but during a Complex Order Strategy opening, the Complex 
Order Strategy opening will continue as long as the option remains 
open. This is consistent with the provisions of Rule 1047 that state 
that the Exchange will halt an option when the underlying security is 
subject to a regulatory halt.
Orders
    Second, the Exchange proposes to adopt provisions regarding the 
treatment of certain orders if the underlying NMS stock is in a Limit 
State or Straddle State. Whenever an NMS stock is in a Limit State or 
Straddle State, trading continues; however, there will not be a 
reliable price for a security to serve as a benchmark for the price of 
the option. For example, if the underlying NMS stock is in a Limit 
State, while trading in that stock continues, by being in a Limit 
State, there will be either cancellations or executions at that price, 
and if the Limit State is not resolved in 15 seconds, the NMS Stock 
will enter a Trading Pause. If an NMS stock is in a Straddle State, 
that means that there is either a National Best Bid or National Best 
Offer that is non-executable, which could result in limited price 
discovery in the underlying NMS stock. In addition to the lack of a 
reliable underlying reference price, the Exchange is concerned about 
the width of the markets and quality of the execution for market 
participants during a Limit State or Straddle State. While the Exchange 
recognizes the importance of continued trading in options overlying NMS 
stocks during Limit States and Straddle States, the Exchange believes 
that certain types of orders increase the risk of errors and poor 
executions and therefore should not be allowed during these times when 
there may not be a reliable underlying reference price, there may be a 
wide bid/ask quotation differential, and there may be lower trading 
liquidity in the options markets.
    Therefore, the Exchange proposes that if an NMS stock is in a Limit 
State or Straddle State, once the option has opened for trading, the 
Exchange shall reject all incoming Market Orders, as defined in Rule 
1066(a) (including Complex Orders, as defined in Rule 1080.08), and 
shall notify Participants of the reason for such rejection.\14\ Market 
orders residing in the Phlx XL System will be handled in the normal 
fashion under Exchange rules. The Exchange shall also cancel Complex 
Orders that are Market Orders residing in the Phlx XL System if they 
are about to be executed by the Phlx XL System.\15\ In addition, the 
Phlx XL System will elect Stop Orders \16\ if the underlying NMS stock 
is in a Straddle State or a Limit State, but, because they become 
Market Orders, shall cancel them back and notify Participants of the 
reason for such rejection. The Exchange believes that permitting these 
order types to execute when the underlying NMS stock is in a Limit 
State or Straddle State would add to the volatility in the options 
markets during times of extraordinary market volatility and could have 
the potential to lead to unwanted executions. The Exchange believes 
that adding certainty to the treatment of Market Orders and Stop Orders 
when the underlying NMS stock is in these situations should encourage 
market participants to continue to provide liquidity to the Exchange 
and thus promote a fair and orderly market.
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    \14\ Such orders will not be eligible for order re-entry 
pursuant to Rule 1082, and market orders being re-entered pursuant 
to this provision will be rejected as well.
    \15\ Pursuant to Rule 1080.08, Complex Orders can become 
executable after a COLA and during the COLA Timer.
    \16\ See Rule 1066(c)(1). Stop Orders when elected create a 
Market Order to buy or sell the option. In contrast, the Exchange is 
not proposing to prohibit the election of Stop Limit Orders. Stop 
Limit Orders when elected create a Limit Order to buy or sell the 
option at a specific price. See Rule 1066(c)(1). The Exchange 
believes that Stop Limit Orders do not raise the same risks during 
periods of extraordinary volatility, because, once elected, the 
associated limit orders would not race through the order book in the 
manner that an elected Market Order would.
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Proposed Rule 1047(g)
    The Exchange also proposes to adopt Rule 1047(g), which provides 
that the Exchange shall halt trading in all options whenever the 
equities markets initiate a market-wide trading halt commonly known as 
a circuit breaker in response to extraordinary market conditions. 
Although the Exchange's rules currently address a variety of situations 
involving halts, pauses and suspensions,\17\ the Exchange has 
determined to adopt a very specific rule to deal with circuit breaker-
related halts. The Exchange believes that this rule can be adopted on a 
permanent basis, even though the equities circuit breakers are subject 
to a pilot program, because the proposed rule refers to such circuit 
breakers generally.
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    \17\ For example, Rule 1047(e) addresses halting an option when 
trading in the underlying NMS stock is paused.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\18\ in general, and with 
Section 6(b)(5) of the Act,\19\ in particular, which requires that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest, 
because it should provide certainty about how options orders and trades 
will be handled during periods of extraordinary volatility in the 
underlying security. Specifically, under the proposal, market 
participants will be able to continue to trade options overlying 
securities that are in a Limit State or Straddle State, while 
addressing specific order types that are subject to added risks during 
such periods. The Exchange believes that the rejection of options 
Market Orders (including elected Stop Orders) should help to prevent 
executions that might occur at prices that have not been reliably 
formed, which should, in turn, protect, in particular, retail investors 
from executions of un-priced orders during times of significant 
volatility.
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    \18\ 15 U.S.C. 78f.
    \19\ 15 U.S.C. 78f(b)(5).
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    Accordingly, the Exchange believes that the proposed rule change is 
consistent with these requirements in that it should reduce the 
negative impacts of sudden, unanticipated volatility in individual 
options, and serve to preserve an orderly market in a transparent and 
uniform manner, enhance the price-discovery process, increase overall 
market confidence, and promote fair and orderly markets and the 
protection of investors.

[[Page 16726]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the proposal does not impose an intra-market burden on 
competition, because it will apply to all Options Participants. Nor 
will the proposal impose a burden on competition among the options 
exchanges, because, in addition to the vigorous competition for order 
flow among the options exchanges, the proposal addresses a regulatory 
situation common to all options exchanges. To the extent that market 
participants disagree with the particular approach taken by the 
Exchange herein, market participants can easily and readily direct 
order flow to competing venues. The Exchange believes this proposal for 
how to treat options openings and orders will not impose a burden on 
competition and will help provide certainty during periods of 
extraordinary volatility in an NMS stock.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \20\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of 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 such 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 under 
Section 19(b)(2)(B) of the Act \22\ to determine whether the proposed 
rule change should be approved or disapproved.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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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 No. SR-Phlx-2013-20 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 No. SR-Phlx-2013-20. 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, 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 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 No. SR-Phlx-2013-20 and should be 
submitted on or before April 8, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06150 Filed 3-15-13; 8:45 am]
BILLING CODE 8011-01-P


