
[Federal Register Volume 78, Number 71 (Friday, April 12, 2013)]
[Notices]
[Pages 22009-22010]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08557]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69332; File No. SR-Phlx-2013-21]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Approving, on an Accelerated Basis, Proposed Rule Change To Adopt New 
Exchange Rule 1047(f)(iv) Regarding Quoting Obligations

April 5, 2013.

I. Introduction

    On March 5, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1)\1\ of the Securities Exchange Act of 1934 
(``Act''),\2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to 
adopt new Exchange Rule 1047(f)(iv) regarding quoting obligations. The 
proposed rule change was published for comment in the Federal Register 
on March 13, 2013.\4\ The Commission received no comment letters on the 
proposal. This order approves the proposed rule change on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 69068 (March 7, 
2013), 78 FR 16001.
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II. Background

    On May 6, 2010, the U.S. equity markets experienced a severe 
disruption that, among other things, resulted in the prices of a large 
number of individual securities suddenly declining by significant 
amounts in a very short time period before suddenly reversing to prices 
consistent with their pre-decline levels.\5\ This severe price 
volatility led to a large number of trades being executed at 
temporarily depressed prices, including many that were more than 60% 
away from pre-decline prices. One response to the events of May 6, 
2010, was the development of the single-stock circuit breaker pilot 
program, which was implemented through a series of rule filings by the 
equity exchanges and by FINRA.\6\ The single-stock circuit breaker was 
designed to reduce extraordinary market volatility in NMS stocks by 
imposing a five-minute trading pause when a trade was executed at a 
price outside of a specified percentage threshold.\7\
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    \5\ The events of May 6 are described more fully in a joint 
report by the staffs of the Commodity Futures Trading Commission 
(``CFTC'') and the Commission. See Report of the Staffs of the CFTC 
and SEC to the Joint Advisory Committee on Emerging Regulatory 
Issues, ``Findings Regarding the Market Events of May 6, 2010,'' 
dated September 30, 2010, available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
    \6\ For further discussion on the development of the single-
stock circuit breaker pilot program, see Securities Exchange Act 
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) 
(``Limit Up-Limit Down Plan'' or ``Plan'').
    \7\ See Securities Exchange Act Release Nos. 62884 (September 
10, 2010), 75 FR 56618 (September 16, 2010) and Securities Exchange 
Act Release No. 62883 (September 10, 2010), 75 FR 56608 (September 
16, 2010) (SR-FINRA-2010-033) (describing the ``second stage'' of 
the single-stock circuit breaker pilot) and Securities Exchange Act 
Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011) 
(describing the ``third stage'' of the single-stock circuit breaker 
pilot).
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    To replace the single-stock circuit breaker pilot program, the 
equity exchanges filed a National Market System Plan \8\ pursuant to 
Section 11A of the Act,\9\ and Rule 608 thereunder,\10\ which featured 
a ``limit up-limit down'' mechanism (as amended, the ``Limit Up-Limit 
Down Plan'' or ``Plan'').
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    \8\ NYSE Euronext filed on behalf of New York Stock Exchange LLC 
(``NYSE''), NYSE Amex LLC (``NYSE Amex''), and NYSE Arca, Inc. 
(``NYSE Arca''), and the parties to the proposed National Market 
System Plan, BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago 
Board Options Exchange, Incorporated (``CBOE''), Chicago Stock 
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial 
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX 
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange, 
Inc. (collectively with NYSE, NYSE MKT, and NYSE Arca, the 
``Participants''). On May 14, 2012, NYSE Amex filed a proposed rule 
change on an immediately effective basis to change its name to NYSE 
MKT LLC (``NYSE MKT''). See Securities Exchange Act Release No. 
67037 (May 21, 2012) (SR-NYSEAmex-2012-32).
    \9\ 15 U.S.C. 78k-1.
    \10\ 17 CFR 242.608.
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    The Plan sets forth requirements that are designed to prevent 
trades in individual NMS stocks from occurring outside of the specified 
price bands. The price bands consist of a lower price band and an upper 
price band for each NMS stock. When one side of the market for an 
individual security is outside the applicable price band, i.e., the 
National Best Bid is below the Lower Price Band, or the National Best 
Offer is above the Upper Price band, the Processors \11\ are required 
to disseminate such National Best Bid or National Best Offer \12\ with 
a flag identifying that quote as non-executable. When the other side of 
the market reaches the applicable price band, i.e., the National Best 
Offer reaches the lower price band, or the National Best Bid reaches 
the upper price band, the market for an individual security enters a 
15-second Limit State, and the Processors are required disseminate such 
National Best Offer or National Best Bid with an appropriate flag 
identifying it as a Limit State Quotation. Trading in that stock would 
exit the 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 will declare a five-minute trading pause, 
which is applicable to all markets trading the security.
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    \11\ As used in the Plan, the Processor refers to the single 
plan processor responsible for the consolidation of information for 
an NMS Stock pursuant to Rule 603(b) of Regulation NMS under the 
Exchange Act. See id.
    \12\ ``National Best Bid'' and ``National Best Offer'' has the 
meaning provided in Rule 600(b)(42) of Regulation NMS under the 
Exchange Act. See id.
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    The Primary Listing Exchange may also declare a trading pause when 
the stock is in a Straddle State, i.e., the National Best Bid (Offer) 
is below (above) the Lower (Upper) Price Band and the NMS Stock is not 
in a Limit State. In order to declare a trading pause in this scenario, 
the Primary Listing Exchange must determine that trading in that stock 
deviates from normal trading characteristics such that declaring a 
trading pause would support the Plan's goal to address extraordinary 
market volatility.\13\
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    \13\ As set forth in more detail in the Plan, all trading 
centers would be required to establish, maintain, and enforce 
written policies and procedures reasonably designed to prevent the 
display of offers below the Lower Price Band and bids above the 
Upper Price Band for an NMS Stock. The Processors would be able to 
disseminate an offer below the Lower Price Band or bid above the 
Upper Price Band that nevertheless may be inadvertently submitted 
despite such reasonable policies and procedures, but with an 
appropriate flag identifying it as non-executable; such bid or offer 
would not be included in National Best Bid or National Best Offer 
calculations. In addition, all trading centers would be required to 
develop, maintain, and enforce policies and procedures reasonably 
designed to prevent trades at prices outside the price bands, with 
the exception of single-priced opening, reopening, and closing 
transactions on the Primary Listing Exchange.

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[[Page 22010]]

    On May 31, 2012, the Commission approved the Plan as a one-year 
pilot, which shall be implemented in two phases.\14\ The first phase of 
the Plan shall be implemented beginning April 8, 2013.\15\
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    \14\ See ``Limit Up-Limit Down Plan,'' supra note 6. See also 
Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR 
13113 (February 26, 2013) (Second Amendment to Limit Up-Limit Down 
Plan by BATS Exchange, Inc., BATS Y- Exchange, Inc., Chicago Board 
Options Exchange, Inc., et al.) and Securities Exchange Act Release 
No. 69062 (March 7, 2013), 78 FR 15757 (March 12, 2013) (Third 
Amendment to Limit Up-Limit Down Plan by BATS Exchange, Inc., BATS 
Y- Exchange, Inc., Chicago Board Options Exchange, Inc., et al.)
    \15\ See ``Second Amendment to Limit Up-Limit Down Plan,'' supra 
note 14.
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III. Description of the Proposal

    In light of and in connection with the Limit Up-Limit Down Plan, 
the Exchange is adopting Rule 1047(f)(iv) to provide that the Exchange 
shall exclude the amount of time an NMS stock underlying a Phlx option 
is in a Limit State or Straddle State from the total amount of time in 
the trading day when calculating the percentage of the trading day 
specialists and Registered Options Traders (``ROTs'') are required to 
quote.
    Currently, under Rule 1014(b)(ii)(D)(1) and (2), Phlx requires: (i) 
that a Streaming Quote Trader (``SQT'') and a Remote Streaming Quote 
Trader (``RQST'') to be responsible for quoting two-sided markets in 
not less than 60% of the series in which such SQT or RSQT is assigned; 
(ii) a Directed SQT (``DSQT'') or a Directed DRSQT (``DRSQT'') to be 
responsible for quoting two-sided markets in the lesser of 99% of the 
series listed on the Exchange or 100% of the series listed on the 
Exchange minus one call-put pair, in each case in at least 60% of the 
options in which such DSQT or DRSQT is assigned; and (iii) the 
specialist (including the RSQT functioning as a Remote Specialist in 
particular options) shall be responsible to quote two-sided markets in 
the less of 99% of the series on 100% of the series minus one call-put 
pair in each option in which such specialist is assigned. To satisfy 
these requirements, specialists and ROTs must quote such series 90% of 
the trading day as a percentage of the total number of minutes in such 
trading day.
    The Exchange's proposal would suspend specialists' and ROTs' 
continuous quoting obligation for the duration that an underlying NMS 
stock is in a Limit State or a Straddle State. As a result, when 
calculating the duration necessary for a specialist or ROT to meet its 
obligations that it post valid quotes at least 90% of the time the 
classes are open for trading, that time will not include the duration 
that the underlying is in a Limit State or Straddle State.

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and rules and 
regulations thereunder applicable to a national securities 
exchange.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\17\ which, 
among other things, requires a national securities exchange to be so 
organized and have the capacity to be able to carry out the purposes of 
the Act and to enforce compliance by its members and persons associated 
with its members with the provisions of the Act, the rules and 
regulations thereunder, and the rules of the exchange, and is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulation, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \16\ In approving the proposed rule changes, the Commission has 
considered their impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b).
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    The Commission finds that the proposal to suspend a Market Maker's 
obligations when the underlying security is in a limit up-limit down 
state is consistent with the Act. During a limit up-limit down state, 
there may not be a reliable price for the underlying security to serve 
as a benchmark for market makers to price options. In addition, the 
absence of an executable bid or offer for the underlying security will 
make it more difficult for market makers to hedge the purchase or sale 
of an option. Given these significant changes to the normal operating 
conditions of market makers, the Commission finds that the Exchange's 
decision to suspend a Market Maker's obligations in these limited 
circumstances is consistent with the Act.
    The Commission notes, however, that the Plan was approved on a 
pilot basis and its Participants will monitor how it is functioning in 
the equity markets during the pilot period. To this end, the Commission 
expects that, upon implementation of the Plan, the Exchange will 
continue monitoring the quoting requirements that are being amended in 
this proposed rule change and determine if any necessary adjustments 
are required to ensure that they remain consistent with the Act.
    The Commission also notes that the Exchange did not propose to 
waive its bid-ask spread requirements for market makers when the 
underlying is in a Limit or Straddle State. The Commission believes 
that retaining this requirement should help ensure the quality of the 
quotes that are entered and preserves one of the obligations of being a 
market maker.
    In addition, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act \18\ for approving the proposed rule change on an 
accelerated basis. The proposal is related to the Plan, which will 
become operative on April 8, 2013.\19\ Without accelerated approval, 
the proposed rule change, and any attendant benefits, would take effect 
after the Plan's implementation date. Accordingly, the Commission finds 
that good cause exists for approving the proposed rule change on an 
accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2)
    \19\ See supra note 15.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\20\ that the proposed rule change (SR-Phlx-2013-21) is approved on an 
accelerated basis.
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    \20\ 15 U.S.C. 78f(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08557 Filed 4-11-13; 8:45 am]
BILLING CODE 8011-01-P


