
[Federal Register Volume 78, Number 94 (Wednesday, May 15, 2013)]
[Notices]
[Pages 28654-28663]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11521]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69550; File No. SR-Phlx-2013-46]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
Regarding Complex Order PIXL

May 9, 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 April 30, 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, II, 
and III, below, which Items have been prepared by the Exchange. On May 
8, 2013, the Exchange filed Amendment No. 1 to the proposed rule 
change. The Commission is publishing this notice to solicit comments on 
the proposed rule change, as amended, 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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[[Page 28655]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Commission a proposal to amend Rule 
1080 (Phlx XL and Phlx XL II) to accommodate Complex Orders in PIXL.\3\ 
The Exchange requests that the Commission approve the proposed rule 
change on an accelerated basis.
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    \3\ The Exchange adopted PIXL in October 2010 as a price-
improvement mechanism that is a component of the Exchange's fully 
automated options trading system, Phlx XL, now known as XL II. See 
Securities Exchange Act Release No. 63027 (October 1, 2010), 75 FR 
62160 (October 7, 2010) (SR-Phlx-2010-108) (order granting approval 
of price improvement system, XL).
    Six-legged Complex Orders trade on the Exchange. See Securities 
Exchange Act Release No. 63777 (January 26, 2011), 76 FR 5630 
(February 1, 2011) (SR-Phlx-2010-157) (approval order allowing six-
legged Complex Orders); and Commentary .08 to Rule 1080. This 
proposal would enable Complex Orders to trade on PIXL.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, 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 purpose of this proposed rule change is to amend Rule 1080 to 
accommodate Complex Orders in PIXL. This proposal would allow Complex 
Orders in the Exchange's price-improving electronic auction, PIXL, 
similarly to other options exchanges that currently allow complex 
orders in their price-improving electronic auctions.\4\
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    \4\ See Securities Exchange Act Release No. 64805 (July 5, 
2011), 76 FR 40758 (July 11, 2011) (SR-ISE-2011-30) (order granting 
approval of a proposed rule change relating to Complex Orders in 
ISE's Price Improvement Mechanism, PIM). See also Securities 
Exchange Act Release No. 66235 (January 25, 2012), 77 FR 4844 
(January 31, 2012) (SR-CBOE-2011-114) (order granting approval of a 
proposed rule change relating to Complex Order processing in CBOE's 
Hybrid 3.0 classes).
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Background
Current PIXL
    The PIXL mechanism is a process whereby members electronically 
submit orders they represent as agent against principal interest or 
other interest that they represent as agent. The submitted orders are 
stopped at a price and are subsequently entered into an auction seeking 
price improvement. Currently, the PIXL mechanism accepts only simple 
orders.
    An Exchange member may initiate a PIXL Auction (``Initiating 
Member'') by submitting a PIXL Order in one of three ways: \5\
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    \5\ Three components of the PIXL system were approved by the 
Commission on a pilot basis: (1) Paragraphs (n)(i)(A)(2) and 
(n)(i)(B)(2) of Rule 1080, relating to stopping the entire PIXL 
Order where the order is for a size less than 50 contracts; (2) 
paragraphs (n)(ii)(B)(4) and (n)(ii)(D) of Rule 1080, relating to 
the early conclusion of the PIXL Auction; and (3) paragraph (n)(vii) 
of Rule 1080, stating that there shall be no minimum size 
requirement of orders entered into PIXL (collectively, the 
``pilots''). See supra note 3. The pilots were extended for a pilot 
period expiring July 18, 2013. All of the pilots are applicable to 
Complex PIXL. The paragraph (n)(i)(A)(2) and (n)(i)(B)(2) pilot is, 
for Complex Orders of less than 50 contracts in size, in new 
(n)(i)(C). Paragraph (n)(ii)(B)(4) is re-numbered as (n)(ii)(B)(5) 
and, along with paragraph (n)(ii)(D), the early conclusion of the 
PIXL Auction pilot is applicable to Complex PIXL Orders. Proposed 
(n)(ii)(D) states, regarding Complex PIXL Auctions, that an 
unrelated market or marketable limit Complex Order on the opposite 
side of the market from the Complex PIXL Order, as well as orders 
for the individual components of the Complex Order received during 
the Auction, will not cause the Auction to end early and will 
execute against interest outside of the Auction. If contracts remain 
from such unrelated order at the time the Auction ends, they will be 
considered for participation in the order allocation process 
described in sub-paragraph (E) below.
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    (1) The Initiating Member could submit a PIXL Order specifying a 
single price at which it seeks to execute the PIXL Order (a ``stop 
price'');
    (2) An Initiating Member could submit a PIXL Order specifying that 
it is willing to automatically match as principal or as agent on behalf 
of an Initiating Order, the price and size of all trading interest, and 
responses to the PIXL Auction Notification (``PAN'') (known as ``auto-
match''), in which case the PIXL Order will be stopped at the National 
Best Bid/Offer (``NBBO'') on the Initiating Order side of the market 
(if 50 contracts or greater) or, if less than 50 contracts, the better 
of: (i) The Phlx Best Bid/Offer (``PBBO'') price on the opposite side 
of the market from the PIXL Order improved by at least one minimum 
price improvement increment, or (ii) the PIXL Order's limit price (if 
the order is a limit order), provided in either case that certain 
circumstances are met and that such price is at least one increment 
better than the limit of an order on the book on the same side as the 
PIXL Order; or
    (3) An Initiating Member could submit a PIXL Order specifying that 
it is willing to either: (i) Stop the entire order at a single stop 
price and auto-match PAN responses, as described below, together with 
trading interest, at a price or prices that improve the stop price to a 
specified price above or below which the Initiating Member will not 
trade (a ``Not Worse Than'' or ``NWT'' price); (ii) stop the entire 
order at a single stop price and auto-match all PAN responses and 
trading interest at or better than the stop price; or (iii) stop the 
entire order at the NBBO on the Initiating Order side (if 50 contracts 
or greater) or the better of: (A) The PBBO price on the opposite side 
of the market from the PIXL Order improved by one minimum price 
improvement increment, or (B) the PIXL Order's limit price (if the 
order is a limit order) on the Initiating Order side (if for less than 
50 contracts), and auto-match PAN responses and trading interest at a 
price or prices that improve the stop price up to the NWT price.\6\ In 
all cases, if the PBBO on the same side of the market as the PIXL Order 
represents a limit order on the book, the stop price must be at least 
one minimum price improvement increment better than the booked limit 
order's limit price.
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    \6\ The PIXL 50 contract distinction is applicable to Complex 
Orders entered into PIXL.
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    After the PIXL Order is entered, a PAN is broadcast and a one-
second blind Auction ensues. Anyone may respond to the PAN 
notification. At the conclusion of the Auction, the PIXL Order will be 
allocated at the best price(s) among quotes, orders, and PAN responses.
    Once the Initiating Member has submitted a PIXL Order for 
processing, such PIXL Order may not be modified or cancelled, and a 
member submitting the order has no ability to control the timing of the 
execution. The execution is carried out by the Exchange's Phlx XL 
automated options trading system and pricing is determined solely by 
the other orders and quotes that are present in the Phlx XL system at 
the time the Auction ends.
Current Complex Orders
    A Complex Order is any order involving the simultaneous purchase 
and/or sale of two or more different options series in the same 
underlying

[[Page 28656]]

security, priced at a net debit or credit based on the relative prices 
of the individual components, for the same account, for the purpose of 
executing a particular investment strategy. A Complex Order may also be 
a stock-option order, which is an order to buy or sell a stated number 
of units of an underlying stock or exchange-traded fund (``ETF'') 
coupled with the purchase or sale of options contract(s). Complex 
Orders on Phlx are discussed in Commentary .08 to Rule 1080.\7\ In 
particular, Commentary .08 governs the trading of Complex Orders on the 
Phlx's electronic options trading platform, Phlx XL II, to, among other 
things: (i) Permit Complex Orders with up to six components, including 
the underlying stock or ETF; (ii) establish a Do Not Auction (``DNA'') 
designation for Complex Orders; (iii) add a definition of conforming 
ratio; \8\ (iv) provide priority rules for Complex Orders traded on 
Phlx XL II; and (v) provide for the communication of the stock or ETF 
component of a Complex Order by the Exchange to NASDAQ Options Services 
LLC (``NOS''), the Phlx's affiliated broker-dealer, for execution.
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    \7\ For the full definition of Complex Order, see Commentary 
.08(a)(i) to Rule 1080. See also Securities Exchange Act Release No. 
63777 (January 26, 2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-
2010-157) (order granting approval of a proposed rule change 
relating to Complex Orders in Phlx Commentary .08 to Rule 1080 and 
establishing, among other things, six-legged Complex Orders) (the 
``Complex Order filing''). Prior to the Complex Order filing, a 
Complex Order could be composed of two option legs and could not 
have a stock component.
    Six other options exchanges have rules that provide for the 
trading of complex orders. See C2 Rule 6.13; CBOE Rules 6.42, 6.45, 
6.53C; ISE Rule 722; NYSE Arca Rules 6.62(e), 6.91; NYSE MKT Rules 
900.3NY(e), 963NY, 980NY.
    \8\ The Exchange proposes to add language to Rule 1080(n)(i)(C) 
to codify the principle that Complex Orders consisting of a ratio 
other than a conforming ratio will not be accepted. See footnote 20 
in Securities Exchange Act Release No. 63509 (December 9, 2010), 75 
FR 78320 (December 15, 2010) (SR-Phlx-2010-157) (notice of Complex 
Order filing).
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    Currently, PIXL does not accommodate auctions for Complex Orders as 
is allowed on other options exchanges that have price-improving 
electronic auctions like PIXL.\9\ However, Complex Orders are becoming 
an increasingly important segment of options trading. This proposal 
allows Complex Orders of up to six legs, as defined in Commentary .08 
of Rule 1080, to be entered into the Exchange's PIXL Auction, and 
proposes changes to Rule 1080 to facilitate this process without making 
any modifications to the PIXL process in place today for orders which 
are not Complex Orders, or to the Complex Order rules.\10\
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    \9\ See Securities Exchange Act Release No. 64805 (July 5, 
2011), 76 FR 40758 (July 11, 2011) (SR-ISE-2011-30) (order granting 
approval of a proposed rule change relating to Complex Orders in 
ISE's Price Improvement Mechanism, PIM). See also Securities 
Exchange Act Release No. 66235 (January 25, 2012), 77 FR 4844 
(January 31, 2012) (SR-CBOE-2011-114) (order granting approval of a 
proposed rule change relating to Complex Order processing in CBOE's 
Hybrid 3.0 classes).
    \10\ The Exchange notes that, as in many filings, it proposes 
technical housecleaning changes that are described below.
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The Proposal
Changes to Rule 1080(n)--PIXL
    The Exchange proposes to enhance PIXL so that Complex Orders may be 
entered into PIXL and may have the benefit of price improvement 
functionality (known as ``Complex PIXL'').
    The Exchange intends to change PIXL, which is codified in Rule 
1080(n), only to the extent needed to accommodate Complex PIXL Orders. 
The Exchange does so by exempting Complex PIXL Orders from those 
sections of PIXL which are not wholly applicable to Complex Orders. 
Specifically, Complex Orders are exempted from the following portions 
of subsection (n) of Rule 1080: (i) The current PIXL auction 
eligibility requirements for the account of a public customer and not a 
public customer that differentiate whether a PIXL Order is for a size 
of less than 50 contracts or 50 contracts or more; \11\ (ii) the 
current procedure for initiating a PAN Auction, how an Initiating 
Member must mark the PIXL Order and what the member must specify; \12\ 
(iii) the current minimum price increment for PAN responses and for an 
Initiating Member's stop price and/or NWT price; \13\ (iv) the current 
rejection of PAN responses that are not equal to or better than the 
NBBO at the time of receipt of the PAN response; \14\ (v) the current 
allocation process whereby after public customer interest at a 
particular price level has been satisfied, remaining contracts will be 
allocated among all Exchange quotes, orders and PAN responses; \15\ 
(vi) the current process whereby if there are PAN responses that cross 
the then-existing NBBO (provided such NBBO is not crossed) at the time 
of the conclusion of the Auction, such PAN responses will be executed, 
if possible, at their limit price(s); \16\ (vii) the current process 
whereby if the PIXL Auction price is the same as that of an order on 
the limit order book on the same side of the market as the PIXL Order, 
the PIXL Order may only be executed at a price that is at least one 
minimum price improvement increment better than the resting order's 
limit price or, if such resting order's limit price crosses the stop 
price, then the entire PIXL Order will trade at the stop price with all 
better priced interest being considered for execution at the stop 
price; \17\ and (viii) that currently the execution price for a PIXL 
Order for the account of a public customer paired with an order for the 
account of a public customer must be expressed in the quoting increment 
applicable to the affected series, and that such an execution may not 
trade through the NBBO or at the same price as any resting customer 
order.\18\
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    \11\ Rule 1080(n)(i)(A) and (B). The analogous provision for 
Complex PILX Orders is in (n)(i)(C), as described below.
    \12\ Rule 1080(n)(ii)(A). Regarding initiation of a PIXL 
Auction, the Exchange is adding (n)(ii)(A)(2).
    \13\ Rule 1080(n)(ii)(A)(6) (re-numbered as (n)(ii)(A)(7)). 
Regarding the minimum price increment for PAN responses and for an 
Initiating Member's stop price and/or for an NWT price in the case 
of a Complex Order ($0.01), the Exchange is adding(n)(ii)(A)(7)(b).
    \14\ Rule 1080(n)(ii)(A)(9). The Exchange proposes new language 
in subsection (9) stating that a Complex Order PAN response must be 
equal to or better than the cPBBO, as defined in Commentary .08(a) 
of this Rule 1080 at the time of receipt of the PAN response. PAN 
responses may be modified or cancelled during the Auction. A PAN 
response (except if it is a Complex Order) submitted with a price 
that is outside the NBBO will be rejected. A Complex Order PAN 
response submitted with a price that is outside the cPBBO will be 
rejected. A PAN or Complex Order PAN response which is inferior to 
the stop price of the PIXL order will be rejected.
    Commentary .08(a)(iv) defines the term cPBBO as the best net 
debit or credit price for a Complex Order Strategy based on the PBBO 
for the individual options components of such Complex Order 
Strategy, and, where the underlying security is a component of the 
Complex Order, the National Best Bid and/or Offer for the underlying 
security.
    \15\ Rule 1080(n)(ii)(E)(2)(a), (b), and (c). Regarding the PIXL 
Order allocation process, the Exchange is adding or modifying 
(n)(ii)(E)(2)(d), (e), (f), and (g).
    \16\ Rule 1080(n)(ii)(F). The Exchange proposes new language 
adding the alternative that if there are Complex Order PAN responses 
that cross the then-existing cPBBO at the time of the conclusion of 
the Auction, such PAN responses will be executed, if possible, at 
their limit price(s). The Exchange believes that this behavior is, 
at best, highly unlikely as participants will cancel PAN responses 
when better priced interest that they could trade against is present 
in the marketplace.
    \17\ Rule 1080(n)(ii)(G). Regarding an Auction price on the 
limit order book on the same side of the market as the Complex PIXL 
Order, the Exchange is adding 1080(n)(ii)(H).
    \18\ Proposed Rule 1080(n)(vi). The Exchange clarifies that the 
subsection applies to the execution price for a PIXL Order and 
proposes new language stating that the execution price for a Complex 
Order PIXL may be in $0.01 increments and may not trade at a price 
equal to or through the cPBBO or at the same price as a resting 
customer Complex Order.
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    The Exchange is proposing several rule provisions in respect of 
Complex Orders so that they can participate in PIXL Auctions. First, 
the Exchange proposes new Rule 1080(n)(i)(C) regarding stopping the 
entire Complex Order when submitting such order into

[[Page 28657]]

PIXL. Specifically, new sub-paragraph (C) states that if the PIXL Order 
is a Complex Order and of a conforming ratio, as defined in Commentary 
.08(a)(i) and (a)(ix) to Rule 1080, the Initiating Member must stop the 
entire PIXL order at a price that is better than the best net price 
(debit or credit) (i) available on the Complex Order book regardless of 
the Complex Order book size; and (ii) achievable from the best Phlx 
bids and offers for the individual options (an ``improved net price''), 
provided in either case that such price is equal to or better than the 
PIXL Order's limit price.\19\ Complex Orders consisting of a ratio 
other than a conforming ratio will not be accepted. New sub-paragraph 
(C) shall apply to all Complex Orders submitted into PIXL and, where 
applied to Complex Orders where the smallest leg is less than 50 
contracts in size, shall be effective for a pilot period scheduled to 
expire July 18, 2013. New sub-paragraph (C) maintains the core complex 
order spread priority principal which stipulates that a Complex Order 
may be executed at a total credit or debit price with priority over 
individual bids or offers established in the marketplace (including 
customers) that are not better than the bids or offers comprising such 
total credit or debit, provided that at least one option leg is 
executed at a better price than the established bid or offer for that 
option contracts and no option leg is executed at a price outside of 
the established bid or offer for that option contract.\20\ New sub-
paragraph (C) does so by requiring a Complex Order submitted into PIXL 
to be stopped at a net debit/credit price which improves upon the 
stated markets present for the individual components of the Complex 
Order. By definition, requiring a Complex Order to be stopped at a net 
debit/credit price which improves upon the stated markets present for 
the individual components of the Complex Order ensures that at least 
one option leg will be executed at a better price than the established 
bid or offer for such leg. For example, a Complex Order that is of a 
conforming ratio to buy one of option A with a PBBO market of $1.00 
bid, offered at $1.20, and sell one of option B with a PBBO market of 
$0.50 bid, offered at $0.60, would need to be stopped by the Initiating 
Member at a net price better than the calculated cPBBO market of $0.40 
bid, offered at $0.70.\21\ If in this same example there was also a 
resting Complex Order to buy one of option A and sell one of option B 
on Phlx for a net debit price of $0.50, the Initiating Member would 
need to stop the Complex Order entered into PIXL at a net price better 
than $0.50 bid and the calculated net best offer (cPBBO) of $0.70.
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    \19\ Subsection (n)(i)(D) (re-numbered from current subsection 
(C)) indicates under what circumstances PIXL Orders are not eligible 
to initiate an Auction and will be rejected. Reference to proposed 
new subsection (C) is added to subsection (D) as re-numbered.
    \20\ The complex order spread priority principal in respect of 
Complex Orders is set forth in Rule 1080, Commentary .08(c)(iii).
    \21\ $0.40 bid = $1.00 bid of A less $0.60 offer of B; and $0.70 
offer = $1.20 offer of A less $0.50 bid of B.
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    Second, the Exchange is adding proposed new Rule (n)(ii)(A)(2) to 
explain the process for initiating a PIXL Complex Auction, which is 
similar to initiating a PIXL Auction today. Specifically, proposed new 
subsection (2) language states that to initiate the PIXL Complex Order 
Auction, the Initiating Member must mark the PIXL Order for Auction 
processing, and specify either: (a) A single price at which it seeks to 
execute the PIXL Order (a ``stop price''); or (b) that it is willing to 
either: (i) Stop the entire order at a single stop price and auto-match 
PAN responses and trading interest at a price or prices that improve 
the stop price to a specified price (a ``Not Worse Than'' or ``NWT'' 
price); or (ii) stop the entire order at a single stop price and auto-
match all PAN responses and trading interest at or better than the stop 
price. Once the Initiating Member has submitted a Complex Order into 
PIXL for processing pursuant to this subparagraph, such order may not 
be modified or cancelled. Under any of the circumstances described in 
sub-paragraphs (a)-(b) of subsection (2), the stop price or NWT price 
may be improved to the benefit of the PIXL Order during the Auction, 
but may not be cancelled.
    The procedure set forth in new Rule 1080(n)(ii)(A)(2) for Complex 
Orders is similar to the procedure set forth in Rule 1080(n)(ii)(A)(1) 
for initiating a PIXL Auction for orders which are not complex. 
However, new Rule 1080(n)(ii)(A)(2) does not allow for Initiating 
Members to enter Complex Orders into PIXL and specify, without 
stipulating a specific stop price, that they are willing to 
automatically match as principal or as agent on behalf of an Initiating 
Order the price and size of all PAN responses, and trading interest. 
Initiating Members entering orders into PIXL which are not Complex 
Orders may indicate that they are willing to stop the PIXL Order at the 
NBBO on the Initiating Order side (if 50 contracts or more) or the PBBO 
on the opposite side of the market from the PIXL Order improved by one 
minimum price improvement increment (if the PIXL Order is for less than 
50 contracts), provided such price is no worse than the NBBO, by 
submitting the order with a market price and a NWT market price.
    When submitted in this manner, the trading system stops the PIXL 
order at a price based on the disseminated markets in that series at 
the time of order receipt, in accordance with PIXL rules stated above. 
The Exchange is not offering this particular functionality for Complex 
Orders in order to avoid stopping an order at a net debit/credit price 
which may be unexpected by the Initiating Member due to the fact that 
there are multiple legs in Complex Orders and prices may change 
rapidly. Requiring the Initiating Member to use an exact limit price as 
the stop price, yet allow the use of a NWT market price, will ensure 
that the stop price will meet the Initiating Member's expectations and 
still allow the Initiating Member to automatically match other interest 
if desired.
    Third, the Exchange is proposing new language in Rule 
1080(n)(ii)(B)(3) to add a Complex Order PIXL alternative for 
concluding a Complex Order PIXL Auction. Specifically, new subsection 
(3) states that a Complex Order PIXL Auction will conclude any time the 
cPBBO or the Complex Order book crosses the PIXL Order stop price on 
the same side of the market as the PIXL Order (defined for these 
purposes as a ``Complex PIXL Order'' or, as the context requires, a 
``PIXL Order'').\22\ This language introduces proposed new Rule 
1080(n)(ii)(B)(2) [sic] for Complex Order PIXL Auctions that is similar 
to what is available for PIXL Auctions today. Today, PIXL Auctions end 
at the earlier of (i) the end of the Auction period, (ii) any time 
there is a trading halt on the Exchange in the affected series, or 
(iii) any time the PBBO crosses the PIXL order stop price on the same 
side as the PIXL Order. The PBBO includes both orders and quotes on the 
Exchange. Complex PIXL Auctions will also conclude (i) at the end of 
the Auction period or (ii) any time there is a trading halt on the 
Exchange in the affected series as stipulated in the rule today. In 
addition, the language of proposed new Rule 1080(n)(ii)(B)(3) is being 
added to explicitly state that the end of a Complex PIXL Auction can 
also occur either when the cPBBO or the Complex Order book crosses the 
PIXL

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Order stop price on the same side of the market as the PIXL Order.
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    \22\ The Exchange also clarifies the end of the Auction 
alternative in Rule 1080(n)(ii)(B)(2) to state that, for a PIXL 
Auction (except if it is a Complex Order), any time the PBBO crosses 
the PIXL Order stop price on the same side of the market as the PIXL 
Order.
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    Fourth, the Exchange is proposing new language in Rule 
1080(n)(ii)(C) to add a Complex Order PIXL alternative for execution 
when a Complex PIXL Auction ended due to the cPBBO or the Complex Order 
book crossing the Complex Order PIXL stop price on the same side as the 
Complex PIXL Order. Specifically, new language in subsection (C)(2) 
states that at the conclusion of the PIXL Auction, in the case of the 
cPBBO or the Complex Order book crossing the Complex PIXL Order stop 
price on the same side as the Complex PIXL Order, the entire Complex 
PIXL Order will be executed at the stop price against executable PAN 
responses and executable Complex Order interest. For example, if a 
Complex PIXL Auction is in progress where the Complex PIXL Order is a 
buy order stopped at $0.60, if either the cPBBO (calculated Phlx Best 
Bid) moves to be $0.61 bid or better, or if a Complex Order is entered 
onto the Phlx book with a bid price of $0.61 or more, the Complex PIXL 
Auction will be terminated as set forth in proposed Rule 
1080(n)(ii)(B)(3). In such case, any complex sell interest, both 
Complex Orders and PAN responses, at a price of $0.60 or lower will be 
considered for trade against the Complex PIXL Order at $0.60.
    The execution process described above for Complex PIXL Orders is 
simpler than the process in place for PIXL Auctions terminated due to 
the PBBO crossing the PIXL Order stop price on the same side of the 
market as the PIXL Order. Currently, when a PIXL Auction is terminated 
due to the PBBO crossing the PIXL Order stop price on the same side of 
the market as the PIXL Order, the PIXL Order is executed at best 
response prices or, if the stop price is the best price in the Auction, 
the PIXL Order is executed at the stop price, unless the best response 
price is equal to the price of a limit order resting on the Phlx book 
on the same side of the market as the PIXL Order, in which case the 
PIXL Order will be executed against that response (but at a price that 
is at least one minimum price improvement increment better than the 
price of such limit order).\23\ For example, assume a PIXL Order to buy 
20 contracts is stopped at a price of $0.60 when the market is $0.40 
bid, offered at $0.70. Additionally, assume a PAN response is received 
to sell 10 contracts at $0.55 and an order is submitted and entered 
onto the Phlx book to sell 10 contracts at $0.60. If a buy order (or 
quote) with a limit of $0.65 is entered into the Phlx XL system, the 
buy order (or quote) will trade immediately against the 10 contract 
order offered at $0.60. The buy order (or quote) will not trade against 
the PAN response offered at $0.55 since it is an Auction response and 
is only eligible to trade as part of the Auction. Any residual interest 
of the buy order (or quote) is reflected in the PBBO causing the market 
to move to $0.65 bid, offered at $0.70, the PIXL Auction is terminated. 
Provided, in the unlikely event that the PAN response to sell at $0.55 
had not been cancelled, the PAN response will trade 10 contracts 
against the PIXL Order at $0.55 and any residual PIXL Order contracts 
will trade at $0.60 against the Initiating Order. The Exchange is 
proposing that when a Complex PIXL Auction is terminated due to either 
the cPBBO or the Complex Order book crossing the Complex Order PIXL 
stop price on the same side as the Complex PIXL Order, such order is 
only executed through the cPBBO and/or the Complex Order book at one 
price, the stop price.\24\ Consider a scenario similar to the stopped 
PIXL Order example set forth above. Assume that a Complex PIXL Order to 
buy is stopped at a price of $0.60. The Complex PIXL Order is to buy 
option A and sell option B, where option A is $0.90 bid, offered at 
$1.00 and option B is $0.30 bid, offered at $0.40. The individual 
option markets imply a cPBBO market of $0.50 bid, offered at $0.70. As 
before, assume a PAN response is received to sell the strategy at 
$0.55. If the market for option A becomes $1.05 bid, offered at $1.15, 
the implied (calculated) cPBBO market becomes $0.65 bid, offered at 
$0.85 causing the Complex PIXL Auction to terminate. As proposed, the 
PAN response at $0.55 will trade against the Complex PIXL Order at the 
stop price of $0.60. To trade at $.60, at least one of the option 
components of the Complex Order will need to be executed at a price 
which is outside of the current market where cPBBO is $0.65 bid. Since 
this event may have up to six components, the Exchange believes that 
limiting the prices trading through the cPBBO and/or the Complex Order 
book to only the stop price is important. Furthermore, combined with 
the improbability that responses will still be available which are 
crossing the cPBBO or the Complex Order book, the Exchange believes the 
price continuity of this approach is also more rational and fair to all 
participants. When executing at the stop price, the Initiating Order as 
well as all better priced PAN responses and Complex Order interest will 
be considered for trade against the Complex PIXL Order.
---------------------------------------------------------------------------

    \23\ Rule 1080(n)(ii)(B).
    \24\ Proposed Rule 1080(n)(ii)(B)(3).
---------------------------------------------------------------------------

    Fifth, the Exchange is proposing new language in Rule 
1080(n)(ii)(E)(2)(d) regarding allocation of Complex Order PIXL. 
Specifically, new subsection (2)(d) states that in the case of a 
Complex Order PIXL, if the Initiating Member selected the single stop 
price option of the PIXL Auction, PIXL executions will occur at prices 
that improve the stop price, and then at the stop price with up to 40% 
of the remaining contracts after public customer complex interest is 
satisfied being allocated to the Initiating Member at the stop price. 
If only one other participant matches the stop price, then the 
Initiating Member may be allocated up to 50% of the contracts remaining 
after public customer complex interest is satisfied at such price. 
Complex Orders on the PHLX Complex Order Book, PAN responses, and 
quotes and orders which comprise the cPBBO at the end of the Auction 
will be considered for allocation against the Complex PIXL order. Such 
interest will be allocated in the following order: (i) To public 
customer Complex Orders and PAN responses in time priority; (ii) to 
SQT, RSQT, and non-SQT ROT Complex Orders and PAN responses on a size 
pro-rata basis; (iii) to non-market maker off-floor broker-dealer 
Complex Orders and PAN responses on a size pro-rata basis, and (iv) to 
quotes and orders which comprise the cPBBO at the end of the Auction 
with public customer interest being satisfied first in time priority, 
then to SQT, RSQT, and non-SQT ROT interest satisfied on a size pro-
rata basis, and lastly to non-market maker off-floor broker-dealers on 
a size pro-rata basis. Thereafter, remaining contracts, if any, shall 
be allocated to the Initiating Member, after public customer Complex 
Orders and PAN responses have been satisfied.
    For example, a Complex Order to buy one of option A and sell one of 
option B, 100 times, with a cPBBO of $0.40 bid, $0.70 offer, may be 
submitted into PIXL by the Initiating Member with a single stop price 
of $0.60. Assume that during the Auction, Phlx receives the following 
responses and order interest:

--MM1 responds to sell the strategy 10 times at a price of $0.55
--MM1 responds to sell the strategy 10 times at a price of $0.60
--BD responds to sell the strategy 5 times at a price of $0.60
--Customer Complex Order to sell the strategy 30 times at a price of 
$0.60
--MM2 responds to sell the strategy 20 times at $0.60.

After all of the aforementioned responses and orders are received,

[[Page 28659]]

option A of the simple market moves causing the cPBBO to become offered 
20 times at $0.55. Option A is quoted in the simple market as $1.00 
bid, $1.05 offer, with the $1.05 offer representing a Customer offer. 
Option B is quoted in the simple market as $0.50 bid, $0.60 offer.
    At the end of the Auction, the Complex PIXL Order will be executed 
30 times at a price of $0.55. Of those 30 strategies, MM1 will trade 10 
and an additional 20 contracts will be traded by legging into the 
interest that represents the cPBBO, including the Customer offered at 
$1.05 in Option A. The Complex PIXL Order will then be traded against 
interest at $0.60. First, the Customer offering the strategy 30 times 
will be satisfied. Next, the Initiating Member will be allocated 40% of 
the remaining 40 strategy contracts, i.e. 16 strategy contracts at his 
stop price of $0.60. The residual 24 strategy contracts will trade 
against the two market maker responses in a pro-rata fashion with MM1 
executing 8 strategy contracts and MM2 executing 16 strategy contracts. 
The broker dealer offering 5 strategies at $0.60 would not receive any 
allocation and the response is cancelled back to the participant.
    An additional example illustrating the execution algorithm proposed 
for Complex Order PIXL is as follows. Assume a Complex Order to buy one 
of option A and sell one of option B, 100 times, with a cPBBO of $0.40 
bid, $0.70 offer, may be submitted into PIXL by the Initiating Member 
with a single stop price of $0.60. Assume that during the Auction, Phlx 
receives the following responses and order interest:

--MM1 responds to sell the strategy 10 times at a price of $0.55
--MM1 responds to sell the strategy 10 times at a price of $0.60
--BD responds to sell the strategy 5 times at a price of $0.60
--Customer Complex Order to sell the strategy 30 times at a price of 
$0.60
--MM2 responds to sell the strategy 20 times at $0.60.

After all of the aforementioned responses and orders are received, 
option A of the simple market moves causing the cPBBO to become offered 
20 times at $0.60. Option A is quoted in the simple market as $1.00 
bid, $1.10 offer, with the $1.10 offer representing a Customer offer. 
Option B is quoted in the simple market as $0.50 bid, $0.60 offer.
    At the end of the Auction, the Complex PIXL Order will be executed 
10 times at a price of $0.55 against MM1. The Complex PIXL Order will 
then be traded against interest at $0.60. First, the Customer offering 
the strategy 30 times will be satisfied. Next, the Initiating Member 
will be allocated 40% of the remaining 60 strategy contracts, i.e. 24 
strategy contracts at his stop price of $0.60. The residual 36 strategy 
contracts will trade against the two market maker responses with MM1 
executing 10 strategy contracts and MM2 executing 20 strategy 
contracts. The broker dealer offering 5 strategies at $0.60 would then 
be executed. The last 1 contract would be traded against the cPBBO 
interest with the Customer offering Option A at $1.10 receiving 
priority over any other interest offered at that price.
    Similarly to PIXL, all interest in the Phlx system at the end of a 
Complex PIXL auction will be considered for execution against the 
Complex PIXL Order. Interest will be traded first based on the prices 
available at the end of the Auction. At all prices, other than the 
final price point, all interest, including Complex Orders, PAN 
response, and interest comprising the cPBBO will be fully satisfied. At 
the final price point, the Initiating Member will be allocated up to 
40% (50% if matching only one other participant) of the Complex PIXL 
Order after public customer complex interest has been satisfied. After 
public customer complex interest and the Initiating Member have been 
allocated contracts, other complex interest will be considered for 
allocation with SQT, RSQT, and non-SQT ROT interest being allocated in 
a size pro-rata fashion followed by non-market maker off-floor broker 
dealer complex interest in a size pro-rata fashion. Once all complex 
interest, including both Complex Orders and PAN responses, has been 
satisfied, interest comprising the cPBBO will be considered for 
allocation. Public customer interest comprising the cPBBO will be 
afforded priority over non-public customer interest comprising the 
cPBBO and will be allocated in a price time manner. After public 
customer interest comprising the cPBBO has been satisfied, SQT, RSQT, 
and non-SQT ROT interest comprising the cPBBO will be allocated in a 
size pro-rata fashion followed by non-market maker off-floor broker 
dealer complex interest in a size pro-rata fashion.
    Complex Orders today which are executed as part of a Complex Order 
Live Auction (COLA) trade first based on the best prices available at 
the end of the COLA timer. If markets for the individual components of 
the Complex Order independently improve during the COLA Timer and match 
the best price of COLA Sweeps(s) and/or responsive Complex Order 
interest, the responses will be executed before executing the 
individual components of the Complex Order. Since a Complex PIXL Order 
must be stopped at a price which improves upon all interest in the Phlx 
XL system at time of receipt, the proposed Complex PIXL execution 
algorithm ensures and maintains the priority of established interest. 
In the event that the individual components of the Complex PIXL Order 
independently improve during the Auction and new interest is received 
during the auction, Complex Orders and PAN responses will be afforded 
priority over individual component interest comprising the cPBBO at a 
given price point just as auction responses and Complex Orders are 
afforded priority over individual components of a Complex Order that 
independently improve during a COLA. It is important to note, however, 
that public customer complex interest will maintain priority over non-
public customer complex interest and public customer interest 
comprising the cPBBO will be afforded priority over non-public customer 
interest comprising the cPBBO. The Complex PIXL Auction allows for all 
participant types, including public customers, to respond to the 
auction notification.\25\ Public customers responding to the auction or 
submitting complex order interest during the auction will be afforded 
priority over non-customer interest. Public customer interest 
comprising the cPBBO will be afforded priority over non-customer 
interest comprising the cPBBO but not over complex order or PAN 
response interest. Such public customer interest was provided the 
opportunity to respond to the auction and/or submit complex interest 
during the auction. Since public customer interest comprising the cPBBO 
chose not to avail themselves of the opportunity to respond to the 
auction, the public customer interest representing individual 
components of the cPBBO will not be afforded priority over participants 
offering contra-side interest to the Complex PIXL for all components of 
the Complex PIXL Order at the same price point.
---------------------------------------------------------------------------

    \25\ Rule 1080(n)(ii)(A)(5) (re-numbered from subsection (A)(4)) 
provides that any person or entity may submit responses to the PAN, 
provided such response is properly marked specifying price, size and 
side of the market.
---------------------------------------------------------------------------

    Sixth, the Exchange is proposing new language in Rule 
1080(n)(ii)(E)(2)(e) regarding allocation of Complex Order PIXL where 
an Initiating Member selected ``stop and NWT'' in respect to the stop 
price of a PIXL Order submission. Specifically, new subsection (2)(e) 
states that in the case of a Complex Order PIXL, if the

[[Page 28660]]

Initiating Member selected the ``stop and NWT'' option for the Complex 
PIXL Order submission, contracts shall be allocated as follows: (i) 
First to Complex Orders and PAN responses at prices better than the NWT 
price, as well as to quotes and orders which comprise the cPBBO if such 
cPBBO is better than the NWT price, pursuant to the algorithm set forth 
above in (n)(ii)(E)(2)(d)(i) through (iv) of Rule 1080 and (ii) next, 
to Complex Orders and PAN responses, as well as to quotes and orders 
which comprise the cPBBO at the end of the Auction, at the Initiating 
Member's NWT price and at prices better than or equal to the Initiating 
Member's stop price, beginning with the NWT price. The Initiating 
Member shall be allocated an equal number of contracts as the aggregate 
size of all other interest at each price point, except that the 
Initiating Member shall be entitled to receive up to 40% (or 50% if 
matching only one other participant) of the contracts remaining at the 
final price point (including situations where the final price is the 
stop price), after public customer Complex Orders and PAN responses 
have been satisfied. In the case of an Initiating Order with a NWT 
price at the market, the Initiating Member shall be allocated an equal 
number of contracts as the aggregate size of all other interest at all 
price points, except that the Initiating Member shall be entitled to 
receive up to 40% (or 50% if matching only one other participant) of 
the contracts remaining at the final price point (including situations 
where the final price is the stop price), after public customer Complex 
Orders and PAN responses have been satisfied. If there is other 
interest at the final price point the contracts will be allocated to 
such interest pursuant to the algorithm set forth in 
(n)(ii)(E)(2)(d)(i) through (iv) of this rule. Any remaining contracts 
shall be allocated to the Initiating Member.\26\
---------------------------------------------------------------------------

    \26\ Proposed new subsection (n)(ii)(E)(2)(f) states that a 
single quote, order or PAN response shall not be allocated a number 
of contracts that is greater than its size.
---------------------------------------------------------------------------

    For example, a Complex Order to buy one of option A and sell one of 
option B, 100 times, with a cPBBO of $0.40 bid, $0.70 offer, could be 
submitted into PIXL by the Initiating Member with a single stop price 
of $0.60 and a NWT price of $0.55. Assume that during the Auction, a 
market maker (MM1) responds to the auction notification and offers to 
sell the same Complex Order strategy 10 times at a price of $0.55 as 
well as offers to sell the strategy 25 times at a price of $0.60. In 
addition, assume that a public customer Complex Order to sell the 
strategy 10 times at $0.60 is received and another market maker (MM2) 
responds to sell the strategy 25 times at $0.60. At the end of the 
Auction, the Complex PIXL Order will be executed 10 times at a price of 
$0.55 against MM1 and an additional 10 times at a price of $0.55 
against the Initiating Member since he indicated he was willing to 
match all interest down to $0.55 by using the NWT functionality. The 
Complex PIXL Order will then execute 10 times at a price of $0.60 
against the public customer offer. Then, the Initiating Member will be 
allocated 40% of the remaining 70 strategy contracts, i.e. 28 strategy 
contracts, of the Complex PIXL Order at the stop price of $0.60. The 
two market maker responders will execute the remaining 42 contracts in 
a pro-rata fashion with both MM1 and MM2 trading 21 strategy contracts 
each.
    Seventh, the Exchange is proposing new language in Rule 
1080(n)(ii)(E)(2)(g) to stipulate that Complex PIXL Orders which 
include a stock/ETF component will only execute against Complex Orders 
or PAN responses that also include the stock/ETF component. Such orders 
will not ``leg'' to the simple market and will therefore not trade 
against interest comprising the cPBBO at the end of the Auction.\27\ 
This behavior is consistent with the handling of Complex Orders that 
include a stock/ETF component and are entered into the Phlx system.\28\ 
Legging of a stock/ETF component would introduce the risk of a 
participant not receiving an execution on all components of the Complex 
Order and is therefore not considered as a means of executing a Complex 
Order which includes a stock/ETR component. The Exchange believes that 
introducing the risk of not having the ability to fully execute a 
complex strategy is counter-productive to, and inconsistent with, the 
effort to allow Complex Orders in PIXL. If there are Complex Orders and 
PAN responses which satisfy all components of the Complex Order in 
PIXL, including the stock component, the stock will be executed in the 
same manner as it is done today for Complex Orders.\29\
---------------------------------------------------------------------------

    \27\ Complex Orders that include a stock/ETF component and are 
submitted to the Phlx Complex Order book or entered into a Complex 
Order Live Auction (COLA) also have a similar restriction. Rule 
1080, Commentary .08(a)(i).
    \28\ Commentary.08 (a)(i) to Rule 1080 states, for example, that 
stock-option orders can only be executed against other stock-option 
orders and cannot be executed by the System against orders for the 
individual components.
    \29\ The Exchange electronically communicates the underlying 
security component of the order to NOS for immediate execution as 
per Exchange Rule 1080 Commentary .08(h). In addition, only those 
participants with the appropriate documentation (e.g. a Qualified 
Special Representative (``QSR'') arrangement with NOS), as required 
by Exchange Rule 1080 Commentary .08(a)(i), will be allowed to 
submit Complex Orders which include a stock component into PIXL.
---------------------------------------------------------------------------

    Eighth, the Exchange is proposing new language in Rule 
1080(n)(ii)(H) regarding a Complex Order PIXL Auction price matching a 
Complex Order Book price on the same side of the market as the PIXL 
Order. Specifically, new subsection (H) states that if the Complex 
Order PIXL Auction price is the same as that of a Complex Order on the 
Complex Order Book on the same side of the market as the Complex PIXL 
Order, the PIXL Order may only be executed at a price that is at least 
one minimum price improvement increment better than the resting order's 
limit price; or if such resting order's limit price is equal to or 
crosses the stop price, then the entire PIXL Order will trade at the 
stop price with all better priced interest being considered for 
execution at the stop price. This is similar to how PIXL executions are 
handled today when an order on the same side as the PIXL Order is on 
the book.\30\ Rule 1080(n)(ii)(H) is being proposed in order to provide 
for the same behavior when a Complex Order on the same side of the 
market as the Complex PIXL Order is resting on the book. For example, 
assume a Complex PIXL Order to buy 20 strategy contracts is stopped at 
a price of $0.60 when the cPBBO market is $0.40 bid, offered at $0.70. 
Additionally, assume a PAN response is received to sell 10 strategy 
contracts at $0.58. In addition, assume a Complex Order is received 
during the Auction to buy 10 strategy contracts for $0.58. The Complex 
Order received during the Auction will rest on the order book since it 
is not marketable against the cPBBO or against other resting Complex 
Order interest. At the end of the Auction, 10 strategy contracts of the 
Complex PIXL Order will be executed at $0.59, one price improvement 
increment better than the resting Complex Order bid of $0.58, against 
the PAN response and 10 strategy contracts of the Complex PIXL Order 
will be executed at $0.60 against the Initiating Order of the Complex 
PIXL. Considering a similar scenario where the Complex Order received 
during the Auction is to buy 10 strategy contracts for $0.60, at the 
end of the Auction, the entire Complex PIXL Order will be executed at 
$0.60 with the Initiating Order and the PAN response each executing 10

[[Page 28661]]

strategy contracts. This is similar to how PIXL executions are handled 
today.
---------------------------------------------------------------------------

    \30\ Rule 1080(n)(ii)(G).
---------------------------------------------------------------------------

    The Exchange is also proposing to add language to existing Rule 
1080(n)(ii)(G) to state that if there is an order on the limit order 
book, on the same side of the market as the PIXL Order, which is 
``equal to or crosses'' the stop price, then the entire PIXL Order will 
trade at the stop price with all better priced interest being 
considered for execution at the stop price. Currently, the rule does 
not address the case where the order on the limit order book is ``equal 
to'' the stop price. This change does not impact behavior since the 
order on the limit order book has been considered by the Phlx system to 
``cross'' the stop price when its limit was equal to the stop price. 
Not adding the consideration when the limit order ``crossed'' the stop 
price would have resulted in PIXL Orders not being able to execute 
since they would be forced to improve the limit of the resting order 
which was also the PIXL Order stop price.
    Ninth, the Exchange is proposing new language in Rule 
1080(n)(ii)(J) regarding Complex Order PIXL Orders with stock 
components. Specifically, subsection (J)(1) states that a member 
organizations may only submit Complex PIXL Orders, Initiating Orders, 
Complex Orders, and/or PAN responses with a stock/ETF component if such 
orders/responses comply with the Qualified Contingent Trade Exemption 
from Rule 611(a) of Regulation NMS pursuant to the Act. Member 
organizations submitting such orders with a stock/ETF component 
represent that such orders comply with the Qualified Contingent Trade 
Exemption. Members of FINRA or the NASDAQ Stock Market (``NASDAQ'') are 
required to have a Uniform Service Bureau/Executing Broker Agreement 
(``AGU'') with Nasdaq Options Services LLC in order to trade orders 
containing a stock/ETF component; firms that are not members of FINRA 
or NASDAQ are required to have a Qualified Special Representative 
(``QSR'') arrangement with Nasdaq Options Services LLC (``NOS'') in 
order to trade orders containing a stock/ETF component.
    New subsection (J)(2) states that where one component of a Complex 
PIXL Order, Initiating Order, Complex Order, or PAN response is the 
underlying security, the Exchange shall electronically communicate the 
underlying security component of a Complex PIXL Order (together with 
the Initiating Order, Complex Order, or PAN response, as applicable) to 
NOS, its designated broker-dealer, for immediate execution. Such 
execution and reporting will occur otherwise than on the Exchange and 
will be handled by NOS pursuant to applicable rules regarding equity 
trading.
    And, new subsection (J)(3) states that when the short sale price 
test in Rule 201 of Regulation SHO \31\ is triggered for a covered 
security, NOS will not execute a short sale order in the underlying 
covered security component of a Complex PIXL Order, Initiating Order, 
Complex Order, or PAN response if the price is equal to or below the 
current national best bid.\32\ However, NOS will execute a short sale 
order in the underlying covered security component of a Complex PIXL 
Order, Initiating Order Complex Order, or PAN response if such order is 
marked ``short exempt,'' regardless of whether it is at a price that is 
equal to or below the current national best bid.\33\ If short sale 
restrictions of Rule 201 are in effect at the end of the Auction and 
either the Complex PIXL Order or the Initiating Order consists of a 
stock/ETF component which is a short sale, NOS will execute the short 
sale order in the underlying covered security component if such order 
is able to be executed at a price which is above than [sic] the 
national best bid at the time of execution. If NOS cannot execute the 
underlying covered security component of a Complex PIXL Order or 
Initiating Order in accordance with Rule 201 of Regulation SHO, the 
Exchange will cancel back the Complex PIXL Order and Initiating Order 
to the entering member organization. Similarly, if short sale 
restrictions of Rule 201 are in effect at the end of the Auction and 
there exist Complex Orders or PAN responses which consist of a stock/
ETF component which is a short sale, NOS will execute the short sale 
order in the underlying covered security component if such order is 
able to be executed at a price which is above the national best bid at 
the time of execution. If NOS cannot execute the underlying covered 
security component of a Complex Order or PAN response in accordance 
with Rule 201 of Regulation SHO, the Exchange will cancel back the 
Complex Order and/or PAN response to the entering member organization. 
For purposes of this paragraph, the term ``covered security'' shall 
have the same meaning as in Rule 201(a)(1) of Regulation SHO.
---------------------------------------------------------------------------

    \31\ 17 CFR 242.201. See Securities Exchange Act Release No. 
61595 (February 26, 2010), 75 FR 11232 (March 10, 2010). See also 
Division of Trading and Markets: Responses to Frequently Asked 
Questions Concerning Rule 201 of Regulation SHO, January 20, 2011 
(``SHO FAQs'') at http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm.
    \32\ The term ``national best bid'' is defined in Rule 
201(a)(4). 17 CFR 242.201(a)(4).
    \33\ The Exchange notes that a broker or dealer may mark a sell 
order ``short exempt'' only if the provisions of Rule 201(c) or (d) 
are met. 17 CFR 242.200(g)(2). Since NOS and the Exchange do not 
display the stock or ETF portion of a complex order, however, a 
broker-dealer should not be in a position to mark the short sale 
order ``short exempt'' under Rule 201(c). See SHO FAQs Question and 
Answer Nos. 4.2, 5.4, and 5.5. See also Securities Exchange Act 
Release No. 63967 (February 25, 2011), 76 FR 12206 (March 4, 2011) 
(SR-Phlx-2011-27) (discussing, among other things, Complex Orders 
marked ``short exempt'').
---------------------------------------------------------------------------

    The Exchange is also proposing two additional minor changes to the 
Phlx rules in order to accommodate Complex Order submission into the 
PIXL mechanism, and one clarifying change to the current PIXL rule. The 
first of these rule changes is to current Rule 1080(n)(i)(E),\34\ which 
states that PIXL Orders submitted during the final second of the 
trading session in the affected series are not eligible to initiate an 
Auction and will be rejected. The Exchange is proposing to alter the 
language to state that orders submitted during the final ``two 
seconds'' of the trading session will not be eligible to initiate an 
Auction and will be rejected. The Exchange is increasing this duration 
from one to two seconds in order to accommodate the execution of 
multiple components of a Complex Order. Since this time allowance is 
set for PIXL as a whole, and not only for PIXL versus Complex PIXL, no 
orders submitted into the PIXL mechanism will be accepted when there 
remains less than two seconds in the trading session for the components 
of the order. Second, the Exchange is proposing to add language to 
Commentary .08(e)(i)(B)(2) of Rule 1080 to stipulate that a Complex 
Order that would otherwise be a COLA-eligible order that is received in 
a strategy where there is currently a Complex Order PIXL Auction in 
progress shall not be COLA-eligible. The Phlx XL system allows for only 
one Auction to be ongoing in a given series or strategy at a time. This 
rule will be changed slightly to include ``strategy'' as well as 
``series''. With the allowance of Complex Orders into PIXL, the Complex 
Order rules will also be changed to stipulate that only one Auction, 
including both COLA and PIXL, may be conducted at a time in a given 
strategy.\35\
---------------------------------------------------------------------------

    \34\ Sub-section (n)(i)(E) of Rule 1080 is re-numbered to 
(n)(i)(F); and for conformity the re-numbering is reflected in the 
opening paragraph of subsection (n). In a similar vein, other 
subsections are re-numbered as needed (e.g. sub-section (n)(i)(C) is 
re-numbered to sub-section (n)(i)(D), (n)(i)(D) is re-numbered to 
(n)(i)(E), and (n)(i)(F) is re-numbered to (n)(i)(G)).
    \35\ Proposed Rule 1080(n)(ii).
---------------------------------------------------------------------------

    Lastly, the Exchange is submitting a clarifying change to current 
Rule 1080(n)(ii)(E)(2)(a). The rule currently states that if the 
Initiating Member is

[[Page 28662]]

matched by only one specialist, SQT or RSQT at the stop price, then the 
Initiating Member is entitled to 50% of the contracts executed at such 
price. The rule is being clarified to state that if the Initiating 
Member is matched by only one other ``participant,'' which includes a 
specialist, SQT or RSQT, as well as any other exchange member, then the 
Initiating Member is entitled to 50% of the contracts executed at such 
price.
 2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \36\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \37\ 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. This will be effectuated by rule changes that allow Complex 
Orders to be submitted into the Phlx price improvement (PIXL) 
mechanism.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    PIXL is the Exchange's electronic order, trade, and execution 
system that allows a member of the Exchange known as an Initiating 
Member to electronically submit for execution an order it represents as 
agent on behalf of a public customer, broker-dealer, or any other 
entity against principal interest or against any other order it 
represents as agent provided it submits the PIXL Order for electronic 
execution into the PIXL Auction pursuant to the Rule. During the one-
second blind PIXL Auction (PAN), the Initiating Member's stop price or 
NWT price may be improved to the benefit of the PIXL Order during the 
Auction, but may not be cancelled. Anyone may respond to the PAN by 
sending orders or quotes. At the conclusion of the Auction, the PIXL 
Order will be allocated at the best price(s). PIXL has proven to be, 
since its institution several years ago, an effective electronic price 
improvement and trading tool on the Exchange that, until this proposal, 
was not able to accept Complex Orders.
    Complex Orders allow the simultaneous purchase and/or sale of two 
or more different options series in the same underlying security and 
for the same account. These orders are priced at a net debit or credit 
based on the relative prices of no more than six individual components 
for the purpose of executing a particular investment strategy. Complex 
Orders may also be stock-option orders, which enable buying or selling 
a stated number of units of an underlying stock or ETF coupled with the 
purchase or sale of options contract(s). Complex Orders allow the 
execution of spread and other multifaceted trading and hedging 
strategies that could not be done effectively, if at all, with multiple 
simple orders.
    Currently, PIXL does not accommodate Complex Orders as is allowed 
on other options exchanges, such as ISE and the Chicago Board Options 
Exchange, Incorporated (``CBOE''), which have price-improving 
electronic auctions like PIXL. Clearly, Complex Orders are and will 
continue to become an increasingly important hedging and trading 
segment of the options industry. This proposal simply allows Complex 
Orders to be entered into the Exchange's PIXL Auction mechanism just as 
is allowed on ISE and CBOE.
    The Exchange is proposing several rule changes to establish how 
Complex Orders will be accommodated in PIXL, including the following. 
First, new Rule 1080(n)(i)(C) regarding stopping the entire Complex 
Order of a conforming ratio when submitting such order into PIXL. 
Second, new Rule (n)(ii)(A)(2) to explain the process for initiating a 
PIXL Complex Auction. Third, new language in Rule 1080(n)(ii)(B)(3) to 
add a Complex Order PIXL alternative for concluding a Complex Order 
PIXL Auction. Fourth, new language in Rule 1080(n)(ii)(C) to add a 
Complex Order PIXL alternative for execution when a Complex PIXL 
Auction ended due to the cPBBO or the Complex Order book crossing the 
Complex Order PIXL stop price on the same side as the Complex PIXL 
Order. Fifth, new language in Rule 1080(n)(ii)(E)(2)(d) regarding 
allocation of Complex Order PIXL. Sixth, new language in Rule 
1080(n)(ii)(E)(2)(e) regarding allocation of Complex Order PIXL where 
an Initiating Member selected ``stop and NWT'' in respect to the stop 
price of a PIXL Order submission. Seventh, new language in Rule 
1080(n)(ii)(E)(g) to stipulate that Complex PIXL Orders which include a 
stock/ETF component will only execute against Complex Orders or PAN 
responses that also include the stock/ETF component. Eighth, new 
language in Rule 1080(n)(ii)(H) regarding a Complex Order PIXL Auction 
price matching a Complex Order Book price on the same side of the 
market as the PIXL Order. Ninth, new language in Rule 1080(n)(ii)(J) 
regarding Complex Order PIXL Orders with stock components. In addition, 
the three pilots applicable to Complex Orders (stopping the entire PIXL 
Order where the order is for a size less than 50 contracts, early 
conclusion of the PIXL Auction, and no minimum size requirement of 
orders entered into PIXL) are applicable to Complex Orders in PIXL.
    The Exchange believes this proposal reflects reasonable and proper 
amendments to accommodate Complex Orders in PIXL, the Exchange's price-
improvement mechanism that is a component of the fully automated 
options trading system Phlx XL. This ensures a dynamic, real-time 
trading mechanism that maximizes the opportunity for trade executions 
for Complex Orders.
    The proposed changes are consistent with Section 6(b)(5) of the Act 
in that they are 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 to protect investors and 
the public interest. In particular, the Exchange believes the proposed 
changes will result in more efficient trading and reduce the risk that 
Complex Orders fail to execute for investors by providing additional 
opportunities to accommodate Complex Orders in PIXL. The interaction of 
orders, including complex strategies and the Complex Book, will benefit 
investors by increasing the opportunity for Complex Orders to receive 
execution, while also enhancing execution quality for orders on the 
Complex Book. The Exchange believes that increased interaction, where 
possible, on a continuous and real-time basis of the bids and offers 
regarding a complex strategy, and the potential for price improvement 
through PIXL, will benefit market participants, investors, and traders.
    The proposal would be of significant benefit to investors and 
traders as well as the public, which will gain the opportunity to 
submit additional orders types seeking price improvement through the 
PIXL mechanism. This may lead to an increase in Exchange volume. As 
such, the proposal is decidedly pro-competitive. In addition to 
increasing volume, the proposal would allow the Exchange to better 
compete against other markets that already offer accommodation of 
complex orders in their electronic auctions.
    For all of the foregoing reasons and as discussed in the proposal, 
the Exchange believes the proposed rule changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the Exchange.

[[Page 28663]]

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. To the contrary, the Exchange 
believes the proposal is pro-competitive. First, the proposal would 
enable the Exchange to provide market participants with an expanded 
opportunity to realize price improvement of Complex Orders through 
PIXL. And second, the proposal would diminish the potential for 
foregone market opportunities on the Exchange by allowing Complex 
Orders in PIXL to be entered by all Phlx members, similarly to 
electronic price improvement functionality for complex orders that is 
allowed on other options exchanges.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2013-46 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-2013-46. 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 10:00 a.m. and 3:00 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-2013-46, and should be submitted on or before June 
5, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11521 Filed 5-14-13; 8:45 am]
BILLING CODE 8011-01-P


