
[Federal Register Volume 78, Number 166 (Tuesday, August 27, 2013)]
[Notices]
[Pages 52991-52994]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-20775]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70242; File No. SR-Phlx-2013-76]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Relating to the Discontinuation of the 
Differentiation of Price Improvement XL Orders of Less Than 50 
Contracts

August 21, 2013.
    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 August 16, 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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to discontinue the differentiation in 
subsection (n)(i)(A)(2) and subsection (n)(i)(B)(2) of Rule 1080 (Phlx 
XL and Phlx XL II) regarding Price Improvement XL (``PIXL'') Orders 
that are for a size of less than 50 contracts.\3\ The text of the 
proposed rule change is available on the Exchange's Web site at http://nasdaqomxphlx.cchwallstreet.com/nasdaqomxphlx/phlx at the principal 
office of the Exchange, and at the Commission's Public Reference Room.
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    \3\ See Exchange Act Release No. 63027 (October 1, 2010), 75 FR 
62160 (October 7, 2010) (SR-Phlx-2010-108) (order approving the PIXL 
electronic price improvement program and the noted pilot programs) 
(the ``PIXL Filing'').
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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 the proposed rule change is to discontinue the 
differentiation in subsection (n)(i)(A)(2) and subsection (n)(i)(B)(2) 
of Rule 1080 regarding PIXL Orders that are for a size of less than 50 
contracts.
    The PIXL program in Rule 1080(n) provides a price-improvement 
mechanism in which a member (an ``Initiating Member'') may 
electronically submit for execution an order it represents as agent on 
behalf of a public customer, broker-dealer, or any other entity (known 
as the ``PIXL Order'') against principal interest or against any other 
order it represents as agent, provided that such Initiating Member 
submits the PIXL Order for electronic execution into the one-second 
long PIXL Auction (``Auction'') pursuant to the rule. In addition, PIXL 
provides for the automatic execution, under certain conditions, of a 
crossing transaction where there is a public customer order in the same 
options series on each side.
    Currently, subsection (n)(i)(A) of Rule 1080 states that for public 
customer orders, if a PIXL Order is for 50 contracts or more, the 
Initiating Member must stop the entire PIXL Order at a price that is 
equal to or better than the National Best Bid or Offer (``NBBO'') on 
the opposite side of the market from the PIXL Order, provided that such 
price must be at least one minimum price improvement increment (as 
determined by the Exchange but not smaller than one cent) better than 
any limit order on the limit order book on the same side of the market 
as the PIXL Order. Subsection (n)(i)(B) states that for non-public 
customer orders (i.e., where the order is for the account of a broker-
dealer or any other person or entity that is not a public customer), if 
the order is for 50 contracts or more, the Initiating Member must stop 
the entire PIXL Order at a price that is the better of: (i) The PBBO 
price improved by at least one minimum price improvement increment on 
the same side of the market as the PIXL Order; or (ii) the PIXL Order's 
limit price (if the order is a limit order), provided in either case 
that such price is at or better than the NBBO.
    Two subsections of Rule 1080 ((n)(i)(A)(2) and (n)(i)(B)(2)) 
currently require, on a pilot basis expiring July 18, 2014, a separate 
price improvement process for public customer and non-public customer 
PIXL Orders that are less than 50 contracts in size. Subsection 
(n)(i)(A)(2) states that if the PIXL Order is for less than 50 
contracts, the Initiating Member must stop the entire PIXL Order at a 
price that is the better of: (i) The 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 such price is at 
or better than the NBBO, and at least one price improvement increment 
better than any limit order on the book on the same side of the market 
as the PIXL Order. Subsection (n)(i)(B)(2) states that if the PIXL 
Order is for less than 50 contracts, the Initiating Member must stop 
the entire PIXL Order at a price that is the better of: (i) The PBBO 
price improved by at least one minimum price improvement increment on 
the same side of the market as the PIXL Order; or (ii) the PIXL Order's 
limit price (if the order is a limit order), provided in either case 
that such price is at or better than the NBBO and at least one price 
improvement increment better than the PBBO on the opposite side of the 
market from the PIXL Order. Subsections (n)(i)(A)(2) and (n)(i)(B)(2) 
are together known as the ``Differentiation Provision''.
    The Exchange is proposing to discontinue the Differentiation 
Provision and the disparate treatment for PIXL Orders for less than 50 
contracts.\4\ As a result, all PIXL Orders regardless of their size 
will be treated the same as PIXL Orders that are 50

[[Page 52992]]

contracts or greater in size in current Rule 1080(n).\5\ Public 
customers will continue to have priority at each price level in 
accordance with PHLX Rule 1080(n)(ii)(E). Consistent with PIXL Orders 
of 50 contracts or greater in size, PHLX will consider resting quotes 
and orders for allocation at the end of the Auction with all prices 
that improve the stop price being considered first. At each given price 
point, PHLX will execute public customer interest in a price/time 
fashion such that all public customer interest which was resting on the 
order book is satisfied before any other interest that arrived after 
the Auction was initiated. After public customer interest at a given 
price point has been satisfied, remaining contracts will be allocated 
among all Exchange quotes, orders and Auction responses in accordance 
with the rules set forth in 1080(n)(ii)(E)(2) based on the manner in 
which the PIXL Order was submitted. Interest, whether resting prior to 
the commencement of the Auction or arriving during the Auction process, 
will continue to be executed according to the rules set forth in 
1080(n)(ii)(E)(2).
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    \4\ The Exchange is making conforming changes throughout 
subsection (n) of Rule 1080 to delete any rule text that 
differentiates PIXL procedures based on size.
    \5\ This proposal refers only to eliminating subsections 
(n)(i)(A)(2) and (n)(i)(B)(2) and does not refer to or effect the 
provision at subsection (n)(vii), on a pilot basis expiring July 18, 
2014, regarding no required minimum value size for orders to be 
eligible for PIXL Auctions.
     Pursuant to the PIXL Filing, see supra note 3, the Exchange has 
provided periodic reports to the Commission with detailed 
information to assist the Commission in ascertaining the level of 
price improvement attained for orders during the period of the 
pilot. The Exchange believes that these reports show the 
effectiveness of the PIXL program in providing price improvement for 
PIXL Orders. This proposal will not impact the pilot or any of the 
pilot reports. The Exchange will continue periodically providing the 
Reports to the Commission through July 18, 2014, or as required 
pursuant to the subsection (n)(vii) pilot.
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    The Exchange believes using the same exact allocation method, as it 
does today for PIXL Orders of 50 contracts or greater, is a fair 
distribution because the Initiating Order provides significant value to 
the market. The Initiating Member guarantees the PIXL Order an 
execution price at the NBBO or better at time of receipt, and is 
subject to market risk while the order is exposed to other market 
participants. The Initiating Member may only improve the stop price 
where they have stopped the agency side, and may not cancel their order 
once the Auction commences. Other market participants are free to 
modify or cancel their quotes and orders at any time during the 
Auction. The Exchange believes that the Initiating Member provides an 
important role in facilitating the price improvement opportunity for 
market participants. The following example illustrates how the proposed 
rule change would operate:
    Example:
    PBBO is 2.48-2.51 (60x30) (10 of the 30 on the offer is a public 
customer; 10 of the 30 on the offer is a market maker (MM) offering 10; 
10 of the 30 on the offer is a resting off-floor broker dealer order).
    NBBO is 2.48-2.51 (100x100).
    Under the proposed PIXL Rule with the removal of the 
Differentiation Provision, a public customer order to buy may be 
entered into PIXL and stopped at a price equal to or within a range of 
2.48-2.51. A non-public customer order to buy may be entered into PIXL 
and stopped at a price equal to or within a range of 2.49-2.51.
    Assume a public customer or non-public customer order to buy 45 
contracts is submitted into PIXL with a Stop Price of 2.51. The Auction 
will commence with an Auction notification being sent to market 
participants.
    Assume, during the Auction, two market makers (MM1 and MM2) 
respond. MM1 responds to sell 10 contracts at 2.50 and MM2 responds to 
sell 10 contracts at 2.51.
    At the end of the Auction, the PIXL Order will buy 10 contracts 
from MM1 at 2.50, leaving 35 to be allocated at the Stop Price of 2.51.
    The allocation process would continue and 10 contracts will be 
allocated to the public customer on the book at 2.51, leaving 25 
contracts to be allocated among the Initiating Order \6\ which stopped 
the PIXL Order at 2.51, the two market makers offering at 2.51, and the 
off-floor broker dealer order on the offer at 2.51.
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    \6\ As defined in Rule 1080(n).
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    The remaining 25 contracts will be allocated at a price of 2.51 
with 10 contracts (40%) being allocated to the Initiating Order, 8 (or 
7) \7\ contracts allocated to MM and 7 (or 8, per footnote 7) contracts 
allocated to MM2. Since all of the contracts have been allocated, the 
off-floor broker dealer order on the offer at 2.51 will not be 
allocated any contracts and will remain on the book.
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    \7\ See Rule 1014(g)(v)(E). PHLX rounds fractional allocations 
(i.e. 7.5 contracts in this case) downward, and allocates the 
remaining 1 contract on a random basis among those participants of 
equal priority.
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    The Exchange believes that the Differentiation Provision is 
unnecessary, and indeed is counterproductive to the goal of treating 
all PIXL Orders equally regardless of PIXL Order size. The Exchange 
believes removing the Differentiation Provision will attract new order 
flow that might not currently be afforded any price improvement 
opportunity into PIXL. When PIXL was first implemented, the 
Differentiation Provision was a means to ensure some level of price 
improvement for smaller orders. Currently, PIXL is a more mature 
product with a robust and seasoned price improvement mechanism that has 
the capacity to benefit all orders regardless of their size. Moreover, 
the Exchange notes that the Boston Options Exchange (``BOX'') currently 
has rules that do not differentiate price improvement opportunities 
based on the order size.\8\ BOX's PIP mechanism was recently modified 
\9\ to commence an auction even when there is resting interest at the 
PIP start price. When a PIP is initiated at a price equal to the NBBO, 
regardless of size, the resting quotes and orders on BOX are considered 
for allocation at the end of the auction. BOX executes interest that 
existed on the BOX order book prior to the commencement of a PIP before 
executing any interest which joined during the auction. This behavior 
aligns with the BOX standard trade allocation rules as they employ a 
price/time allocation algorithm. Similar to BOX, the PHLX proposed rule 
change will allow orders of any size to initiate an Auction at a price 
which is equal to or better than the NBBO where PHLX may have resting 
interest. PHLX will execute a PIXL Order against any interest, resting 
prior to the commencement of an Auction or interest which arrived 
during the Auction, in accordance with the rules as stated and 
illustrated with the example above. While this is different than the 
allocation algorithm that BOX employs, this behavior is consistent with 
the allocation algorithm established in the PHLX PIXL rules and 
employed today in PIXL when an order of 50 contracts or more is 
entered, regardless of the stop price.
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    \8\ See BOX Rules Chapter V, Section 18(e). BOX likewise 
operates an auction known as the PIP that does not differentiate 
based on order size. Similarly to PIXL as proposed to be amended, 
PIP involves a member entering an order into an electronic auction 
at a price that is at least equal to the NBBO. See Securities 
Exchange Act Release Nos. 49068 (January 13, 2004), 69 FR 2775 
(January 20, 2004) (SR-BSE-2002-15) (order approving trading rules 
for BOX including PIP).
    \9\ See Securities Exchange Act Release No. 67592 (August 3, 
2012), 77 FR 154 (August 9, 2012) (SR-BOX-2012-03) (order approving 
rule change to amend the PIP).
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    While the removal of the Differentiation Provision removes the 
guarantee of price improvement in a limited instance, specifically when 
a PIXL Order is for fewer than 50 contracts and PHLX is already present 
at the NBBO at the commencement of the Auction, the Exchange believes 
that the proposed rule change will benefit

[[Page 52993]]

customers because it will encourage the entry of more orders into PIXL, 
thus it is more likely that such orders may receive price improvement. 
Similar price improvement mechanisms on both the ISE and BOX do not 
guarantee price improvement over the NBBO today. ISE's PIM mechanism 
has no size differentiation and only guarantees price improvement over 
the ISE BBO.\10\ The BOX PIP mechanism allows orders of any size to be 
stopped at the NBBO or better which also does not guarantee price 
improvement.
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    \10\ See Securities Exchange Act Release No. 57847 (May 21, 
2008), 73 FR 104 (May 29, 2008) (SR-ISE-2008-29) (order approving 
proposed rule change relating to the PIM).
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    The Exchange believes that because there is no rational need for 
volume differentiation, and as there is a competitive disadvantage to 
the Exchange in continuing differentiation, it is appropriate to 
discontinue the Differentiation Provision and thereby simplify the way 
PIXL operates.
    This proposal would continue to afford the same price improvement 
opportunities for public customer and non-public customer PIXL Orders 
as is in operation today, but without differentiating based on order 
size. By way of example, to initiate an Auction for public customer 
orders, the Initiating Member would stop the entire PIXL Order at a 
price that is equal to or better than the NBBO on the opposite side of 
the market from the PIXL Order, provided that such price was at least 
one price improvement increment (no smaller than one cent) better than 
any limit order on the limit order book on the same side of the market 
as the PIXL Order. Conversely, to initiate an Auction for non-public 
customer orders where the order is for the account of a broker-dealer 
or any other person or entity that is not a public customer, the 
Initiating Member would stop the entire PIXL Order at a price that is 
the better of: (i) The PBBO price improved by at least one minimum 
price improvement increment on the same side of the market as the PIXL 
Order; or (ii) the PIXL Order's limit price (if the order is a limit 
order), provided that in either case that such price is at or better 
than the NBBO. A member would initiate a one-second long Auction by 
submitting a PIXL Order in one of three ways: (i) A single stop price; 
(ii) an auto-match price; or (iii) a not-worse-than price. Thus, under 
this proposal all PIXL Orders would be handled by current procedures 
for the price improvement of non-public and public PIXL Orders that are 
of 50 contracts or greater.\11\
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    \11\ For a description of all PIXL procedures, see Rule 1080(n).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ 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 by creating positive, beneficial incentives for Initiating 
Members to provide price improvement opportunities to market 
participants, most notably public customers. Specifically, the Exchange 
believes the proposal will result in more orders of less than 50 
contracts being executed in PIXL, thus providing an increased 
probability of price improvement for small orders. By removing the 
Differentiation Provision market participants would be incentivized to 
introduce more customer orders to PIXL for the opportunity to receive 
price improvement. Furthermore, public customers will continue to have 
priority at each price level in accordance with PHLX Rule 
1080(n)(ii)(E). In particular, the Exchange believes that using the 
same allocation process as is used today for PIXL Orders of 50 
contracts or greater, is fair and equitable because of the value the 
Initiating Member brings to the market place. Specifically, by stopping 
the PIXL Order at or better than the NBBO, the Initiating Member 
facilitates a process that protects investors and is in the public 
interest by providing an opportunity for price improvement. The 
Differentiation Provision as it is presently constructed assumes all 
broker-dealers have the same view about the price of an options 
contract. But this assumption is not necessarily true. While the market 
participant that introduces an order of less than 50 contracts into 
PIXL may only value that option at the NBBO, another market maker 
participant may be willing to price improve because their valuation is 
different. These different opinions make for a robust price discovery 
system that is the backbone of the U.S. options markets. The Exchange 
believes strongly that it should encourage such price discovery, and 
the removal of the Differentiation Provision would help to achieve this 
and more generally, benefit investors by offering more opportunities 
for customers and non-customers to receive price improvement. For these 
reasons, the Exchange believes that the proposal is fair, reasonable 
and equitable for all market participants.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, the Exchange 
is proposing to amend Rule 1080(n) to offer opportunities found on 
other options exchanges and to further foster the price discovery 
process as well as create systems that embolden market participants to 
seek out price improvement opportunities for customers.

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-2013-76 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.


[[Page 52994]]


All submissions should refer to File Number SR-Phlx-2013-76. 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-2013-76, and should be submitted on or before 
September 17, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20775 Filed 8-26-13; 8:45 am]
BILLING CODE 8011-01-P


