
[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24776-24779]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09923]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72027; File No. SR-Phlx-2014-25]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Rules 1064 and 1080

April 25, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 16, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend Rules 1064 and 1080 to more

[[Page 24777]]

specifically address the number and size of contra-parties to a 
Qualified Contingent Cross Order (``QCC Order'').
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.

* * * * *

Rule 1064. Crossing, Facilitation and Solicited Orders

    (a)-(d) No change.
    (e) A Floor Qualified Contingent Cross Order is comprised of an 
originating order to buy or sell at least 1,000 contracts, or 10,000 
contracts in the case of Mini Options, that is identified as being 
part of a qualified contingent trade, as that term is defined in 
subsection (3) below, coupled with a contra-side order or orders 
totaling [to buy or sell] an equal number of contracts.
    (1)-(3) No change.

Commentary

    .01-.04 No change.
* * * * *

Rule 1080. Phlx XL and Phlx XL II

    (a)-(n) No change.
    (o) Qualified Contingent Cross Order.
    A Qualified Contingent Cross Order is comprised of an 
originating order to buy or sell at least 1,000 contracts, or 10,000 
contracts in the case of Mini Options, that is identified as being 
part of a qualified contingent trade, as that term is defined in 
subsection (3) below, coupled with a contra-side order or orders 
totaling [to buy or sell] an equal number of contracts.
    (1)-(3) No change.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposal is to expand the availability of QCC 
orders by permitting multiple contra-parties on a QCC order. Under the 
proposal, multiple contra-parties would be allowed on one side (the 
contra-side), so long as they total the originating QCC Order, which 
would be a single order from a single party for at least 1,000 
contracts (in addition to meeting the other requirements of a QCC 
Order).
    The Exchange currently permits two types of QCC Orders. Pursuant to 
Rule 1064(e), A Floor Qualified Contingent Cross Order (``Floor QCC 
Order'') is comprised of an order to buy or sell at least 1,000 
contracts \3\ that is identified as being part of a qualified 
contingent trade,\4\ coupled with a contra-side order to buy or sell an 
equal number of contracts. Floor QCC Orders are immediately executed 
upon entry into the System by an Options Floor Broker provided that (i) 
no Customer Orders are at the same price on the Exchange's limit order 
book and (ii) the price is at or between the National Best Bid/Offer 
(``NBBO''). Floor QCC Orders are submitted into the System by Floor 
Brokers on the Floor via the Floor Broker Management System. Floor QCC 
Orders are automatically rejected if they cannot be executed.
---------------------------------------------------------------------------

    \3\ In the case of Mini Options, the minimum size is 10,000 
contracts.
    \4\ A ``qualified contingent trade'' is a transaction consisting 
of two or more component orders, executed as agent or principal, 
where: (a) At least one component is an NMS Stock, as defined in 
Rule 600 of Regulation NMS under the Exchange Act; (b) all 
components are effected with a product or price contingency that 
either has been agreed to by all the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (c) the 
execution of one component is contingent upon the execution of all 
other components at or near the same time; (d) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) is determined by the time the 
contingent order is placed; (e) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (f) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade.
---------------------------------------------------------------------------

    In addition to Floor QCC Orders, Phlx offers automated Qualified 
Contingent Cross Orders (``Automated QCC Order''). Pursuant to Rule 
1080(o), an Automated QCC Order is very similar to a Floor QCC Order, 
in that it must be comprised of an order to buy or sell at least 1,000 
contracts that is identified as being part of a qualified contingent 
trade, coupled with a contra-side order to buy or sell an equal number 
of contracts. Automated QCC Orders shall only be submitted 
electronically from off the Floor to the Phlx System. Automated QCC 
Orders are immediately executed upon entry into the System by an Order 
Entry Firm provided that (i) no Customer Orders are at the same price 
on the Exchange's limit order book and (ii) the price is at or between 
the NBBO. Automated QCC Orders will be automatically rejected if they 
cannot be executed.
    Each definition of a QCC Order is currently framed in the singular 
(* * * coupled with a contra-side order * * *), therefore, the Exchange 
would like to amend its rule to permit its members and other 
participants to submit a QCC Order consisting of a single order from a 
single party for at least 1,000 contracts on the originating or agency 
side and a single order or multiple orders on the opposite, contra-side 
(generally known as the solicited side). Multiple contra-parties are 
only permitted on one side, the contra-side, and are not permitted on 
the originating side. Currently, the contra-side to a QCC Order is 
entered into the Phlx system as a single order, even if that order 
consists of multiple contra-parties who are allocated their portion in 
a post-trade allocation. Therefore, the Exchange now proposes to modify 
its rules to provide that a QCC Order must involve a single order for a 
single party for at least 1,000 contracts on the originating side, but 
that it may consist of a single or multiple orders on the opposite, 
contra-side, so long as it totals the number of contracts on the 
originating side.
    Furthermore, the Exchange proposes to permit single or multiple 
contra-side orders on a QCC Order with a total number of contracts 
equaling the originating order size without any size restriction for 
such contra-side orders. The Exchange believes that permitting multiple 
contra-parties to QCC Orders that total the number of contracts on the 
originating side may increase liquidity and, potentially, improve the 
prices at which QCC Orders get executed. The ability for market 
participants to provide liquidity in response to large sized orders is 
directly proportional to the size and associated risk of the resulting 
position. As a result, smaller sized trades are often done at a better 
price than larger sized trades, which convey more risk. The ability to 
pool together multiple market participants to participate on the 
contra-side of a trade for any size has a direct and positive impact on 
the ability of those market participants to provide the best price as 
they compete to participate in the order without being compelled to 
provide liquidity with a large minimum quantity. This concept is not 
unique to large crosses. It is well understood and observed that any 
product with multiple market participants providing liquidity offers 
the tightest and most liquid market and the same applies to the larger 
orders negotiated away from the exchanges.
    For instance, a 5,000 contract originating QCC Order to buy could,

[[Page 24778]]

under this proposal, be coupled with two orders to sell 2,500 contracts 
each. Similarly, a 5,000 contract originating QCC Order to buy could, 
under this proposal, be coupled with two contra-side orders to sell, 
one for 4,500 contracts and one for 500 contracts. In the above 
examples, the total of all sell (contra-side) orders equals the size of 
the originating order and the originating order is for at least 1,000 
contracts.
    An area of concern has been the protection of smaller orders, which 
is why the QCC Order is limited to the 1,000 contract minimum. It is 
important to note that the concern has always been and should continue 
to be for the originating order or unsolicited part of the order that 
is seeking liquidity and not the professional responders and providers 
of liquidity. Allowing smaller orders to participate on the other side 
(i.e., contra-side) of QCC Orders not only provides the best price and 
opportunity for a trade to occur in a tight and liquid market, but 
ensures that the highest possible number of liquidity providers are 
able to participate. Accordingly, the proposal would benefit both sides 
of a QCC trade by ensuring a trade at the best possible price without 
favoring larger participants on the solicited side of the trade.
    Under this proposal, the QCC Order must continue to satisfy all 
other requirements of a QCC Order under the Exchange's rules.
    The Exchange will track and monitor QCC Orders to determine which 
is the originating/agency side of the order and which is the contra-
side(s) of the order to ensure that Members are complying with the 
minimum 1,000 contract size limitation on the originating/agency side 
of the QCC Order. The Exchange will check to see if Members are 
aggregating multiple orders to meet the 1,000 contract minimum on the 
originating/agency side of the trade in violation of the requirements 
of the rule. The rule requires that the originating/agency side of the 
trade consist of one party who is submitting a QCC Order for at least 
1,000 contracts. The Exchange represents that it will enforce 
compliance with this portion of the rule by checking to see if a Member 
breaks up the originating/agency side of the order in a post trade 
allocation to different clearing firms, allocating less than 1,000 
contracts to a party or multiple parties. For example, a Member enters 
a QCC Order into the system for 1,500 contracts and receives an 
execution. Subsequent to the execution, the Member allocates the 
originating/agency side of the order to two different clearing firms on 
a post trade allocation basis, thereby allocating 500 contracts to one 
clearing firm and 1,000 contracts to another clearing firm. This type 
of transaction would not meet the requirements of a QCC Order under the 
current and proposed rule.
    With regard to order entry, a Member will have to mark the 
originating/agency side as the first order in the system and the 
contra-side(s) as the second. The Exchange will monitor order entries 
to ensure that Members are properly entering QCC Orders into the 
system.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \5\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \6\ 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 amending the rule text to expand a QCC Order. Specifically, because 
the proposal states that multiple parties are permitted on the contra-
side, it should provide members and participants with certainty as to 
what is allowed and, therefore, provide more opportunity to participate 
in QCC trades, consistent with the key principles behind the QCC Order. 
Furthermore, because the proposal permits a single or multiple contra-
parties without any contract size requirement so long as they total the 
originating size, it should also increase liquidity and improve the 
prices at which QCC Orders get executed and, therefore, provide more 
opportunity to participate in QCC trades, consistent with the key 
principles behind the QCC Order.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In approving QCC Orders, the Commission has stated that ``. . . 
qualified contingent trades are of benefit to the market as a whole and 
a contribution to the efficient functioning of the securities markets 
and the price discovery process.'' \7\ The Commission ``also has 
recognized that contingent trades can be useful trading tools for 
investors and other market participants, particularly those who trade 
the securities of issuers involved in mergers, different classes of 
shares of the same issuer, convertible securities, and equity 
derivatives such as options [emphasis added].'' \8\ In light of these 
benefits, the Exchange believes that the proposal should improve the 
usefulness of the QCC Order without raising novel regulatory issues, 
because the proposal does not impact the fundamental aspects of this 
order type--it merely permits multiple contra-parties, regardless of 
size, on the contra-side, while preserving the 1,000 contract minimum 
on the originating order.
---------------------------------------------------------------------------

    \7\ QCC Approval Order [sic] at text accompanying footnote 115.
    \8\ QCC Approval Order [sic] at Section III.A. citing Securities 
Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829 
(September 7, 2006) (Original QCT Exemption).
---------------------------------------------------------------------------

    Consistent with Section 6(b)(8) of the Act, the Exchange seeks to 
compete with other options exchanges for QCC Orders involving multiple 
parties, including where there are multiple contra-parties. The 
Exchange believes that this will be beneficial to participants because 
allowing single or multiple contra-parties of any size on the contra-
side should foster competition for filling the contra-side of a QCC 
Order and thereby result in potentially better prices.

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. In fact, the proposal is 
intended to relieve a burden on competition, which results from 
different exchanges interpreting their rules differently. Among the 
options exchanges, the Exchange believes that the proposal to allow, on 
the contra-side, a single or multiple contra-parties without any 
contract size restriction so long as they total the originating size 
should foster competition for filling the contra-side of a QCC order 
and thereby result in potentially better prices for such orders.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \9\ and rule 19b-4(f)(6) thereunder.\10\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the

[[Page 24779]]

Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\11\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.196-4(f)(6).
    \11\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\13\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest, as it will help 
eliminate investor confusion and promote competition among the option 
exchanges.\14\ Therefore, the Commission designates the proposed rule 
change to be operative upon filing.
---------------------------------------------------------------------------

    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    The Commission notes that, given the differing requirements as 
between the originating side and contra-side for QCC Orders, it is 
essential that the Exchange be able to clearly identify and monitor--
throughout the life of a QCC Order, beginning at time of order entry on 
the Exchange through the post-trade allocation process--each side of 
the QCC Order and ensure that the requirements of the order type are 
being satisfied including, importantly, those relating to the 
originating side. The Commission believes this to be critical so that 
the Exchange can ensure that market participants are not able to 
circumvent the requirements of the QCC Order (as amended by this 
proposed rule change), each of which the Commission continues to 
believe are critical to ensuring that the QCC Order is narrowly 
drawn.\15\ Further, the Commission notes that the Exchange has made 
certain representations regarding its enforcement and surveillance of 
its Members' use of QCC Orders, including, for example, not only at the 
time of order entry, but through the post-trade allocation process as 
well.
---------------------------------------------------------------------------

    \15\ The Commission expects the Exchange to have the capability 
to enable it to surveil that such requirements are being met. Though 
the Exchange has stated its ability to do so, if the Exchange is not 
able to have such monitoring at any point in time, the Commission 
would expect the Exchange to take other steps to ensure that the QCC 
Order cannot be improperly used. For example, if the Exchange were 
not able to identify and monitor which side of a QCC Order is the 
originating order, the Commission would expect that it would require 
that both sides of the QCC Order meet the more stringent 
requirements of the originating side, i.e., that it be for a single 
order for at least 1,000 contracts.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2014-25 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2014-25. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2014-25, and should be 
submitted on or before May 22, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09923 Filed 4-30-14; 8:45 am]
BILLING CODE 8011-01-P


