
[Federal Register Volume 79, Number 219 (Thursday, November 13, 2014)]
[Notices]
[Pages 67498-67501]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26809]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73545; File No. SR-Phlx-2014-54]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Add a New 
Complex Order Process Called Legging Orders

November 6, 2014.

I. Introduction

    On September 10, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its rules governing the trading of 
complex orders on the Exchange to adopt ``legging orders.'' The 
proposed rule change was published for comment in the Federal Register 
on September 25, 2014.\3\ The Commission received no

[[Page 67499]]

comment letters regarding the proposed rule change. On November 5, 
2014, the Exchange filed Amendment No. 1 to the proposal.\4\ The 
Commission is publishing this notice to solicit comments on Amendment 
No. 1 from interested persons and is approving the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73152 (September 19, 
2014), 79 FR 57632.
    \4\ Amendment No. 1 revises the proposal to: (i) modify proposed 
Phlx Rule 1080.08(f)(iii)(C)(4)(vi) to provide that, in the event 
the Exchange receives a PIXL Order for the account of a public 
customer that is paired with another order for the account of a 
public customer pursuant to Phlx Rule 1080(n)(vi), the Exchange will 
remove any resting legging orders in those options series; (ii) add 
a proposed Phlx Rule 1080.08(f)(iii)(C)(4)(xii) to provide that a 
legging order will be removed when the legging order is on the 
Exchange's book at a price that is not at the minimum increment for 
that series and that is more aggressive than the same side Phlx Best 
Bid or Offer (``PBBO'') and an away market moves to lock the PBBO 
(which is also the NBBO); (iii) provide that the proposal will be 
implemented within 30 days of Commission approval and that the 
Exchange will notify members of implementation by issuing an Options 
Trader Alert; and (iv) the Exchange expects to implement the new 
functionality on a symbol by symbol bases over the course of a week 
to mitigate risks associated with the rollout of new technology; and 
(v) make certain non-substantive clarifications to the rule text.
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II. Description

A. Legging Orders

    The Exchange proposes to adopt Phlx Rule 1080.08(f)(iii)(C) 
relating to the generation and execution of ``legging orders.'' Under 
the proposal, a legging order is a limit order on the regular order 
book in an individual series that represents one leg of a two-legged 
complex order (which improves the cPBBO) \5\ to buy or sell an equal 
quantity of two option series resting on the Exchange's Complex Order 
Book (``CBOOK'').\6\ Phlx proposes that legging orders are firm orders 
that are included in the Exchange's displayed best bid or offer.\7\ 
According to the Exchange, legging orders are designed to increase the 
opportunity for complex orders to execute by ``legging'' into the 
market, whereby all of the legs of the complex order execute against 
the best bids or offers on the Exchange for the individual options 
series.\8\
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    \5\ According to the Exchange, the term ``cPBBO'' means 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. See Notice supra, note 3, at n.3 (citing Phlx Rule 
1080.08(a)(iv)).
    \6\ See proposed Phlx Rule 1080.08(f)(iii)(C).
    \7\ See id. Under the proposal, legging orders are also not 
routable and are limit orders with a time-in-force of DAY. See id.
    \8\ See Notice, supra note 3, at 57632.
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B. Generation of Leg Orders

    The Exchange proposes that legging orders may be automatically 
generated on behalf of Complex Orders resting on the top of the CBOOK 
so that they are represented at the best bid and/or offer on the 
Exchange for the individual legs.\9\ Phlx proposes that a legging order 
may be automatically generated for one leg of a Complex Order at a 
price: (i) that matches or improves upon the best Phlx displayed bid or 
offer; and (ii) at which the net price can be achieved when the other 
leg is executed against the best displayed bid or offer (other than 
against a legging order).\10\ The Exchange proposes not to generate 
legging orders when the Exchange or a particular option has not opened, 
is halted or is otherwise not available for trading.\11\ The Exchange 
also proposes to not generate a legging order for complex order 
strategies that are not available for trading.\12\
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    \9\ See proposed Phlx Rule 1080.08(f)(iii)(C)(1). The Exchange 
represents that there can be only one legging order on the same side 
of the market in a series. See Notice, supra note 3, at 57633.
    \10\ See proposed Phlx Rule 1080.08(f)(iii)(C)(1). See Notice, 
supra note 3, at 57633 for an example of how legging orders would be 
generated.
    \11\ See proposed Phlx Rule 1080.08(f)(iii)(C)(1).
    \12\ See id.
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    To determine whether a Legging Order may be generated, the Exchange 
proposes to evaluate the CBOOK when a Complex Order enters the CBOOK 
and at a regular time interval to be determined by the Exchange (which 
interval shall not exceed 1 second) following a change in the National 
Best Bid/Offer (``NBBO'') or PBBO in any component of a complex order 
eligible to generate legging orders to determine whether legging orders 
may be generated.\13\ Under the proposal, a legging order may be 
generated and executed in an increment other than the minimum increment 
for that series and will be ranked on the order book at its generated 
price and displayed at a price that is rounded, down for legging orders 
to buy and up for legging orders to sell, to the nearest minimum 
increment allowable for that series.\14\
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    \13\ See proposed Phlx Rule 1080.08(f)(iii)(C)(1). See also 
Notice, supra note 3, at 57633. Under the proposal, two legging 
orders relating to the same complex order can be generated, but only 
one of those can execute as part of the execution of a particular 
complex order. See id.
    \14\ See proposed Phlx Rule 1080.08(f)(iii)(C)(2).
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    The Exchange proposes to adopt Phlx Rule 1080.08(f)(iii)(C)(2) to 
provide that legging orders will not be generated if: (i) The price of 
the legging order would lock or cross the best bid or offer of another 
exchange; (ii) there is an auction on either side of the market in the 
series or a ``Posting Period'' under Phlx Rule 1080(p) regarding 
``Acceptable Trade Range'' on the same side in progress in the series; 
(iii) the price of the complex order is outside of the Acceptable 
Complex Execution (``ACE'') Parameter under Phlx Rule 1080.08(i); (iv) 
there is already a legging order in that series on the same side of the 
market at the same price (unless it has priority based on the 
participant type, under existing Exchange rules); (v) the complex order 
is an all-or-none order; or (vi) the generated legging order for a 
complex order would immediately cause resting legging orders to be 
removed pursuant to section proposed Phlx Rule 
1080.08(f)(iii)(C)(4)(ix).\15\
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    \15\ See id.
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    The Exchange proposes that it may limit the number of legging 
orders generated on an objective basis and may remove existing legging 
orders to maintain a fair and orderly market in time of extreme 
volatility or uncertainty.\16\ The Exchange represents that it will 
determine the options for which, if any, legging orders will be 
available and will communicate this to its participants.\17\ Phlx 
represents that it would not limit the generation of legging orders on 
the basis of the entering participant or the participant category of 
the order (e.g., professional or public customer).\18\
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    \16\ See Notice, supra note 3, at 57632-33.
    \17\ See id. at 57633.
    \18\ See id. at n.17.
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C. Execution of Legging Orders

    The Exchange proposes that legging orders would be executed only 
after all other executable orders (including any non-displayed size) 
and quotes at the same price are executed in full pursuant to the Phlx 
priority rules applicable to Phlx XL non-Complex Orders, rather than 
based on the time of receipt of the Complex Order.\19\ As a result, the 
Exchange states the generation of legging orders will not affect the 
existing priority, or execution opportunities, currently provided to 
participants in the regular market in any way.\20\ Under the proposal, 
when a legging order is executed, the other leg of the complex order 
will be automatically executed against the displayed best bid or offer 
on the Exchange and any other legging order based on that complex order 
will be removed.\21\
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    \19\ See proposed Phlx Rule 1080.08(f)(iii)(C)(3) and Notice, 
supra note 3, at 57634.
    \20\ See Notice, supra note 3, at 57634.
    \21\ See proposed Phlx Rule 1080.08(f)(iii)(C)(3).
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    Phlx believes that legging orders will provide additional execution 
opportunities for complex orders without negatively impacting investors

[[Page 67500]]

in the regular market.\22\ Phlx also believes that legging orders may 
facilitate additional executions and enhance execution quality for 
investors in the regular market by improving the price and/or size of 
the PBBO and by providing additional execution opportunities for 
resting orders on the regular book.\23\
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    \22\ See Notice, supra note 3, at 57634.
    \23\ See Notice, supra note 3, at 57637.
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D. Removal of Legging Orders

    The Exchange proposes to adopt Phlx Rule 1080.08(f)(iii)(C)(4) to 
provide that a legging order will be removed from the Exchange's 
regular limit order book automatically if: (i) The price of the legging 
order is no longer at the Exchange's displayed best bid or offer on the 
regular limit order book; (ii) execution of the legging order would no 
longer achieve the net price of the complex order when the other leg is 
executed against the Exchange's best displayed bid or offer on the 
regular limit order book (other than another legging order); (iii) the 
complex order is executed in full or in part; (iv) the complex order is 
cancelled or modified; (v) the price of the complex order is outside of 
the ACE Parameter of Phlx Rule 1080.08(i); (vi) the Exchange receives a 
Qualified Contingent Cross Order \24\ which includes a component in 
which a legging order exists, an order that will trigger an auction 
under Phlx rules in a component in which there is a legging order 
(whether a buy order or a sell order), or a PIXL Order for the account 
of a public customer paired with an order for the account of a public 
customer pursuant to Phlx Rule 1080(n)(vi); (vii) a legging order is 
generated by a different complex order in the same leg at a better 
price or the same price for a participant with a higher priority; 
(viii) a complex order is marketable against the cPBBO where a legging 
order is present and has more than one leg in common with the existing 
complex order that generated the legging order; (ix) a complex order 
becomes marketable against multiple legging orders; (x) a complex order 
consisting of an unequal quantity of components is marketable against 
the cPBBO where a legging order is present but cannot be executed due 
to insufficient size in at least one of the components of the cPBBO; 
(xi) an incoming all-or-none order is entered onto the order book at a 
price which is equal to or crosses the price of a legging order; or 
(xii) when the legging order is on the book at a price which is not at 
the minimum price variation and which is more aggressive than the same 
side PBBO, and an away market moves to lock the PBBO (which is also the 
NBBO).\25\
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    \24\ See Phlx Rule 1080(o).
    \25\ See proposed Phlx Rule 1080.08(f)(iii)(C)(4). See also 
Notice, supra note 3, at 57634-57636 for examples illustrating the 
removal of legging orders and supra note 4 describing Amendment No. 
1 to the proposal.
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    Finally, the Exchange proposes to implement the proposed rule 
change within 30 days of approval by the Commission, and represents 
that it will notify Exchange members of implementation by issuing an 
Options Trader Alert.\26\ The Exchange expects to implement the new 
functionality on a symbol by symbol basis over the course of a week in 
order to mitigate risks associated with the rollout of new 
technology.\27\
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    \26\ See supra note 4 describing Amendment No. 1 to the 
proposal.
    \27\ See id.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\28\ In particular, the 
Commission finds that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act,\29\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, 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.
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    \28\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \29\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that legging orders could facilitate the 
execution of complex orders resting on the Exchange's CBOOK by 
increasing the opportunities for eligible complex orders to execute 
against interest in the regular market on the Exchange's regular order 
book, thereby benefitting investors seeking to execute complex orders. 
In addition, the Commission believes that legging orders could benefit 
participants in the regular market by providing additional liquidity, 
and potentially more favorable executions, for regular market interest. 
The Commission notes that it previously approved proposals by other 
options exchanges to implement legging orders.\30\
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    \30\ See Securities Exchange Act Release Nos. 66234 (January 25, 
2012), 77 FR 4852 (January 31, 2012) (order approving File No. SR-
ISE-2011-82); 69419 (April 19, 2013), 78 FR 24449 (April 25, 2013) 
(order approving File No. SR-BOX-2013-01); and 69987 (July 15, 
2013), 78 FR 43254 (July 19, 2013) (order approving File No. SR-
CBOE-2013-026).
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    Under the proposal, legging orders will be firm orders that 
represent one leg of a two-legged complex order involving a one-to-one 
ratio resting on the top of the CBOOK.\31\ The Commission notes that, 
on Phlx, legging orders may be generated and executed in an increment 
other than the minimum increment for that options series and will be 
ranked on the order book at its generated price and displayed at a 
price that is rounded, down for legging orders to buy and up for 
legging orders to sell, to the nearest minimum increment allowable for 
that series.\32\ The Commission also notes that a legging order will be 
executed only after all other executable orders (including any non-
displayed size) and quotes at the same price are executed in full 
pursuant to the Exchange's priority rules applicable to non-complex 
orders.\33\ Accordingly, the Exchange represents that the generation of 
a legging order will not affect the existing priority, or execution 
opportunities, currently provided to market participants in the regular 
market in any way.\34\
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    \31\ See infra note 6 and accompanying text.
    \32\ See infra note 14 and accompanying text.
    \33\ See infra note 19 and accompanying text.
    \34\ See infra note 20 and accompanying text.
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    As noted above, the Exchange represents that it will carefully 
manage and curtail the number of legging orders being generated so that 
they do not negatively impact system capacity and performance.\35\ Phlx 
represents, further, that it may curtail the number of leg orders on an 
objective basis, such as by limiting the number of leg orders generated 
in a particular option, and that it will not limit the generation of 
leg orders on the basis of the entering participant or the participant 
category of the order (i.e., professional or public customer).\36\
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    \35\ See infra note 16 and accompanying text.
    \36\ See infra note 18 and accompanying text.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

[[Page 67501]]

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-2014-54 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2014-54. 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 20549-1090 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-2014-54, and should be submitted on or before December 4, 2014.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause for approving the proposed rule 
change, as amended by Amendment No. 1, prior to the 30th day after the 
date of publication of notice in the Federal Register. Amendment No. 1 
revises the proposal to, among other things, provide for two instances 
whereby the Exchange will remove legging orders to ensure that legging 
orders are removed when public customer orders are crossed through the 
Exchange's PIXL auction pursuant to Phlx Rule 1080(n)(vi) and to ensure 
that legging orders are removed consistent with Phlx Rule 1084 
governing order protection.\37\ The Commission notes that the revisions 
are designed to provide market participants with more specificity 
regarding the operation and implementation of the Exchange's legging 
order functionality. Accordingly, the Commission finds good cause for 
approving the proposed rule change, as amended, on an accelerated 
basis, pursuant to Section 19(b)(2) of the Act.\38\
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    \37\ See supra note 4 for a description of Amendment No. 1.
    \38\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-Phlx-2014-54), as amended, 
be, and hereby is, approved.
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    \39\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26809 Filed 11-12-14; 8:45 am]
BILLING CODE 8011-01-P


