
[Federal Register Volume 80, Number 77 (Wednesday, April 22, 2015)]
[Notices]
[Pages 22569-22580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-09265]



[[Page 22569]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74746; File No. SR-Phlx-2014-66]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Amendment No. 2 and Designation of Longer Period for 
Commission Action on Proceedings To Determine Whether To Approve or 
Disapprove Proposed Rule Change, as Modified by Amendment No. 2, To 
Adopt New Exchange Rule 1081, Solicitation Mechanism, To Introduce a 
New Electronic Solicitation Mechanism

April 16, 2015.

I. Introduction

    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 9, 2015, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') Amendment No. 2 to the proposed rule change as 
described in Items II and III below, which Items have been 
substantially prepared by the Exchange.\3\ Amendment No. 2 replaces the 
original filing in its entirety.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as modified by 
Amendment No. 2, from interested persons and to designate a longer 
period within which to issue an order approving or disapproving the 
proposed rule change, as modified by Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed Amendment No. 1 on April 1, 2015. 
Amendment No. 1 was withdrawn on April 8, 2015.
    \4\ See infra note 7. See also infra note 14 for the Exchange's 
description of the changes in Amendment No. 2.
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    On October 14, 2014, the Exchange filed with the Commission, 
pursuant to Section 19(b)(1) of the Act \5\ and Rule 19b-4 
thereunder,\6\ a proposed rule change to adopt new Exchange Rule 1081, 
Solicitation Mechanism, to introduce a new electronic solicitation 
mechanism pursuant to which a member would be able to electronically 
submit all-or-none orders of 500 contracts or more (or, in the case of 
mini options, 5,000 contracts or more) that the member represents as 
agent against contra orders that the member solicited. The proposed 
rule change was published for comment in the Federal Register on 
October 31, 2014.\7\ On December 8, 2014, the Commission extended the 
time period in which to either approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change to 
January 29, 2015.\8\ On January 28, 2015, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Act \9\ to determine 
whether to approve or disapprove the proposed rule change.\10\ The 
Commission received one comment letter regarding the proposal,\11\ as 
well as a response to the comment letter from the Exchange.\12\
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    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ See Securities Exchange Act Release No. 73441 (October 27, 
2014), 79 FR 64862 (``Notice'').
    \8\ See Securities Exchange Act Release No. 73791 (December 8, 
2014), 79 FR 73924 (December 12, 2014).
    \9\ 15 U.S.C. 78s(b)(2)(B).
    \10\ See Securities Exchange Act Release No. 74167 (January 28, 
2015), 80 FR 5865 (February 3, 2015) (``Order Instituting 
Proceedings'').
    \11\ See Letter from Michael J. Simon, Secretary and General 
Counsel, International Securities Exchange LLC, dated February 25, 
2015.
    \12\ See Letter from Carla Behnfeldt, Associate General Counsel, 
Nasdaq, dated March 11, 2015.
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II. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt new Exchange Rule 1081, Solicitation 
Mechanism, to introduce a new electronic solicitation mechanism 
pursuant to which a member can electronically submit all-or-none orders 
of 500 contracts or more (or, in the case of mini options, 5,000 
contracts or more) the member represents as agent against contra orders 
the member solicited. The Exchange is also proposing a corresponding 
amendment to the definition of ``professional'' in Rule 1,000(b)(14) 
and a clarification to Rule 1080, Phlx XL and Phlx XL II. The proposed 
rule change was filed on October 14, 2014.\13\ Amendment No. 2 amends 
and replaces the original filing in its entirety.\14\
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    \13\ See Securities Exchange Act Release No. 73441 (October 27, 
2014), 79 FR 64862 (October 31, 2014). The Exchange filed Amendment 
No. 1 on April 1, 2015. Amendment No. 1 was withdrawn on April 8, 
2015.
    \14\ The amendment makes certain changes to Exchange Rule 
1080(n) regarding the PIXL auction process, clarifies that the 
trading system does not currently accept all-or-none Complex Orders, 
provides that the side of the Agency Order will be disseminated at 
the commencement of an auction, clarifies the treatment of 
responsive all-or-none interest in the auction, adds examples and 
makes certain other technical and clarifying changes.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

III. 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 proposal is to introduce an electronic 
solicitation mechanism. Currently, under Phlx Rule 1080(c)(ii)(C)(2), 
Order Entry Firms \15\ must expose orders they represent as agent for 
at least one second before such orders may be automatically executed, 
in whole or in part, against orders solicited from members and non-
member broker-dealers to transact with such orders.\16\ The proposed 
rule change would provide an alternative, enabling a member to 
electronically execute orders it represents on behalf of a public 
customer, broker-dealer, or any other

[[Page 22570]]

entity (an ``Agency Order'') \17\ against solicited limit orders of a 
public customer, broker-dealer, or any other entity (a ``Solicited 
Order'') through a solicitation mechanism designed for this 
purpose.\18\
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    \15\ Rule 1080(c)(ii)(A)(1) defines ``Order Entry Firm'' as a 
member organization of the Exchange that is able to route orders to 
AUTOM. (AUTOM is the Exchange's electronic quoting and trading 
system, which has been denoted in Exchange rules as XL II, XL and 
AUTOM.)
    \16\ Section (c), Solicited Orders, of Exchange Rule 1064, 
Crossing, Facilitation and Solicited Orders, governs execution of 
solicited orders by open outcry, on the Exchange trading floor, and 
is unaffected by proposed Rule 1081. Additionally, many aspects of 
the functionality of the proposed solicitation mechanism are similar 
to those provided for in Rule 1080(n), PIXL, and certain of the 
rules proposed herein consequently track the existing PIXL rules. 
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. Like the 
solicitation mechanism, PIXL is a mechanism whereby an initiating 
member submits a two-sided (buy and sell) order into an auction 
process soliciting price improvement. See Securities Exchange Act 
Release Nos. 63027 (October 1, 2010), 75 FR 62160 (October 7, 2010) 
(order approving SR-Phlx-2010-108, for purposes of this proposed 
rule change, the ``PIXL Filing'') and 69845 (June 25, 2013), 78 FR 
39429 (July 1, 2013) (SR-Phlx-2013-46 and, for purposes of this 
proposed rule change, the ``Complex PIXL Filing'') (Order Granting 
Approval To Proposed Rule Change, as Modified by Amendment No. 1, 
Regarding Complex Order PIXL).
    \17\ Rule 1080(b)(i)(A) provides in part that ``[f]or purposes 
of Exchange options trading, an agency order is any order entered on 
behalf of a public customer, and does not include any order entered 
for the account of a broker-dealer, or any account in which a 
broker-dealer or an associated person of a broker-dealer has any 
direct or indirect interest.'' However, that provision did not 
contemplate, and is not applicable to, the capitalized and defined 
term ``Agency Order'' as used in proposed Rule 1081.
    \18\ To be clear, participants must ensure that their records 
adequately demonstrate the solicitation of an order that is entered 
into the mechanism for execution against an Agency Order as a 
Solicited Order prior to entry of such order into this mechanism.
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    The new mechanism is a process by which a member (the ``Initiating 
Member'') can electronically submit all-or-none orders \19\ of 500 
contracts or more (or, in the case of mini options,\20\ 5,000 contracts 
or more) that it represents as agent against contra orders that it has 
solicited, and initiate an auction (the ``Solicitation Auction'').\21\ 
As explained below, at the end of the Solicitation Auction, allocation 
will occur with all contracts of the Agency Order trading at an 
improved price against non-solicited contra-side interest or at the 
stop price, defined below, against the Solicited Order. The 
solicitation mechanism would accommodate both simple orders and Complex 
Orders.\22\ Prior to the first time a member enters an Agency Order 
into the solicitation mechanism on behalf of a customer, the member 
would be required to deliver to the customer a written notification 
informing the customer that its Agency Orders may be executed using the 
Phlx's solicitation mechanism. Such written notification would be 
required to disclose the terms and conditions contained in Rule 1081 
and to be in a form approved by the Exchange.\23\
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    \19\ Exchange Rule 1066(c)(4) defines an ``all-or-none'' order 
as a market or limit order which is to be executed in its entirety 
or not at all.
    \20\ A given Solicitation Auction may be for options contracts 
exclusively or for mini options contracts exclusively, but cannot be 
used for a combination of both options contracts and mini options 
contracts together.
    \21\ Similar electronic functionality is offered today by 
competing exchanges. See Chicago Board Options Exchange (``CBOE'') 
Rule 6.74B, Solicitation Auction Mechanism (the ``CBOE Mechanism''), 
and International Securities Exchange (``ISE'') Rule 716(e), 
Solicited Order Mechanism (the ``ISE Mechanism'').
    \22\ A Complex Order is any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying 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 .07 to Rule 1080.
    \23\ See Rule 1081(i)(H). The rule would require delivery of 
this disclosure only prior to the first submission of an Agency 
Order on behalf of a customer rather than prior to the submission of 
each and every Agency Order on behalf of such customer.
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Solicitation Auction Eligibility Requirements
    All options traded on the Exchange, including mini options, are 
eligible for the Solicitation Auction. Proposed Rule 1081(i) describes 
the circumstances under which an Initiating Member may initiate a 
Solicitation Auction.
    Proposed Rule 1081(i)(A) provides that the Agency Order and the 
Solicited Order must each be limit orders for at least 500 contracts 
(or, in the case of mini options, at least 5,000 contracts) and be 
designated as all-or-none. The orders must match in size, and their 
limit prices must match or cross in price.\24\ If the orders cross in 
price, the price at which the Agency Order and the Solicited Order may 
be considered for submission pursuant to Rules 1081(i)(B) and (C) shall 
be the limit price of the Solicited Order.\25\ The orders may not be 
stop or stop limit orders, must be marked with a time in force of day, 
good till cancelled or immediate or cancel, and will not be routed 
regardless of routing strategy indicated on the order.\26\
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    \24\ In the case of Complex Orders, the underlying components of 
both Complex Orders must also match. Additionally, all the option 
legs of each Complex Order must consist entirely of options or 
entirely of mini options.
    \25\ For example, assume an Agency Order to buy 1000 contracts 
for $2.00 and a Solicited Order to sell 1,000 contracts at $1.90 are 
entered into the solicitation mechanism. Since the limits of these 
orders cross in price, the Agency Order and Solicited Order are 
considered to be submitted into the mechanism with a stop price 
equal to the Solicited Order price of $1.90.
    \26\ Whether an order is marked with a time in force of day as 
opposed to, for example, good till cancelled or immediate or cancel 
is irrelevant to the manner in which they will be treated once they 
are entered into the solicitation mechanism.
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    Pursuant to Rule 1081(i)(B) the Initiating Member must stop the 
entire Agency Order at a price (the ``stop price'') that is equal to or 
better than the National Best Bid/Offer (``NBBO'') on both sides of the 
market, provided that such price must be at least $0.01 better than any 
public customer non-contingent limit order on the Phlx order book and 
must be equal to the Agency Order's limit price or provide the Agency 
Order with a better price than its limit price. Stop prices may be 
submitted in $0.01 increments, regardless of the applicable Minimum 
Price Variation (the ``MPV''). Contingent orders \27\ (including all-
or-none, stop or stop-limit orders) on the book will not be considered 
when checking the acceptability of the stop price. Contingent orders 
are not represented as part of the Exchange Best Bid/Offer since they 
may only be executed if specific conditions are met. Given these orders 
are not represented as part of the Exchange Best Bid/Offer, they are 
not included in the NBBO and thus not considered when checking the 
acceptability of the stop price.\28\
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    \27\ A contingent order is a limit or market order to buy or 
sell that is contingent upon a condition being satisfied. PIXL also 
does not consider contingent orders on the book when checking the 
acceptability of the stop price.
    \28\ Rule 1081(i)(B) does not apply if the Agency Order is a 
Complex Order (a ``Complex Agency Order''). Rather, Rule 1081(i)(C) 
applies to Complex Agency Orders and requires them to be of a 
conforming ratio, as defined in Commentary .07(a)(ix) to Rule 1080. 
A Complex Agency Order which is not of a conforming ratio will be 
rejected. (PIXL operates in the same manner. See Rule 
1080(n)(i)(C).) Rule 1081(i)(C) requires all component option legs 
of the order to be for at least 500 contracts (or, in the case of 
mini options, at least 5,000 contracts). It also provides that the 
Initiating Member must stop the entire Complex Agency Order at a 
price that is better by at least $0.01 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'') regardless of size, provided in either case that such price 
is equal to or better than the Complex Agency Order's limit price. 
Stop prices for Complex Agency Orders may be submitted in $0.01 
increments, regardless of MPV, and contingent orders on the book 
will not be considered when checking the acceptability of the stop 
price. See proposed Rule 1081(i)(C).
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    Orders which are submitted which do not comply with the eligibility 
requirements set forth in proposed Rule 1081(i)(A) through (C) will be 
rejected upon receipt and ineligible to initiate a Solicitation 
Auction.\29\ In addition, Agency Orders submitted at or before the 
opening of trading are not eligible to initiate a Solicitation Auction 
and will be rejected.\30\ Orders submitted during a specified period of 
time, as determined by the Exchange and communicated to Exchange 
membership on the Exchange's Web site, prior to the end of the trading 
session in the affected series \31\ (including, in the case of Complex 
Orders, in any series which is a component of the Complex Order) are

[[Page 22571]]

not eligible to initiate a Solicitation Auction and will be 
rejected.\32\ Agency Orders which are not Complex Orders received while 
another electronic auction (including any Solicitation Auction, PIXL 
auction, or any other kind of auction) involving the same option series 
is in progress are not eligible to initiate a Solicitation Auction and 
will be rejected.\33\ Similarly, a Complex Agency Order received while 
another auction in the same Complex Order strategy is in progress is 
not eligible to initiate a Solicitation Auction and will be 
rejected.\34\
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    \29\ See Rule 1081(i)(D).
    \30\ See Rule 1081(i)(E).
    \31\ The term ``series'' of options means all option contracts 
of the same class having the same expiration date and exercise 
price. A ``class'' of options means all option contracts of the same 
``type'' of option covering the same underlying stock. A ``type'' of 
option means the classification of an option contract as a put or a 
call. See Rule 1000, Applicability, Definitions and References.
    \32\ See Rule 1081(i)(F).
    \33\ A similar restriction applies with respect to PIXL 
auctions. See PIXL Rule 1080(n)(ii) which provides that ``[o]nly one 
Auction may be conducted at a time in any given series or 
strategy.'' The Exchange is proposing to revise this provision to 
make clear that only one electronic auction of any kind may be 
conducted at a time in any given series or strategy. The Exchange is 
proposing to further amend the PIXL rule by adding Rule 
1080(n)(i)(H) to provide that PIXL Orders that are received while 
another electronic auction involving the same option series or the 
same Complex Order strategy is in progress are not eligible to 
initiate a PIXL Auction and will be rejected.
    \34\ However, a simple Agency Order in one series that is 
submitted while an electronic auction is already in process with 
respect to a Complex Agency Order that includes the same series will 
not be rejected. Instead, a Solicitation Auction will be initiated 
for that incoming Agency Order offering each unique strategy or 
individual series the same opportunity to initiate an auction. This 
behavior is consistent with the handling of overlapping PIXL and 
Complex PIXL auctions. See PIXL Rule 1080(n)(ii). Any Legging Orders 
will automatically be removed from the order book upon receipt of an 
Agency or Complex Agency Order which consists of a component in 
which there is a Legging Order (whether a buy order or a sell order) 
that initiates a Solicitation Auction. See Rule 
1080.07(f)(iii)(C)(4)(vi). Complex Orders submitted during normal 
trading hours in a strategy which has not yet opened under 
Commentary .07 of Exchange Rule 1080 will cause the strategy to 
immediately open and a Solicitation Auction may be initiated. See 
Rule 1081(i)(E). In addition, neither a Solicitation Auction for a 
simple Agency Order or Complex Agency Order may be initiated prior 
to the regular opening of the individual option in the case of a 
simple Agency Order, or the regular opening of all individual 
components in the case of a Complex Agency Order.
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    Finally a solicited order for the account of any Exchange 
specialist, streaming quote trader (``SQT''), remote streaming quote 
trader (``RSQT'') or non-streaming registered options trader (``ROT'') 
assigned in the affected series may not be a Solicited Order.\35\ 
Consistent with the explanation the Exchange made in the PIXL Filing, 
the Exchange believes that in order to maintain fair and orderly 
markets, a market maker assigned in an option should not be solicited 
for participation in a Solicitation Auction by an Initiating Member. 
The Exchange believes that market makers interested in participating in 
transactions on the Exchange should do so by way of his/her quotations, 
and should respond to Solicitation Auction notifications rather than 
create them by having an Initiating Member submitting Solicited Orders 
on the market maker's behalf.
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    \35\ See Rule 1081(i)(G). An SQT is an Exchange Registered 
Options Trader (``ROT'') who has received permission from the 
Exchange to generate and submit option quotations electronically 
through AUTOM in eligible options to which such SQT is assigned. An 
SQT may only submit such quotations while such SQT is physically 
present on the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(A). A RSQT is defined in Exchange Rule 1014(b)(ii)(B) as 
an ROT that is a member affiliated with a Remote Streaming Quote 
Trader Organization (``RSQTO'') with no physical trading floor 
presence who has received permission from the Exchange to generate 
and submit option quotations electronically in options to which such 
RSQT has been assigned. A qualified RSQT may function as a Remote 
Specialist upon Exchange approval. An RSQT may only submit such 
quotations electronically from off the floor of the Exchange. An 
RSQT may not submit option quotations in eligible options to which 
such RSQT is assigned to the extent that the RSQT is also approved 
as a Remote Specialist in the same options. An RSQT may only trade 
in a market making capacity in classes of options in which he is 
assigned or approved as a Remote Specialist. An RSQTO is a member 
organization in good standing that satisfies the SQTO readiness 
requirements in Rule 507(a).
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Solicitation Auction Process
    Pursuant to Rule 1081(ii)(A)(1), to begin the process the 
Initiating Member must mark the Agency Order and the Solicited Order 
for Solicitation Auction processing, and specify the stop price at 
which it seeks to cross the Agency Order with the Solicited Order. The 
system will determine the stop price based upon the submitted limit 
prices if such prices do not match as discussed above. Once the 
Initiating Member has submitted an Agency Order and Solicited Order for 
processing pursuant to this subparagraph, such Agency Order and 
Solicited Order may not be modified or cancelled.\36\
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    \36\ For clarity, Rule 1080(ii)(A)(l) does not apply to Complex 
Agency Orders. Rather, in a parallel provision, proposed Rule 
1081(ii)(A)(2) provides that to initiate a Solicitation Auction in 
the case of a Complex Agency Order and Complex Solicited Order (a 
``Complex Solicitation Auction''), the Initiating Member must mark 
the orders for Solicitation Auction processing, and specify the 
price (``stop price'') at which it seeks to cross the Complex Agency 
Order with the Complex Solicited Order. The system will determine 
the stop price based upon the submitted limit prices if such prices 
do not match as discussed above. Once the Initiating Member has 
submitted the orders for processing pursuant to this subparagraph, 
they may not be modified or cancelled.
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Crossing Two Public Customer Orders Without a Solicitation Auction
    As noted above, the proposed rule change would enable a member to 
electronically execute an Agency Order, which is an order it represents 
on behalf of a public customer, broker-dealer, or any other entity, 
against a Solicited Order, which is a solicited limit order of a public 
customer, broker-dealer, or any other entity through the solicitation 
mechanism.
    However, pursuant to Rule 1081(v), if a member enters an Agency 
Order for the account of a public customer paired with a Solicited 
Order for the account of public customer and if the paired orders 
adhere to the eligibility requirements of Rule 1081(i), such paired 
orders will be automatically executed without a Solicitation 
Auction.\37\ The execution price for such paired public customer orders 
(except if they are Complex Orders) must be expressed in the minimum 
quoting increment applicable to the affected series.\38\ Such an 
execution may not trade through the NBBO or at the same price as any 
resting public customer order. If all-or-none orders are on the order 
book in the affected series, the public customer-to-public customer 
order may not be executed at a price at which the all-or-none order 
would be eligible to trade based on its limit price and size.\39\
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    \37\ The eligibility requirements require the orders to each be 
limit orders for at least 500 contracts (or, in the case of mini 
options, at least 5000 contracts) and be designated as all-or-none. 
The orders must match in size, and the limit prices must match or 
cross in price. The orders may not be stop or stop limit orders, 
must be marked with a time in force of day, good till cancelled or 
immediate or cancel. In the case of Complex Orders, the orders must 
be of a conforming ratio, and all component option legs of the order 
must be for at least 500 contracts (or, in the case of mini options, 
at least 5000 contracts). See Rule 1081(i). The Exchange also 
accommodates the crossing of two public customer orders in PIXL. See 
Rule 1080(n).
    \38\ The execution price for a Complex Order may be in $.01 
increments.
    \39\ All-or-none orders can only be submitted for non-broker 
dealer customers. As stated above, all-or-none orders are not 
considered when checking the acceptability of the stop price of an 
Agency Order.
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    In the case of a Complex Order, a public customer-to-public 
customer cross may only occur at a price which improves the calculated 
Phlx Best Bid/Offer or ``cPBBO'' and improves upon the net limit price 
of any Complex Orders (excluding all-or-none) on the Complex Order book 
in the same strategy.\40\ If all-or-none Complex Orders \41\ are on the 
Complex Order

[[Page 22572]]

book in the same strategy, the public customer-to-public customer 
Complex Order may not be executed at a price at which the all-or-none 
Complex Order would be eligible to trade based on its limit price and 
size.
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    \40\ 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 Rule 
1080.07(a)(iv).
    \41\ The Exchange's trading system is capable of accepting all-
or-none Complex Orders which are not, however, affirmatively 
permitted to be submitted under Exchange rules. Rule 1080.07(b)(v) 
provides in part that ``Complex Orders may be submitted as: All-or-
none orders--to be executed in its entirety or not at all.'' See 
Securities Exchange Act Release No. 72351 (June 9, 2014), 79 FR 
33977 (June 13, 2014) (SR-Phlx-2014-39). Nevertheless, all-or-none 
Complex Orders may not be submitted at this time. To make this 
clear, the Exchange proposes to add a sentence at the end of Rule 
1080.07(b)(v) stating that ``[n]otwithstanding the above, the 
trading system does not currently accept all-or-none Complex 
Orders.'' The Exchange anticipates that it will file a proposed rule 
change to provide for the handling and execution of all-or-none 
Complex Orders and thereafter permit the trading system to accept 
them. The Exchange therefore intends to delete this new sentence if 
the Exchange submits and the Commission approves a proposed rule 
change that provides for all-or-none orders to be submitted through 
the trading system. The instant proposed rule change describes how 
the solicitation mechanism will deal with all-or-none Complex Orders 
once they are permitted under Exchange rules. Complex Agency Orders 
and Complex Solicited Orders provided for herein are not Complex 
Orders that will require filing of a proposed rule change in order 
to be submitted into the system. Complex Agency Orders and Complex 
Solicited Orders, while all-or-none in character, are unique to the 
solicitation mechanism and are explicitly provided for herein.
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    The Exchange believes that permitting such executions will benefit 
public customers on both sides of the crossing transaction by providing 
speedy and efficient executions to public customer orders in this 
circumstance while maintaining the priority of public customer interest 
on the book. The proposed handling of a public customer Agency Order 
paired with a public customer Solicited Order is similar to the 
handling of a public customer PIXL Order paired with a public customer 
Initiating Order which is submitted into the PIXL mechanism.\42\
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    \42\ See Rule 1080(n)(vi).
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Solicitation Auction Notification
    Pursuant to proposed Rule 1081(ii)(A)(3), when the Exchange 
receives an order for Solicitation Auction processing, a Request for 
Response with the option details (meaning, the security, strike price, 
and expiration date), size, side and stop price of the Agency Order and 
the Solicitation Auction start time is then sent over the PHLX Orders 
data feed \43\ and Specialized Quote Feed (``SQF'').\44\ The Exchange 
believes that providing option details, size, side and stop price is 
sufficient information for participants to determine whether to submit 
responses to the Solicitation Auction.\45\
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    \43\ The PHLX Orders data feed is designed to provide the real-
time status of simple and Complex Orders on the Phlx order book 
directly to subscribers. This includes new orders and changes to 
orders resting on the Phlx book for all Phlx listed options. PHLX 
Orders also includes opening imbalance information, PIXL information 
and Complex Order Live Auction (``COLA'') data.
    \44\ SQF is an interface that allows specialists and market 
makers to connect and send quotes into Phlx XL and assists them in 
responding to auctions and providing liquidity to the market.
    \45\ In the case of a Complex Agency Order, the Request for 
Response will include the strategy, side, size, and stop price of 
the Agency Order as well as the Solicitation Auction start time.
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Solicitation Auction
    The Solicitation Auction process is described in proposed Rules 
1081(ii)(A)(4)-(10). Following the issuance of the Request for 
Response, the Solicitation Auction will last for a period of 500 
milliseconds \46\ unless it is concluded as the result of any of the 
circumstances described below.\47\
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    \46\ In April/May 2014, to determine whether the proposed 
Solicitation Auction timer would provide sufficient time to respond 
to a Request for Response, the Exchange polled all Phlx market 
makers, 20 of which responded. Of those that responded to the 
survey, 15 are currently responding to auctions on Phlx or intend to 
do so. 100% of those respondents indicated that their firm could 
respond to auctions with a duration of at least 50 milliseconds. 
Thus, the Exchange believes that the proposed Solicitation Auction 
duration of 500 milliseconds would provide a meaningful opportunity 
for participants on Phlx to respond to a Solicitation Auction, 
whether initiated by an Agency Order or a Complex Agency Order, 
while at the same time facilitating the prompt execution of orders. 
The Exchange notes that both ISE and Miami International Securities 
Exchange LLC (``MIAX'') rules provide for a 500 millisecond response 
time. See ISE Rule 716, Supplementary Material .04 and MIAX Rule 
515A(b)(2)(i)(C).
    \47\ Rule 1080(c)(ii)(C)(2), which states that Order Entry Firms 
must expose orders they represent as agent for at least one second 
before such orders may be automatically executed against solicited 
orders, is being amended to clarify that it does not apply to Rule 
1081, Solicitation Mechanism. See also Rule 1081(ii)(A)(4).
---------------------------------------------------------------------------

    Any person or entity may submit Responses to the Request for 
Response, provided such Response is properly marked specifying the 
price, size and side of the market at which it would be willing to 
participate in the execution of the Agency Order.\48\ The Exchange 
believes that permitting any person or entity to submit Responses to 
the Request for Response should attract Responses from all sources, 
maximizing the potential for liquidity in the Solicitation Auction and 
thus affording the Agency Order the best opportunity for price 
improvement. Responses will not be visible to Solicitation Auction 
participants, and will not be disseminated to the Options Price 
Reporting Authority (``OPRA''). A Response may be for any size up to 
the size of the Agency Order.\49\ The minimum price increment for 
Responses will be $0.01. A Response must be equal to or better than the 
NBBO on both sides of the market at the time of receipt of the 
Response. A Response with a price that is outside the NBBO at the time 
of receipt will be rejected.\50\ Multiple Responses from the same 
member may be submitted at different prices during the Solicitation 
Auction. Responses may be modified or cancelled during the Solicitation 
Auction. The acceptance and handling of Responses to a Solicitation 
Auction is the same as the acceptance and handling of Responses today 
for a PIXL Auction.\51\
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    \48\ In the case of a Complex Agency Order, the Response must 
also specify the price, size and side of the market at which the 
person submitting the Response would be willing to participate in 
the execution of the Complex Agency Order.
    \49\ Responses may not be submitted with an all-or-none 
contingency. All-or-none (as a Response) is not available for any 
type of auction in the Phlx market because all-or-none orders may be 
submitted only for Customer accounts under Exchange rules, and 
Customers typically do not respond to auctions in any event. (Note, 
however, that all-or-none orders entered and present in the system 
at the end of the Solicitation Auction will be considered for 
execution, as discussed below.)
    \50\ Similarly, in the case of Complex Order Responses, the 
Response must be equal to or better than the cPBBO on both sides, as 
defined in Commentary .07(a)(iv) of Rule 1080 at the time of receipt 
of the Complex Order Response but need not improve upon the limit of 
orders on the CBOOK since the CBOOK is not displayed on OPRA and may 
not be known to the responding participant. If a Complex Order 
Response was received which was equal to or crossed the limit of 
orders on the CBOOK, such Responses will only be executed at a price 
which improves the resting order's limit price by at least $0.01. 
See proposed rule 1081(ii)(H). A Complex Order Response submitted 
with a price that is outside the cPBBO at the time of receipt will 
be rejected. See proposed Rule 1081(ii)(A)(9).
    \51\ See Exchange Rule 1080(n).
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Conclusion of the Solicitation Auction
    Rules 1081(ii)(B)(1)-(4) describe a number of circumstances that 
will cause the Solicitation Auction to conclude. Generally, it will 
conclude at the end of the Solicitation Auction period, except that it 
may conclude earlier: (i) Any time the Phlx Best Bid/Offer (``PBBO'') 
on the same side of the market as the Agency Order crosses the stop 
price (since further price improvement will be unlikely and any 
Responses offering improvement are likely to be cancelled),\52\ or (ii) 
any time there is a

[[Page 22573]]

trading halt on the Exchange in the affected series (or, in the case of 
a Complex Solicitation Auction, any time there is a trading halt on the 
Exchange in any component of a Complex Agency Order).\53\
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    \52\ In the case of a Complex Solicitation Auction, it would end 
any time the cPBBO or the Complex Order book, excluding all-or-none 
Complex Orders, on the same side of the market as the Complex Agency 
Order, crosses the stop price. See Rule 1081(ii)(B)(3). The Exchange 
believes that when either the cPBBO or Complex Order interest, 
excluding all-or-none, is present on the Exchange on the same side 
as the Complex Agency Order and crosses the stop price that further 
price improvement will be unlikely and Responses offering 
improvement are likely to be cancelled. The Exchange also believes 
that an all-or-none Complex Order crossing the stop price should not 
end the Complex Solicitation Auction since the order is contingent 
and may not actually be tradable based on its size contingency. The 
Exchange believes continuing to run the Complex Solicitation Auction 
for the duration of the auction timer benefits the Agency Order in 
allowing for interest to continue to be collected which may offer 
price improvement over the stop price. This behavior is consistent 
with Solicitation Auctions involving simple orders. Simple 
Solicitation Auctions conclude early when the PBBO on the same side 
of the market as the Agency Order crosses the stop price. All-or-
none orders are not part of the PBBO as they are contingent and not 
displayed on OPRA.
    \53\ Trading on the Exchange in any option contract is halted 
whenever trading in the underlying security has been paused or 
halted by the primary listing market. See Exchange Rule 1047(e). See 
also Securities Exchange Act Release No. 62269 (June 10, 2010), 75 
FR 34491 (June 17, 2010) (SR-Phlx-2010-82). Any executions that 
occur during any latency between the pause or halt in the underlying 
security and the processing of the halt on the Exchange are 
nullified pursuant to Exchange Rule 1092(c)(iv)(B).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 1081(ii)(C), if the Solicitation Auction 
concludes before the expiration of the Solicitation Auction period as 
the result of the PBBO, cPBBO or Complex Order book (excluding all-or-
none Complex Orders) crossing the stop price as described in Rules 
1081(ii)(B)(2) and 1081(ii)(B)(3), the entire Agency Order will be 
executed using the allocation algorithm set forth in Rule 1081(ii)(E). 
The algorithm is described below under the heading ``Order 
Allocation''.
    Also pursuant to proposed Rule 1081(ii)(C), if the Solicitation 
Auction concludes before the expiration of the Solicitation Auction 
period as the result of a trading halt, the entire Agency Order or 
Complex Agency Order will be executed solely against the Solicited 
Order or Complex Solicited Order at the stop price and any unexecuted 
Responses will be cancelled.\54\ Responses and other interest present 
in the system will not be considered for trade against the Agency Order 
in the case of a trading halt. The Exchange believes this is 
appropriate since the participants representing tradable interest in 
the Solicitation Auction have not `stopped' the Agency Order in its 
entirety and would have no means after the auction executions occur to 
offset the trading risk they would incur because the market is halted 
if they were permitted to execute against the Agency Order in this 
instance. However, the Solicited Order `stopped' the Agency Order when 
the order was submitted into the Solicitation Auction and will 
therefore execute against the Agency Order if the Solicitation Auction 
concludes before the expiration of the Solicitation Auction period as 
the result of a trading halt.
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    \54\ The Exchange's PIXL auction features similar functionality. 
Pursuant to Exchange Rule 1080(n)(ii)(C), in the case of a trading 
halt on the Exchange in the affected series, a PIXL Order will be 
executed solely against the Initiating Order at the stop price and 
any unexecuted PAN responses will be cancelled.
---------------------------------------------------------------------------

    Furthermore, when Agency and Solicited Orders are submitted into 
the Solicitation Auction, the stop price must be equal to or improve 
the NBBO and be at least $0.01 better than any public customer non-
contingent limit orders on the Phlx order book. The Exchange believes 
that public customer interest submitted to Phlx after submission of the 
Agency and Solicited Orders but prior to the trading halt should not 
prevent the Agency Order from being executed at the stop price since 
such public customer interest was not present at the time the Agency 
Order was `stopped' by the Solicited Order.
    Entry of an unrelated market or marketable limit order on the 
opposite side of the market from the Agency Order received during the 
Solicitation Auction will not cause the Solicitation Auction to end 
early. Rather, the unrelated order will execute against interest 
outside the Solicitation Auction (if marketable against the PBBO) or 
will post to the book and then route if eligible for routing (in the 
case of an order marketable against the NBBO but not against the PBBO), 
pursuant to Rule 1081(ii)(D). If contracts remain from such unrelated 
order at the time the Solicitation Auction ends, the total unexecuted 
volume of such unrelated interest will be considered for participation 
in the order allocation process, regardless of the number of contracts 
in relation to the Solicitation Auction size, described in Rule 
1081(ii)(E).\55\ The handling of unrelated opposite side interest which 
is received during the Solicitation Auction is the same as the handling 
of unrelated opposite side interest which is received during a PIXL 
Auction.\56\ Participants submitting such unrelated interest may not be 
aware that an auction is in progress and should therefore be able to 
access firm quotes that comprise the NBBO without delay. Considering 
such unrelated interest which remains unexecuted upon receipt for 
participation in the order allocation process described in Rule 
1081(ii)(E) will increase the number of contracts against which an 
Agency Order could be executed, and should therefore create more 
opportunities for the Agency Order to be executed at better prices.
---------------------------------------------------------------------------

    \55\ Similarly, pursuant to Rule 1081(ii)(D), in the case of a 
Complex Solicitation Auction, an unrelated market or marketable 
limit Complex Order on the opposite side of the market from the 
Complex Agency Order as well as orders for the individual components 
of the unrelated Complex Order received during the Complex 
Solicitation Auction will not cause the Complex Solicitation Auction 
to end early and will execute against interest outside of the 
Complex Solicitation Auction. If contracts remain from such 
unrelated Complex Order at the time the Complex Solicitation Auction 
ends, the total unexecuted volume of such unrelated interest will be 
considered for participation in the order allocation process, 
regardless of the number of contracts in relation to the Complex 
Solicitation Auction size, described in Rule 1081(ii)(E).
    \56\ See Exchange Rule 1080(n)(ii)(D).
---------------------------------------------------------------------------

Order Allocation
    The allocation of orders executed upon the conclusion of a 
Solicitation Auction will depend upon whether the Solicitation Auction 
has yielded sufficient improving interest to improve the price of the 
entire Agency Order. As noted above, all contracts of the Agency Order 
will trade at an improved price against non-solicited contra-side 
interest or, in the event of insufficient improving interest to improve 
the price of the entire Agency Order, at the stop price against the 
Solicited Order.
    Consideration of All-or-None Interest. The treatment of all-or-none 
interest in assessing the presence of sufficient improving interest 
differs between simple Solicitation Auctions and Complex Solicitation 
Auctions. In all Solicitation Auctions, whether simple or complex, the 
system will not consider an all-or-none order when determining if there 
is sufficient size to execute the Agency Order (or Complex Agency 
Order) at a price(s) better than the stop price if the all-or-or none 
contingency cannot be satisfied by an execution. However, all-or-none 
interest of a size which could potentially be executed consistent with 
its all-or-none contingency is considered when determining whether 
there is sufficient size to execute simple Agency Orders at price(s) 
better than the stop price. By contrast, pursuant to proposed Rule 
1081(ii)(E)(5), when determining if there is sufficient size to execute 
Complex Agency Orders at a price(s) better than the stop price, no all-
or-none interest of any size will be considered. This difference in 
behavior is due to a system limitation relating to all-or-none Complex 
Orders.\57\ The Exchange believes this behavior is not impactful since 
all-or-none Complex Orders are

[[Page 22574]]

rare \58\ and if sufficient size exists to execute the entire Complex 
Agency Order at an improved price, the all-or-none Complex Order will 
be considered for trade and executed if possible as explained below.
---------------------------------------------------------------------------

    \57\ All-or-none simple orders reside with simple orders on the 
book. By contrast, all-or-none Complex Orders reside in a separate 
book, in a different part of the trading system. Thus aggregation of 
all-or-none Complex Orders with other Complex Orders in order to 
determine the presence of sufficient improving interest is a more 
difficult process than aggregation of all-or-none simple orders with 
other simple orders.
    \58\ The Exchange reviewed six months of data which showed that 
all-or-none Complex Orders represented only 0.12% of all Complex 
Orders.
---------------------------------------------------------------------------

    Assessing Sufficiency of Improving Interest in a Simple 
Solicitation Auction. Assume an Agency Order to buy 1000 contracts 
stopped by a Solicited Order at $2.00 is entered when the PBBO is 
$1.90-$2.10. Assume that during the Solicitation Auction, Responses are 
received to sell 700 contracts at $1.97 and sell 150 contracts at 
$1.99. In addition, assume an order to sell 300 contracts at $1.98 with 
an all-or-none contingency is received. At the end of the Solicitation 
Auction, the system will consider the all-or-none order when 
determining if there is sufficient size to execute the Agency Order at 
a price(s) better than the stop price since the all-or-none contingency 
can be satisfied by an execution.\59\ In this example, at the end of 
the Solicitation Auction, the Agency Order will execute against 
improving interest with 700 contracts executing at $1.97 and 300 
contracts (representing the all-or-none order) executing at $1.98.
---------------------------------------------------------------------------

    \59\ Consider a similar scenario whereby the Responses received 
were to sell 700 contracts at $1.97 and sell 300 contracts at $1.99 
and an all-or-none order to sell 500 contracts at $1.98 was 
received. In this scenario, the system will not consider the all-or-
none order when determining if there is sufficient size to execute 
the Agency Order at a price(s) better than the stop price since the 
all-or-or none contingency cannot be satisfied by an execution. 
However, excluding the all-or-none order, the Agency Order can still 
be satisfied at a price(s) better than the stop price. In this 
scenario, at the end of the Solicitation Auction, the Agency Order 
will execute against improving interest with 700 contracts executing 
at $1.97 and 300 contracts executing at $1.99. The 500 contract all-
or-none order does not execute because the all-or-none contingency 
cannot be satisfied.
---------------------------------------------------------------------------

    Assessing Sufficiency of Improving Interest in a Complex 
Solicitation Auction. Assume a Complex Agency Order to buy 1000 
contracts stopped by a Complex Solicited Order at $2.00 is entered when 
the cPBBO is $1.90-$2.10. Assume that during the Solicitation Auction a 
Response is received to sell 900 contracts at $1.98 and an all-or-none 
Complex Order is received to sell 100 contracts at $1.99. At the end of 
the Solicitation Auction involving a Complex Order, the system does not 
consider all-or-none interest in determining whether it can execute the 
Complex Agency Order at a better price than the stop price.\60\ In this 
case, excluding the all-or-none Complex Order, only 900 contracts are 
available to sell at a better price than the stop price. Therefore the 
Complex Agency Order would trade against the Solicited Order at the 
$2.00 stop price.
---------------------------------------------------------------------------

    \60\ If however, the example is changed and Responses are 
received to sell 900 contracts at $1.98 and sell 100 contracts at 
$1.99 and an order to sell 100 contracts at $1.98 all-or-none is 
received, at the end of the Solicitation Auction, there is enough 
interest which is not all-or-none to satisfy the Complex Agency 
Order at a better price than the $2.00 stop price. Therefore the 
Agency Order would be executed against the 900 lot at $1.98 and the 
remaining 100 contracts executed against the all-or-none Complex 
Order at $1.98.
---------------------------------------------------------------------------

    In both simple Solicitation Auctions and Complex Solicitation 
Auctions, once a determination is made that sufficient improving 
interest exists, all-or-none interest will be executed pursuant to 
normal priority rules, except that it will not be executed if the all-
or-none contingency cannot be satisfied. If an execution which can 
adhere to the all-or-none contingency is not possible, such all-or-none 
interest will be ignored and will remain on the order book.
    Solicitation Auction with Sufficient Improving Interest. Pursuant 
to the Rule 1081(ii)(E)(1) algorithm, if there is sufficient size 
(considering all resting orders, quotes and Responses) to execute the 
entire Agency Order at a price or prices better than the stop price, 
the Agency Order will be executed against such better priced interest 
with public customers having priority at each price level. After public 
customer interest at a particular price level has been satisfied, 
including all-or-none orders with a size which can be satisfied, 
remaining contracts will be allocated among all Exchange quotes, orders 
and Responses in accordance with Exchange Rules 1014(g)(vii)(B)(1)(b) 
and (d), and the Solicited Order will be cancelled.\61\
---------------------------------------------------------------------------

    \61\ Similarly, pursuant to Rule 1081(ii)(E)(3), in the case of 
a Complex Solicitation Auction, if there is sufficient size 
(considering resting Complex Orders and Responses) to execute the 
entire Complex Agency Order at a price(s) better than the stop 
price, the Complex Agency Order will be executed against better 
priced Complex Orders, Responses, as well as quotes and orders which 
comprise the cPBBO at the end of the Complex Solicitation Auction. 
(The cPBBO is not considered in determining whether there is 
sufficient improving size because the market and/or size of the 
individual components can change between the calculation of 
sufficient size and the actual execution.) Such interest will be 
allocated at a given price in the following order: (i) To public 
customer Complex Orders and Responses in time priority; (ii) to SQT, 
RSQT, and non-SQT ROT Complex Orders and Responses on a size pro-
rata basis; (iii) to non-market maker off-floor broker-dealer 
Complex Orders and Responses on a size pro-rata basis, and (iv) to 
quotes and orders which comprise the cPBBO at the end of the Complex 
Solicitation 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. This allocation 
methodology is consistent with the allocation methodology utilized 
for a Complex Order executed in PIXL. In addition, providing public 
customer's with priority over SQT, RSQT, and non-SQT ROTs, who in 
turn have priority over non-market maker off-floor broker-dealers is 
the same priority scheme used for regular orders. See Exchange Rule 
1014(g).
    When determining if there is sufficient size to execute the 
entire Complex Agency Order at a price(s) better than the stop 
price, if the short sale price test in Rule 201 of Regulation SHO is 
triggered for a covered security, Complex Orders and Responses which 
are marked ``short'' will not be considered because of the 
possibility that a short sale price restriction may apply during the 
interval between assessing for adequate size and the execution of 
the Complex Agency Order. However, if there is sufficient size to 
execute the entire Complex Agency Order at a price(s) better than 
the stop price irrespective of any covered securities for which the 
price test is triggered that may be present, then all Complex Orders 
and Responses which are marked ``short'' will be considered for 
allocation in accordance with Rule 1081(ii)(J)(3).
---------------------------------------------------------------------------

    Example of Solicitation Auction with Sufficient Improving Interest. 
To illustrate a case where a Solicitation Auction yields enough 
improving interest to better the stop price and the application of the 
Rule 1081(ii)(E)(1) algorithm, assume the NBBO is $0.95-$1.03, and a 
buy side Agency Order for 1000 contracts is submitted with a contra-
side Solicited Order to stop the Agency Order at $1.00. During the 
Solicitation Auction, assume a market maker (``MM1'') Response is 
submitted to sell 800 contracts at $0.97, a broker-dealer Response is 
submitted to sell 100 contracts at $0.99, and a public customer sends 
in an order, outside of the Solicitation Auction, to sell 100 contracts 
at $0.99. Upon receipt of the public customer order, the NBBO changes 
to $0.95-$0.99. In addition, assume two market makers send in quotes of 
$0.95-$0.99 during the Solicitation Auction. Market Maker 2 (``MM2'') 
quotes $0.95-$0.99 with 100 contracts and Market Maker 3 (``MM3'') 
quotes $0.95-$0.99 with 50 contracts. At the end of the Solicitation 
Auction, since there is enough interest to execute the entire Agency 
Order at a price(s) better than the stop price, the Agency Order will 
be executed against the better priced interest as follows:

--the Agency Order trades 800 contracts at $0.97 against MM1 Response;
--the Agency Order trades 100 contracts at $0.99 against public 
customer;
--the Agency Order trades 67 contracts at $0.99 against MM2 quote (pro-
rata allocation); and
--the Agency Order trades 33 contracts at $0.99 against MM3 quote (pro-
rata allocation).

    The broker-dealer does not trade any contracts since broker-dealer 
orders execute only after all public customer

[[Page 22575]]

and market maker interest is satisfied. The unexecuted Solicited Order 
and broker-dealer Response are cancelled back to the sending 
participants.\62\
---------------------------------------------------------------------------

    \62\ To illustrate a Complex Solicitation Auction with enough 
improving interest and the operation of Rule 1081(ii)(E)(3), assume 
that a Complex Order to buy one of option A and sell one of option 
B, 1000 times, with a cPBBO of $0.40 bid, $0.70 offer, is submitted 
with a stop price of $0.65. Assume that during the Solicitation 
Auction, the following Responses and order interest are received: A 
market maker (``MM1'') responds to sell the strategy 100 times at a 
price of $0.55; MM1 responds to sell the strategy 100 times at a 
price of $0.60; a broker-dealer responds to sell the strategy 400 
times at a price of $0.60; a public customer Complex Order to sell 
the strategy 300 times at a price of $0.60; and another market maker 
(``MM2'') responds to sell the strategy 200 times at $0.60.
    After all these Responses and orders are received, option A of 
the simple market moves causing the cPBBO to become offered 200 
times at $0.60. Option A is quoted in the simple market as $1.00-
$1.10 and Option B is quoted in the simple market as $0.50-$0.60. At 
the end of the Solicitation Auction, the Complex Agency Order will 
be executed as follows: The Complex Agency Order trades 100 
contracts at $0.55 against MM1; the Complex Agency Order trades 300 
contracts at $0.60 against public customer; the Complex Agency Order 
trades 100 contracts at $0.60 against MM1; the Complex Agency Order 
trades 200 contracts at $0.60 against MM2; the Complex Agency Order 
trades 300 contracts at $0.60 against the broker-dealer; and the 
Solicited Order and the residual unexecuted contracts of the broker-
dealer Response are cancelled.
---------------------------------------------------------------------------

    Solicitation Auction with Insufficient Improving Interest. Pursuant 
to proposed Rule 1081(ii)(E)(2), if there is not sufficient size 
(considering all resting orders, quotes and Responses) to execute the 
entire Agency Order at a price(s) better than the stop price, the 
Agency Order will be executed against the Solicited Order at the stop 
price provided such price is better than the limit of any public 
customer order (excluding all-or-none) on the limit order book, on 
either the same side as or the opposite side of the Agency Order, and 
equal to or better than the contra-side PBBO.\63\ Otherwise, both the 
Agency Order and Solicited Order will be cancelled without a trade 
occurring. This proposed behavior ensures non-contingent public 
customer orders on the limit order book maintain priority. While the 
Exchange recognizes that at least one other solicitation mechanism 
offered by another exchange considers public customer orders on the 
limit order book at the stop price when determining if there is 
sufficient improving interest to satisfy the Agency Order, the proposed 
solicitation mechanism offered on Phlx will not consider such 
interest.\64\ The Exchange believes that requiring the stop price to be 
at least $0.01 better than any public customer interest on the limit 
order book ensures public customer priority of existing interest and in 
turn provides the Solicited Order participant certainty that if an 
execution occurs at the stop price, such execution will represent the 
Solicited Order and not interest which arrived after the Solicited 
Order participant stopped the Agency Order for its entire size.
---------------------------------------------------------------------------

    \63\ Rule 1081(ii)(E)(2) does not apply to Complex Solicitation 
Auctions. Rather, a parallel provision, Rule 1081(ii)(E)(4), 
provides that in a Complex Solicitation Auction, if there is not 
sufficient size (considering resting Complex Orders and Responses) 
to execute the entire Complex Agency Order at a price(s) better than 
the stop price, the Complex Agency Order will be executed against 
the Solicited Order at the stop price, provided such stop price is 
better than the limit of any public customer Complex Order 
(excluding all-or-none) on the Complex Order book, better than the 
cPBBO when a public customer order (excluding all or none) is 
resting on the book in any component of the Complex Agency Order, 
and equal to or better than the cPBBO on the opposite side of the 
Complex Agency Order. This proposed behavior ensures non-contingent 
public customers on the limit order book maintain priority. 
Otherwise, both the Complex Agency Order and the Solicited Order 
will be cancelled with no trade occurring.
    \64\ See ISE Rule 716(e)(2) which provides in part that in the 
case of insufficient improving interest ``[i]f there are Priority 
Customer Orders on the Exchange on the opposite side of the Agency 
Order at the proposed execution price and there is sufficient size 
to execute the entire size of the Agency Order, the Agency Order 
will be executed against the bid or offer, and the solicited order 
will be cancelled.''
---------------------------------------------------------------------------

    Example of Solicitation Auction with Insufficient Improving 
Interest. To illustrate a case where the Solicitation Auction has not 
yielded sufficient interest to improve the price for the entire Agency 
Order, assume the NBBO is $0.97-$1.03, and a buy side Agency Order for 
1000 contracts is submitted with a contra-side Solicited Order to stop 
the Agency Order at $1.00. During the Solicitation Auction, assume a 
Response is submitted to sell 100 contracts at $0.97 and another to 
sell 100 contracts at $0.99. At the end of the Solicitation Auction 
period, since there is not enough interest to execute the entire Agency 
Order at a price(s) better than the stop price, the Agency Order will 
be executed at $1.00 against the Solicited Order. The unexecuted 
Responses are then cancelled back to the sending participant.\65\
---------------------------------------------------------------------------

    \65\ To illustrate a Complex Solicitation Auction that yields 
insufficient improving interest and the operation of Rule 
1081(ii)(E)(4), assume a Complex Order to buy one of option A and 
sell one of option B, 1000 times, with a cPBBO of $0.40 bid, $0.70 
offer, is submitted with a stop price of $0.65. Assume that during 
the Complex Solicitation Auction, the following Responses and order 
interest are received: A market maker (``MM1'') responds to sell the 
strategy 100 times at a price of $0.55; MM1 responds to sell the 
strategy 100 times at a price of $0.60; a broker-dealer responds to 
sell the strategy 300 times at a price of $0.60; and another market 
maker (``MM2'') responds to sell the strategy 200 times at $0.60.
    At the end of the Complex Solicitation Auction, since there is 
not sufficient size to execute the entire Complex Agency Order at a 
price(s) better than the stop price, the Complex Agency Order 
executes at the stop price of $0.65 against the Solicited Order. All 
unexecuted Responses are cancelled back to the sending participants.
---------------------------------------------------------------------------

    Proposed Rule 1081(ii)(E)(6) provides that a single quote, order or 
Response shall not be allocated a number of contracts that is greater 
than its size.
    Finally, Rule 1081(ii)(E)(7) provides that a Complex Agency Order 
consisting of a stock/ETF component will not execute against interest 
comprising the cPBBO at the end of the Complex Solicitation 
Auction.\66\ 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/ETF component. The Exchange 
believes that introducing the risk of inability to fully execute a 
complex strategy is counterproductive to, and inconsistent with, the 
effort to allow Complex Orders in the solicitation mechanism.
---------------------------------------------------------------------------

    \66\ This provision parallels PIXL Rule 1080(n)(ii)(E)(2)(g) and 
is being proposed for the same reasons explained in the Complex PIXL 
Filing. This limitation is also consistent with the handling of 
Complex Orders that include a stock/ETF component and are entered 
into the Phlx XL system. Commentary .07(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.
---------------------------------------------------------------------------

Miscellaneous Provisions
    Proposed Rules 1081(ii)(F) through (I) address the handling of the 
Agency Order and other orders, quotes and Responses when certain 
conditions are present. Pursuant to Rule 1081(ii)(F), if the market 
moves following the receipt of a Response, such that there are 
Responses that cross the then-existing NBBO (provided such NBBO is not 
crossed) at the time of the conclusion of the Solicitation Auction, 
such Responses will be executed, if possible, at their limit 
price(s).\67\ Although Exchange Rule 1084, Order Protection, generally 
prohibits trade-throughs, an exception to the prohibition exists 
pursuant to Rule 1084(b)(x) when the transaction that constituted the 
trade-through was the execution of an order that was stopped at a price 
that did not trade-through at the time of the stop.
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    \67\ Similarly, in the case of a Complex Solicitation Auction, 
if there are Responses that cross the then-existing cPBBO at the 
time of conclusion of the Complex Solicitation Auction, such 
Responses will be executed, if possible, at their limit prices. This 
provision parallels PIXL Rule 1080(n)(ii)(F).
---------------------------------------------------------------------------

    Since Responses may be cancelled at any time prior to the 
conclusion of the Solicitation Auction, the Exchange believes that this 
behavior is, at best, highly unlikely as participants will cancel 
Responses when better priced

[[Page 22576]]

interest that they could trade against is present in the marketplace. 
This behavior is consistent with the current handling of PAN Responses 
in a PIXL Auction.
    Rule 1081(ii)(G) provides that if the Solicitation Auction price 
when trading against non-solicited interest (except if it is a Complex 
Solicitation Auction) would be the same as or cross the limit of an 
order (excluding an all-or-none order) on the limit order book on the 
same side of the market as the Agency Order, the Agency Order may only 
be executed at a price that is at least $0.01 better than the resting 
order's limit price \68\ provided such execution price improves the 
stop price. If such execution price would not improve the stop price, 
the Agency Order will be executed at a price which is $0.01 better for 
the Agency Order than the stop price provided the price does not equal 
or cross a public customer order and is equal to or improves upon the 
PBBO on the opposite side of the Agency Order.\69\ If such price is not 
possible, the Agency Order and Solicited Order will be cancelled with 
no trade occurring. For example, assume the NBBO is $1.03-$1.10 when an 
order is submitted into the Solicitation Auction, that the Agency Order 
is buying and that the order is stopped at $1.05. The $1.03 bid is an 
order on Phlx. During the Solicitation Auction a Response arrives to 
sell at $1.03. At the end of the Solicitation Auction, if the Response 
to sell at $1.03 can fully satisfy the Agency Order, the auction price 
would theoretically be $1.03 but, since that price is the same as the 
price of a resting order on the book, the Agency Order will trade 
against the Response at $1.04 (an improvement of $0.01 over the resting 
order's limit). By contrast, assume a case where the NBBO is $1.03-
$1.10 and where during the Auction an unrelated non-customer order to 
pay $1.04 is received. This order rests on the book and the NBBO 
becomes $1.04-$1.10. Assume the same stop price of $1.05 for an Agency 
Order to buy, and the receipt of a Response to sell at $1.04 which can 
fully satisfy the Agency order. At the end of the Solicitation Auction, 
the auction price would be $1.04 which equals the resting order on the 
book. In this case, if the trade were executed with $0.01 improvement 
over the resting order limit (that is, if the trade were theoretically 
executed at $1.05 due to the $1.04 order on the book) the execution 
would be at the stop price. However, the system only permits the 
Solicited Order and no other interest to trade against the Agency Order 
at the stop price since the Solicited Order stopped the entire size 
Agency Order at a price which was required upon receipt to be equal to 
or improve the NBBO and to be at least $0.01 improvement over any 
public customer orders resting on the Phlx limit order book, thereby 
establishing priority at the stop price. Therefore the execution price 
in this example will be $1.04, which is the same price as the $1.04 
resting non-customer order on the book, in order to execute at a price 
which is $0.01 better than the stop price. This system logic ensures 
that the Agency Order receives a better priced execution than the stop 
price when trading against interest other than the Solicited Order.
---------------------------------------------------------------------------

    \68\ The system does not consider the origin of the resting 
order but seeks to ensure the priority of all resting orders on the 
book by requiring that any execution occur at a price which improves 
upon the limit of a resting order by at least $0.01 if possible. If 
an execution cannot occur at least $0.01 better than the limit of a 
resting order on the book, the system will permit the Solicited 
Order to trade against the Agency Order at the resting limit order 
price provided the resting order is not for a public customer.
    \69\ See also PIXL Rule 1080(n)(ii)(H). Proposed Rule 
1081(ii)(G) does not apply to Complex Solicitation Auctions. Rather, 
a parallel provision, Rule 1081(ii)(H), provides that if the Complex 
Solicitation Auction price when trading against non-solicited 
interest would be the same as or cross the limit of that of a 
Complex Order (excluding all-or-none) on the Complex Order Book on 
the same side of the market as the Complex Agency Order, the Complex 
Agency Order may only be executed at a price that improves the 
resting order's limit price by at least $0.01, provided such 
execution price improves the stop price. If such execution price 
would be equal to or would not improve the stop price, the Agency 
Order will be executed $0.01 better than the stop price provided the 
price does not equal or cross a non-all-or-none public customer 
Complex Order or a non-all-or-none public customer order present in 
the cPBBO on the same side as the Complex Agency Order in a 
component of the Complex Order Strategy and is equal to or better 
than the cPBBO on the opposite side of the Complex Agency Order. If 
such price is not possible, the Agency Order and Solicited Order 
will be cancelled with no trade occurring. This functionality is 
consistent with that of Complex PIXL auctions.
---------------------------------------------------------------------------

    Rule 1081(ii)(I) provides that any unexecuted Responses or 
Solicited Orders will be cancelled at the end of the Solicitation 
Auction. This behavior is consistent with the handling of unexecuted 
PAN Responses and Initiating Orders in PIXL.\70\ Both Responses and 
Solicited Orders are specifically entered into the Solicitation Auction 
to trade against the Agency Order. The Exchange believes that 
cancelling the unexecuted portion of Responses and Solicited Orders is 
consistent with the expected behavior of such interest by the 
submitting participants.
---------------------------------------------------------------------------

    \70\ See Exchange Rule 1080(n)(ii)(I).
---------------------------------------------------------------------------

Complex Agency Orders With Stock/ETF Components
    Rule 1081(ii)(J) deals with Complex Agency Orders with stock or ETF 
components and generally tracks Rule 1080(n)(ii)(J) applicable to PIXL 
. Rule 1081(ii)(J)(1) states that member organizations may only submit 
Complex Agency Orders, Complex Solicited Orders, Complex Orders and/or 
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 
Execution Services LLC (``NES'') 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 NES in order to trade orders containing a stock/ETF 
component.
    New Rule 1081(ii)(J)(2) provides that where one component of a 
Complex Agency Order, Complex Solicited Order, Complex Order or 
Response is the underlying stock or ETF share, the Exchange shall 
electronically communicate the underlying security component of the 
Complex Agency Order (together with the Complex Solicited Order or 
Response, as applicable) to NES, its designated broker-dealer, for 
immediate execution. Such execution and reporting will occur otherwise 
than on the Exchange and will be handled by NES pursuant to applicable 
rules regarding equity trading.
    Finally, new Rule 1081(ii)(J)(3) states that when the short sale 
price test in Rule 201 of Regulation SHO \71\ is triggered for a 
covered security, NES will not execute a short sale order in the 
underlying covered security component of a Complex Agency Order, 
Complex Solicited Order, Complex Order or Response if the price is 
equal to or below the current national best bid.\72\ However, NES will 
execute a short sale

[[Page 22577]]

order in the underlying covered security component of a Complex Agency 
Order, Complex Solicited Order, Complex Order or 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.\73\ If NES cannot 
execute the underlying covered security component of a Complex Agency 
Order, Complex Solicited Order, Complex Order or Response in accordance 
with Rule 201 of Regulation SHO, the Exchange will cancel back the 
Complex Agency Order, Complex Solicited Order, Complex Order or 
Response to the entering member organization. For purposes of this 
paragraph, the term ``covered security'' has the same meaning as in 
Rule 201(a)(1) of Regulation SHO.\74\
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    \71\ 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 www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm.
    \72\ The term ``national best bid'' is defined in SEC Rule 
201(a)(4). 17 CFR 242.201(a)(4).
    \73\ The Exchange notes that a broker or dealer may mark a sell 
order ``short exempt'' only if the provisions of SEC Rule 201(c) or 
(d) are met. 17 CFR 242.200(g)(2). Since NES and the Exchange do not 
display the stock or ETF portion of a Complex Order, however, a 
broker-dealer should not 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'') and the Complex PIXL Filing. The system will handle short 
sales of the orders and Responses described herein the same way it 
handles the short sales discussed in the Complex PIXL Filing.
    \74\ 17 CFR 242.201(a)(4).
---------------------------------------------------------------------------

    The Exchange believes that this approach is consistent with Rule 
201. Under this proposal, the Exchange and NES, as trading centers, 
will prevent the execution or display of a short sale of the stock/ETF 
component of a complex order priced at or below the current national 
best bid when the short sale price test restriction is triggered. 
Specifically, while the Exchange and NES are determining, respectively, 
the prices of the options component and of the stock or ETF component 
of the complex order, as described above, NES will check the current 
national best bid of the stock or ETF component at the time of 
execution. The execution of one component is contingent upon the 
execution of all other components and once a complex order is accepted 
and validated by the Phlx trading System, the entire package is 
processed as a single transaction and both the option leg and stock/ETF 
components are simultaneously processed.
Regulatory Issues
    The proposed rule change contains two paragraphs describing 
prohibited practices when participants use the solicitation mechanism. 
These new provisions track similar provisions in the PIXL rule.\75\
---------------------------------------------------------------------------

    \75\ See Rules 1080(n)(iii) and (iv).
---------------------------------------------------------------------------

    Proposed Rule 1081(iii) states that the Solicitation Auction may be 
used only where there is a genuine intention to execute a bona fide 
transaction. It will be considered a violation of Rule 1081 and will be 
deemed conduct inconsistent with just and equitable principles of trade 
and a violation of Exchange Rule 707 if an Initiating Member submits an 
Agency Order (thereby initiating a Solicitation Auction) and also 
submits its own Response in the same Solicitation Auction. The purpose 
of this provision is to prevent Solicited Members from submitting an 
inaccurate or misleading stop price or trying to improve their 
allocation entitlement by participating with multiple expressions of 
interest.
    Proposed Rule 1081(iv) states that a pattern or practice of 
submitting unrelated orders or quotes that cross the stop price causing 
a Solicitation Auction to conclude before the end of the Solicitation 
Auction period will be deemed conduct inconsistent with just and 
equitable principles of trade and a violation of Rule 707.
Definition of Professional in Rule 1000(b)(14)
    In addition to adopting Rule 1081, the Exchange is amending Rule 
1000(b)(14). In 2010 the Exchange amended its priority rules to give 
certain non-broker-dealer orders the same priority as broker-dealer 
orders. In so doing, the Exchange adopted a new defined term, the 
``professional,'' for certain persons or entities.\76\ Rule 1000(b)(14) 
defines professional as a person or entity that (i) is not a broker or 
dealer in securities, and (ii) places more than 390 orders in listed 
options per day on average during a calendar month for its own 
beneficial account(s). A professional account is treated in the same 
manner as an off-floor broker-dealer for purposes of Phlx Rule 1014(g), 
to which the trade allocation algorithm described in proposed Rule 
1081(ii)(E)(1) refers. However, Rule 1000(b)(14) also currently states 
that all-or-none professional orders will be treated like customer 
orders. The Exchange proposes to amend Rule 1000(b)(14) by (i) 
specifying that orders submitted pursuant to Rule 1081 for the accounts 
of professionals will be treated in the same manner as off-floor 
broker-dealer orders for purposes of Rule 1014(g), and (ii) adding 
proposed Rule 1081 to the list of rules for the purpose of which a 
professional will be treated in the same manner as an off-floor broker-
dealer. The effect of these changes to Rule 1000(b)(14) is that 
professionals will not receive the same execution priority afforded to 
public customers in a Solicitation Auction under new Rule 1081, and 
instead will be treated as broker-dealers in this regard. Therefore, 
Agency Orders or Solicited Orders submitted for professionals are not 
public customer orders and will not be paired with a public customer 
order or another professional order and automatically executed without 
a Solicitation Auction pursuant to Rule 1081(v) discussed above. 
Additionally, unrelated professional orders, excluding all-or-none 
orders, or responses for the account of a professional will be treated 
as broker-dealers for purposes of execution priority. Unrelated 
professional all-or-none orders will continue to receive customer 
priority as stipulated in rule 1000(b)(14).
---------------------------------------------------------------------------

    \76\ See Securities Exchange Act Release No. 61802 (March 30, 
2010), 75 FR 17193 (April 5, 2010) (approving SR-Phlx-2010-05).
---------------------------------------------------------------------------

Deployment
    The Exchange anticipates that it will deploy the solicitation 
mechanism within 30 days of the Commission's approval of this proposed 
rule change. Members will be notified of the deployment date by an 
Options Trader Alert posted on the Exchange's Web site.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \77\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \78\ 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 providing new functionality that offers the potential for 
price improvement. Specifically, the new functionality may lead to an 
increase in Exchange volume and should allow the Exchange to better 
compete against other markets that already offer an electronic 
solicitation mechanism, while providing an opportunity for price 
improvement for Agency Orders.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78f(b).
    \78\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As discussed below, the proposed solicitation mechanism on Phlx is 
similar in relevant respects to solicitation mechanisms on other 
exchanges. The Commission previously has found such mechanisms 
consistent with the Act, stating that they should allow for greater 
flexibility in pricing large-sized orders and may provide a greater 
opportunity for price

[[Page 22578]]

improvement.\79\ The Exchange believes that its proposal will allow the 
Exchange to better compete for solicited transactions, while providing 
an opportunity for price improvement for Agency Orders and assuring 
that public customers on the book are protected. The new solicitation 
mechanism should promote and foster competition and provide more 
options contracts with the opportunity for price improvement, which 
should benefit market participants, investors, and traders.
---------------------------------------------------------------------------

    \79\ See Securities Exchange Act Release Nos. 49141 (January 28, 
2004), 69 FR 5625 (February 5, 2004) (SR-ISE-2001-22) (approval of 
ISE Solicited Order Mechanism); and 57610 (April 3, 2008), 73 FR 
19535 (April 10, 2008) (SR-CBOE-2008-14) (approval of CBOE 
Solicitation Auction Mechanism).
---------------------------------------------------------------------------

    Section 11(a)(1) of the Act \80\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\81\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\82\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member has investment 
discretion, neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule. The Exchange believes that this proposed rule 
change is consistent with Section 11(a)(1) of the Act and the 
Commission's regulations thereunder.
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78k(a)(1).
    \81\ 17 CFR 240.11a2-2(T).
    \82\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\83\ Only specialists and on-floor SQTs \84\ have the 
ability to submit orders into the solicitation mechanism from on the 
floor of the Exchange. These members, however, would be subject to the 
``market maker'' exception to Section 11(a) of the Act and Rule 11a2-
2(T)(a)(1) thereunder.\85\ RSQTs may only submit orders into the 
solicitation mechanism from off the floor of the Exchange.\86\ While 
Floor Brokers have the ability to submit orders they represent as agent 
to the electronic limit order book through the Exchange's Options Floor 
Broker Management System (``FBMS''), there is no mechanism by which 
such Floor Brokers can directly submit orders to the solicitation 
mechanism or send orders to off-floor broker-dealers through FBMS for 
indirect submission into the solicitation mechanism.\87\ Because no 
Exchange members, other than specialists and SQTs, may submit orders 
into the solicitation mechanism from on the floor of the Exchange, the 
Exchange believes that the solicitation mechanism satisfies the off-
floor transmission requirement.
---------------------------------------------------------------------------

    \83\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \84\ As discussed above, an SQT is an Exchange Registered 
Options Trader (``ROT'') who has received permission from the 
Exchange to generate and submit option quotations electronically 
through AUTOM in eligible options to which such SQT is assigned. An 
SQT may only submit such quotations while such SQT is physically 
present on the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(A).
    \85\ See 15 U.S.C. Section 78k(a)(1)(A); 17 CFR 240.11a2-
2(T)(a)(1). There are no other on-floor members, other than Exchange 
specialists and SQTs, who have the ability to submit orders into the 
Solicitation Auction.
    \86\ As discussed above, an RSQT is defined in Exchange Rule 
1014(b)(ii)(B) as an ROT that is a member affiliated with a Remote 
Streaming Quote Trader Organization (``RSQTO'') with no physical 
trading floor presence who has received permission from the Exchange 
to generate and submit option quotations electronically in options 
to which such RSQT has been assigned. A qualified RSQT may function 
as a Remote Specialist upon Exchange approval. An RSQT may only 
submit such quotations electronically from off the floor of the 
Exchange. An RSQT may not submit option quotations in eligible 
options to which such RSQT is assigned to the extent that the RSQT 
is also approved as a Remote Specialist in the same options. An RSQT 
may only trade in a market making capacity in classes of options in 
which he is assigned or approved as a Remote Specialist. An RSQTO is 
a member organization in good standing that satisfies the SQTO 
readiness requirements in Rule 507(a). While RSQTs may only submit 
orders into the Auction from off the Exchange floor, RSQTs also 
would be subject to the ``market maker'' exception to Section 11(a) 
of the Act and Rule 11a2-2(T)(a)(1) thereunder.
    \87\ Because FBMS does not have the coding required to enter 
orders into the Solicitation Auction, it is impossible for such 
Floor Brokers to submit orders into the Solicitation Auction.
---------------------------------------------------------------------------

    Second, the Rule requires that the member not participate in the 
execution of its order. At no time following the submission of an order 
is a member organization able to acquire control or influence over the 
result or timing of an order's execution. The execution of a member's 
order is determined by what other orders are present in the 
solicitation mechanism and the priority of those orders.\88\ 
Accordingly, the Exchange believes that a member does not participate 
in the execution of an order submitted to the solicitation mechanism.
---------------------------------------------------------------------------

    \88\ A member may cancel or modify the order, or modify the 
instruction for executing the order, but only from off the floor. 
The Commission has stated that the non-participation requirement is 
satisfied under such circumstances, so long as such modifications or 
cancellations are also transmitted from off the floor. See 
Securities Exchange Act Release No. 14713 (April 27, 1978), 43 FR 
18557 (May 1, 1978) (``1978 Release'') (stating that the ``non-
participation requirement does not prevent initiating members from 
canceling or modifying orders (or the instructions pursuant to which 
the initiating member wishes orders to be executed) after the orders 
have been transmitted to the executing member, provided that any 
such instructions are also transmitted from off the floor'').
---------------------------------------------------------------------------

    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated systems, such as the solicitation mechanism, are used, 
as long as the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange.\89\ The design of the 
solicitation mechanism ensures that no member organization has any 
special or unique trading advantage in the handling of its

[[Page 22579]]

orders after transmitting its orders to the solicitation mechanism. The 
Exchange therefore believes the solicitation mechanism satisfies this 
requirement.
---------------------------------------------------------------------------

    \89\ In considering the operation of automated execution systems 
operated by an exchange, the Commission has noted that, while there 
is not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T).
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with 
respect to which the Initiating Member or an associated person thereof 
exercises investment discretion, neither the Initiating Member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\90\ Member organizations relying on Rule 11a2-2(T) for 
transactions effected through the solicitation mechanism must comply 
with this condition of the Rule.
---------------------------------------------------------------------------

    \90\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release 
(stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
---------------------------------------------------------------------------

    For all of the foregoing reasons and as discussed in the proposal, 
the Exchange believes the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the Exchange.

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. The proposal would diminish 
the potential for foregone market opportunities on the Exchange by 
allowing Agency Orders to be entered into the solicitation mechanism by 
all members. The solicitation mechanism is similar to electronic 
solicitation mechanism functionality that is allowed on two other 
options exchanges. The Exchange believes that the new solicitation 
mechanism functionality should help it compete with these other 
exchanges.
    With respect to intra-market competition, the solicitation 
mechanism will be available to all Phlx members for the execution of 
Agency Orders. Moreover, as explained above, the proposal should 
encourage Phlx participants to compete amongst each other by responding 
with their best price and size for a particular Solicitation Auction.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange did not solicit or receive written comments prior to 
filing the proposed rule change. Written comments on the proposed rule 
change were solicited by the Commission in response to the institution 
of proceedings for SR-Phlx-2014-66. The Commission received one comment 
letter and one letter from the Exchange in response.\91\
---------------------------------------------------------------------------

    \91\ See supra notes 11 and 12. The letters are available on the 
Commission's Web site at http://www.sec.gov/comments/sr-phlx-2014-66/phlx201466.shtml.
---------------------------------------------------------------------------

IV. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 180 days after the date of publication of the initial notice 
in the Federal Register (i.e., October 31, 2014) or within such longer 
period up to an additional 60 days (i) as the Commission may designate 
if it finds such longer period to be appropriate and publishes its 
reasons for so finding or (ii) as to which the self-regulatory 
organization consents, the Commission will issue an order approving or 
disapproving such proposed rule change, as amended. As discussed in 
Item VI below, the Commission is designating an additional 60 days 
within which to issue an order approving or disapproving the proposed 
rule change.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 2, 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-2014-66 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-2014-66. 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 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-2014-66, and should be submitted on or before May 7, 2015.

VI. Designation of Longer Period for Commission Action

    Section 19(b)(2) of the Act \92\ provides that, after initiating 
disapproval proceedings, the Commission shall issue an order approving 
or disapproving the proposed rule change not later than 180 days after 
the date of publication of notice of the filing of the proposed rule 
change. The Commission may extend the period for issuing an order 
approving or disapproving the proposed rule change, however, by not 
more than 60 days if the Commission determines that a longer period is 
appropriate and publishes the reasons for such determination. The 
proposed rule change was published for comment in the Federal Register 
on October 31, 2014. April 29, 2015 is 180 days from

[[Page 22580]]

that date, and June 28, 2015 is an additional 60 days from that date.
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    \92\ 15 U.S.C. 78s(b)(2).
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    The Commission finds it appropriate to designate a longer period 
within which to issue an order approving or disapproving the proposed 
rule change so that it has sufficient time to consider the proposed 
rule change, the issues raised in the comment letter that has been 
submitted in connection with the proposal and the response from the 
Exchange and any comments that may be submitted on the proposed rule 
change, as modified by Amendment No. 2. As the Commission noted in the 
Order Instituting Proceedings, the proposal raises questions as to 
whether the Exchange's proposed rule change is consistent with the 
requirements of Sections 6(b)(5) \93\ of the Act.\94\ Extending the 
time within which to approve or disapprove the proposed rule change, as 
modified by Amendment No. 2, will enable the Commission to more fully 
consider the issues raised by the proposed rule change, the comment 
letter received to date and the Exchange's response and any comments 
that may be submitted on the proposed rule change, as modified by 
Amendment No. 2.
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    \93\ 15 U.S.C. 78f(b)(5).
    \94\ See supra note 10.
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    Accordingly, the Commission, pursuant to Section 19(b)(2) of the 
Act,\95\ designates June 28, 2015, as the date by which the Commission 
should either approve or disapprove the proposed rule change, as 
modified by Amendment No. 2 (File No. SR-Phlx-2014-66).
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    \95\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\96\
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    \96\ 17 CFR 200.30-3(a)(12) and (a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-09265 Filed 4-21-15; 8:45 am]
BILLING CODE 8011-01-P


