
[Federal Register Volume 80, Number 120 (Tuesday, June 23, 2015)]
[Notices]
[Pages 35997-36006]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-15339]



[[Page 35997]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75189; File No. SR-Phlx-2015-49]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change to Rule 1080.07

June 17, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 5, 2015, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend and correct Rule 1080.07 in a number 
of ways, as described further below.
    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.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts 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 amend and correct certain rule 
text and provide additional clarity to Phlx Participants regarding the 
trading of Complex Orders on the Exchange. The Exchange's Complex Order 
System (``System''), which is governed by Rule 1080.07 includes an 
opening process called the Complex Order Opening Process or ``COOP,'' 
the Complex Order Live Auction (``COLA''), an automated auction for 
seeking additional liquidity and price improvement for Complex Orders, 
and a Complex Limit Order book, the CBOOK.
    Except for the time period referred to in Rule 1080.07(f)(i)(F) and 
the acceptance and treatment of all-or-none orders (both of which are 
discussed below), the Exchange proposes to correct several 
inconsistencies between the existing Complex Orders rule, Rule 1080.07, 
and the operation of the Complex Orders System today.
Opening Inconsistencies
    First, the Exchange proposes to amend the rule text applicable to 
its opening process. Specifically, Rule 1080.07(d) currently provides 
for performing a COOP Evaluation in order to identify a COLA-eligible 
order and then operating an auction respecting that order, similar to 
the way the COLA operates.\3\ The Exchange proposes to amend Rule 
1080.07(d) to reflect that the System operates the opening auction 
process for Complex Orders differently than the COLA.\4\ Specifically, 
the COOP identifies a price at which the maximum number of contracts 
can trade on the opening based on interest received in the Complex 
Order Strategy.\5\ Thus, the COOP operates like a traditional opening 
process for non-Complex Orders (meaning, single leg orders), 
considering buys and sells, taking all interest into account (without 
bias toward any participant) to determine which interest is executable 
and identifying any imbalance.\6\
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    \3\ The COLA is an auction intended to solicit interest in a 
particular Complex Order other than on the opening. See Rule 
1080.07(e).
    \4\ The rule provides that the System determines which Complex 
Order, if any, on the CBOOK will be the ``COLA-eligible order'' 
subject to a COLA. This is not correct.
    \5\ A Complex Order Strategy means a particular combination of 
components of a Complex Order and their ratios to one another. The 
Exchange will calculate both a bid price and an offer price for each 
Complex Order Strategy based on the current PBBO (as defined below) 
for each component of the Complex Order. Each Complex Order Strategy 
will be assigned a strategy identifier by the System. See Rule 
1080.07(a)(ii).
    \6\ An imbalance is the number of contracts that cannot be 
matched with other interest at a particular price. See e.g. NOM 
Chapter VI, Section 8(a)(1).
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    Despite the current rule text, a Complex Order on the opening would 
not have been designated as the COLA-eligible Order with priority over 
all other same-side orders. Instead, such order would have been 
considered for execution alongside other same-priced same-side orders 
received in the same Complex Order Strategy, both before and during the 
COOP, consistent with a normal opening process. Specifically, for each 
Complex Order Strategy, the System will take into consideration all 
Complex Orders, identify the price at which the maximum number of 
contracts can trade and calculate the imbalance, if any, as follows:
     Pursuant to existing Rule 1080.07(d)(i), the System will 
accept pre-opening Complex Orders, and will accept Complex Orders prior 
to re-opening following a halt in trading on the Exchange. Complex 
Orders received prior to the opening or during a trading halt will 
reside on the CBOOK (as defined above). There will be one such COOP per 
Complex Order Strategy. These provisions are not changing.
     Rule 1080.07(d)(ii) will be amended to add reference to a 
timer. Specifically, new rule text will provide that once trading in 
each option component of a Complex Order Strategy has opened (or re-
opened following a trading halt) for a certain configurable time not to 
exceed 60 seconds \7\ (and none of the conditions described in Rule 
1080.07(c)(ii) exist),\8\ the System will initiate the COOP, provided 
that a COOP will only be conducted for any Complex Order Strategy that 
has a Complex Order received before the opening \9\ of that Complex 
Order Strategy. The Exchange is proposing to add new rule text to 
provide that the Exchange will not conduct a COOP when a particular 
Complex Order Strategy is already open as a result of another 
electronic auction process, such as PIXL pursuant to Rule 1080(n) or 
the Exchange's Solicitation mechanism or if another electronic auction 
involving the same Complex

[[Page 35998]]

Order Strategy is in progress.\10\ If that Complex Order Strategy is 
already open, a COOP is not needed and will not occur.
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    \7\ This is known as the opening delay timer, which is intended 
to allow a brief period of time for the prices for the various 
series of an option to stabilize after the opening of those series.
    \8\ These include: the Complex Order is received prior to the 
opening on the Exchange of any options component of the Complex 
Order; during an opening rotation for any options component of the 
Complex Order; during a trading halt for any options component of 
the Complex Order; when the Exchange's Risk Monitor Mechanism is 
engaged for any options component of the Complex Order that 
represents all of the PBBO pursuant to Rule 1093; or when the 
Exchange's market for any options component of the Complex Order is 
disseminated pursuant to Rule 1082(a)(ii)(B).
    \9\ Currently, the Rule provides that the COOP is conducted if a 
Complex Order is pending at the opening or re-opening. However, such 
Complex Order may no longer be pending (perhaps it was canceled), 
such that a COOP is actually triggered by receipt of the order.
    \10\ See SR-Phlx-2014-66.
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     The Exchange is also proposing to add to Rule 
1080.07(d)(ii) that following a trading halt, a COOP will be conducted 
for any Complex Order Strategy where a Complex Order was received 
before or during a trading halt or that Complex Order Strategy had 
previously opened prior to the trading halt.
     The COOP will be conducted in two phases, the ``COOP 
Timer'' (as defined below) and the ``COOP Evaluation'' (also defined 
below). A COOP can be occurring at the same time in different Complex 
Order Strategies.
     To add specificity, the Exchange is proposing to add to 
Rule 1080.07(d)(ii)(A)(1) that the Exchange will send a broadcast 
message indicating that a COOP has been initiated. The broadcast 
message will identify the Complex Order Strategy,\11\ the opening price 
(based on the maximum number of contracts that can be executed at one 
particular price, except if there is no price at which any orders can 
be executed), and the imbalance side and volume, if any. This broadcast 
message is called the Complex Order Opening Auction Notification and is 
sent over an order feed, PHLX Orders, which contains Complex Order 
information, as well as over the Specialized Quote Feed (``SQF'').\12\
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    \11\ Each Complex Order Strategy has an identifier. See Rule 
1080.07(a)(ii).
    \12\ Securities Exchange Act Release Nos. 60877 (October 26, 
2009), 74 FR 56255 (October 30, 2009) (SR-Phlx-2009-92) and 66993 
(May 15, 2012), 77 FR 30043 (May 21, 2012) (SR-Phlx-2012-63) 
(addressing TOPO Plus Orders/PHLX Orders).
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     Pursuant to Rule 1080.07(d)(ii)(A)(1), the Complex Order 
Opening Auction Notification starts a COOP Timer, which will begin 
counting a number of seconds during which the Complex Order, if any, 
may not be traded. The COOP Timer is configurable to a period ranging 
from 0 to 600 seconds as determined by the Exchange and communicated to 
Exchange membership on the Exchange's Web site. The COOP Timer will be 
configured for the same number of seconds for all options trading on 
the Exchange. During the COOP Timer, Phlx XL Participants can submit 
responses to the Complex Order Opening Auction Notification pursuant to 
subparagraph (B).
    The Exchange is proposing to delete Rule 1080.07(d)(ii)(A)(2), 
which currently provides that the System will not engage the COOP Timer 
upon re-opening Complex Order trading when either: (a) The Exchange's 
automated execution system was disengaged and subsequently re-engaged, 
or (b) the Phlx XL Risk Monitor Mechanism was engaged and subsequently 
disengaged. It further provides that, instead, the System will 
immediately begin the COOP Evaluation and will not initiate the COOP 
Timer. This provision is incorrect and obsolete because the Exchange 
does not and cannot disengage its automatic execution system; automatic 
execution is a fundamental aspect of the System. With respect to the 
Risk Monitor Mechanism, its operation has no impact on the COOP Timer.
    The Exchange proposes to amend Rule 1080.07(d)(ii)(A)(4) to specify 
in more detail that Complex Orders received prior to the COOP Timer and 
Complex Orders received during the COOP Timer (other than COOP Sweeps 
and Complex Order Responses marked as a response) will be visible to 
Phlx XL participants upon receipt.
Opening--Immediate-or-Cancel Orders and DNA Orders
    Currently, Complex Orders marked as Immediate-or-Cancel (``IOC'') 
\13\ and Do Not Auction (``DNA'') \14\ can be submitted. The Exchange 
proposes to adopt into Rule 1080.07(d)(ii)(A)(5) how both IOC and DNA 
orders are handled on the opening. Complex Orders marked as IOC or DNA 
received before the COOP is initiated will be cancelled and will not 
participate in the COOP; however, a COOP will nevertheless occur in 
that Complex Order Strategy. The Exchange believes that it is 
appropriate for the COOP to occur even though the IOC or DNA order that 
triggered it is cancelled,\15\ because the opening process is intended 
to open key strategies in which participants are interested. From a 
system perspective and as a practical matter, not every Complex Order 
Strategy can be opened each day, as there are millions of possible 
permutations, based on the number of options and option series 
available for trading today. This way, the System can focus on the 
Complex Order Strategies that attract interest and prepare to open 
those, making them available for trading on a particular day.
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    \13\ See Rule 1080.07(b)(i)-(iii).
    \14\ See Rule 1080.07(a)(viii).
    \15\ A Complex Order Opening Auction Notification is sent with a 
price and size of zero, and a buy side.
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    The Exchange believes it is appropriate for the COOP to occur, 
because responsive interest on both sides of the market can 
nevertheless trade against other responding interest. In fact, today, 
if an order that is not an IOC order (like a Day order) initiates a 
COOP and then is cancelled by the entering participant before the end 
of the COOP, responsive interest can nevertheless trade.
    IOC and DNA orders are handled differently when received during a 
COOP. IOC Complex Orders received during a COOP will join the COOP and 
be treated like any other Complex Order, except such orders will be 
cancelled at the end of the COOP Timer if not executed. This is 
intended to try to execute the order, because the order may be 
responding to the Complex Order Opening Auction Notification. The 
Exchange notes that IOC Complex Orders are handled similarly in the 
Exchange's PIXL system for similar reasons; \16\ that is, an attempt is 
made to execute the IOC Complex PIXL order, and therefore there is a 
delay in executing the order, even though it is marked IOC. 
Accordingly, the Exchange does not believe that participants will be 
surprised about this handling.
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    \16\ See Phlx Rule 1080(n) governing PIXL; the Exchange notes 
that this provision does not expressly describe how IOC orders are 
handled.
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    The Exchange also notes that participants who want their order 
handled in a more immediate way during a COOP can submit a DNA order, 
which would not join a COOP that is in progress and instead be 
cancelled right away, because that would involve a delay. Consistent 
with the rule language that DNA Orders are cancelled if not immediately 
executed,\17\ DNA Orders do not participate in a COOP.
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    \17\ See Phlx Rule 1080.07(a)(viii)(B).
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Opening--Responses During COOP Timer
    Pursuant to proposed Rule 1080.07(d)(ii)(B), Phlx XL participants 
\18\ may bid and/or offer on either or both side(s) of the market 
during the COOP Timer by submitting one or more Complex Orders 
(``Complex Order Response''). In addition, Phlx XL market makers \19\ 
may also bid and/or offer on either or both side(s) of the market

[[Page 35999]]

during the COOP Timer by submitting one or more COOP Sweeps. The 
Exchange is proposing to codify COOP Sweeps in Rule 1080.07(d)(ii)(B). 
COOP Sweeps are one-sided and always have a limit price. Like COLA 
Sweeps, COOP Sweeps can only be entered by Phlx XL market makers, 
participants who quote electronically as market makers for their own 
account (SQTs, RSQTs and specialists). Because non-SQT ROTs do not 
quote electronically, they cannot enter COOP Sweeps or COLA Sweeps, 
which are electronic.\20\ Specifically, a COOP Sweep is a one-sided 
electronic quotation for execution against opening trading interest in 
a particular Complex Order Strategy; this definition is proposed to be 
added to the rule text.\21\
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    \18\ This term is currently defined in Rule 1080.07(a)(vii) as 
Streaming Quote Traders (``SQTs''), Remote Streaming Quote Traders 
(``RSQTs''), non-SQT Registered Options Traders (``non-SQT ROTs''), 
specialists and non-Phlx market makers on another exchange; non-
broker-dealer customers and non-market-maker off-floor broker-
dealers; and Floor Brokers using the Options Floor Broker Management 
System. Once amended to include Firms (as proposed herein), this 
term will cover all potential users of the Complex Orders system.
    \19\ This is a new term that the Exchange believes will help 
distinguish Phlx XL market makers (which include specialists, SQTs 
and RSQTs) from other types of Phlx participants. See proposed Rule 
1080.07(a)(vii).
    \20\ See Rule 1014(b)(ii)(C) and Rule 1080.07(e)(ix).
    \21\ This definition parallels the definition of an opening 
sweep in Rule 1017(l)(vii)(A).
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    The Exchange believes it is appropriate to permit Phlx XL market 
makers to submit COOP Sweeps, in addition to Complex Orders, for 
several reasons. Today, Phlx XL market makers are the only participants 
who can submit quotes, sweeps of non-Complex Orders, COLA Sweeps and 
COOP Sweeps (``Sweeps'').\22\ All of these, including COOP Sweeps, are 
submitted over the Specialized Quote Feed, SQF, which is a method of 
submitting quoting information and receiving information back about 
those quotes and Sweeps. Quotes and Sweeps can only be submitted over 
SQF, the quoting protocol, because this protocol is designed to handle 
quotes and Sweeps. Some Phlx XL market makers choose to submit their 
interest in the form of a Complex Order, which is submitted through a 
different interface than SQF and is geared toward the submission of 
orders (rather than quotes) to the Exchange. The Exchange developed 
Sweeps in order for Phlx XL market makers to be able to expeditiously 
submit one-sided responsive interest without having to enter an order, 
which involves an entirely different protocol and method of entry; this 
was intended to encourage Phlx XL market makers to submit responsive 
interest while managing risk, utilizing a single protocol, which should 
promote just and equitable principles of trade.
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    \22\ Although Rule 1080.07(e)(iv) states that Phlx XL 
participants can submit COLA Sweeps, this is not correct. Only Phlx 
XL market makers can submit COLA Sweeps. The Exchange proposes to 
correct this in Rule 1080.07(a)(vii) and (e)(iv).
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    There is no advantage to submitting a COOP Sweep versus a Complex 
Order; Phlx XL market maker interest is handled the same once it is 
submitted regardless of how it is submitted, including for priority 
purposes.\23\ Furthermore, there is no timing advantage of submitting a 
COOP Sweep versus a Complex Order (whether for a Phlx XL market maker 
or not), because none of the interest is processed until after the COOP 
Timer ends and all Phlx XL market maker interest is executed on a pro-
rata basis, not in time priority. Conversely, there is no disadvantage 
to non-Phlx XL market makers that they cannot submit a COOP Sweep, just 
like there is no such disadvantage that such participants cannot submit 
a quote. By definition, Phlx XL market makers submit, and are obligated 
to submit, quotes; this is the core distinction between market makers 
and other market participants.
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    \23\ See e.g., proposed Rule 1080.07(d)(ii)(C).
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    A Phlx XL market maker may submit multiple COOP Sweeps at different 
prices (but not multiple COOP Sweeps at the same price, except as 
provided in sub-paragraph (2)), in increments of $0.01 in response to a 
Complex Order Opening Auction Notification, regardless of the minimum 
trading increment applicable to the specific series.\24\
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    \24\ See proposed Rule 1080.07(d)(ii)(B)(1).
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    In addition, Phlx XL market makers may change the size of a 
previously submitted COOP Sweep during the COOP Timer. The System will 
use the Phlx XL market maker's most recently submitted COOP Sweep at 
each price level as that market maker's response at that price level, 
unless the COOP Sweep has a size of zero. A COOP Sweep with a size of 
zero will remove a Phlx XL market maker's COOP Sweep from that COOP at 
that price level.\25\ COOP Sweeps will not be visible to any 
participant and will not be disseminated by the Exchange.\26\ This is 
because COOP Sweeps are only available to trade during the COOP and 
will expire if unexecuted at the end of the COOP Timer once all 
executions are complete. Similarly, Complex Order Responses are not 
visible if marked as a response. A Complex Order Response will expire 
if unexecuted at the end of the COOP Timer once all executions are 
complete, but a Complex Order submitted during the COOP Timer which is 
not marked as a response will be available to be traded after the 
opening of a Complex Order Strategy unless it is marked IOC.
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    \25\ See Rule 1080.07(d)(ii)(B)(2).
    \26\ See Rule 1080.07(d)(ii)(B)(3).
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Opening--COOP Evaluation
    Upon expiration of the COOP Timer,\27\ the System will conduct a 
COOP Evaluation to determine, for a particular Complex Order Strategy, 
the price at which the maximum number of contracts can trade, taking 
into account Complex Orders marked all-or-none, unless the maximum 
number of contracts can only trade without including all-or-none 
orders.\28\ The Exchange will open at that price, executing marketable 
trading interest, in the following order: First, to non-broker-dealer 
customers in time priority; next to Phlx XL market makers on a pro-rata 
basis; and then to all other participants on a pro-rata basis.\29\ The 
imbalance of Complex Orders that are unexecutable at that price are 
placed on the CBOOK.
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    \27\ See Rule 1080.07(d)(ii)(C).
    \28\ The Exchange stopped accepting all-or-none Complex Orders 
on March 17, 2014 in order to align the System with the rule. The 
Exchange has incorporated a definition of all-or-none orders in 
Securities Exchange Act Release No. 72351 (June 9, 2014), 79 FR 
33977 (June 13, 2014) (SR-Phlx-2014-39). Now, the Exchange proposes 
to begin accepting them again and explain how they are handled, 
including how they are treated on the opening and that they do not 
leg. See Rule 1080.07(d)(ii)(C), (e)(vi)(A)(1) and (f)(iii)(A).
    \29\ This is consistent with the Exchange's normal priority 
allocation process. See e.g., Rule 1080.07(e)(vi)(B) and Rule 
1014(g)(vii).
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    The following examples illustrate the handling of an all-or-none 
order on the opening.

    Example 1: 
Complex Order #1: Buy 40 for $1.05 AON customer
Complex Order #2: Buy 30 for $1.05 customer
Complex Order #3: Buy 20 for $1.05 customer
Complex Order #4: Sell 50 at $1.04 AON customer

    The result is that Complex Order #4 will trade against the full 
size of Complex Order #1 (because it was first) and 10 contracts of 
Complex Order #2.

    Example 2: 
Complex Order #1: Buy 40 for $1.05 AON customer
Complex Order #2: Buy 30 for $1.05 customer
Complex Order #3: Buy 20 for $1.05 customer
Complex Order #4: Sell 20 at $1.04 AON customer

    The result is that Complex Order #4 will trade against 20 contracts 
of Complex Order #2 since the all-or-none contingency of Order #1 
cannot be satisfied.
    Opening--No trade possible. If at the end of the COOP Timer the 
System determines that no market or marketable limit Complex Orders or 
COOP Sweeps, Complex Orders or COOP Sweeps that are equal to or improve 
the cPBBO,\30\

[[Page 36000]]

and/or Complex Orders or COOP Sweeps that cross within the cPBBO exist 
in the System, all Complex Orders received during the COOP Timer will 
be placed on the CBOOK, as described in Rule 1080.07(f). This is 
because, without an opening execution possible based on the prices of 
orders and COOP Sweeps in a particular strategy, such Complex Orders 
shall rest on the CBOOK for potential execution later while COOP Sweeps 
expire.
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    \30\ The term ``cPBBO'' means the best net debit or credit price 
for a Complex Order Strategy based on the Phlx Best Bid and/or Offer 
(``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. The cPBBO is a calculated number and does not 
include orders on the CBOOK or interest on other exchanges. See Rule 
1080.07(a)(iv).
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    Opening--Trade is possible. If at the end of the COOP Timer the 
System determines that there are market or marketable limit Complex 
Orders or COOP Sweeps, Complex Orders or COOP Sweeps that are equal to 
or improve the cPBBO, and/or Complex Orders or COOP Sweeps that cross 
within the cPBBO in the Phlx XL System, the System will do the 
following: If such interest crosses and does not match in size, the 
execution price is based on the highest (lowest) executable offer (bid) 
price when the larger sized interest is offering (bidding), provided, 
however, that if there is more than one price at which the interest may 
execute, the execution price when the larger sized interest is offering 
(bidding) is the midpoint of the highest (lowest) executable offer 
(bid) price and the next available executable offer (bid) price 
rounded, if necessary, down (up) to the closest minimum trading 
increment.\31\ If the crossing interest is equal in size, the execution 
price is the midpoint of lowest executable bid price and the highest 
executable offer price, rounded, if necessary, up to the closest 
minimum trading increment. This process maximizes the interest which is 
traded during the opening process and delivers a rational price for the 
available interest on the opening. The opening price logic maximizes 
the number of contracts executed during the opening process and ensures 
that residual contracts of partially executed orders or quotes are at a 
price equal to or inferior to the opening price, in other words, the 
logic ensures there is no remaining unexecuted interest available at a 
price which crosses the opening price. If multiple prices exist that 
ensure that there is no remaining unexecuted interest available through 
such price(s), the opening logic chooses the midpoint of such price 
points.
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    \31\ See Rule 1080.07(d)(ii)(C)(2).
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    In determining the execution price and which interest will trade, 
the System affords priority to customers on the opening as well. 
Executable bids/offers include any interest which could be executed 
without trading through residual interest or the cPBBO, or without 
trading at the cPBBO where there is non-broker-dealer customer 
interest. This is consistent with Rule 1080.07(c)(iii).
    To illustrate ``if such interest crosses and does not match in 
size, the execution price is based on the highest (lowest) executable 
offer (bid) price when the larger sized interest is offering 
(bidding)'' as referenced above, assume the following is present at the 
end the COOP Timer for a given Complex Order Strategy:

cPBBO = 3.50 (10)-3.90 (10)
Complex Order #1: Buy 30 for $3.79
Complex Order #2: Sell 20 at $3.56

    COOP Opening execution will be for 20 strategies at a price of 
$3.79 because there were more contracts to buy than there were to sell. 
In this example, while there are multiple price points at which the 
System can open the same number of contracts, there is only one price 
point, $3.79, at which there will be no residual contracts available 
after the opening process at a price which crosses the opening price. 
After the System executes 20 strategies at $3.79, there will remain 10 
unexecuted strategies to buy for $3.79.
    If the example were changed slightly such that Complex Order #1 was 
a market order instead of a limit order, the market order is limited by 
the cPBBO assuming no customer interest is present, and the COOP 
execution price for 20 strategies would be $3.90. The remaining 10 
strategies of Complex Order #1 will then leg to the simple market at 
$3.90.
    To illustrate ``if there is more than one price at which the 
interest may execute, the execution price when the larger sized 
interest is offering (bidding) is the midpoint of the highest (lowest) 
executable offer (bid) price and the next available executable offer 
(bid) price rounded, if necessary, down (up) to the closest minimum 
trading increment'' as referenced above, assume the following is 
present at the end the COOP Timer for a given Complex Order Strategy:

cPBBO = 3.50 (10)-3.90 (10)
Complex Order #1: Buy 20 for $3.79
Complex Order #2: Buy 20 for $3.77
Complex Order #3: Buy 20 at $3.74
Complex Order #4: Sell 20 at $3.60
Complex Order #5: Sell 20 at $3.62

    COOP Opening execution will be for 40 strategies at a price of 
$3.76. The execution price of $3.76 is derived from the midpoint of the 
lowest executable bid price of $3.74 and the next available executable 
bid price of $3.77, rounded up to the closest minimum trading 
increment. In this example, 40 strategies can be opened at multiple 
price points ranging from $3.74 up to $3.77. None of these potential 
opening prices will cause the unexecuted $3.74 buy order to be 
available at a price which crosses the opening price, therefore, the 
System opens at the midpoint of such prices, $3.76.
    If the example were changed slightly such that Complex Order #1 and 
Complex Order #2 were market orders instead of a limit orders, the COOP 
Opening execution price for the 40 strategies would be $3.82, which is 
the midpoint of the potential opening prices ranging from $3.74 to 
$3.90.
    To illustrate ``if the crossing interest is equal in size, the 
execution price is the midpoint of lowest executable bid price and the 
highest executable offer price, rounded, if necessary, up to the 
closest minimum trading increment'' as referenced above, assume the 
following is present at the end the COOP Timer for a given Complex 
Order Strategy:

cPBBO = 3.50 (10)-3.90 (10)
Complex Order #1: Buy 10 for $3.78
Complex Order #2: Buy 20 for $3.74
Complex Order #3: Buy 10 at $3.71
Complex Order #4: Sell 20 at $3.64
Complex Order #5: Sell 20 at $3.66

    COOP Opening execution will be for 40 strategies at a price of 
$3.69. The execution price of $3.69 is derived from the midpoint of the 
lowest executable bid price of $3.71 and the highest executable offer 
price of $3.66, rounded up to the closest minimum trading increment. If 
the example were changed slightly such that Complex Order #4 and 
Complex Order #5 were market orders rather than limit orders, the COOP 
Opening execution price for the 40 strategies would be $3.61, which is 
derived from the midpoint of the lowest executable bid price of $3.71 
and the highest executable offer of $3.50, rounded to the closest 
minimum trading increment.
    To illustrate the application of the Acceptable Complex Execution 
(ACE) parameter as defined in Rule 1080.07(i), assume the following is 
present at the end the COOP Timer for a given Complex Order Strategy:

ACE Parameter of $0.05
cPBBO = 3.50 (10)-4.00 (10)
cNBBO = 3.70 (10)-3.90 (10)
Complex Order #1: Buy 10 for $3.78
Complex Order #2: Buy 20 for $3.74
Complex Order #3: Buy 10 at $3.71
Complex Order #4: Sell 20 at market
Complex Order #5: Sell 20 at market

    The COOP Opening execution may not occur more than $0.05 outside of 
the

[[Page 36001]]

cNBBO, and thus cannot occur at a price of less than $3.65 or more than 
$3.95. In this case, Complex Order #4 and Complex Order #5 will both be 
considered in determining the COOP Opening execution price as orders to 
sell limited by the contra side cNBBO ACE limit of $3.65. Therefore, 
the COOP Opening execution price for the 40 strategies would be $3.68, 
which is derived from the midpoint of the lowest executable bid price 
of $3.71 and the highest executable offer of $3.65.
    If there is any remaining interest after complex interest has 
traded against other complex interest and there is no component that 
consists of the underlying security,\32\ such interest may ``leg'' 
whereby each options component may trade at the PBBO with existing 
quotes and/or limit orders on the limit order book for the individual 
components of the Complex Order; provided that remaining interest may 
execute against any eligible Complex Orders received before legging 
occurs.\33\ If the remaining interest has a component that consists of 
the underlying security or is an all-or-none Complex Order, such 
Complex Order will be placed on the CBOOK. Although the current rule 
text does not provide for legging on the opening, the System is 
currently programmed to consider whether legging is possible in order 
to maximize the number of executions. Accordingly, the Exchange 
proposes to add rule text regarding legging to Rule 
1080.07(d)(ii)(C)(2).
---------------------------------------------------------------------------

    \32\ Complex Orders that are not executable at the opening 
price, including those that could not leg because there is a 
component that consists of the underlying security, will be placed 
on the CBOOK. See proposed Rule 1080.07(d)(ii)(C).
    \33\ Remaining interest includes Complex Orders that did not 
execute at the opening price and are therefore on the CBOOK and 
available to be traded before legging occurs as well as any new 
interest that may have arrived during the legging process.
---------------------------------------------------------------------------

    The Exchange also proposes to add that the Complex Order Strategy 
will be open for trading after the COOP even if no executions occur. 
This is intended to attract additional interest to a Complex Order 
Strategy. If additional interest arrives, the Exchange does not believe 
another COOP is needed, because such interest will under the normal 
processes of the System either be subject to a COLA, be placed on the 
CBOOK (both of which are disseminated), or be cancelled.
Other Inconsistencies
    Second, Rule 1080.07(e)(vi)(C) currently provides that when 
executing against the COLA-eligible order after a COLA, a participating 
specialist shall be entitled to receive, respecting an option in which 
he is the specialist, the greater of: (1) The proportion of the 
aggregate size at the cPBBO associated with such specialist's COLA 
Sweep, SQT and RSQT COLA Sweeps, and non-SQT ROT Complex Orders on the 
CBOOK; \34\ (2) the Enhanced Specialist Participation as described in 
Rule 1014(g)(ii) \35\ (60/40/30%); or (3) 40% of the remainder of the 
order.\36\
---------------------------------------------------------------------------

    \34\ This is commonly known as size pro-rata allocation.
    \35\ Rule 1014(g)(ii) provides that when the registered 
specialist is on parity with a controlled account, in accordance 
with Exchange Rules 119 and 120 and the number of contracts to be 
bought or sold is greater than five, the specialist is entitled to 
receive an enhanced participation of 30% of the Remainder of the 
Order (``Enhanced Specialist Participation''), except in the 
following circumstances: (1) Where there is one controlled account 
on parity, the specialist is entitled to receive 60% of the 
Remainder of the Order; or (2) where there are two controlled 
accounts on parity, in which case, the specialist is entitled to 
receive 40% of the Remainder of the Order. See also ISE Rule 722.05.
    \36\ A specialist is not entitled to this enhanced allocation in 
options in which he is not registered as the specialist.
---------------------------------------------------------------------------

    The Exchange proposes to better define a COLA Sweep in Rule 
1080.07(e)(iv). Specifically, a COLA Sweep, similar but not identical 
to a COOP Sweep,\37\ is a one-sided electronic quotation submitted for 
execution against other trading interest in a particular Complex Order 
Strategy. Any COLA Sweeps which remain unexecuted at the end of the 
COLA Timer once all executions are complete will expire.
---------------------------------------------------------------------------

    \37\ See proposed Rule 1080.07(d)(ii)(B).
---------------------------------------------------------------------------

    The Exchange proposes to amend Rule 1080.07(e)(vi)(C) to eliminate 
the 40% component, because it does not currently operate.\38\ The 
Exchange believes that the 40% language being deleted may have been an 
error, because, given the ``greater of'' language in this provision, 
the 30% guarantee would never have operated. Accordingly, the Exchange 
proposes to amend this provision to reflect that the specialist would 
be entitled to receive the greater of: (1) The proportion of the 
aggregate size associated with such specialist's COLA Sweep, SQT and 
RSQT COLA Sweeps, and non-SQT ROT Complex Orders on the CBOOK; or (2) 
the 60/40/30% Enhanced Specialist Participation described in Rule 
1014(g)(ii). The Exchange believes that the specialist guarantee of 60/
40/30% is a sufficient incentive for participants to become specialists 
and make continuous markets in individual options. The Exchange notes 
that this is the same enhanced pro-rata specialist allocation that 
applies to non-Complex Orders.\39\
---------------------------------------------------------------------------

    \38\ Because the minimum 40% allocation did not operate, the 
specialist may have received less of an allocation than expected 
when executing against COLA-eligible interest in a limited number of 
situations.
    \39\ Unlike regular, single component options listed and traded 
on the Exchange, Complex Orders do not have a specialist or required 
market maker providing continuous markets. Complex Orders operate as 
an order-driven process, with the prices derived from the prices of 
the individual components.
---------------------------------------------------------------------------

    In addition, the Exchange proposes to amend Rule 1080.07(e)(vi)(C) 
to correct it by deleting the limitation of aggregating size only at 
the cPBBO; the size of the specialist's COLA Sweep, SQT and RSQT COLA 
Sweeps, and non-SQT ROT Complex Orders on the CBOOK are all aggregated 
at the execution price, regardless whether the price is at cPBBO or 
not. Today, the System looks at all of a specialist's COLA Sweeps at a 
particular price, not just at the cPBBO and compares it to all other 
Phlx XL market maker interest at that price, so the Exchange proposes 
to correct the rule.
    In short, the Specialist would be entitled to receive the greater 
of: (1) The proportion of the aggregate size associated with such 
specialist's COLA Sweep, SQT and RSQT COLA Sweeps, and non-SQT ROT 
Complex Orders on the CBOOK; or (2) the 60/40/30% Enhanced Specialist 
Participation described in Rule 1014(g)(ii). The Exchange believes that 
the specialist guarantee of 60/40/30% is a sufficient incentive for 
participants to become specialists and make continuous markets in 
individual options. The Exchange notes that this is the same enhanced 
pro-rata specialist allocation that applies to non-Complex Orders.\40\
---------------------------------------------------------------------------

    \40\ Rule 1014(g)(vii).
---------------------------------------------------------------------------

    Furthermore, pursuant to Rule 1080.07(e)(vi)(B), for allocation 
purposes, the rule states that the size of a COLA Sweep or responsive 
Complex Order received during the COLA Timer shall be limited to the 
size of the COLA-eligible order. In actuality, the Exchange will accept 
size in excess of the COLA-eligible order size and such size can be 
executed against remaining interest \41\ after the COLA-eligible order 
has been executed to the fullest extent possible.\42\ For example, 
where there is a COLA-eligible order bidding $2.00 for 20 contracts, 
and the other interest consists of a $2.10 bid for 10 contracts, a 
$2.10 offer for 10 contracts and a $2.00 offer

[[Page 36002]]

for 10 contracts, even though only 10 contracts of the COLA-eligible 
order are executable, the buy and sell orders at $2.10 can nevertheless 
execute against each other; thus, although the COLA-eligible order was 
not fully executed, it was executed to the fullest extent possible,\43\ 
which permitted additional executions of responsive interest at a 
different price, to the benefit of those orders.
---------------------------------------------------------------------------

    \41\ The remaining interest consists of any potential interest 
that has been received, including orders, quotes and COLA Sweeps, as 
well as the individual leg market.
    \42\ The Exchange notes that this reflects an internal 
inconsistency in this rule, because another sub-paragraph in the 
rule addresses the execution of remaining bids or offers from the 
incoming non-customer Complex Order(s). See Rule 
1080.07(e)(viii)(C)(2)(e).
    \43\ The Exchange is replacing the term ``in its entirety'' with 
``to the fullest extent possible'' respecting COLA-eligible orders, 
because COLA-eligible orders to [sic] not have to be fully executed 
in order for other interest to be executed; such interest might, for 
example, be at a different price than the price of the COLA-eligible 
order. See Rule 1080.07(e)(vii), (e)(viii)(B), (e)(viii)(C)(1), 
(e)(viii)(C)(1)(e), (e)(viii)(C)(2), (e)(viii)(C)(2)(e) and 
(e)(viii)(C)(3).
---------------------------------------------------------------------------

    As a result, participants would have had a greater opportunity for 
execution and may have received executions in excess of the COLA-
eligible order volume, up to the full size of their order. If the 
System operated as stated in the current rule text, fewer contracts 
would have been executed, because fewer contracts would have been 
available for execution against the COLA-eligible order and other 
responsive interest. It is likely that some of the interest in that 
Complex Order Strategy would not have traded but for the ability for 
COLA Sweeps and Complex Orders to be submitted for any size.
    The Exchange is proposing to amend the rule to reflect the current 
practice and permit the full size of responding interest to trade 
against non-COLA-eligible interest. This change is intended to have as 
many contracts trade as possible. The Exchange does not believe that 
the current size limitation in the rule is useful.\44\ The Exchange 
notes that the size of a COLA Sweep or responsive Complex Order is only 
relevant where the resulting allocation of a trade is conducted on a 
pro-rata basis, but not respecting non-broker-dealer customer 
allocations, which are based on time priority. The Exchange believes 
that permitting interest in excess of the COLA-eligible volume benefits 
market participants, because it helps ensure that as many contracts as 
possible are executed. The Exchange does not believe that there is any 
negative effect from permitting responsive interest of any size. 
Although in a pro-rata allocation, a greater allocation might result, 
this is not harmful, but rather enhances the liquidity in the 
marketplace. It should also be noted that the Exchange considers non-
responsive interest present in the system when executing and allocating 
in a COLA and such non-responsive interest is also not restricted to 
the size of the COLA-eligible volume.
---------------------------------------------------------------------------

    \44\ The Exchange notes that this is similar to NYSEArca Rule 
6.91(c)(7), which permits executions above such size.
---------------------------------------------------------------------------

    Fourth, Rule 1080.07(e)(viii) determines the price at which orders 
are executed while Rule 1080.07(e)(vi) determines the execution 
priority of such orders; the Exchange seeks to make the interaction of 
these two provisions clearer by adding descriptive language to that 
effect in Rule 1080.07(e)(viii). Rule 1080.07(e)(viii)(C)(1)(d) 
currently provides that if multiple customer Complex Orders are 
received on the opposite side of the market from the COLA-eligible 
order, customer orders will be executed in the order in which they were 
received. This provision operates to determine the price at which the 
COLA-eligible order is executed against customer Complex Orders and 
defines the allocation algorithm utilized for each type of customer. In 
the context of determining the execution price of such interest, the 
Exchange uses the term ``customer'' to include both non-broker-dealer 
customer orders as well as non-market maker off-floor broker-dealer 
orders, because in this context non-market maker off-floor broker-
dealer orders seek liquidity and are therefore more like customer 
orders versus other participants, which generally provide liquidity.
    With respect to Rule 1080.07(e)(vi) regarding the allocation within 
a participant category, the System executes non-broker-dealer customer 
orders in the order in which they were received and non-market maker 
off-floor broker-dealer orders on a pro-rata basis at each price level. 
Thus, non-market maker off-floor broker-dealer orders may have received 
a higher or lower allocation at a particular price than they would have 
received in time priority allocation, which is required under the 
current rule, depending on their particular time and size.
    The Exchange proposes to change Rule 1080.07(e)(viii)(C)(1)(d) to 
reflect that off-floor broker- dealer orders at the same price are 
executed on a pro-rata basis, consistent with the priority rules 
applicable in other aspects of the execution of Complex Orders \45\ and 
simple orders.\46\
---------------------------------------------------------------------------

    \45\ See e.g., Rule 1080.07(e)(vi)(B).
    \46\ See Rule 1014(g)(vii).
---------------------------------------------------------------------------

    Fifth, pursuant to Rule 1080.07(e)(viii)(C)(2)(d), if multiple non-
customer \47\ Complex Orders are received on the opposite side of the 
market from the COLA-eligible order, such orders will be executed in 
the order in which they were received. Instead, the System executes 
non-customer orders on a pro-rata basis among Phlx market maker 
interest and then, again on a pro-rata basis, among remaining Phlx XL 
participants at each price level, as described in Rule 
1080.07(e)(vi)(B). Non-customer orders may have received a higher or 
lower allocation at a particular price than they would have received in 
time priority allocation, depending on their particular time and size.
---------------------------------------------------------------------------

    \47\ In the context of executing these orders, the Exchange uses 
the term ``non-customer'' to include all interest other than non-
broker-dealer customer interest and non-market-maker off-floor 
broker-dealer interest.
---------------------------------------------------------------------------

    The Exchange proposes to amend the rule to reflect that non-
customer orders are executed on a pro-rata basis, consistent with the 
priority rules applicable in other aspects of the execution of Complex 
Orders and simple orders.\48\
---------------------------------------------------------------------------

    \48\ See supra note 29.
---------------------------------------------------------------------------

    Sixth, the System recently operated such that when a Complex Order 
was received during the final 3 seconds of the trading session, it was 
placed onto the CBOOK.\49\ Pursuant to Rule 1080.07(f)(i)(F), a Complex 
Order an order should go on the CBOOK when is received during the final 
10 seconds of the trading session, rather than 3 seconds. Accordingly, 
more Complex Orders may have started a COLA than the rule provides for 
and were perhaps executed rather than resting on the CBOOK, which the 
Exchange believes may have been considered a benefit for those orders.
---------------------------------------------------------------------------

    \49\ In order to comply with the current rule, the System was 
changed on March 7, 2014 to 10 seconds to align with the rule.
---------------------------------------------------------------------------

    At this time, the Exchange proposes to change the rule to reflect a 
configurable time period (for all options) to determine how many 
seconds before the end of the trading session that an order is placed 
on the CBOOK. The Exchange believes that this should maximize 
executions rather than applying a fixed time period of 10 seconds. The 
Exchange will notify participants on its Web site in advance when the 
number of seconds will change. The Exchange believes that this is a 
useful change, because the Exchange believes that 10 seconds may be too 
long and may prevent executions from occurring; a COLA can be triggered 
and completed in less than 3 seconds so the Exchange believes a smaller 
number than 10 seconds is appropriate to maximize executions.
    In addition, the Exchange is adding to this provision a reference 
to any marketable portion of the Complex Order being executed, because 
the System seeks to execute any portion that

[[Page 36003]]

can be traded before placing a Complex Order on the CBOOK.
    Seventh, after the COLA-eligible order has been executed in its 
entirety, Rule 1080.07(e)(viii)(C)(3) provides that the execution price 
of crossing interest is based on the price of the smaller sized 
interest. Crossing interest refers to any buy or sell interest that 
crosses in price such that a buyer order is at a higher price than the 
best sell price, for example. If such interest crosses and does not 
match in size, the execution price of the remaining interest is based 
on the highest (lowest) executable offer (bid) price when the larger 
sized interest is offering (bidding), provided, however, that if there 
is more than one price at which the interest may execute, the execution 
price when the larger sized interest is offering (bidding) is the 
midpoint of the highest (lowest) executable offer (bid) price and the 
next available executable offer (bid) price rounded, if necessary, down 
(up) to the closest minimum trading increment. If the crossing interest 
is equal in size, the execution price is the midpoint of lowest 
executable bid price and the highest executable offer price, rounded, 
if necessary, up to the closest minimum trading increment.
    In determining the execution price and which interest will trade, 
the System affords priority to non-broker-dealer customers. Executable 
bids/offers include any interest which could be executed without 
trading through residual interest or the cPBBO, or without trading at 
the cPBBO where there is non-broker-dealer customer interest. This is 
consistent with Rule 1080.07(c)(iii).
    While participants are ``blind'' to the determination of the 
execution price because they do not know the size of all eligible 
interest, the participants that were part of the smaller sized interest 
would likely have received a better execution price than the rule 
states.
    The Exchange proposes to amend Rule 1080.07(e)(viii)(C)(3) to 
reflect the use of larger sized interest, because it is indicative of 
the price of remaining unexecuted interest. The Exchange believes that 
this correction and level of detail should help participants understand 
how their execution prices are determined, and this method is fair and 
orderly, based on both size and midpoint, which reflect the totality of 
the remaining interest. This is the same process used in the COOP as 
proposed in Rule 1080.07(d)(ii)(C)(2).
    This provision is also proposed to state that if there is any 
remaining interest, which means any interest present in the System in 
that Complex Order Strategy at that time provided that it is not an 
all-or-none order and there is no component that consists of the 
underlying security,\50\ such interest may ``leg'' whereby each options 
component may trade at the PBBO with existing quotes and/or limit 
orders on the limit order book for the individual components of the 
Complex Order; provided that remaining interest may execute against any 
eligible Complex Orders received before legging occurs. This is 
intended to maximize the number of contracts that execute.
---------------------------------------------------------------------------

    \50\ Complex Orders that are not executable, including those 
that could not leg because there is a component that consists of the 
underlying security, will be placed on the CBOOK. See proposed Rule 
1080.07(d)(ii)(C).
---------------------------------------------------------------------------

    Eighth, Rule 1080.07(b)(i) governs the types of Complex Orders that 
different participants may submit to the Exchange. The rule does not 
currently specify a category of participant known as Firms. Because the 
current rule does not define a Firm, under the current language Firms 
are broker-dealers that fit the definition of non-market maker off-
floor broker-dealer.
    At this time, the Exchange is proposing to adopt a definition of 
Firm in Rule 1080.07(a)(x), based on the current definition in the Phlx 
fee schedule.\51\ Specifically, the Exchange is proposing to define the 
term ``Firm'' to mean a broker-dealer trading for its own (proprietary) 
account that is: (i) A member of The Options Clearing Corporation 
(``OCC''); or (ii) maintains a Joint Back Office (``JBO'') \52\ 
arrangement with an OCC member. Firms are distinct from non-market 
maker off-floor broker-dealers because of their OCC membership, which 
implies that Firms, and thus the JBO participants with whom they have 
established JBO arrangements are large, well-capitalized entities.
---------------------------------------------------------------------------

    \51\ See Securities Exchange Act Release No. 62140 (May 20, 
2010), 75 FR 29788 (May 27, 2010) (SR-Phlx-2010-69).
    \52\ A member organization can establish and maintain a JBO 
arrangement with a clearing broker-dealer subject to the 
requirements of Regulation T Section 220.7 of the Federal Reserve 
System if each JBO participant is registered as a broker-dealer, 
maintains a minimum account equity requirement of $1,000,000, and 
comply with certain ownership standards. See Rule 703(a)(vi).
---------------------------------------------------------------------------

    The pricing schedule currently provides that Firm means a non-
customer broker-dealer for which orders are identified by a member or 
member organization as clearing in the firm range at OCC.\53\ The term 
``clearing in the firm range at OCC'' refers to what type of an account 
is held at OCC and is commonly used by exchanges.\54\ The participants 
that clear in the firm range at OCC are Firms, including both broker-
dealers trading for their own (proprietary) account who are OCC members 
as well as JBO participants. In contrast, broker-dealers trading for 
their own (proprietary) account who are not OCC members (and do not 
have a JBO arrangement) must have their trades cleared via an OCC 
member and do not clear in the firm range.\55\ Accordingly, the 
proposed definition of Firm comports with the definition used in the 
pricing schedule, with respect to which dozens of proposed rule changes 
have taken effect based on such pricing differentiation being 
consistent with the Act, including not being unfairly 
discriminatory.\56\
---------------------------------------------------------------------------

    \53\ See preface to Phlx Pricing Schedule.
    \54\ See e.g., http://www.cboe.com/publish/RegCir/RG13-038.pdf.
    \55\ These broker-dealer orders are ultimately cleared as 
customer orders at OCC.
    \56\ See e.g., Securities Exchange Act Release Nos. 68880 
(February 8, 2013), 78 FR 10664 (February 14, 2013) (SR-Phlx-2013-
10); and 67189 (June 12, 2012), 77 FR 36310 (June 18, 2012) (SR-
Phlx-2012-77).
---------------------------------------------------------------------------

    In addition, the Exchange proposes to specify the two ways in which 
Firm orders are handled like Phlx XL market maker orders rather than 
non-market maker off-floor broker-dealer orders. Specifically, the 
Exchange proposes to amend Rule 1080.07(e)(i)(B)(1) to provide that 
Firm orders, like Phlx market maker orders, are not COLA-eligible 
orders and therefore cannot start a COLA; \57\ non-market-maker off-
floor broker-dealer orders can start a COLA. In addition, for purposes 
of Rule 1080.07(e)(viii)(C)(2), Firms orders are proposed to be treated 
as ``non-customer'' orders. Specifically, when the System determines 
how Complex Orders on the opposite side of the market from a COLA-
eligible order are executed, the System executes Firm orders on a pro-
rata basis along with non-Phlx market maker orders. Non-market-maker 
off-floor broker-dealer orders are executed along with non-broker-
dealer customer orders. In these two ways, Firm orders are proposed to 
be treated the same way as non-Phlx market makers, rather than the same 
way as off-floor broker-dealers, because the Exchange believes that the 
trading style and needs of Firms are more like market makers. Firms are 
large, well-capitalized broker-dealers trading for their own account, 
generally submitting large orders, including orders that facilitate 
their clients' orders or offset often large positions taken to

[[Page 36004]]

accommodate their customers; \58\ in order to do so, Firms must have 
the financial wherewithal that this role necessitates, which by OCC 
rule applicable to OCC clearing members, generally requires a certain 
amount of net capital, risk management procedures addressing certain 
risks and margin requirements, among other things.\59\ Thus, in 
general, Firms are commonly viewed as providers of liquidity, much like 
market makers.
---------------------------------------------------------------------------

    \57\ See Rule 1080.07(e)(i)(B)(1) which defines a COLA-eligible 
order. The Exchange is deleting from this provision the requirement 
that such order improve the cPBBO, because that requirement is 
already stated in Rule 1080.07(e)(i)(A).
    \58\ Of course, the clients/customers of a Firm could be other 
broker-dealers.
    \59\ See OCC Rules 301, 311 and 601.
---------------------------------------------------------------------------

    Ninth, the Exchange proposes to accept all-or-none orders \60\ and 
specify how they are handled. The handling of all-or-none orders on the 
opening is explained above.\61\ Specifically, Rule 1080.07(e)(vi)(A)(1) 
will provide that all-or-none Complex Orders will not leg into the 
prices of the individual components of such Complex Order. In addition, 
Rule 1080.07(f)(iii)(A) will similarly provide that all-or-none Complex 
Orders on the CBOOK will not leg.
---------------------------------------------------------------------------

    \60\ The Exchange stopped accepting all-or-none Complex Orders 
on March 17, 2014 in order to align the System with the rule. The 
Exchange has incorporated a definition of all-or-none orders in 
Securities Exchange Act Release No. 72351 (June 9, 2014), 79 FR 
33977 (June 13, 2014) (SR-Phlx-2014-39).
    \61\ See proposed Rule 1080.07(d)(ii)(C).
---------------------------------------------------------------------------

    Tenth, the Exchange proposes to amend 1080.07(b)(iii) to specify in 
more detail that only IOC Complex Orders can be accepted by Floor 
Brokers from SQTs, RSQTs, non-SQT ROTs, specialists, non-Phlx market 
makers on another exchange and Firms. Currently, this provision refers 
to broker-dealers or affiliates of broker-dealers; these terms are not 
used elsewhere in the rule and is thus confusing.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\62\ in general, and with 
Section 6(b)(5) of the Act,\63\ in particular, which requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade as well as protect investors and the 
public interest. Specifically, the Exchange is proposing various 
changes that should promote just and equitable principles of trade, 
because Complex Orders will be handled in a fair and orderly manner by 
the System, as described above. The Exchange believes that the proposed 
changes are consistent with how participants could reasonably expect 
that their complex interest should be treated. The various corrections 
are, together, intended to improve the rule overall. The Exchange 
believes that this should promote just and equitable principles of 
trade as well as protect investors and the public interest by making 
more clear how specifically Complex Orders are handled on the Exchange.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78f.
    \63\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    More specifically, the opening changes are intended to promote just 
and equitable principles of trade by seeking to execute as much 
interest as possible at the best possible price(s). The opening process 
maximizes price discovery and liquidity while employing price priority, 
which the Exchange believes is a fairer process on the opening when 
dealing with potentially different sources of interest, versus a single 
Complex Order triggering a COLA during the day's trading. Although the 
COOP operates differently than the COLA, the Exchange notes that the 
COOP operates like a traditional opening process, seeking to execute as 
much interest as possible, which is consistent with just and equitable 
principles of trade.
    The opening delay timer promotes just and equitable principles of 
trade by allowing options prices to stabilize after the options 
opening, before permitting Complex Orders to become available for 
trading. If a particular Complex Order Strategy is already open, the 
COOP does not occur, which is consistent with just and equitable 
principles of trade, because there is no need for an opening process. 
The Complex Order Opening Auction Notification is intended to attract 
interest to the opening process and encourage the opening of a Complex 
Order Strategy, like the COLA message is intended to attract interest 
to the COLA. Accordingly, the Complex Order Opening Auction 
Notification, which contains the opening price, imbalance, if any, and 
volume, promotes just and equitable principles of trade.
    The change to Rule 1080.07(d)(ii)(B)(3) enumerating that COOP 
responses are not visible promotes just and equitable principles of 
trade by making this clear to participants and because the temporary, 
quick nature of the COOP would not render this information useful. The 
Complex Order Opening Auction Notification is sufficient notification 
of the forthcoming opening of a particular Complex Order Strategy.
    The Exchange noted above that Complex Orders marked IOC do not 
participate in an auction that such order may trigger if that order 
would be the first order in that Complex Order Strategy, thereby 
opening that Strategy for the day. The Exchange does not believe that 
this raises regulatory issues, such as the potential for manipulation 
or abuse relating to the opening auction. The Exchange similarly treats 
non-Complex Orders marked IOC, in that such orders, if received prior 
to the opening in an option, are cancelled upon receipt. Thus, the fact 
that Complex Orders marked IOC do not participate in the opening 
auction does not raise new concerns for manipulation; today, if a 
participant enters a DAY or GTC order and then immediately cancels it, 
an auction will ensue without that order. Accordingly, the Exchange 
believes that its proposed handling of IOC orders should promote just 
and equitable principles of trade. Similarly, the proposal addresses 
how DNA orders are handled, which also promotes just and equitable 
principles of trade by providing an order type that involves immediate 
handling.
    The Exchange believes that COOP Sweeps, as described above, promote 
just and equitable principles of trade by providing an opportunity for 
a single sided quote to be entered by Phlx XL market makers responding 
to a COOP, much like opening sweeps in Rule 1017 and regular sweeps in 
Rule 1080. The Exchange does not believe it is unfairly discriminatory 
for COOP Sweeps to be available only to Phlx XL market makers, because 
the ability to enter two-sided quotes is also available only to Phlx XL 
market makers, who use a particular protocol to submit quotes and 
sweeps to the Exchange. Other Phlx XL participants can submit orders 
over the protocol specific to orders, specifically IOC orders, which 
behave in the same manner as a sweep. Accordingly, such other 
participants are not disadvantaged by the inability to submit sweeps, 
much like they are not disadvantaged by the inability to submit quotes 
or sweeps respecting non-Complex Orders.
    With respect to the provision in Rule 1080.07(d)(ii)(C)(3) that 
provides that a Complex Order Strategy will be open after a COOP even 
if no executions occur, the Exchange believes that this proposed 
language should promote just and equitable principles of trade by 
opening a Complex Order Strategy based on the fact that interest was 
received, regardless of whether the responsive interest resulted in an 
execution. In addition, it promotes just and equitable principles of 
trade for the rule to reflect this.
    With respect to any priority provisions addressed herein, the 
proposed treatment is similar to the Exchange's priority rule 
respecting orders other than Complex Orders, as well as the comparable 
rules of other

[[Page 36005]]

options exchanges.\64\ This includes allocating to the specialist based 
on all of his interest at a particular price pursuant to proposed Rule 
1080.07(e)(vi)(C), off-floor broker-dealer customer orders on a pro-
rata basis pursuant to proposed Rule 1080.07(e)(viii)(C)(1)(d), and to 
Phlx XL market makers and other non-customers each on a pro-rata basis 
pursuant to proposed Rule 1080.07(e)(viii)(C)(2)(d). The deletion of 
the 40% allocation promotes just and equitable principles of trade both 
by correcting the rule text as well as by rendering meaning to the 
reference to Rule 1014(g)(ii), which is otherwise pointless.
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    \64\ See Phlx Rule 1014(g)(vii)(B)(1)(b). See also CBOE Rule 
6.53C(d)(v).
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    The deletion of aggregating size only at the cPBBO in Rule 
1080.07(e)(vi)(C)(1) for purposes of determining the pro rata 
allocation promotes just and equitable principles of trade by taking 
into account all expressed interest (the specialist's COLA Sweep, SQT 
and RSQT COLA Sweeps and non-SQT ROT Complex Orders on the CBOOK) at 
each price instead of only at one price, the cPBBO. This should 
maximize the number of contracts executed, to the benefit of those 
participating in that Complex Order Strategy.
    The change to Rule 1080.07(e)(vi)(B) permitting responses for a 
size greater than the size of the COLA-eligible orders is consistent 
with just and equitable principles of trade, because it enables as many 
contracts as possible to trade, which is also consistent with 
protecting investors and the public interest. Restricting responses to 
the size of the COLA-eligible order serves no regulatory purpose and, 
instead, merely limits the number of contracts that can trade. 
Restricting responses to the size of the COLA-eligible order could also 
provide interest that has been submitted coincidentally, without 
intentionally responding to an auction, to have an unfair advantage 
since this interest would not be restricted to the size of the COLA-
eligible order.
    The Exchange believes a configurable end of day timer as proposed 
in Rule 1080.07(f)(i)(F) is consistent with just and equitable 
principles of trade, because it can be tailored to maximize the number 
of executions but is still limited to 600 seconds, as originally 
approved.
    The Exchange also believes that the proposed execution process in 
proposed Rule 1080.07(d)(ii)(C)(2) and (e)(viii)(C)(3) for crossing 
interest is consistent with just and equitable principles of trade, 
because it is based on the price of the larger sized interest, which 
affects more options contracts and is likely to result in more 
executions than the current rule provides, because the current rule is 
based on the mid-point, regardless of size.
    The reference to legging remaining interest in these same 
subparagraphs promotes just and equitable principles of trade by 
providing an opportunity for additional Complex Orders to trade. The 
additional executions would be expected by users who expressed an 
interest to trade by submitting their interest; their expression of 
interest is not limited to the COLA-eligible order but rather to the 
Complex Order Strategy as a whole.
    In addition, this proposal is not unfairly discriminatory, 
including to the new category of Firm orders, because it proposes to 
deal with Complex Orders and responsive interest in a reasonable way. 
As explained above, it is not uncommon to have certain order types and 
time-in-force conditions available only to certain participant types, 
both on the Exchange \65\ as well as other exchanges.\66\ Indeed, the 
Exchange's pricing schedule has long distinguished Firms from other 
broker-dealers.\67\ The Exchange believes that certain order types and 
time-in-force conditions, if made available, would likely not be used 
by certain market participants, because of the particular trading style 
of those participants. For example, Phlx XL market makers are not 
permitted to send in GTC orders; the Exchange does not believe that 
Phlx XL market makers would be interested in submitting GTC orders, as 
they generally participate in the marketplace using electronic 
quotations, which are updated and replaced frequently, unlike GTC 
orders.
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    \65\ See Phlx Rule 1080(b).
    \66\ See CBOE Rule 6.53C(d)(iii).
    \67\ See supra note 53.
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    Similarly, the Exchange believes that Firms do not expect or need 
their Complex Orders to trigger a COLA nor to submit GTC orders, 
because these are features commonly associated with customers rather 
than liquidity providers who function to accommodate trading interest. 
Both of these features involve a temporal component; both a delay and 
long-lasting interest are inconsistent with the sort of accommodation 
that Firms provide. Firms are interested in trading in a manner that 
offers liquidity to their customers. Accordingly, the Exchange believes 
that by tailoring its offerings to the needs and trading style of 
Firms, Firms are more likely to send orders to the Exchange, which 
should increase order interaction with other market participants, 
consistent with promoting just and equitable principles of trade.
    The Exchange believes that its proposal to accept all-or-none 
Complex Orders should promote just and equitable principles of trade by 
offering this order type, commonly available for non-Complex Orders as 
well as complex orders on other options exchanges, to market 
participants, who may want a certain minimum size. This contingency is 
particularly appropriate respecting Complex Orders, because of the 
complexity of the strategies employed by users; the size of the order 
may be relevant to such strategy. The Exchange believes that its 
proposal to not leg all-or-none Complex Orders promotes just and 
equitable principles of trade, because the all-or-none contingency 
complicates the execution of such orders expeditiously against the 
individual components of such orders; the Exchange does not believe 
that users would expect such orders to leg, as all-or-none orders are 
often treated differently than other orders because of the nature of 
that contingency.\68\
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    \68\ See e.g., Options Floor Advice A-9.
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    The Exchange believes that its proposal to amend 1080.07(b)(iii) to 
specify in more detail that Floor Brokers can only accept IOC Complex 
Orders from SQTs, RSQTs, non-SQT ROTs, specialists, non-Phlx market 
makers on another exchange and Firms is merely replacing vague terms 
(broker-dealers or affiliates of broker-dealers) to more precise ones 
that are linked to definitions within the rule. Using defined terms 
should promote just and equitable principles of trade.
    The Exchange believes that deleting reference in Rule 
1080.07(d)(ii)(A)(2) to disengaging the automated execution system and 
the Phlx XL Risk Monitor Mechanism clarifies that the COOP Timer 
nevertheless occurs in these situations. The COOP Timer facilitates 
price discovery and opening interest in a Complex Order Strategy, which 
should, in turn, promote just and equitable principles of trade.
    The Exchange believes that specifying in more detail that Complex 
Orders received prior to the COOP Timer and Complex Orders received 
during the COOP Timer (other than COOP Sweeps and Complex Order 
Responses marked as a response) are visible to Phlx XL participants 
upon receipt should promote just and equitable principles of trade by 
further attracting additional interest in a particular Complex Order 
Strategy.

[[Page 36006]]

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the proposal does not impose an intra-market burden on 
competition, because these changes make the rule clearer and more 
complete for all participants. Nor will the proposal impose a burden on 
competition among the options exchanges, because of the vigorous 
competition for order flow among the options exchanges. To the extent 
that market participants disagree with the particular approach taken by 
the Exchange herein, market participants can easily and readily direct 
complex order flow to competing venues.

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

    No written comments were either solicited or received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2015-49 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-2015-49. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing will also 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-2015-49 and should be 
submitted on or before July 14, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\69\
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    \69\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-15339 Filed 6-22-15; 8:45 am]
BILLING CODE 8011-01-P


