
[Federal Register Volume 80, Number 126 (Wednesday, July 1, 2015)]
[Notices]
[Pages 37672-37685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16088]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75300; File No. SR-Phlx-2014-66]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 2, To 
Adopt New Exchange Rule 1081, Solicitation Mechanism, To Introduce a 
New Electronic Solicitation Mechanism

June 25, 2015.

I. Introduction

    On October 14, 2014, NASDAQ OMX PHLX LLC (``Exchange'' or ``Phlx'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 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, 5000 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.\3\ On December 8, 2014, the Commission 
extended the time period

[[Page 37673]]

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.\4\ 
On January 28, 2015, the Commission instituted proceedings under 
Section 19(b)(2)(B) of the Act \5\ to determine whether to approve or 
disapprove the proposed rule change.\6\ The Commission received two 
comment letters from the same commenter regarding the proposal,\7\ as 
well as a response from the Exchange to the commenter's first 
letter.\8\ On April 9, 2015, the Exchange filed Amendment No. 2 to the 
proposed rule change.\9\ The proposed rule change, as modified by 
Amendment No. 2, was published for comment in the Federal Register on 
April 22, 2015, on which date the Commission also designated a longer 
period for Commission action on the proposed rule change.\10\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73441 (October 27, 
2014), 79 FR 64862 (``Notice'').
    \4\ See Securities Exchange Act Release No. 73791 (December 8, 
2014), 79 FR 73924 (December 12, 2014).
    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ See Securities Exchange Act Release No. 74167 (January 28, 
2015), 80 FR 5865 (February 3, 2015) (``Order Instituting 
Proceedings'').
    \7\ See Letters from Michael J. Simon, Secretary and General 
Counsel, International Securities Exchange LLC (``ISE''), dated 
February 25, 2015 (``ISE Letter'') and dated June 15, 2015 (``Second 
ISE Letter''). The Second ISE Letter notes that ISE reiterates its 
original comments.
    \8\ See Letter from Carla Behnfeldt, Associate General Counsel, 
Nasdaq, dated March 11, 2015 (``Phlx Response Letter'').
    \9\ The Exchange filed Amendment No. 1 on April 1, 2015. 
Amendment No. 1 was withdrawn on April 8, 2015. Amendment No. 2 
amends and replaces the original filing in its entirety. In 
Amendment No. 2, the Exchange: (1) Makes certain changes to Exchange 
Rule 1080(n) regarding the PIXL auction process; (2) clarifies that 
the trading system does not currently accept all-or-none Complex 
Orders; (3) provides that the side of the Agency Order will be 
disseminated at the commencement of an auction; (4) clarifies the 
treatment of responsive all-or-none interest in the auction; (5) 
adds examples regarding the operation of the solicitation mechanism; 
and (6) makes certain other technical and clarifying changes.
    \10\ See Securities Exchange Act Release No. 74746 (April 16, 
2015), 80 FR 22569 (April 22, 2015) (``Notice of Amendment No. 2''). 
The comment period for the Notice of Amendment No. 2 closed on May 
7, 2015.
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    This Order disapproves the proposed rule change, as modified by 
Amendment No. 2.

II. Description of the Proposal

    The Exchange proposes to adopt new 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, 5000 contracts or more) that the member represents as agent 
against contra orders that the member had solicited. Currently, under 
Phlx Rule 1080(c)(ii)(C)(2), Order Entry Firms \11\ 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.\12\ The proposed rule change would provide an alternative 
method, to enable a member to electronically execute orders it 
represents on behalf of a public customer, broker-dealer, or any other 
entity (an ``Agency Order'') \13\ 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.\14\
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    \11\ 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.)
    \12\ According to the Exchange, Section (c), Solicited Orders, 
of Exchange Rule 1064, Crossing Facilitation and Solicited Orders, 
governs execution of solicited orders by open outcry, on the 
Exchange's trading floor, and would not be affected by proposed Rule 
1081. The Exchange states that 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 proposed rules 
correspond to the existing PIXL rules. For information about 
specific provisions of proposed Rule 1081 that correspond to the 
PIXL rule and that have been omitted in the description of the 
proposal herein, see Notice of Amendment No. 2, supra note 10.
    \13\ The Exchange notes that the capitalized and defined term 
``Agency Order'' as used in proposed Rule 1081 differs from the term 
``agency order'' as used in Phlx Rule 1080(b)(i)(A). See Notice of 
Amendment No. 2, supra note 10, 80 FR at 22570 n. 17.
    \14\ The Exchange states that participants would be required to 
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 proposed mechanism would be a process by which a member (the 
``Initiating Member'') would be able to electronically submit an all-
or-none Agency Order of 500 contracts or more (or, in the case of mini 
options,\15\ 5000 contracts or more) against a Solicited Order, and to 
initiate an auction (the ``Solicitation Auction'').\16\ As noted below, 
at the end of the Solicitation Auction, allocation would 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.\17\ 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 Phlx's solicitation 
mechanism. Such written notification would be required to disclose the 
terms and conditions contained in proposed Rule 1081 and to be in a 
form approved by the Exchange.\18\
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    \15\ A given Solicitation Auction could be for options contracts 
exclusively or for mini options contracts exclusively, but could not 
be used for a combination of both options contracts and mini options 
contracts.
    \16\ The Exchange notes that similar electronic functionality is 
offered today by other option exchanges. See Chicago Board Options 
Exchange (``CBOE'') Rule 6.74B, Solicitation Auction Mechanism, and 
ISE Rule 716(e), Solicited Order Mechanism.
    \17\ 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.
    \18\ See proposed 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, would 
be eligible for the Solicitation Auction. Proposed Rule 1081(i) 
describes the circumstances under which an Initiating Member would be 
permitted to 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 5000 contracts) and must be 
designated as all-or-none. The orders must match in size, and their 
limit prices must match or cross in price.\19\ If the orders cross in 
price, the price at which the Agency Order and the Solicited Order 
would be considered for submission pursuant to proposed Rules 
1081(i)(B) and (C) would be the limit price of the Solicited Order.\20\ 
The orders would not be able to be stop or stop limit orders; would 
need to be marked with a time in force of day, good

[[Page 37674]]

`til cancelled or immediate or cancel; and would not be routed 
regardless of routing strategy indicated on the order.\21\
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    \19\ In the case of Complex Orders, the underlying components of 
both Complex Orders would also need to match. Additionally, all the 
option legs of each Complex Order would need to consist entirely of 
options or entirely of mini options.
    \20\ As noted below, under Rule 1081(i)(B), the limit price of 
the Solicited Order must also be equal to or better than the 
National Best Bid/Offer.
    \21\ According to the Exchange, 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 would be treated once they are entered into the 
solicitation mechanism.
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    Pursuant to proposed Rule 1081(i)(B), the Initiating Member would 
need to 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 would need to be 
at least $0.01 better than any public customer non-contingent limit 
order on the Phlx order book and would need to be equal to the Agency 
Order's limit price or provide the Agency Order with a better price 
than its limit price. Stop prices could be submitted in $0.01 
increments, regardless of the applicable Minimum Price Variation (the 
``MPV''). Contingent orders (including all-or-none, stop or stop-limit 
orders) on the order book would not be considered when checking the 
acceptability of the stop price. The Exchange states that 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 that 
these orders are not represented as part of the Exchange Best Bid/
Offer, they are not included in the NBBO and thus would not be 
considered when checking the acceptability of the stop price.\22\
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    \22\ Proposed Rule 1081(i)(B) would not apply if the Agency 
Order is a Complex Order (a ``Complex Agency Order''). Rather, 
proposed Rule 1081(i)(C) would apply to Complex Agency Orders and 
would require 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 would be rejected. The Exchange represents 
that PIXL operates in the same manner. See Amendment No. 2, supra 
note 9 (citing Rule 1080(n)(i)(C)). Proposed Rule 1081(i)(C) would 
require all component option legs of the order to be for at least 
500 contracts (or, in the case of mini options, at least 5000 
contracts). It also would provide 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 would be submitted in $0.01 increments, regardless of 
MPV, and contingent orders on the order book would not be considered 
when checking the acceptability of the stop price. See proposed Rule 
1081(i)(C).
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    Orders that are submitted but that do not comply with the 
eligibility requirements set forth in proposed Rule 1081(i)(A) through 
(C) would be rejected upon receipt and would be ineligible to initiate 
a Solicitation Auction.\23\ In addition, Agency Orders submitted at or 
before the opening of trading would not be eligible to initiate a 
Solicitation Auction and would be rejected.\24\ Agency Orders that 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 would not be eligible 
to initiate a Solicitation Auction and would be rejected.\25\ 
Similarly, a Complex Agency Order received while another auction in the 
same Complex Order strategy is in progress would not be eligible to 
initiate a Solicitation Auction and would be rejected.\26\
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    \23\ See proposed Rule 1081(i)(D).
    \24\ See proposed Rule 1081(i)(E). 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 
(including, in the case of Complex Orders, in any series that is a 
component of the Complex Order) also would not be eligible to 
initiate a Solicitation Auction and would be rejected. See proposed 
Rule 1081(i)(F).
    \25\ The Exchange notes that a similar restriction currently 
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 proposes to revise 
this provision to make clear that only one electronic auction may be 
conducted at a time in any given series or strategy. The Exchange 
proposes to 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 would not be eligible to initiate a PIXL 
Auction and would be rejected. See Amendment No. 2, supra note 9.
    \26\ According to the Exchange, 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 would not be rejected. Instead, a Solicitation Auction 
would be initiated for that incoming Agency Order offering each 
unique strategy or individual series the same opportunity to 
initiate an auction. Any Legging Orders would automatically be 
removed from the order book upon receipt of an Agency or Complex 
Agency Order that 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 Amendment No. 2, supra note 9, 80 FR at 
22571, n. 34 (noting that this feature of proposed Rule 1081 
comports with a feature of PIXL). Complex Orders submitted during 
normal trading hours in a strategy that has not yet opened under 
Commentary .07 of Rule 1080 would cause the strategy to immediately 
open and permit a Solicitation Auction to be initiated. See proposed 
Rule 1081(i)(E). In addition, neither a Solicitation Auction for a 
simple Agency Order or for 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. See Notice of 
Amendment No. 2, supra note 10, 80 FR at 22571 n. 34.
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    Finally, a solicited order may not be 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.\27\ 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 a market maker interested in participating in transactions on the 
Exchange should do so by way of his or 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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    \27\ See proposed Rule 1081(i)(G). See also Notice of Amendment 
No. 2, supra note 10, 80 FR at 22571 n. 35, for a description of 
each of these types of market participants.
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Solicitation Auction Process

    Pursuant to proposed Rule 1081(ii)(A)(1), to begin the Solicitation 
Auction process, the Initiating Member would need to 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 would determine the stop price based 
upon the submitted limit prices, if such prices for the Agency Order 
and Solicited Order do not match as discussed above.\28\ Once the 
Initiating Member has submitted an Agency Order and Solicited Order for 
processing in the Solicitation Auction, the Agency Order and the 
Solicitation Order could not be modified or cancelled.\29\
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    \28\ See Notice of Amendment No. 2, supra note 10, 80 FR at 
22571, n 36.
    \29\ Rule 1081(ii)(A)(l) would not apply to Complex Agency 
Orders. Rather, a parallel provision, proposed Rule 1081(ii)(A)(2) 
would provide 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 would need to 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 would determine 
the stop price based upon the submitted limit prices if such prices 
do not match as discussed above. See Notice of Amendment No. 2, 
supra note 10, 80 FR at 22571, n. 36. Once the Initiating Member has 
submitted the Complex Agency Order and the Complex Solicited Order 
for processing pursuant to proposed Rule 1081(ii)(A)(1)-(2), the 
Complex Agency Order and Complex Solicited Order could 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

[[Page 37675]]

of a public customer, broker-dealer, or any other entity through the 
solicitation mechanism.\30\
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    \30\ However, the Solicited Order may not be for the account of 
any Exchange specialist, SQT, RSQT or ROT assigned in the affected 
series. See note 27, supra and accompanying text.
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    However, pursuant to proposed Rule 1081(v), if a member were to 
enter 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 adhered to the eligibility requirements of proposed Rule 
1081(i), such paired orders would be executed automatically without a 
Solicitation Auction.\31\ The execution price for such paired public 
customer orders (except if they are Complex Orders) would need to be 
expressed in the minimum quoting increment applicable to the affected 
series.\32\ Such an execution would not be permitted to 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.\33\
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    \31\ 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, would be amended to clarify that it would not apply to Rule 
1081, Solicitation Mechanism. See also Rule 1081(ii)(A)(4).
    \32\ The execution price for a Complex Order would be permitted 
to be in $.01 increments.
    \33\ All-or-none orders can be submitted on the Exchange only 
for non-broker-dealer customers. As stated above, the mechanism 
would not consider all-or-none orders 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 would be permitted to occur only at a price that would 
improve the calculated Phlx Best Bid/Offer or ``cPBBO'' and would 
improve upon the net limit price of any Complex Orders (excluding all-
or-none) on the Complex Order book in the same strategy.\34\ If all-or-
none Complex Orders \35\ are on the Complex Order book in the same 
strategy, the public customer-to-public customer Complex Order would 
not be permitted to 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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    \34\ 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).
    \35\ According to the Exchange, its trading system is capable of 
accepting all-or-none Complex Orders, but such orders are not 
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 [sic] 
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). 
The Exchange states, however, that 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.'' See Amendment No. 2, 
supra note 9, 80 FR at 22571, n. 40. The Exchange states that it 
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 states that it intends to delete this new sentence to be 
added to Rule 1080.07(b)(v) if the Exchange submits, and the 
Commission approves, a proposed rule change that provides for all-
or-none Complex Orders to be submitted through the trading system. 
See id. The proposed rule change describes how the solicitation 
mechanism would handle all-or-none Complex Orders once they are 
permitted under Exchange rules. According to the Exchange, the 
Complex Agency Orders and Complex Solicited Orders that would be 
permitted to be entered into the Solicitation Auction, however, are 
unique to the mechanism and their acceptability is mandated by it, 
despite the requirement that these orders must be entered with an 
all-or-none contingency. Thus, the Exchange states that it would not 
need to file a proposed rule change in order to allow Complex Agency 
Orders and Complex Solicited Orders to be submitted into the system.
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    The Exchange believes that permitting public customer to public 
customer crosses for simple orders and Complex Orders through use of 
the solicitation mechanism would 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.

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 (name of security, strike price, and 
expiration date), size, side,\36\ and stop price of the Agency Order 
and the Solicitation Auction start time would then be sent over the 
PHLX Orders data feed and Specialized Quote Feed (``SQF'').\37\ 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.\38\
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    \36\ See Notice of Amendment No. 2, supra note 10, 80 FR at 
22572.
    \37\ 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.
    \38\ See Notice of Amendment No. 2, supra note 10, 80 FR at 
22572. 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. 
See id.
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Solicitation Auction

    The proposed Solicitation Auction process is described in proposed 
Rules 1081(ii)(A)(4) through 1081(ii)(A)(10). Following the issuance of 
the Request for Response, the Solicitation Auction would last for a 
period of 500 milliseconds,\39\ unless the auction was concluded as the 
result of any of the circumstances of early termination described 
below.\40\
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    \39\ 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 states that it 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).
    \40\ 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, would be amended by the proposed rule change to clarify that 
it would not apply to proposed Rule 1081, Solicitation Mechanism. 
See also proposed Rule 1081(ii)(A)(4).
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    Any person or entity would be permitted to submit Responses to the 
Request for Response, provided each 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.\41\ 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 would not be visible to Solicitation 
Auction participants, and would not be disseminated to the Options 
Price Reporting Authority (``OPRA''). A Response would be permitted to 
be for any size up to the size of the Agency Order.\42\ The

[[Page 37676]]

minimum price increment for Responses would be $0.01. A Response would 
need to 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 would be rejected.\43\ Multiple 
Responses at different prices from the same member would be permitted 
during the Solicitation Auction.\44\ Responses would be permitted to be 
modified or cancelled during the Solicitation Auction.
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    \41\ In the case of a Complex Agency Order, the Response would 
need to 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. See Notice of Amendment 
No. 2, supra note 10.
    \42\ The Exchange's proposal would not permit Responses to be 
submitted with an all-or-none contingency. The Exchange states that 
an all-or-none contingency included 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. See Notice of Amendment No. 2, supra note 10, 80 FR at 22572. 
(However, all-or-none orders entered and present on the Exchange 
book at the end of the Solicitation Auction would be considered for 
execution, as discussed below.)
    \43\ Similarly, in the case of Complex Order Responses, the 
Response would need to 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. However, the Responses 
would not need to improve upon the limit of orders on the Complex 
Order book because, the Exchange states, the Complex Order book is 
not displayed on OPRA and would not necessarily be known to the 
responding participant. If a Complex Order Response was received 
that was equal to or crossed the limit of orders on the Complex 
Order book, the Response would only be executed at a price that 
improves the resting order's limit price by at least $0.01. See 
proposed rule 1081(ii)(H). See also Notice of Amendment No. 2, supra 
note 10, 80 FR at 22572, n. 50. A Complex Order Response submitted 
with a price that is outside the cPBBO at the time of receipt would 
be rejected. See proposed Rule 1081(ii)(A)(9).
    \44\ See Notice of Amendment No. 2, supra note 10, 80 FR at 
22572.
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Conclusion of the Solicitation Auction

    Proposed Rules 1081(ii)(B)(1) through (B)(4) describe a number of 
circumstances that would cause the Solicitation Auction to conclude. 
Generally, it would conclude at the end of the Solicitation Auction 
period, except that it would 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 \45\ (because, the Exchange states, 
further price improvement would be unlikely and any Responses offering 
improvement would likely be cancelled); \46\ or (ii) any time there is 
a 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).\47\
---------------------------------------------------------------------------

    \45\ See proposed Rule 1081(ii)(B)(2).
    \46\ In the case of a Complex Solicitation Auction, the auction 
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 proposed Rule 
1081(ii)(B)(3). The Exchange believes that, when either the cPBBO or 
Complex Order interest, excluding all-or-none interest, is present 
on the Exchange on the same side as the Complex Agency Order and 
crosses the stop price, further price improvement would be unlikely 
and Responses offering improvement would likely be cancelled. The 
Exchange also states that an all-or-none Complex Order crossing the 
stop price should not end the Complex Solicitation Auction since the 
order would be contingent and might not actually be able to trade 
based on its size contingency. The Exchange believes that continuing 
to run the Complex Solicitation Auction in this instance for the 
duration of the auction timer would benefit the Agency Order in 
allowing interest that may offer price improvement over the stop 
price to continue to be collected. This approach would be consistent 
with the proposed rules for Solicitation Auctions involving simple 
orders. Under the proposal, Simple Solicitation Auctions would 
conclude early when the PBBO on the same side of the market as the 
Agency Order crossed the stop price. All-or-none orders are not part 
of the PBBO as they are contingent and not displayed on OPRA. See 
Amendment No. 2, supra note 9, 80 FR at 22572, n.52.
    \47\ See proposed Rule 1081(ii)(B)(4). 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 Rule 1047(e). See also Securities Exchange Act Release No. 62269 
(June 10, 2010), 75 FR 34491 (June 17, 2010) (SR-Phlx-2010-82). The 
Exchange states that 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 would be nullified pursuant 
to Exchange Rule 1092(c)(iv)(B).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 1081(ii)(C), if the Solicitation Auction 
concluded before the expiration of the Solicitation Auction period 
because of the PBBO, cPBBO or Complex Order book (excluding all-or-none 
Complex Orders) crossed the stop price, as described above, the entire 
Agency Order would be executed using the allocation algorithm set forth 
in proposed Rule 1081(ii)(E). The algorithm is described below under 
the heading ``Order Allocation''.
    In addition, pursuant to proposed Rule 1081(ii)(C), if the 
Solicitation Auction concluded before the expiration of the 
Solicitation Auction period as the result of a trading halt, the entire 
Agency Order or Complex Agency Order would be executed solely against 
the Solicited Order or Complex Solicited Order at the stop price and 
any unexecuted Responses would be cancelled.\48\ Responses and other 
interest present in the system would not be considered for trading 
against the Agency Order in the case of a trading halt. The Exchange 
believes that this result 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 that they 
otherwise would incur because the market is halted, if they were 
permitted to execute against the Agency Order in this instance. By 
contrast, the Solicited Order ``stopped'' the Agency Order when the 
order was submitted into the Solicitation Auction and, in the 
Exchange's view, therefore should 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.
---------------------------------------------------------------------------

    \48\ 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, the Exchange notes, when an Agency Order and Solicited 
Order are submitted into the Solicitation Auction, the stop price would 
need to 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 Order and Solicited Order 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 would not cause the Solicitation Auction to end 
early. Rather, the unrelated order would execute against interest 
outside the Solicitation Auction (if marketable against the PBBO) or 
would post to the order 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 proposed 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 would be considered 
for participation in the order allocation process set forth in proposed 
Rule 1081(ii)(E) (described below), regardless of the number of 
contracts in relation to the Solicitation Auction size.\49\ The

[[Page 37677]]

Exchange states that unrelated opposite side interest received during 
the Solicitation Auction is handled in this manner because 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. The Exchange further believes that 
considering such unrelated interest that remains unexecuted upon 
receipt for participation in the order allocation process would 
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.
---------------------------------------------------------------------------

    \49\ Similarly, pursuant to proposed 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 would not cause the Complex 
Solicitation Auction to end early and would 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 would 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 
proposed Rule 1081(ii)(E).
---------------------------------------------------------------------------

Order Allocation

    The allocation of orders executed upon the conclusion of a 
Solicitation Auction would 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 
would 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 Exchange states that the 
treatment of all-or-none interest in assessing the presence of 
sufficient improving interest would not always be the same for Complex 
Solicitation Auctions as it would be for simple Solicitation Auctions. 
In all Solicitation Auctions, whether simple or complex, the system 
would 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 it would not be possible to 
satisfy the all-or-or none contingency in the execution.\50\ However, 
in the case of simple Solicitation Auctions, all-or-none interest of a 
size that could potentially be executed consistent with its all-or-none 
contingency would be considered when determining whether there is 
sufficient size to execute the Agency Orders at a price(s) better than 
the stop price.\51\
---------------------------------------------------------------------------

    \50\ See Amendment No. 2, supra note 9.
    \51\ The Exchange provided an example of assessing the 
sufficiency of improving interest in a simple Solicitation Auction. 
See Notice of Amendment No. 2, supra note 10, 80 FR at 22574.
---------------------------------------------------------------------------

    By contrast, in the case of Complex Solicitation Auctions, pursuant 
to proposed Rule 1081(ii)(E)(5), when determining if there is 
sufficient size to execute the Complex Agency Orders at a price(s) 
better than the stop price, no all-or-none interest of any size would 
be considered. Phlx states that this difference is due to a system 
limitation relating to all-or-none Complex Orders.\52\ The Exchange 
believes that the difference in the treatment of all-or-none Complex 
Orders would not be impactful since, according to a study it made of 
the matter, all-or-none Complex Orders are rare.\53\ Moreover, the 
Exchange notes, if sufficient size exists in other non-solicited 
interest to execute the entire Complex Agency Order at an improved 
price, the all-or-none Complex Order would be considered for trade and 
executed if possible.\54\
---------------------------------------------------------------------------

    \52\ Phlx explains that 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. According to the Exchange, the aggregation of all-or-none 
Complex Orders with other Complex Orders in order to determine the 
presence of sufficient improving interest would be a more difficult 
process than aggregation of all-or-none simple orders with other 
simple orders. See also Amendment No. 2, supra note 9.
    \53\ The Exchange reviewed six months of data which showed that 
all-or-none Complex Orders represented only 0.12% of all Complex 
Orders. See Notice of Amendment No. 2, supra note 10.
    \54\ The Exchange provided the following example of assessing 
the sufficiency of improving interest in a Complex Solicitation 
Auction. Assume a Complex Agency Order to buy 1000 contracts that 
was 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 would not consider all-or-none interest in 
determining whether it can execute the Complex Agency Order at a 
better price than the stop price. In this example, by excluding the 
all-or-none Complex Order, only 900 contracts would be 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. See Notice of Amendment No. 2, supra note 10.
---------------------------------------------------------------------------

    In both simple Solicitation Auctions and Complex Solicitation 
Auctions, once a determination is made that sufficient improving 
interest exists, all-or-none interest would be executed at the 
auction's conclusion pursuant to normal priority rules, except in a 
case where the all-or-none contingency could not be satisfied. If an 
execution that can adhere to the all-or-none contingency would not be 
possible, the all-or-none interest would be ignored and would remain on 
the order book.\55\
---------------------------------------------------------------------------

    \55\ As discussed above, however, if without the size of the 
all-or-none order there would be insufficient interest to satisfy 
the Agency Order at an improved price, the Agency Order would be 
executed against the Solicited Order, and the responding interest 
would be cancelled.
---------------------------------------------------------------------------

    Solicitation Auction with Sufficient Improving Interest. Pursuant 
to the proposed 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 would be executed against such better priced 
interest, with public customers having priority in the allocation 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 would be allocated among 
all Exchange quotes, orders and Responses in accordance with Phlx Rules 
1014(g)(vii)(B)(1)(b) and (d), and the Solicited Order would be 
cancelled.\56\ The Exchange provided an example of allocation in a 
Solicitation Auction with sufficient improving interest.\57\
---------------------------------------------------------------------------

    \56\ Similarly, pursuant to proposed 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 would 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 Exchange states that 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 would 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 that 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 Rule 1014(g).
     When determining if there would be 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 
would be triggered for a covered security, Complex Orders and 
Responses marked ``short'' would 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 was 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 would be triggered that might be present, then all 
Complex Orders and Responses marked ``short'' would be considered 
for allocation in accordance with proposed Rule 1081(ii)(J)(3).
    \57\ See Notice of Amendment No. 2, supra note 10, at 80 FR 
22574. The Exchange also provided an example of allocation in a 
Complex Solicitation Auction with sufficient improving interest. See 
Notice of Amendment No. 2, supra note 10, 80 FR 22575 n.62.

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

[[Page 37678]]

    Solicitation Auction with Insufficient Improving Interest. Pursuant 
to proposed Rule 1081(ii)(E)(2), if there was 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 would 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.\58\ Otherwise, both the 
Agency Order and Solicited Order would be cancelled without a trade 
occurring.\59\ The Exchange believes that this proposed provision would 
ensure that non-contingent public customer orders on the limit order 
book would maintain priority. The Exchange notes 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 . . . .'' \60\ In contrast, the Exchange points out that 
the proposed solicitation mechanism offered on Phlx would not consider 
such interest.\61\ The Exchange states that requiring the stop price to 
be at least $0.01 better than any public customer interest on the limit 
order book would ensure public customer priority of existing interest 
and in turn provide the Solicited Order participant certainty that if 
an execution occurs at the stop price, such execution would represent 
the Solicited Order and not interest that arrived after the Solicited 
Order participant stopped the Agency Order for its entire size.
---------------------------------------------------------------------------

    \58\ Proposed Rule 1081(ii)(E)(2) would not apply to Complex 
Solicitation Auctions. Rather, a parallel provision, proposed Rule 
1081(ii)(E)(4), would provide 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 would be executed against the Solicited Order at the stop 
price, provided such stop price was 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. The Exchange states 
that this proposed behavior would ensure that non-contingent public 
customers on the limit order book maintain priority. Otherwise, both 
the Complex Agency Order and the Solicited Order would be cancelled 
with no trade occurring.
    \59\ The Exchange provided examples of allocation in a 
Solicitation Auction with insufficient improving interest. With 
respect to simple Solicitation Auctions, see Notice of Amendment No. 
2, supra note 10, 80 FR at 22575. With respect to Complex 
Solicitation Auctions, see Notice of Amendment No. 2, supra note 10, 
80 FR at 22575 n.63.
    \60\ See Notice of Amendment No. 2, supra note 10, at 80 FR 
22575.
    \61\ See ISE Rule 716(e)(2)(i) 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.''
---------------------------------------------------------------------------

    Proposed Rule 1081(ii)(E)(6) would provide that a single quote, 
order or Response may not be allocated a number of contracts that is 
greater than its size.
    Finally, proposed Rule 1081(ii)(E)(7) provides that a Complex 
Agency Order consisting of a stock/ETF component would not execute 
against interest comprising the cPBBO at the end of the Complex 
Solicitation Auction.\62\ 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 would therefore not be considered 
as a means of executing a Complex Order that includes a stock/ETF 
component. The Exchange states 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.
---------------------------------------------------------------------------

    \62\ The Exchange states that this provision, which parallels 
Phlx Rule 1080(n)(ii)(E)(2)(g) concerning Complex Orders in its PIXL 
auction, is being proposed for the same reasons explained in its 
File No. SR-Phlx- 2013-46 with respect to that rule. See Securities 
Exchange Act Release No. 69845 (June 25, 2013), 78 FR 39429 (July 1, 
2013) (Order Granting Approval To Proposed Rule Change, as Modified 
by Amendment No. 1, Regarding Complex Order PIXL) (for purposes of 
this Order, the ``Complex PIXL Filing''). The Exchange states that 
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, noting that Commentary .08(a)(i) to Phlx 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) would address the handling 
of the Agency Order and other orders, quotes and Responses when certain 
conditions are present. Pursuant to proposed 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 would be executed, if possible, at their limit price(s). 
Although Exchange Rule 1084, Order Protection, generally prohibits 
trade-throughs, the Exchange notes that 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.\63\
---------------------------------------------------------------------------

    \63\ See Notice of Amendment No. 2, supra note 10, at 80 FR at 
22575.
---------------------------------------------------------------------------

    In addition, the Exchange believes that, since the proposal would 
permit Responses to be cancelled at any time prior to the conclusion of 
the Solicitation Auction, Responses being executed at a price trading 
through the market is, at best, highly unlikely as participants would 
cancel Responses when better priced interest that they could trade 
against is present in the marketplace.
    Proposed Rule 1081(ii)(G) would provide that if, the Solicitation 
Auction price when trading against non-solicited interest (except if it 
was a Complex Solicitation Auction), would be the same as or would 
cross the limit of an order (excluding an all-or-none order) resting on 
the limit order book on the same side of the market as the Agency 
Order, the Agency Order could be executed only at a price that is at 
least $0.01 better than the resting order's limit price.\64\ However, 
if such execution price would be equal to or would not improve the stop 
price, the Agency Order would be executed against the non-solicited 
interest at a price that is $0.01 better for the Agency Order than the 
stop price, provided the price would not equal or cross a public 
customer order and would be equal to or improved upon the PBBO on the 
opposite side of the Agency Order.\65\ If

[[Page 37679]]

such price is not possible, the Agency Order and Solicited Order would 
be cancelled with no trade occurring.\66\ The Exchange states that the 
system would permit only 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 
order book, thereby establishing priority at the stop price. The 
Exchange further states that this system logic ensures that the Agency 
Order would receive a better priced execution than the stop price when 
trading against interest other than the Solicited Order.
---------------------------------------------------------------------------

    \64\ The system would not consider the origin of the resting 
order but would seek to ensure the priority of all resting orders on 
the order book by requiring that any execution occur at a price 
which would improve upon the limit of a resting order by at least 
$0.01, if possible. If an execution could not occur at least $0.01 
better than the limit of a resting order on the book, the system 
would 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. See Notice of Amendment No. 2, supra note 10, 
at 80 FR at 22576.
    \65\ See also Phlx Rule 1080(n)(ii)(H). Proposed Rule 
1081(ii)(G) would not apply to Complex Solicitation Auctions. 
Rather, a parallel provision, proposed Rule 1081(ii)(H), would 
provide that if the Complex Solicitation Auction price when trading 
against non-solicited interest was the same as or would 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 would be permitted to be 
executed only at a price that improves the resting order's limit 
price by at least $0.01, provided such execution price would improve 
the stop price. If such execution price would be equal to or would 
not improve the stop price, the Agency Order would 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 would be equal to or better than the cPBBO on the 
opposite side of the Complex Agency Order. If such price would not 
be possible, the Agency Order and Solicited Order would be cancelled 
with no trade occurring. The Exchange noted that this functionality 
is consistent with the operation of PIXL auctions.
    \66\ The Exchange provided an example of the operation of 
proposed Rule 1081(ii)(G). See Notice of Amendment No. 2, supra note 
10 (adding clarifying language to the example).
---------------------------------------------------------------------------

    Proposed Rule 1081(ii)(I) would provide that any unexecuted 
Responses or Solicited Orders would be cancelled at the end of the 
Solicitation Auction. The Exchange notes that because both Responses 
and Solicited Orders would be specifically entered into the 
Solicitation Auction to trade against the Agency Order, and then 
cancelling the unexecuted portion of Responses and Solicited Orders 
would be consistent with the expected behavior of such interest by the 
submitting participants.

Complex Agency Orders With Stock/ETF Components

    Proposed Rule 1081(ii)(J) deals with Complex Agency Orders with 
stock or ETF components. Proposed Rule 1081(ii)(J)(1) provides that 
member organizations would be permitted to submit Complex Agency 
Orders, Complex Solicited Orders, Complex Orders and/or Responses with 
a stock/ETF component only if such orders/Responses comply with the 
Qualified Contingent Trade Exemption from Rule 611(a) of Regulation NMS 
\67\ 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.\68\ 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.
---------------------------------------------------------------------------

    \67\ 17 CFR 242.611(a).
    \68\ See, e.g., Securities Exchange Act Release No. 54389 
(August 31, 2006), 71 FR 52829 (September 7, 2006) (order granting 
an exemption for each NMS stock component of certain qualified 
contingent trades from Rule 611(a) of Regulation NMS).
---------------------------------------------------------------------------

    Proposed 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,\69\ the Exchange would 
be required to electronically communicate the underlying security 
component of the Complex Agency Order (together with the Complex 
Solicited Order, Complex Order or Response, as applicable) to NES, its 
designated broker-dealer, for immediate execution. The Exchange states 
that such execution and reporting would occur otherwise than on the 
Exchange and would be handled by NES pursuant to applicable rules 
regarding equity trading.
---------------------------------------------------------------------------

    \69\ See text of proposed Rule 1081(ii)(J)(2), Amendment No. 2, 
supra note 9.
---------------------------------------------------------------------------

    Finally, proposed Rule 1081(ii)(J)(3) states that when the short 
sale price test in Rule 201 of Regulation SHO \70\ would be triggered 
for a covered security, NES would 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 was 
equal to or below the current national best bid.\71\ However, NES would 
execute a short sale order in the underlying covered security component 
of a Complex Agency Order, Complex Solicited Order, Complex Order or 
Response if such order was marked ``short exempt,'' regardless of 
whether it was at a price that was equal to or below the current 
national best bid.\72\ If NES could not 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 would cancel back the Complex Agency Order, Complex 
Solicited Order, Complex Order or Response to the entering member 
organization. For purposes of proposed Rule 1081(ii)(J)(3), the term 
``covered security'' would have the same meaning as in Rule 201(a)(1) 
of Regulation SHO.\73\
---------------------------------------------------------------------------

    \70\ 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.
    \71\ The term ``national best bid'' is defined in SEC Rule 
201(a)(4). 17 CFR 242.201(a)(4).
    \72\ 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 would handle short 
sales of the orders and Responses described herein the same way it 
handles the short sales discussed in the Complex PIXL Filing.
    \73\ 17 CFR 242.201(a)(4).
---------------------------------------------------------------------------

    The Exchange states that this approach is consistent with Rule 201 
of Regulation SHO. Under this proposal, the Exchange and NES, as 
trading centers, would 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 would 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 would be 
processed as a single transaction and both the option leg and stock/ETF 
components would be simultaneously processed.\74\
---------------------------------------------------------------------------

    \74\ See Notice of Amendment No. 2, supra note 10, at 80 FR 
22577.
---------------------------------------------------------------------------

Regulatory Issues

    The proposed rule change contains two paragraphs describing 
prohibited practices when participants use the solicitation mechanism.
    Proposed Rule 1081(iii) states that the Solicitation Auction could 
be used only where there is a genuine intention to execute a bona fide 
transaction. It would be considered a violation of proposed Rule 1081 
and would be deemed conduct inconsistent with just and equitable 
principles of trade and a

[[Page 37680]]

violation of Rule 707 \75\ if an Initiating Member submitted an Agency 
Order (thereby initiating a Solicitation Auction) and also submitted 
its own Response in the same Solicitation Auction. The Exchange states 
that 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.
---------------------------------------------------------------------------

    \75\ Phlx Rule 707 states, ``[a] member, member organization, or 
person associated with or employed by a member or member 
organization shall not engage in conduct inconsistent with just and 
equitable principles of trade.''
---------------------------------------------------------------------------

    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 would 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 proposing Rule 1081, the Exchange also proposes an 
amendment to 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 
are to 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 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 would be treated in the same manner as an off-
floor broker-dealer. The effect of these proposed changes to Rule 1014 
would be that professionals would not receive the same priority 
afforded to public customers in a Solicitation Auction under proposed 
Rule 1081, and instead would be treated as broker-dealers in this 
regard. Therefore, an Agency Order or Solicited Order submitted for a 
professional would not be considered a public customer order eligible 
to be paired with a public customer order or another professional order 
and these would not be automatically executed without a Solicitation 
Auction pursuant to Rule 1081(v), discussed above. In addition, 
unrelated professional orders, excluding all-or-none orders, or 
Responses for the account of a professional would be treated under the 
proposed rule as broker-dealer orders for purposes of execution 
priority. Unrelated professional all-or-none orders would continue to 
receive customer priority as stipulated in Rule 1000(b)(14).\77\
---------------------------------------------------------------------------

    \76\ See Securities Exchange Act Release No. 61802 (March 30, 
2010), 75 FR 17193 (April 5, 2010) (approving SR-Phlx-2010-05).
    \77\ See Amendment No. 2, supra note 9.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Act, the Commission shall approve 
a proposed rule change of a self-regulatory organization if it finds 
that such proposed rule change is consistent with the requirements of 
the Act, and the rules and regulations thereunder that are applicable 
to such organization.\78\ The Commission shall disapprove a proposed 
rule change if it does not make such a finding.\79\ The Commission's 
Rules of Practice, under Rule 700(b)(3), state that the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory organization that proposed the rule change'' and that a 
``mere assertion that the proposed rule change is consistent with those 
requirements . . . is not sufficient.'' \80\
---------------------------------------------------------------------------

    \78\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \79\ See 15 U.S.C. 78s(b)(2)(C)(ii); and see also 17 CFR 
201.700(b)(3).
    \80\ See 17 CFR 201.700(b)(3). ``The description of a proposed 
rule change, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative 
Commission finding. Any failure of a self-regulatory organization to 
provide the information elicited by Form 19b-4 may result in the 
Commission not having a sufficient basis to make an affirmative 
finding that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder that are 
applicable to the self-regulatory organization.'' Id. See also 
General Instructions to Form 19b-4, Item 3(b), 17 CFR 249.819.
---------------------------------------------------------------------------

    After careful consideration, the Commission does not find that the 
proposed rule change, as modified by Amendment No. 2, is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Commission does not find that the proposed rule change, as modified 
by Amendment No. 2, is consistent with Section 6(b)(5) of the Act, 
which, among other things, requires that the rules of a national 
securities exchange be 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 . . . .'' \81\ Because 
this determination under the Act necessitates disapproving the proposed 
rule change, as modified by Amendment No. 2, the Commission does 
so.\82\
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78f(b)(5).
    \82\ The Commission notes that, other than as discussed below, 
this order makes no findings with respect to whether other aspects 
of the proposed rule change are consistent with the Act.
---------------------------------------------------------------------------

    The Commission recognizes that it has previously approved rules of 
other national securities exchanges that provide for solicited order 
mechanisms.\83\ Phlx's proposed solicitation mechanism rules, however, 
would deviate from the solicited order mechanism rules of other 
exchanges that previously were approved by the Commission.
---------------------------------------------------------------------------

    \83\ See, e.g., ISE Rule 716(e), Solicited Order Mechanism; CBOE 
Rule 6.74B, Solicitation Auction Mechanism; BOX Rule 7270(b), 
Solicitation Auction; and MIAX Rule 515A(b), PRIME Solicitation 
Mechanism.
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission invited the 
views of interested persons concerning whether the Exchange's proposal 
is consistent with Section 6 or any other provision of the Act, or the 
rules and regulations thereunder. The Commission also highlighted 
specific features of the Exchange's proposal and requested the views of 
interested persons on those features.\84\ In particular, the Commission 
noted that, under the Exchange's proposal, if at the conclusion of the 
Solicitation Auction period there is a public customer order on the 
order book at the stop price, the auction would be cancelled.\85\ The 
Commission stated that this result is consistent with the rule of 
another exchange's solicited order mechanism.\86\ The Commission 
remarked that the Exchange's proposed rule differs from

[[Page 37681]]

the other exchange's rule in a case where, in addition to the public 
customer order at the stop price, there is sufficient price-improving 
interest along with the public customer order at the stop price to fill 
the Agency Order.\87\ The Commission pointed out that, on the other 
exchange, the public customer order at the stop price and the price-
improving interest would trade against the Agency Order.\88\ The 
Commission noted that, under Phlx's proposal, the Agency Order and the 
Solicited Order would be cancelled.\89\
---------------------------------------------------------------------------

    \84\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5874-5875.
    \85\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5874.
    \86\ See id., citing to ISE Rule 716(e), Solicited Order 
Mechanism.
    \87\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5874.
    \88\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5875, citing to proposed Rule 1081(ii)(E)(1).
    \89\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5875.
---------------------------------------------------------------------------

    The Commission also sought comment on a similar feature of the 
Exchange's proposal.\90\ The Commission noted that, under Phlx's 
proposal, generally, if, upon the conclusion of an auction, a public 
customer order is resting on the book opposite the Agency Order at the 
Solicited Order's stop price, both the Solicited Order and the Agency 
Order are canceled. However, if the public customer order was an all-
or-none order, the proposal provides that the execution of the 
Solicited Order against the Agency Order can take place.\91\ The 
Commission understands this result to apply even if the size of the 
all-or-none public customer order was such that it otherwise would be 
eligible to trade against the Agency Order.\92\
---------------------------------------------------------------------------

    \90\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5874.
    \91\ See id.
    \92\ See id.
---------------------------------------------------------------------------

    The Commission further sought comment on another feature of the 
Exchange's proposal.\93\ The Commission noted that, under Phlx's 
proposal, in the case of a Solicitation Auction for simple orders, all 
interest on the opposite side of the Agency Order would be considered 
in determining whether the price can be improved for the full size of 
the Agency Order.\94\ The Commission noted that, in the case of a 
Complex Order Solicitation Auction, all-or-none interest would not be 
considered.\95\ The Commission pointed to the Exchange's explanation 
that this difference was due to a system limitation relative to all-or-
none Complex Orders: ``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.'' \96\
---------------------------------------------------------------------------

    \93\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5874.
    \94\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5874, citing to proposed Rule 1081(ii)(E)(1).
    \95\ Id., citing to proposed Rule 1081(ii)(E)(5).
    \96\ See Order Instituting Proceedings, supra note 6, 80 FR at 
5870 n.48 and accompanying text.
---------------------------------------------------------------------------

    As noted above, the Commission received two comment letters, each 
letter from ISE, on the proposed rule change and a response from the 
Exchange to ISE's first comment letter.\97\ The Commission below 
discusses the issues raised in ISE's comment letters and the Exchange's 
response to ISE's first comment letter and sets forth the Commission's 
consideration of the arguments made by both the ISE and the Exchange.
---------------------------------------------------------------------------

    \97\ See supra notes 7 and 8.
---------------------------------------------------------------------------

A. Cancellation of the Solicitation Auction when the Agency Order Could 
Be Satisfied by a Public Customer Order at the Stop Price and Improving 
Interest

    In its first letter, ISE notes that it operates a solicitation 
mechanism. ISE expresses concern that the Phlx proposal would not 
contain appropriate safeguards to ensure that customer orders on the 
book would be protected and that agency orders would be adequately 
exposed to all potential price improvement.\98\ ISE states that Phlx's 
proposed solicitation mechanism would not serve the public interest and 
the protection of investors, maintaining that it ``fails to provide 
important protections guaranteed by competing markets.'' \99\ In its 
response, Phlx states that it strongly disagrees with ``ISE's negative 
characterization'' of its proposed rule change,\100\ and concludes that 
ISE's concerns are ``misguided and raised no valid concerns.'' \101\
---------------------------------------------------------------------------

    \98\ See ISE Letter at 1.
    \99\ See ISE Letter at 2.
    \100\ See Phlx Response Letter at 1.
    \101\ See Phlx Response Letter at 4.
---------------------------------------------------------------------------

    ISE notes that Phlx would cancel a solicitation auction if there 
was customer interest on the order book at the stop price that, 
combined with other available price improving interest, would be of 
sufficient size to trade with the Agency Order.\102\ ISE states that 
Phlx does not provide any policy justification for this ``change from 
established customer protections.'' \103\ ISE also states that Phlx's 
``weakened protections'' would enable regulatory arbitrage by broker-
dealers seeking to reduce the likelihood that their crosses will be 
broken up.\104\ ISE suggests that ISE and other competing exchanges 
``would be forced to match these changes in order to maintain 
competitive standing.'' \105\ ISE urges that the Commission hold Phlx 
to ``the same standards guaranteed by other options exchanges,'' 
maintaining that the Commission would thereby uphold ``principles of 
customer protection that were central to the approval of solicitation 
mechanisms operated by ISE and other markets.'' \106\
---------------------------------------------------------------------------

    \102\ See ISE Letter at 1. ISE noted that other options 
exchanges, including ISE, would execute the agency order against the 
customer order and the other price improving interest, thereby 
providing an execution for the customer on the book as well as an 
improved price for the agency order. Id.
    \103\ See ISE Letter at 1.
    \104\ Id.
    \105\ Id.
    \106\ See ISE Letter at 1-2.
---------------------------------------------------------------------------

    In response, Phlx states that ISE's argument is ``without merit.'' 
\107\ Phlx notes that it ``will not allow a solicitation auction to be 
initiated at a price where there is non-contingent customer interest on 
the PHLX book and will continue to prevent customers from being traded 
through.'' \108\ In addition, Phlx notes, customer interest that 
arrives after an order is submitted into the solicitation mechanism 
would still be protected, ``but in a different manner than on ISE.'' 
\109\
---------------------------------------------------------------------------

    \107\ See Phlx Response Letter at 2.
    \108\ Id. (emphasis in original).
    \109\ Id.
---------------------------------------------------------------------------

    Phlx states that its protection of customer interest at the stop 
price would not result in regulatory arbitrage. Rather, Phlx argues, 
its proposal would represent ``merely a different process for customer 
protection.'' Phlx points out that its proposal ``would not permit 
trading through the customer, nor would it allow trading ahead of the 
customer.'' \110\ Phlx describes its proposal as ``simply not providing 
customer interest (or any other interest)'' that arrives after the 
solicited order is stopped with the unfair advantage of trading against 
the agency order ahead of the solicited contra order at a price that 
does not offer price improvement,\111\ adding that ``there is no 
justification for permitting any market participant to step ahead of 
the solicited contra order at a price which does not offer price 
improvement.'' \112\
---------------------------------------------------------------------------

    \110\ Id.
    \111\ Id.
    \112\ See Phlx Response Letter at 2 (emphasis in original).
---------------------------------------------------------------------------

    Phlx notes that ISE cancels a solicitation auction with no trade 
resulting when there is a customer order at the stop price that, 
together with any improving interest, cannot satisfy the agency order. 
``Whether ISE `protects' a customer order at the stop price,'' Phlx

[[Page 37682]]

asserts, ``evidently depends upon the size of that customer order (or 
the absence of other orders sufficient to aggregate into a size 
sufficient for the agency order to execute against),'' arguing that 
ISE's approach ``cannot really be considered customer `protection.' '' 
\113\
---------------------------------------------------------------------------

    \113\ See Phlx Response Letter at 2.
---------------------------------------------------------------------------

    Further, Phlx observes that, in its PIXL auction mechanism, 
customers rarely submit interest priced at the stop price after the 
auction has been initiated, with that interest being executed in the 
auction.\114\ Phlx states that there is ``no reason to expect that 
customer orders would be received at the stop price more frequently in 
solicitation auctions than in PIXL Auctions.'' Specifically, Phlx 
represents that in February 2015, customer executions at the stop price 
occurred only 70 times out of 474,388 PIXL auctions, or approximately 
.015% of the time. The Exchange observes that cancellations caused by 
customer orders arriving at the stop price after a Solicitation Auction 
was initiated might occur only roughly 0.015% more often in its 
solicitation mechanism than in ISE's solicitation mechanism.\115\ Phlx 
states that, ``[g]iven how rarely a customer order can be expected to 
be received during a solicitation auction at the stop price, the PHLX's 
proposal to cancel a solicitation order with no trade occurring when a 
customer order is received at the stop price during the auction does 
not pose a significant risk to the protection of customer interest nor 
to the opportunity for price improvement.'' \116\
---------------------------------------------------------------------------

    \114\ Id.
    \115\ Id.
    \116\ See Phlx Response Letter at 2.
---------------------------------------------------------------------------

    The Second ISE Letter reiterates the comments that ISE made in its 
initial letter.\117\ ISE states that ``Phlx should instead be held to 
the same high standard required of other markets that guarantee an 
execution for the customer order by allowing the solicitation auction 
to be broken up. This remains the case even when dealing with customer 
orders that are received after an auction has been initiated, and 
regardless of how rare Phlx anticipates such orders may be.'' \118\
---------------------------------------------------------------------------

    \117\ See Second ISE Letter at 1.
    \118\ See Second ISE Letter at 2.
---------------------------------------------------------------------------

    The Commission notes that solicited order mechanisms generally are 
designed to enable a member firm to assist a customer that wishes to 
buy or sell 500 or more contracts (i.e., an agency order) by finding a 
counterparty (i.e., a solicited order) to execute against the full size 
of the customer's interest at the NBBO or better.\119\ The agency order 
must be exposed to the broader market in a solicitation auction so that 
it has the possibility of obtaining a better price, before the 
solicited order is permitted to be crossed with the agency order.\120\ 
In a solicited order mechanism, the trading crowd to which the agency 
order is exposed does not have the right to trade against the agency 
order at the price proposed by the solicited party.\121\ Unless the 
trading crowd provides (i) a better price and (ii) enough interest at 
that better price for the entire size of the order, the solicited order 
is permitted to trade against the agency order for its full size, with 
all other participants excluded.\122\
---------------------------------------------------------------------------

    \119\ See supra note 83.
    \120\ Id.
    \121\ Id.
    \122\ Id.
---------------------------------------------------------------------------

    The exchanges that currently feature a solicited order mechanism 
include provisions that address, among other scenarios, the 
circumstance where there is a public customer order on the order book 
at the stop price that, when combined with price-improving interest 
that otherwise could not fill the agency order on its own, would be 
able to fill the agency order.\123\ In that circumstance, those 
exchanges' rules provide that the public customer order and the 
available price-improving interest would be executed against the agency 
order. By contrast, under its proposal, Phlx would cancel the Agency 
Order rather than permit it to be executed against a public customer at 
the stop price that, when combined with available price-improving 
interest, would be of sufficient size to fill the Agency Order.
---------------------------------------------------------------------------

    \123\ Id.
---------------------------------------------------------------------------

    In view of the fact that the purpose of the Phlx's proposed 
solicitation mechanism is to enable the Agency Order to be executed, 
the Commission believes that the Agency Order should be given the 
opportunity to receive an execution in the above-described 
circumstance. Moreover, to the extent that the Agency Order could 
execute against the customer order at the stop price, along with 
available price-improving interest that otherwise could not fill the 
Agency Order on its own, the composite price that the Agency Order 
would receive would be at a better price than the Solicited Order's 
stop price. In addition, the public customer order and any available 
price-improving interest that arrived on the order book after the 
auction's commencement also would receive an execution, rather than 
simply remaining on the book.
    In explaining its approach, Phlx notes that, under its proposal, at 
the initiation of the auction, the stop price must be at least $0.01 
better than any public customer interest on the limit order book at 
that time. According to Phlx, this ``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, it 
will be against the Solicited Order rather than against interest 
(including public customer orders) that arrived after the solicited 
party had already stopped the Agency Order for its entire size at that 
price.'' \124\ Phlx also states that it is ``simply not providing 
customer interest (or any other interest) which arrives after the 
solicited order is stopped with the unfair advantage of trading against 
the solicited agency order ahead of the solicited contra order at a 
price which does not offer price improvement.'' \125\
---------------------------------------------------------------------------

    \124\ See Notice of Amendment No. 2, supra note 10, 80 FR at 
22575.
    \125\ See Phlx Response Letter at 2 (emphasis in original).
---------------------------------------------------------------------------

    The Commission does not view a public customer order at the stop 
price that arrives after the auction has commenced as trading ``ahead 
of'' the Solicited Order and thereby as receiving an ``unfair 
advantage'' when the Solicited Order would be required to be cancelled 
in any event under the Phlx's proposal. On the contrary, the Commission 
believes that the Agency Order should be given the opportunity to 
execute against the later-arriving public customer interest at the stop 
price, together with sufficient price-improving interest to satisfy the 
size of the Agency Order, and thus benefit from a measure of price 
improvement, rather than being cancelled as under the Exchange's 
proposal.
    In making the argument that its proposal ``does not pose a 
significant risk to the protection of customer interest nor to the 
opportunity for price improvement,'' Phlx cites to data from its PIXL 
auction showing that public customer orders arrive on the order book at 
the stop price very infrequently.\126\ The Commission notes that this 
data also could be cited to argue, on the other side of the issue, that 
the incentive for solicited parties to provide liquidity through the 
proposed solicitation mechanism would be little affected by later-
arriving public customer orders. In any event, the Commission believes 
that data showing the potential infrequency of a situation should not 
be dispositive of the Commission's consideration regarding

[[Page 37683]]

the Exchange's proposed treatment of public customer orders at the stop 
price that arrive during the auction and that otherwise could satisfy 
the size of the Agency Order when combined with price-improving 
interest.
---------------------------------------------------------------------------

    \126\ See Phlx Response Letter at 2.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission believes that Phlx's 
proposed approach not to execute the Agency Order against a public 
customer order at the stop price, that when combined with price-
improving interest could fulfill the Agency Order, would result in an 
outcome that does not appear to be consistent with the Act. 
Specifically, cancelling the Agency Order and leaving the public 
customer order on the order book unexecuted would disadvantage both of 
these orders. It would also disadvantage any price-improving interest 
that arrived on the book during the auction (but was insufficient in 
size to trade against the Agency Order without taking into account the 
public customer order), which, under the other exchanges' rules, also 
would receive an execution. While such a result may be expedient for 
the firm that entered the Agency Order and Solicited Order into the 
Solicitation Auction and for the solicited party, it would raise 
concerns under Section 6(b)(5) of the Act, which, among other things, 
requires that the rules of a national securities exchange be 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 . . .'' \127\ In light of these observations, the 
Commission cannot find that the proposed rule change is consistent with 
the Act.
---------------------------------------------------------------------------

    \127\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Execution of the Solicitation Auction at the Stop Price When There 
Is a Contingent Public Customer Order at the Stop Price

    In addition, ISE expresses a concern regarding Phlx's handling of 
all-or-none customer orders on the book. ISE notes that the Exchange's 
proposal would allow a Solicited Order to cross with the Agency Order 
when there is a resting customer all-or-none order at the stop price of 
the Solicited Order, even if the customer order is eligible to trade 
based on its size contingency.\128\ ISE maintains that customer 
protection was ``a central principle in the approval of solicitation 
mechanisms of other markets.'' \129\ ISE does not believe that Phlx 
should be permitted to ``eliminate this protection'' without providing 
a policy rationale.\130\
---------------------------------------------------------------------------

    \128\ See ISE Letter at 2; The Second ISE Letter reiterates 
comments ISE included in its first letter.
    \129\ Id.
    \130\ Id.
---------------------------------------------------------------------------

    In response, Phlx notes that all-or-none orders ``continue to be 
protected from being traded through when their all-or-none contingency 
can be satisfied.'' However, Phlx explains, due to the contingency, 
such orders are offered a ``less robust protection'' than non-
contingent orders.\131\ Phlx states that a customer seeking the same 
protection could submit the order without this contingency, since the 
contingency is within the discretion and control of the customer.\132\ 
Further, Phlx notes that ISE does not provide priority to all-or-none 
orders on ISE's book \133\ and cited to ISE Rule 713.
---------------------------------------------------------------------------

    \131\ See Phlx Response Letter at 3.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

    The Commission believes that Phlx's proposed approach to permit the 
Agency Order and Solicited Order to cross when an all-or-none customer 
order at the stop price exists on Phlx's order book would result in an 
outcome that is not consistent with the Act. Specifically, rather than 
protecting the all-or-none public customer order at the stop price, 
Phlx's proposal to allow the Solicited Order to execute against the 
Agency Order and leave the all-or-none public customer order on the 
order book would disadvantage the public customer order. While such a 
result may be expedient for the firm that entered the Agency Order and 
Solicited Order into the Solicitation Auction and for the solicited 
party, it would raise concerns under Section 6(b)(5) of the Act, which, 
among other things, requires that the rules of a national securities 
exchange be 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 . . .'' \134\ In light of these 
observations, the Commission cannot find that the proposed rule change 
is consistent with the Act.
---------------------------------------------------------------------------

    \134\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

C. No Consideration of All-or-None Complex Orders When Determining 
Whether the Price Has Been Improved for the Full Size of the Agency 
Order

    The ISE Letter expresses a concern regarding the provision of the 
Phlx proposal that would allow all-or-none orders in the Complex Order 
Book to be ignored when determining whether there would be sufficient 
interest to execute the Agency Order at a better price.\135\ ISE states 
that Phlx does not cite any relevant policy considerations to justify 
this provision, but ``simply reasons that it should be exempted from 
providing this functionality due to `systems limitations' that make it 
more difficult to aggregate complex orders with all-or-none orders.'' 
\136\ ISE contends that other options exchanges ``have spent the 
necessary time and resources to overcome such obstacles in the interest 
of maintaining a fair and orderly market where agency orders are 
adequately exposed to potential price improvement.'' \137\ ISE remarks 
that ``Phlx should not be singled out for favorable treatment simply 
because it was unwilling to invest in appropriate safeguards offered by 
its competitors.'' \138\
---------------------------------------------------------------------------

    \135\ See ISE Letter at 2.
    \136\ Id.
    \137\ Id.
    \138\ Id.
---------------------------------------------------------------------------

    In response, Phlx reiterates its position that aggregation of all-
or-none complex orders with other complex orders was a more difficult 
process than aggregation of all-or-none simple orders with other simple 
orders, because all-or-none complex orders reside in a separate book 
that is in a different part of the trading system.\139\ Citing data 
that it had reviewed to demonstrate that all-or-none complex orders are 
rare,\140\ Phlx responds that it must carefully weigh the costs and 
benefits of changes to its trading system and deploy resources in the 
manner it determines most beneficial to its market participants.\141\ 
In this case, Phlx states that it has elected to ``enhance the 
efficiency and effectiveness of its markets'' rather than to ``overhaul 
the trading system to include a mere 0.12% of all Complex Orders in the 
calculation of sufficiency of improving interest.'' \142\ Phlx does not 
believe that such an overhaul would advance the interests of market 
participants.\143\
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    \139\ See Phlx Response Letter at 3.
    \140\ Id. The Exchange noted that it had reviewed six months of 
data which showed that all-or-none complex orders represented only 
0.12% of all Complex Orders. Id.
    \141\ Id.
    \142\ See Phlx Response Letter at 3-4.
    \143\ See Phlx Response Letter at 4.
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    The Second ISE Letter states that ``[b]y ignoring all-or-none 
complex orders, Phlx would allow the execution of an agency order 
against the solicited order at a worse price than available from other 
market participants.'' \144\ ISE notes that ``Phlx attempts to equate 
their proposal with ISE's rules regarding the priority of all-or-none 
orders. To clarify this here, all-or-none orders on ISE have

[[Page 37684]]

no priority over other orders at the same price (emphasis in original). 
Our rules make clear, however, that all-or-none orders are available 
for execution after other trading interest at the same price has been 
exhausted. All-or-none orders on ISE decidedly may not be ignored when 
such orders would result in a better price for the other side of the 
trade.'' \145\ ISE further remarks that ``[i]t is fundamental to the 
solicitation process that the agency order be fully exposed to all 
other price improving interest, including all-or-none orders.'' \146\
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    \144\ See Second ISE Letter at 2.
    \145\ Id.
    \146\ See Second ISE Letter at 3.
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    As described above, under Phlx's proposal, at the conclusion of a 
Solicitation Auction involving Complex Orders, the Exchange's system 
would not consider all-or-none complex interest in determining whether 
such interest could execute against the Complex Agency Order at a 
better price than the stop price. Therefore, when the determination of 
whether there is sufficient improving interest to execute against the 
Complex Agency Order otherwise would require the inclusion of such all-
or-none complex interest, the Complex Agency Order simply would trade 
against the Solicited Order at the stop price, rather than against the 
sufficient improving interest that could be available on the Exchange 
at a better price.
    The Commission notes that the solicited order mechanisms of other 
exchanges that accommodate complex orders provide for the consideration 
of all-or-none complex order interest in determining whether there is 
sufficient improving interest.\147\ ISE Rule 722 Supplementary Material 
.08 permits complex orders in ISE's solicited order mechanism and 
provides no carve-out for the consideration of all-or-none complex 
orders.\148\ CBOE Rule 6.74B Interpretation .01 permits complex orders 
in CBOE's solicited order mechanism and provides no carve-out for the 
consideration of all-or-none complex orders.\149\
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    \147\ See ISE Rule 716(e) and Supplementary Material .08 and 
CBOE Rule 6.74B, Solicitation Auction Mechanism. Neither BOX Rule 
7270(b), Solicitation Auction, or MIAX Rule 515A(b), PRIME 
Solicitation Mechanism, permit solicitation auctions for complex 
orders.
    \148\ See ISE Rule 716(e) and Supplementary Material .08; see 
also ISE Rule 722(b)(4) (permitting complex orders to be entered as 
all-or-none).
    \149\ See CBOE Rule 6.74B and Interpretation .01; see also CBOE 
Rule 6.53C(b) (permitting complex orders to be entered as all-or-
none).
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    Similar to these other exchanges' solicitation mechanisms, under 
Phlx's proposal, when there is sufficient improving interest that is 
not all-or-none interest to satisfy a Complex Agency Order at a better 
price than the stop price, any resting all-or-none Complex Orders would 
participate in the execution pursuant to normal priority rules, so long 
as the all-or-none contingency can be satisfied. However, Phlx's 
proposal differs when there is sufficient improving interest to satisfy 
the Complex Agency Order at a better price than the stop price only 
when all-or-none Complex Order interest is included. In those 
circumstances, Phlx's proposal would deny the all-or-none Complex Order 
resting elsewhere on the Exchange a potential execution and it would 
not provide the Complex Agency Order with an execution at a better 
price than the stop price, even though there was, in fact, sufficient 
improving interest available.
    Phlx has provided data indicating that participants infrequently 
submit all-or-none Complex Orders. However, Phlx has not provided 
sufficient information in its proposal to overcome the Commission's 
fundamental concerns about the impact that the proposal could have on 
exchanges' incentives to maintain a fair and orderly market where 
agency orders are adequately exposed to potential price improvement. 
The Commission believes that data showing the infrequency of a 
situation should not be dispositive of the Commission's consideration 
regarding whether the Exchange has met its burden to demonstrate that 
its proposal is consistent with the Act.
    Further, Phlx has stated that it must weigh the costs and benefits 
of changes to its trading system, and has determined not to overhaul 
the trading system to include infrequently submitted all-or-none 
Complex Orders in the calculation of assessing the extent of price-
improving interest that could interact with the Complex Agency Order. 
The Commission notes that other exchanges have overcome such obstacles 
in the interest of maintaining a fair and orderly market where agency 
orders are adequately exposed to potential price improvement.\150\
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    \150\ See supra notes 151-153.
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    The Commission believes that Phlx's failure to provide a potential 
execution to all-or-none Complex Orders and to provide meaningful 
opportunity for price improvement to Complex Agency Orders would result 
in an execution allocation that is inconsistent with Section 6(b)(5) of 
the Act,\151\ which requires that the rules of an exchange must be 
designed, among other things, 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. Specifically, rather than 
including all-or-none Complex Order interest in its consideration of 
whether there is sufficient improving Complex Order interest, Phlx's 
proposal, by ignoring all-or-none Complex Orders on one of its systems, 
would disadvantage both the resting all-or-none Complex Orders and the 
Complex Agency Order. As discussed above, the Commission does not 
believe the Exchange has sufficiently demonstrated why its proposal, 
which fails to take into account interest available in its market, 
would satisfy the requirements of Section 6(b)(5) of the Act.\152\ 
Accordingly, the Commission cannot find that the proposed rule change 
is consistent with the Act.
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    \151\ 15 U.S.C. 78f(b)(5).
    \152\ 15 U.S.C. 78f(b)(5).
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D. Efficiency, Competition and Capital Formation

    In analyzing the proposed rule change, as modified by Amendment No. 
2, and in making its determination to disapprove the rule change, the 
Commission has considered whether the action will promote efficiency, 
competition, and capital formation,\153\ but, as discussed above, the 
Commission does not find that the proposed rule change, as modified by 
Amendment No. 2, is consistent with Section 6(b)(5) of the Act.
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    \153\ Whenever pursuant to the Act the Commission is engaged in 
rulemaking or the review of a rule of a self-regulatory 
organization, and is required to consider or determine whether an 
action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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IV. Conclusion

    For the foregoing reasons, the Commission does not believe that 
Phlx has met its burden to demonstrate that the proposed rule change, 
as modified by Amendment No. 2, is consistent with the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange, and, in particular, with Section 6(b)(5) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-Phlx-2014-66), as modified by 
Amendment No. 2, be, and hereby is, disapproved.


[[Page 37685]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\154\
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    \154\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-16088 Filed 6-30-15; 8:45 am]
BILLING CODE 8011-01-P


