
[Federal Register Volume 80, Number 184 (Wednesday, September 23, 2015)]
[Notices]
[Pages 57406-57408]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24062]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75942; File No. SR-Phlx-2015-49]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend and Correct Rule 1080.07

September 17, 2015.

I. Introduction

    On June 5, 2015, 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 
amend and correct several provisions in Phlx Rule 1080.07, ``Complex 
Orders on Phlx XL,'' which governs the trading of Complex Orders on the 
Phlx's Complex Order System (``System''). The proposed rule change was 
published for comment in the Federal Register on June 23, 2015.\3\ On 
July 30, 2015, the Commission extended the time period for Commission 
action to September 21, 2015.\4\ The Commission received no comments 
regarding the proposal. This order institutes proceedings under Section 
19(b)(2)(B) of the Act \5\ to determine whether to disapprove the 
proposed rule change.
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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. 75189 (June 17, 
2015), 80 FR 35997 (``Notice'').
    \4\ See Securities Exchange Act Release No. 75570, 80 FR 46619 
(August 5, 2015).
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    The Phlx proposes to make a number of changes to Phlx Rule 1080.07 
to amend and correct inconsistencies in the rule and provide additional 
clarity regarding the trading of Complex Orders on the Exchange. The 
Phlx's System for trading Complex Orders includes a Complex Order 
Opening Process (``COOP''); the Complex Order Live Auction (``COLA''), 
an automated auction for seeking liquidity and price improvement for 
Complex Orders; and a Complex Limit Order Book (``CBOOK''). According 
to the Phlx, among other things, the proposal would revise Phlx Rule 
1080.07 to: (i) Accurately describe the operation of the COOP and the 
execution of orders at the opening, including the treatment of 
Immediate-or-Cancel (``IOC'') orders and Do Not Auction (``DNA'') 
orders at the opening; (ii) add definitions of ``COOP Sweep'' and 
``COLA Sweep,'' and correct existing rule text to indicate that only 
Phlx XL market makers may submit COLA Sweeps; (iii) delete rule text 
that incorrectly states that a specialist could be entitled to receive 
40% of the remainder of a COLA-eligible order, as well as rule text 
indicating that only a specialist's interest at the cPBBO is aggregated 
for purposes of determining the specialist's entitlement in the COLA, 
so that the revised rule will provide that the specialist is entitled 
to receive the greater of (a) the proportion of the aggregate size 
associated with the specialist's COLA Sweep, SQT and RSQT COLA Sweeps, 
and non-SQT ROT Complex Orders on the CBOOK, or (b) the Enhanced 
Specialist Participation as described in Phlx Rule 1014(g)(ii); (iv) 
delete rule text indicating that, for allocation purposes, the size of 
a COLA Sweep or responsive Complex Order will be limited to the size of 
the COLA-eligible order, thereby clarifying that the size of a COLA 
Sweep or responsive Complex Order that exceeds the size of the COLA-
eligible order may trade against remaining interest after the COLA-
eligible order has been executed to the fullest extent possible; (v) 
revise rule text to indicate that other interest in a COLA may trade 
after a COLA-eligible order has been executed to the fullest extent 
possible, rather than in its entirety, and to correct the description 
of the execution of crossing interest after a COLA-eligible order has 
been executed; (vi) provide that the System will place a Complex Order 
received during a configurable period of time prior to the end of a 
trading session on the CBOOK after any marketable portion of the order 
has been executed; and (vii) describe the handling of all-or-none 
Complex Orders.
    In addition to these changes, the Phlx proposes to amend Phlx Rule 
1080.07 to add a definition of ``Firm.'' \6\ Specifically, the Phlx 
proposes to define a ``Firm'' to mean ``a broker-dealer trading for its 
own (proprietary) account that is: A member of The Options Clearing 
Corporation (``OCC'') or maintains a Joint Back Office (``JBO'') 
arrangement with an OCC member.\7\ The Phlx also proposes to revise 
Phlx Rule 1080.07 to provide that orders from Firms, like orders from 
market makers, would not trigger a COLA.\8\ In addition, the Phlx 
proposes to treat Firms like market makers for purposes of determining 
the allocations and execution price that their trading interest will 
receive at the conclusion of a COLA.\9\
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    \6\ See Phlx Rule 1080.07(a)(x).
    \7\ Id. Unless otherwise specified, Firms are included in the 
category of non-market-maker off-floor broker-dealer. Id.
    \8\ See Phlx Rule 1080.07(e)(i)(B)(1). Orders from non-market 
maker off-floor broker-dealers that are not Firms would be COLA-
eligible. See Phlx Rule 1080.07(e)(i)(B)(1) and Notice, 80 FR at 
36003.
    \9\ See Phlx Rule 1080.07(e)(viii)(C)(2) and Notice, 80 FR at 
36003. Orders of non-market maker off-floor broker-dealers that are 
not Firms would be executed along with the orders of non-broker-
dealer customers at the conclusion of the COLA. See Phlx Rule 
1080.07(e)(viii)(C)(1) and Notice, 80 FR at 36003. At the same 
price, non-broker-dealer customer orders would be executed in time 
priority, while non-market-maker off-floor broker-dealer orders 
would be executed on a pro rata basis at each price level. See Phlx 
Rule 1080.07(e)(viii)(C)(1)(d).
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    The Phlx proposes to treat Firm orders like non-Phlx market makers 
for purposes of these rules because the Phlx believes that the trading 
style and needs of Firms are more like market makers.\10\ The Phlx 
states that Firms are large, well-capitalized broker-dealers that trade 
for their own accounts and generally submit large orders, including 
orders that facilitate their clients' orders or offset large positions 
taken to accommodate their customers.\11\ According to the Phlx, Firms 
must have the financial wherewithal that this role necessitates.\12\ 
Thus, the Phlx states that Firms, in general, are commonly viewed as 
liquidity providers, much like market makers.\13\ The Phlx states that 
Firms do not expect or need their Complex Orders to trigger a COLA, nor 
do they need or expect to submit Good Til Cancelled Orders, because 
these are features commonly associated with customers rather than 
liquidity providers who function to accommodate trading interest.\14\ 
The Phlx notes that both of these features involve a temporal 
component, and that both a delay and long-lasting interest are 
inconsistent

[[Page 57407]]

with the sort of accommodation that Firms provide.\15\ The Phlx 
believes that by tailoring its offerings to the needs and trading style 
of Firms, Firms are more likely to send orders to the Exchange.\16\
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    \10\ See Notice, 80 FR at 36003.
    \11\ See Notice, 80 FR at 36003-36004.
    \12\ See Notice, 80 FR at 36004. In addition, Firms that are OCC 
clearing members must comply with OCC rules regarding, among other 
things, net capital, risk management procedures, and margin. See id.
    \13\ See id.
    \14\ See Notice, 80 FR at 36005.
    \15\ See id.
    \16\ See id.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-Phlx-
2015-49 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \17\ to determine whether the proposed rule 
change should be disapproved. Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, as described in greater detail 
below, the Commission seeks and encourages interested persons to 
comment on the proposed rule change to inform the Commission's analysis 
of whether to approve or disapprove the proposed rule change.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\18\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposed rule change with Section 6(b)(5) of the Act,\19\ which 
requires that the rules of a national securities exchange be designed, 
among other things, to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \18\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
The time for conclusion of the proceedings may be extended for up to 
60 days if the Commission finds good cause for such extension and 
publishes its reasons for so finding.
    \19\ 15 U.S.C. 78f(b)(5).
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    In addition, under the Commission's rules of procedure, a self-
regulatory organization that proposes to amend its rules bears the 
burden of demonstrating that its proposal is consistent with the 
Act.\20\ In this regard:
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    \20\ Rule 700(b)(3), 17 CFR 201.700(b)(3).

The description of the proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
the applicable requirements must all be sufficiently detailed and 
specific to support an affirmative Commission finding. Any failure 
of the 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 thereunder that are applicable to the self-regulation 
organization.\21\
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    \21\ Id.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any others they may have identified 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with Section 6(b)(5) or any other provision of the Act, 
or the rules and regulations thereunder. Although there do not appear 
to be any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\22\
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    \22\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by October 14, 2015. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 28, 2015. The Commission asks that commenters address the 
sufficiency and merit of the Exchange's statements in support of the 
proposed rule change, in addition to any other comments they may wish 
to submit about the proposed rule change. In particular, the Commission 
asks that commenters address the sufficiency of the Exchange's 
statements, which are set forth in the Notice,\23\ in support of its 
proposal to prevent Firms' orders from triggering a COLA, in addition 
to any other comments they may wish to submit about the proposed rule 
change. The Commission notes that the Phlx states that Firms, like 
market makers, are liquidity providers that function to accommodate the 
trading interest of their clients, and that Firms do not expect or need 
their orders to trigger a COLA. With respect to this conclusion, the 
Commission seeks comment on whether there are circumstances in which a 
Firm might want its order to trigger a COLA, and the potential impact 
of permitting or prohibiting Firms' orders from triggering a COLA.
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    \23\ See supra note 3.
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2015-49 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2015-49. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-

[[Page 57408]]

2015-49 and should be submitted by October 14, 2015. Rebuttal comments 
should be submitted by October 28, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-24062 Filed 9-22-15; 8:45 am]
 BILLING CODE 8011-01-P


