
[Federal Register Volume 81, Number 162 (Monday, August 22, 2016)]
[Notices]
[Pages 56733-56742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19896]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78588; File No. SR-Phlx-2016-79]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Amend Rule 1017, Openings in Options

August 16, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 4, 2016, NASDAQ PHLX LLC (``Phlx'' or

[[Page 56734]]

``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 1017, Openings in Options, as 
described in detail below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange is proposing to amend its rules relating to its 
opening process. This rule change proposes to amend the current 
functionality of the Exchange's trading system (``system'') \3\ 
regarding the opening of trading in an option series.
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    \3\ The Exchange is replacing references to Phlx XL II with the 
word ``system'' to reflect current usage.
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Definitions
    First, the Exchange proposes to adopt a ``Definitions'' section as 
new Rule 1017(a) \4\ to define several terms that are used throughout 
the Rule. The new section will state that the Exchange conducts an 
electronic opening for all option series \5\ traded on Phlx using its 
trading system (hereinafter ``system'').\6\
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    \4\ The current text of Rule 1017(a) is being deleted and 
replaced by proposed Rule 1017(a)(iii), as described below.
    \5\ Rule 1017 only applies to simple (non-Complex) orders; the 
opening process for Complex Orders is described in Rule 1080.07.
    \6\ The Exchange notes that Rule 1017 describes the Exchange's 
opening process for its electronic order book. Rule 1017 does not 
apply to trading on the Exchange's trading floor.
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    The Exchange proposes to define the following terms, which are 
described below: ``Opening Process,'' ``Opening Price,'' ``Potential 
Opening Price,'' ``ABBO,'' ``Phlx Electronic Market Maker,'' ``Pre-
Market BBO,'' ``Quality Opening Market,'' ``Valid Width Quote,'' and 
``Zero Bid Market.''
    The Exchange defines ``Opening Process'' by cross-referencing Rule 
1017(d).\7\ The Exchange defines ``Opening Price'' by cross-referencing 
Rule 1017(i) and (k).\8\ The Exchange defines ``Potential Opening 
Price'' by cross-referencing Rule 1017(h).\9\ The Exchange defines 
``ABBO'' as the Away Best Bid or Offer.\10\ The ABBO does not include 
Phlx's market. The Exchange defines ``market for the underlying 
security'' as either the primary listing market or the primary volume 
market (defined as the market with the most liquidity in that 
underlying security for the previous two calendar months), as 
determined by the Exchange by underlying and announced to the 
membership on the Exchange's Web site.\11\ Currently, this term is 
defined in Rule 1017(j) as either the primary listing market or the 
primary volume market (defined as the market with the most liquidity in 
that underlying security for the previous two calendar months), or the 
first market to open the underlying security, as determined by the 
Exchange on an issue-by-issue basis and announced to the membership on 
the Exchange's Web site. In practice, the Exchange does not and has not 
considered the first market to open in determining the primary market 
for an underlying, and therefore the new definition will not refer to 
it. The existing language in Rule 1017(j) regarding the first market to 
open is thus being deleted.
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    \7\ See proposed Rule 1017(a)(i).
    \8\ See proposed Rule 1017(a)(ii).
    \9\ See proposed Rule 1017(a)(iii).
    \10\ See proposed Rule 1017(a)(iv). This term is also used in 
Phlx Rule 1082(a)(ii)(B)(3)(g).
    \11\ See proposed Rule 1017(a)(v).
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    The term ``Phlx Electronic Market Makers'' is defined as a 
Specialist,\12\ Streaming Quote Trader or ``SQT,'' \13\ and Remote 
Streaming Quote Trader or ``RSQT'' \14\ who is required to submit 
continuous two-sided electronic quotations pursuant to Rule 
1014(b)(ii)(D).\15\ Currently, Rule 1017(a) utilizes the term ``Phlx XL 
Participant'' which is not as precise as the term ``Phlx Electronic 
Market Makers'' as it also includes non-SQT Registered Options Traders 
or ROTs.\16\ This is incorrect because non-SQT ROTs cannot submit 
quotes electronically and therefore should not be subject to Rule 1017, 
which applies only to electronic trading. By definition, these non-SQT 
ROTs make markets verbally and thus provide on-floor liquidity; they 
have chosen not to submit quotes electronically to the Exchange. To be 
considered in the Opening Process, orders represented by Floor Brokers 
must be entered electronically.\17\ The next definition is ``Pre-Market 
BBO'' defined as the highest bid and the lowest offer among Valid Width 
Quotes.\18\ The rule currently refers to the highest bid and the lowest 
offer multiple times, so defining the term is more efficient and 
consistent. References to determining the highest quote bid and lowest 
quote offer are being replaced with the new term, ``Pre-Market BBO'' 
throughout. The term ``Quality Opening Market'' is defined as a bid/ask 
differential applicable to the best bid and offer from all Valid Width 
Quotes defined in a table to be determined by the Exchange and 
published on the Exchange's Web site.\19\ This definition appears in 
current Rule 1017(l)(v)(B) and is being deleted. Next, a ``Valid Width 
Quote'' is defined as a two-sided electronic quotation submitted by a 
Phlx Electronic Market Maker that consists of a bid/ask differential 
that is compliant with Rule

[[Page 56735]]

1014(c)(i)(A)(1)(a).\20\ This term appears in current Rule 1017(l)(ii) 
and is being deleted. The term ``Zero Bid Market'' is where the best 
bid for an options series is zero.\21\ The Exchange currently uses this 
concept in other rules.\22\
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    \12\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a). An options Specialist 
includes a Remote Specialist which is defined as an options 
Specialist in one or more classes that does not have a physical 
presence on an Exchange floor and that is approved by the Exchange 
pursuant to Rule 501.
    \13\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as an ROT 
who has received permission from the Exchange to generate and submit 
option quotations electronically in options to which such SQT is 
assigned.
    \14\ An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an 
ROT that is a member affiliated with an RSQTO with no physical 
trading floor presence who has received permission from the Exchange 
to generate and submit option quotations electronically in options 
to which such RSQT has been assigned.
    \15\ See proposed Rule 1017(a)(vi).
    \16\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT. 
See Rule 1014(b)(ii)(C).
    \17\ See current rule 1017(c).
    \18\ See proposed Rule 1017(a)(vii). Valid Width Quotes is 
defined at proposed Rule 1017(a)(ix).
    \19\ See proposed Rule 1017(a)(viii).
    \20\ See proposed Rule 1017(a)(ix).
    \21\ See proposed Rule 1017(a)(x).
    \22\ See Rule 1080(i)(A)(1) and Rule 1082(a)(ii)(B)(4)(C); a 
zero priced bid equates with a Zero Bid Market.
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Reorganization of Certain Provisions
    New rule text is being added to Rule 1017 and certain provisions 
are being relocated within the rule for better organization and 
understanding.
Eligible Interest
    The Exchange proposes to move the language from current Rule 
1017(l)(vii) to new Rule 1017(b), with minor changes. Specifically, the 
Exchange proposes to adopt in new paragraph (b) a provision that 
eligible opening interest includes: (i) Valid Width Quotes; (ii) 
Opening Sweeps; and (iii) orders. Specialists, SQTs, and RSQTs may 
submit quotes,\23\ Opening Sweeps and orders, but quotes other than 
Valid Width Quotes will not be included in the Opening Process. Non-SQT 
ROTs may submit orders; provided they are submitted electronically.\24\
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    \23\ Rule 1017(l)(vii) currently provides that quotes may be 
submitted; the Exchange is now specifying that these must be Valid 
Width Quotes, which will be defined in proposed Rule 1017(a)(ix).
    \24\ See note 17 above.
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    New Rule 1017 paragraph (b) will provide that all-or-none (``AON'') 
interest \25\ that can be satisfied is considered for execution and in 
determining the Opening Price throughout the Opening Process. The rule 
is currently silent on the eligibility of AON interest on the opening, 
from which it can be inferred that they are accepted; nevertheless, the 
Exchange is proposing to add this specific provision to add detail to 
the rule. The Exchange is specifically addressing AON interest to make 
clear that this type of contingency market or limit order which would 
be executed in its entirety or not at all, will be considered for 
execution within the Opening, provided that this interest can be 
satisfied.
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    \25\ All-or-none (``AON'') means a contingency market or limit 
order which is to be executed in its entirety or not at all.
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Opening Sweep
    Proposed new Rule 1017(b)(i) provides that an Opening Sweep is a 
one-sided electronic quotation submitted for execution against eligible 
opening trading interest in the system.\26\ A Phlx Electronic Market 
Maker assigned in a particular option may only submit an Opening Sweep 
if, at the time of entry of the Opening Sweep, that Phlx Electronic 
Market Maker has already submitted and maintained a Valid Width Quote. 
All Opening Sweeps in the affected series entered by a Phlx Electronic 
Market Maker will be cancelled immediately if that Phlx Electronic 
Market Maker fails to maintain a continuous quote with a Valid Width 
Quote in the affected series.\27\
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    \26\ This rule text is currently located in current Rule 
1017(l)(vii)(A). This rule text is being relocated with this rule 
change.
    \27\ See proposed Rule 1017(b)(i)(A).
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    Opening Sweeps may be entered at any price with a minimum price 
variation applicable to the affected series, on either side of the 
market, at single or multiple price level(s), and may be cancelled and 
re-entered. A single Phlx Electronic Market Maker may enter multiple 
Opening Sweeps, with each Opening Sweep at a different price level. If 
a Phlx Electronic Market Maker submits multiple Opening Sweeps, the 
system will consider only the most recent Opening Sweep at each price 
level submitted by such Phlx Electronic Market Maker in determining the 
Opening Price. Unexecuted Opening Sweeps will be cancelled once the 
affected series is open.\28\ Except as described above, most of the 
language mimics current Rule 1017(l)(vii); it is being relocated 
because it is more logical to refer to the types of eligible opening 
interest in the beginning of the rule.
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    \28\ See proposed Rule 1017(b)(i)(B).
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    Proposed new Rule 1017(b)(ii) generally tracks current Rule 
1017(l)(vii)(B) in stating that the system will aggregate the size of 
all eligible interest for a particular participant category at a 
particular price level for trade allocation purposes. For example, all 
Phlx Electronic Market Maker (a participant category) quotes, Opening 
Sweeps, and orders are thus aggregated in determining the pro-rata 
allocation. The proposed rule is broader than the existing language, 
which is limited to Opening Sweeps, because it includes quotes and 
orders. The Exchange believes it is appropriate to amend the rule to 
expressly state that the Exchange currently considers this interest 
because there is no need to exclude quotes and orders, which contribute 
liquidity just like Opening Sweeps.
    Proposed Rule 1017(c) simplifies the current rule text to simply 
provide that to be considered in the Opening Process, orders 
represented by Floor Brokers must be entered electronically.
    Proposed new Rule 1017(d) is based on existing paragraph Rule 
1017(k). The Exchange seeks to organize this rule more logically by 
describing when the Opening Process can begin and adding more detail 
related to specific time-related triggers. Specifically, Phlx 
Electronic Market Maker Valid Width Quotes and Opening Sweeps may start 
at 9:25 a.m. and are included in the Opening Process. Orders may be 
entered at any time before an options series opens and are included in 
the Opening Process. This proposed language adds greater specificity to 
the rule regarding the submission of orders. The 9:25 a.m. trigger is 
intended to tie the option Opening Process to quoting in the underlying 
security; \29\ it presumes that option quotes submitted before any 
indicative quotes have been disseminated for the underlying security 
may not be reliable or intentional. Therefore, the Exchange has chosen 
a reasonable timeframe at which to begin utilizing option quotes, based 
on the Exchange's experience when underlying quotes start becoming 
available.
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    \29\ For purposes of this rule, the underlying security can also 
be an index.
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    Furthermore, the Opening Process for an option series will be 
conducted pursuant to paragraphs (f)-(k) on or after 9:30 a.m. if: \30\ 
The ABBO, if any, is not crossed; \31\ and if the system has received, 
within two minutes (or such shorter time as determined by the Exchange 
and disseminated to membership on the Exchange's Web site) of the 
opening trade or quote on the market for the underlying security in the 
case of equity options or, in the case of index options, within two 
minutes of the receipt of the Opening Price in the underlying index (or 
such shorter time as determined by the Exchange and disseminated to 
membership on the Exchange's Web site), or within two minutes of market 
opening in the case of U.S. dollar-settled FCO (or such shorter time as 
determined by the Exchange and disseminated to membership on the 
Exchange's Web site) either:
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    \30\ The new reference to 9:30 a.m. adds detail; of course, the 
market cannot open before 9:30 a.m.
    \31\ The crossed ABBO is currently referred to in Rule 
1017(l)(x), which provides that: ``If at any point during the 
Opening Process the ABBO becomes crossed (e.g., 1.05 bid, 1.00 
offer), the opening process will be terminated and the Exchange will 
not open the affected series. A new opening process for the affected 
series will commence at the time the ABBO is uncrossed.''
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    (A) The Specialist's Valid Width Quote;
    (B) the Valid Width Quotes of at least two Phlx Electronic Market 
Makers other than the Specialist; or
    (C) if neither the Specialist's Valid Width Quote nor the Valid 
Width Quotes of two Phlx Electronic Market

[[Page 56736]]

Makers have been submitted within such timeframe, one Phlx Electronic 
Market Maker has submitted a Valid Width Quote.
    These requirements are intended to tie the option Opening Process 
to receipt of liquidity. These requirements are the same as those of 
current Rule 1017(k) and are reorganized.
    In addition, the Exchange is proposing to state in proposed Rule 
1017(d)(ii) that the underlying security, including indexes, must be 
open on the primary market for a certain time period for all options to 
be determined by the Exchange. The Exchange is proposing that the time 
period be no less than 100 milliseconds and no more than 5 seconds. The 
Exchange currently applies a minimal delay of 500 milliseconds. This 
proposal is intended to permit the price of the underlying security to 
settle down and not flicker back and forth among prices after its 
opening. The Exchange is adding this detail to Rule 1017(d)(ii). It is 
common for a stock to fluctuate in price immediately upon opening; such 
volatility reflects a natural uncertainty about the ultimate Opening 
Price, while the buy and sell interest is matched. The Exchange is 
proposing a range of no less than 100 milliseconds and no more than 5 
seconds in order to ensure that it has the ability to adjust the period 
for which the underlying security must be open on the primary market. 
The Exchange may determine that in periods of high/low volatility that 
allowing the underlying to be open for a longer/shorter period of time 
may help to ensure more stability in the marketplace prior to 
initiating the Opening Process.
    The Exchange is proposing to relocate the obligations of Phlx 
Electronic Market Makers to new paragraph (d) as well. They are 
unchanged. The Specialist assigned in a particular equity option must 
enter a Valid Width Quote not later than one minute following the 
dissemination of a quote or trade by the market for the underlying 
security or, in the case of index options, following the receipt of the 
Opening Price in the underlying index. The Specialist assigned in a 
particular U.S. dollar-settled FCO must enter a Valid Width Quote not 
later than 30 seconds after the announced market opening.\32\
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    \32\ See proposed Rule 1017(d)(iii).
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    Furthermore, a Phlx Electronic Market Maker other than a Specialist 
that submits a quote pursuant to Rule 1017 in any option series when 
the Specialist's quote has not been submitted shall be required to 
submit continuous, two-sided quotes in such option series until such 
time as the Specialist submits his/her quote, after which the Phlx 
Electronic Market Maker that submitted such quote shall be obligated to 
submit quotations pursuant to Rule 1014(b)(ii)(D). This is also 
substantially unchanged.\33\
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    \33\ See proposed Rule 1017(d)(iv).
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    The Exchange is proposing to state in Rule 1017(d)(iv) that the 
Opening Process will stop and an option series will not open if the 
ABBO becomes crossed or when the requisite number of Valid Width Quotes 
pursuant to Rule 1017(d)(i) are no longer present. Once each of these 
conditions no longer exists, the Opening Process in the affected option 
series will start again pursuant to Rule 1017(f)-(k). All eligible 
opening interest will continue to be considered during the Opening 
Process when the process is re-started. The Exchange is amending Rule 
1017 to add this detail, which the Exchange believes is implied from 
the conditions that trigger the Opening Process.
    Overall, as explained above, new Rule 1017(d) is the same as 
current Rule 1017(k), except the reference at the end of paragraph (k) 
to Intermarket Sweep Orders (``ISOs'') \34\ will now appear in new 
subparagraph (k)(C)(3)(i) and a reference is being added to the 
Immediate-or-Cancel (``IOC'') designation. In addition, the proposed 
Rule 1017(d) is more closely tied to specific time periods, like 9:25 
a.m. for the receipt of quote and Opening Sweeps, and 9:30 a.m. for the 
beginning of the actual Opening Process. The proposed rule also 
reflects that the ABBO cannot be crossed because it is indicative of 
uncertainty in the marketplace of where the option series should be 
valued. In this case, the Exchange will wait for the ABBO to become 
uncrossed before initiating the Opening Process to ensure that there is 
stability in the marketplace in order to assist the Exchange in 
determining the Opening Price. These additions are intended to provide 
additional detail to the rule that the Exchange believes will be 
helpful to the reader.
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    \34\ Current Rule 1017(k), which is being deleted, provides: Any 
order volume that is routed to away markets pursuant to this Rule 
1017 will be marked as an ISO.
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    New Rule 1017(e) states that the procedure described in this Rule 
may be used to reopen an option after a trading halt. This is currently 
in Rule 1017(h). The Exchange is adding that if there is a trading halt 
or pause in the underlying security, the Opening Process will start 
again irrespective of the specific times listed in Rule 1017(d). This 
is because these times relate to the normal market opening at 9:30 a.m. 
Most of this language is in Rule 1017 at current paragraph (h), except 
the aforementioned reference to specific times provides additional 
detail.
Opening With a PBBO
    New Rule 1017(f) will now be titled ``Opening with a PBBO (No 
Trade)'' and provide that if there are no opening quotes or orders that 
lock or cross each other and no routable orders crossing the ABBO, the 
system will open with an opening quote by disseminating the Exchange's 
best bid and offer among quotes and orders (``PBBO'') that exist in the 
system at that time, unless the following three conditions exist: (i) A 
Zero Bid Market; (ii) no ABBO; and (iii) no Quality Opening Market. If 
all of these conditions exist, the Exchange will calculate an Opening 
Quote Range pursuant to paragraph (j) and conduct the Price Discovery 
Mechanism or ``PDM'' pursuant to paragraph (k) below. These three 
conditions exist in the system today, but do not appear in Rule 1017. 
The existence of all three conditions being present at the same time is 
very rare. The Exchange believes that when all three of these 
conditions exist, further price discovery is warranted to validate or 
perhaps update the Potential Opening Price and to attract additional 
interest to perhaps render an opening trade possible, because: (i) A 
Zero Bid Market reflects a lack of buying interest that could benefit 
from price discovery; (ii) the lack of an ABBO means there is no 
external check on the Exchange's market for that options series; and 
(iii) the lack of a Quality Opening Market indicates that the 
Exchange's market is wide. If no quotes or orders lock/cross each 
other, nothing matches and there can be no trade. This is the same as 
Rule 1017(l)(i). The Exchange believes that when these conditions 
exist, it is difficult to arrive at a reasonable and expected price.
Further Opening Processes
    If an opening did not occur pursuant to proposed Rule 1017(f) and 
there are opening Valid Width Quotes or orders that lock or cross each 
other, the system will calculate the Pre-Market BBO. This new rule text 
is located in new Rule 1017(g), which is the same as current Rule 
1017(l)(ii), except the term Pre-Market BBO is now specifically defined 
in proposed Rule 1017(a)(vii).
    Proposed new Rule 1017 (h) describes the general concept of how the 
system calculates the Potential Opening Price under all circumstances 
once the Opening Process is triggered. Specifically, the system will 
take into consideration all Valid Width Quotes,

[[Page 56737]]

Opening Sweeps and orders (except AON interest that cannot be 
satisfied) \35\ for the option series and identify the price at which 
the maximum number of contracts can trade (``maximum quantity 
criterion''). This concept of maximizing the number of contracts that 
can trade currently appears in current Rule 1017(l)(ii), and is 
intended to find the most reasonable and suitable price, relying on the 
maximization to reflect the best price. However, current Rule 
1017(l)(ii) states that if the Opening Price calculation leaves no 
imbalance, the Exchange will open at that price, executing marketable 
trading interest, as long as the Opening Price includes only Exchange 
interest. This only occurs under certain circumstances, which is now 
explained in new Rule 1017(i).
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    \35\ See proposed Rule 1017(b).
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    The Exchange proposal further states that when two or more 
Potential Opening Prices would satisfy the maximum quantity criterion 
and leave no contracts unexecuted, the system takes the highest and 
lowest of those prices and takes the mid-point; if such mid-point is 
not expressed as a permitted minimum price variation, it will be 
rounded to the minimum price variation that is closest to the closing 
price for the affected series from the immediately prior trading 
session. If there is no closing price from the immediately prior 
trading session, the system will round up to the minimum price 
variation to determine the Opening Price.\36\ This is similar to 
current Rule 1017 (l)(ii)(B).
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    \36\ See proposed Rule 1017(h)(A).
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    If two or more Potential Opening Prices for the affected series 
would satisfy the maximum quantity criterion and leave contracts 
unexecuted, the Opening Price will be either the lowest executable bid 
or highest executable offer of the largest sized side.\37\ This, again, 
bases the Potential Opening Price on the maximum quantity that is 
executable. The Potential Opening Price is limited by the away market 
price that cannot be satisfied with the Exchange routable interest.\38\ 
The Exchange does not open with a trade that trades through another 
market. The Exchange is amending Rule 1017 to provide detail to the 
rule not contemplated by the current language. This process, 
importantly, breaks a tie by considering the largest sized side and 
away markets, which are relevant to determining a fair Opening Price.
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    \37\ See proposed Rule 1017(h)(B).
    \38\ See proposed Rule 1017(h)(C).
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    The system applies certain boundaries to the Potential Opening 
Price to help ensure that the price is a reasonable one by identifying 
the quality of that price; if a well-defined, fair price can be found 
within these boundaries, the option series can open at that price 
without going through a further price discovery mechanism. Accordingly, 
new Rule 1017(i),\39\ entitled ``Opening with Trade,'' will state at 
Rule 1017(i)(A) the Exchange will open the option series for trading at 
the following Opening Price if any of these conditions occur: (i) The 
Potential Opening Price is at or within the best of the Pre-Market BBO 
and the ABBO; (ii) the Potential Opening Price is at or within the non-
zero bid ABBO if the Pre-Market BBO is crossed; or (iii) where there is 
no ABBO, the Potential Opening Price is at or within the Pre-Market BBO 
which is also a Quality Opening Market.
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    \39\ The deletion of current paragraph (i) is discussed below.
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    These boundaries serve to validate the quality of the Opening 
Price. This concept is defined in current Rule 1017(l)(ii) in a limited 
manner, which provides that, ``If the price is within the highest quote 
bid and lowest quote offer and leaves no imbalance, the Exchange will 
open at that price, executing marketable trading interest, as long as 
the opening price includes only Exchange interest.'' New Rule 1017(i) 
provides that the Exchange will open with a trade as long as it is 
within the defined boundaries regardless of any imbalance. The Exchange 
believes that since the Opening Price can be determined within a well-
defined boundary and not trading through other markets, it is fair to 
open the market immediately with a trade and to have the remaining 
interest available to be executed in the displayed market. Using a 
boundary-based price counterbalances opening faster at a less bounded 
and perhaps less expected price and reduces the possibility of leaving 
an imbalance.
    If there is more than one Potential Opening Price which meets the 
conditions set forth in proposed Rule 1017(i)(A), where (1) no 
contracts would be left unexecuted and (2) any value used for the mid-
point calculation (which is described in Rule 1017(h)) that crosses 
either: the Pre-Market BBO or the ABBO, then the Exchange will open the 
option series for trading with an execution and use the best price 
which the Potential Opening Price crosses as a boundary price for the 
purpose of the mid-point calculation.\40\ The proposed rule now better 
explains the boundary as well as the price basis for the mid-point 
calculation for immediate opening with a trade, which improves the 
detail included in the rule. The Exchange believes that this process is 
logical because it seeks to select a fair and balanced price.
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    \40\ See proposed Rule 1017(i)(B).
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    Proposed Rule 1017(j) will provide that the system will calculate 
an Opening Quote Range (``OQR'') for a particular option series that 
will be utilized in the PDM. The OQR is an additional type of boundary 
beyond the boundaries mentioned in Rule 1017 at proposed paragraph (i). 
OQR is intended to limit the Opening Price to a reasonable, middle 
ground price and thus reduce the potential for erroneous trades during 
the Opening Process. Although the Exchange applies other boundaries 
such as the BBO, the OQR is outside of that and provides a price that 
can satisfy more size without becoming unreasonable.
    Specifically, to determine the minimum value for the OQR, an 
amount, as defined in a table to be determined by the Exchange,\41\ 
will be subtracted from the highest quote bid among Valid Width Quotes 
on the Exchange and on the away market(s), if any, except as provided 
in proposed Rule1017(j)(3) and (4).\42\ To determine the maximum value 
for the OQR, an amount, as defined in a table to be determined by the 
Exchange, will be added to the lowest quote offer among Valid Width 
Quotes on the Exchange and on the away market(s), if any, except as 
provided in proposed Rule 1017(j)(3) and (4).\43\ However, if one or 
more away markets have disseminated opening quotes that are not 
crossed, and there are Valid Width Quotes on the Exchange that cross 
each other or that cross away market quotes, then the minimum value for 
the OQR will be the highest quote bid among quotes on away 
market(s).\44\ In addition, the maximum value for the OQR will be the 
lowest quote offer among quotes on away market(s).\45\ And if, however, 
there are opening quotes on the Exchange that cross each other, and 
there is no away market in the affected option series, the minimum 
value for the OQR will be the lowest quote bid among Valid Width Quotes 
on the Exchange, and the maximum value for the OQR will be the highest 
quote offer among Valid Width Quotes on the Exchange.\46\ This is the 
same as existing Rule 1017(l)(iii) and (iv), except that the new Rule 
1017(j) combines those concepts into a single provision.
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    \41\ The table will be available on the Exchange's Web site.
    \42\ See proposed Rule 1017(j)(1).
    \43\ See proposed Rule 1017(j)(2).
    \44\ See proposed Rule 1017(j)(3)(a).
    \45\ See proposed Rule 1017(j)(3)(b).
    \46\ See proposed Rule 1017(j)(4)(a) and (b).

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[[Page 56738]]

    If there is more than one Potential Opening Price possible where no 
contracts would be left unexecuted, any price used for the mid-point 
calculation (which is described in new Rule 1017(h)) that is through 
the OQR will be restricted to the OQR price on that side of the market 
for the purposes of this calculation. This, in Rule 1017(j) at new 
subparagraph (5), continues the theme of relying on both maximizing 
executions and looking at the correct side of the market to determine a 
fair price.
    New Rule 1017(j) (6) deals with the situation where there is an 
away market price involved. If there is more than one Potential Opening 
Price possible where no contracts would be left unexecuted and any 
price used for the mid-point calculation (which is described in new 
Rule 1017(h)) is an away market price when contracts will be routed, 
the system will use the away market price as the Potential Opening 
Price. Because the system may need to route to other markets it uses 
the away market price as the Opening Price.
    If non-routable interest can be maximum executable against Exchange 
interest after routable interest has been determined by the system to 
satisfy the away market, then the Potential Opening Price is the price 
at which the maximum volume, excluding the volume which will be routed 
to an away market, may be executed on the Exchange as described in Rule 
1017 at new paragraph (h). The system will consider routable Customer 
interest in price/time priority to satisfy the away market.\47\ This is 
consistent with the price/time handling of Customer interest outside of 
the Opening Process.\48\ This continues the theme of trying to satisfy 
the maximum amount of interest during the Opening Process.
---------------------------------------------------------------------------

    \47\ See proposed Rule 1017(j)(7).
    \48\ See Rule 1014(vii) [sic].
---------------------------------------------------------------------------

    If the Exchange has not opened pursuant to proposed Rule 1017 
paragraphs (f) or (i), the Exchange will conduct a PDM pursuant to new 
Rule 1017(k). The PDM is the process by which the Exchange seeks to 
identify an Opening Price having not been able to do so following the 
process outlined thus far. The principles behind the PDM are, just like 
above, to satisfy the maximum number of contracts possible by 
identifying a price that may leave unexecuted contracts. However, the 
PDM applies a new, wider boundary to identify the Opening Price and the 
PDM involves seeking additional liquidity.
    Currently, the price discovery process, known as the ``imbalance 
process'' in current Rule 1017, is triggered only by unexecuted 
contracts at the price at which the maximum number of contracts can 
trade. Instead, the situations in proposed Rule 1017(f) and (j) also 
result in the initiation of an imbalance process.\49\ The Exchange 
believes that conducting the price discovery process in these 
situations protects opening orders from receiving a random price that 
does not reflect the totality of what is happening in the markets on 
the opening and also further protects opening interest from receiving a 
potentially erroneous execution price on the opening. Opening 
immediately has the benefit of speed and certainty, but that benefit 
must be weighed against the quality of the execution price and whether 
orders were left unexecuted. The Exchange believes that the proposed 
rule strikes an appropriate balance.
---------------------------------------------------------------------------

    \49\ Today, in these situations, the option series would not 
open immediately. Rather an imbalance would occur where there is 
unexecutable trading interest at a certain price.
---------------------------------------------------------------------------

    In addition, the current rule takes away market interest into 
account at the beginning of the imbalance process, while the proposed 
rule attempts to open using Exchange interest only to determine an 
Opening Price, provided certain conditions contained in new paragraph 
(i) are present to ensure participants receive a quality execution in 
the opening. This is reflected beginning in current Rule 
1017(l)(ii)(C). The proposed rule does not consider away market 
liquidity until the price discovery process. As a result, the Exchange 
might open without routing if all of the conditions described above are 
met. The Exchange believes that the benefit of this process is a more 
rapid opening with quality execution prices.
    Specifically, new Rule 1017(k)(A) provides that the system will 
broadcast an Imbalance Message (which includes the symbol, side of the 
imbalance (unmatched contracts), size of matched contracts, size of the 
imbalance, and price of the affected series (which must be within the 
Pre-Market BBO) to participants, and begin an ``Imbalance Timer,'' not 
to exceed three seconds. The Imbalance Message is intended to attract 
additional liquidity, much like an auction is, using an auction message 
and timer.\50\ The Imbalance Timer will be for the same number of 
seconds for all options traded on the Exchange. This is the same as the 
existing rule, except that the Exchange is adding more detail to this 
provision, to provide that the price in the imbalance message must be 
within the Pre-Market BBO. This is intended, as some of the other 
boundaries applied in the Opening Process, to help ensure that the 
price is reasonable in light of the price discovery needed to determine 
an Opening Price.
---------------------------------------------------------------------------

    \50\ See COOP and COLA descriptions in Rule 1080.07.
---------------------------------------------------------------------------

    New Rule 1017(k)(B), states that any new interest received by the 
system will update the Potential Opening Price. This amendment adds 
detail to the rule. If during or at the end of the Imbalance Timer, the 
Opening Price is at or within the OQR the Imbalance Timer will end and 
the system will execute at the Opening Price if the executions consist 
of Exchange interest only without trading through the ABBO and without 
trading through the limit price(s) of interest within OQR which is 
unable to be fully executed at the Opening Price. If no new interest 
comes in during the Imbalance Timer and the Opening Price is at or 
within OQR, the Exchange will open at the end of the Imbalance Timer. 
This reflects that the Exchange is seeking to identify a price on the 
Exchange without routing away, yet which price may not trade through 
another market and the quality of which is addressed by applying the 
OQR boundary.
    Currently, Rule 1017(l)(vi)(B) provides that if opening quotes, 
Opening Sweeps and orders submitted during the Imbalance Timer, or 
other changes to the ABBO, would allow the entire imbalance amount to 
trade at the Exchange at or within the OQR without trading through the 
ABBO, the Imbalance Timer will end and the system will execute at the 
appropriate Opening Price. Accordingly, the current rule takes away 
market prices and volume into account at this step, while the system 
functionality does not. This is intended to foster trading on the 
Exchange before routing away.
    Next, current Rule 1017(l)(vi)(C) is being reorganized with 
additional detail, and introduces the process of routing away. Provided 
the option series has not opened pursuant to proposed Rule 1017(k)(B), 
the system will send a second Imbalance Message with a Potential 
Opening Price that is bounded by the OQR (without trading through the 
limit price(s) of interest within OQR which is unable to be fully 
executed at the Opening Price) and includes away market volume in the 
size of the imbalance to participants; and concurrently initiate a 
Route Timer, not to exceed one second.\51\ The Route

[[Page 56739]]

Timer is intended to give Exchange users an opportunity to respond to 
an Imbalance Message before any opening interest is routed to away 
markets and, thereby, maximize trading on the Exchange. If during the 
Route Timer, interest is received by the system which would allow the 
Opening Price to be within OQR without trading through other markets 
and without trading through the limit price(s) of interest within OQR 
which is unable to be fully executed at the Opening Price, the system 
will trade and the Route Timer will end. The system will monitor quotes 
received during the Route Timer period and make ongoing corresponding 
changes to the permitted OQR to reflect them.\52\ This is being changed 
to eliminate the requirement that there be no imbalance, which means it 
is more likely that an Opening Price will be discovered. It also widens 
the boundary of available Opening Prices, which should similarly 
increase the likelihood that an Opening Price can be determined. The 
Route Timer, like the Imbalance Timer, is intended to permit responses 
to be submitted and considered by the system in calculating the 
Potential Opening Price. The system does not route away until the Route 
Timer ends.
---------------------------------------------------------------------------

    \51\ The Route Timer is a brief timer that operates as a pause 
before an order is routed to an away market. The Route Timer is 
currently set at 200 milliseconds, which the Exchange has determined 
is a reasonable time period to gather additional interest on the 
Exchange before routing away. The Exchange has only changed this 
timer a few times over the past several years.
    \52\ See proposed Rule 1017(k)(C)(1) and (2).
---------------------------------------------------------------------------

    Proposed Rule 1017(k)(C)(3) will provide that when the Route Timer 
expires, if the Potential Opening Price is within OQR (without trading 
through the limit price(s) of interest within OQR that is unable to be 
fully executed at the Opening Price), the system will determine if the 
total number of contracts displayed at better prices than the 
Exchange's Potential Opening Price on away markets (``better priced 
away contracts'') would satisfy the number of marketable contracts 
available on the Exchange. This is largely unchanged in terms of 
applying the OQR as a boundary before considering away markets. The 
Exchange is adding reference to the limit price, because the limit 
price of interest within the OQR serves as a boundary as well. This 
protects the unexecuted interest and should result in a fairer price. 
The Exchange is adding rule text to state that the Exchange will open 
the option by routing and/or trading on the Exchange, pursuant to 
proposed Rule 1017(k)(C)(3)(i)-(iii).
    Proposed Rule 1017(k)(C)(3)(i) will provide that if the total 
number of contracts displayed at better prices than the Exchange's 
Potential Opening Price on away markets (``better priced away 
contracts'') would satisfy the number of marketable contracts available 
on the Exchange on either the buy or sell side, the system will route 
all marketable contracts on the Exchange to such better priced away 
markets as ISO IOC orders, and determine an opening PBBO that reflects 
the interest remaining on the Exchange. The system will price any 
contracts routed away to other markets at the Exchange's Opening Price 
or proposed Rule 1017(k)(C)(3)(ii) or (iii) described hereinafter. 
Currently, Rule 1017 states that contracts routed away are priced at 
the better away market price. This is incorrect. Routing away at the 
Exchange's Opening Price is intended to achieve the best possible price 
available at the time the order is received by the away market.
    Proposed Rule 1017(k)(C)(3)(ii) \53\ will provide that if the total 
number of better priced away contracts would not satisfy the number of 
marketable contracts the Exchange has, the system will determine how 
many contracts it has available at the Exchange Opening Price. If the 
total number of better priced away contracts plus the number of 
contracts available at the Exchange Opening Price would satisfy the 
number of marketable contracts on the Exchange on either the buy or 
sell side, the system will contemporaneously route a number of 
contracts that will satisfy interest at other markets at prices better 
than the Phlx Opening Price, and trade available contracts on the 
Exchange at the Exchange Opening Price. The system will price any 
contracts routed to other markets at the better of the Exchange Opening 
Price or the order's limit price pursuant to Rule 1017(k)(vi)(C)(3)(ii) 
[sic] at the better of the Exchange Opening Price or the order's limit 
price. Currently, the rule states that the Exchange will execute only 
at the Opening Price, but in actuality the system uses the better of 
the Opening Price or the order's limit price to route to away markets. 
This continues with the theme of maximum possible execution of the 
interest in Phlx or away markets. The addition of the reference to the 
buy or sell side is intended to provide additional detail and accuracy 
to the description.\54\
---------------------------------------------------------------------------

    \53\ This is currently subparagraph 4.
    \54\ This addition is proposed in several places in Rule 1017 
for the same reason.
---------------------------------------------------------------------------

    Proposed Rule 1017(k)(C)(3)(iii) \55\ will provide that if the 
total number of better priced away contracts plus the number of 
contracts available at the Exchange Opening Price plus the contracts 
available at other markets at the Exchange Opening Price would satisfy 
the number of marketable contracts the Exchange has on either the buy 
or sell side, the system will contemporaneously route a number of 
contracts that will satisfy interest at other markets at prices better 
than the Exchange Opening Price (pricing any contracts routed to other 
markets at the better of the Exchange Opening Price or the order's 
limit price), trade available contracts on the Exchange at the Exchange 
Opening Price, and route a number of contracts that will satisfy 
interest at other markets at prices equal to the Exchange Opening 
Price. Much of this appears in the current rule but is supplemented by 
the reference to the order's limit price, as discussed above. This 
provision, like the existing one, is intended to introduce routing to 
away markets potentially both at a better price than the Exchange 
Opening Price as well as at the Exchange Opening Price to access as 
much liquidity as possible to maximize the number of contracts able to 
be traded as part of the Opening Process. The Exchange routes at the 
better of the Exchange's Opening Price or the order's limit price to 
first ensure the order's limit price is not violated. Routing away at 
the Exchange's Opening Price is intended to achieve the best possible 
price available at the time the order is received by the away market.
---------------------------------------------------------------------------

    \55\ This is currently subparagraph 5.
---------------------------------------------------------------------------

    Proposed Rule 1017(k)(C)(4) \56\ is proposed to state that the 
system may send up to two additional Imbalance Messages \57\ (which may 
occur while the Route Timer is operating) bounded by OQR and reflecting 
away market interest in the volume. The reference to two additional 
Imbalance Messages is intended to replace in a clearer way the current 
reference to repeating the ``Imbalance Process'' (a term no longer 
being used in this rule) three times. The reference to the OQR and away 
market interest, again, amends the rule by adding detail to make clear 
that both are boundaries. These boundaries are intended to assist in 
determining a reasonable price at which an option series might open.
---------------------------------------------------------------------------

    \56\ This is currently subparagraph 6.
    \57\ The first two Imbalance Message always occur, while the 
next two may or may not occur based on whether or not the Exchange 
has been able to open before repeating the Imbalance Process.
---------------------------------------------------------------------------

    This provision is proposed to further state that after the Route 
Timer has expired, the processes in proposed Rule 1017(k)(C)(3) will 
repeat (except no new Route Timer will be initiated). No new Route 
Timer is initiated because the Exchange believes that after the Route 
Timer has been initiated and subsequently expired, no further delay

[[Page 56740]]

is needed before routing contracts if at any point thereafter the 
Exchange is able to satisfy the total number of marketable contracts 
the Exchange has by executing on the Exchange and routing to other 
markets.
    Proposed Rule 1017(k)(vi)(C)(5) [sic],\58\ entitled ``Forced 
Opening,'' will describe what happens as a last resort in order to open 
an options series when the processes described above have not resulted 
in an opening of the options series. Under this process, called a 
Forced Opening, after all additional Imbalance Messages have occurred 
pursuant to proposed Rule 1017(k)(4),\59\ the system will open as many 
contracts as possible by routing to other markets at prices better than 
the Exchange Opening Price for their disseminated size, trading 
available contracts on the Exchange at the Exchange Opening Price 
bounded by OQR (without trading through the limit price(s) of interest 
within OQR which is unable to be fully executed at the Opening Price). 
The system will also route contracts to other markets at prices equal 
to the Exchange Opening Price at their disseminated size. In this 
situation, the system will price any contracts routed to other markets 
at the better of the Exchange Opening Price or the order's limit price. 
Any unexecuted contracts from the imbalance not traded or routed will 
be cancelled back to the entering participant if they remain unexecuted 
and priced through the Opening Price, unless the member that submitted 
the original order has instructed the Exchange in writing to re-enter 
the remaining size, in which case the remaining size will be 
automatically submitted as a new order. Currently, the rule provides 
that before the order is cancelled back or reentered, it will be 
displayed in the Exchange quote at the Opening Price for the remaining 
size for a period not to exceed ten seconds; this does not occur since 
the Exchange has set this period of time to zero seconds. The Exchange 
is amending this rule to add the boundaries of OQR and limit prices 
within the OQR to provide additional detail. A majority of this 
paragraph is not being amended. These boundaries are intended to ensure 
a quality Opening Price as well as protect the unexecutable interest 
entered with a limit price which may not be able to be fully executing 
at the Opening Price.
---------------------------------------------------------------------------

    \58\ This is currently subparagraph 7.
    \59\ The reference to subparagraph (4) helps link these 
provisions.
---------------------------------------------------------------------------

    Although much of new Rule 1017(k)(vi)(C)(5) [sic] is the same as 
current subparagraph (7), the Exchange is proposing to delete the 
sentence that provides that during the display time period, the system 
will disseminate, on the opposite side of the market from remaining 
unexecuted contracts: (i) A non-firm bid for the price and size of the 
next available bid(s) on the Exchange if the imbalance is a sell 
imbalance, or (ii) a non-firm offer for the price and size of the next 
available offer(s) on the Exchange if the imbalance is a buy imbalance. 
This language is obsolete, because this does not occur as there is 
currently no display time period.
    Proposed Rule 1017(k)(viii), currently Rule 1017(l)(viii), as 
amended, provides that the system will give priority to market orders 
first in time priority, then to resting limit orders at the Opening 
Price. Market orders have priority because they are considered to be 
the most aggressively priced, consistent with price priority. The 
Exchange is proposing to amend the existing rule text which provides 
that limit orders are treated as market orders, because they are not. 
The Exchange proposes to state that limit orders are prioritized based 
on their limit price and capacity (participant type) as they are during 
normal trading (outside the opening). Accordingly, the Exchange is 
proposing to amend this rule text to state that the system will give 
priority to market orders first in time, then to resting limit orders. 
Further, the allocation provisions of Rule 1014(g)(vii) will apply.
    The Exchange proposes to delete rule text in current Rule 1017(i), 
which is incorrect. It currently provides that a limit order to buy 
which is at a higher price than the price at which the option is to be 
opened and a limit order to sell which is at a lower price than the 
price at which the option is to be opened, shall be treated as market 
orders. The Exchange proposes to remove this rule text. The Exchange 
continues to treat these orders as limit orders, which is consistent 
with their handling during normal trading. The Exchange does not 
believe that limit orders should be handled differently on the opening 
and believes that this is consistent with users' expectations. 
Presumably, market participants choose to enter limit orders for the 
protection associated with a limit price, and they understand that 
market orders may be executed before limit orders as a matter of 
priority, which is an acceptable outcome because they are not willing 
to take the risks associated with market orders.\60\
---------------------------------------------------------------------------

    \60\ See Rule 1014(g)(vii).
---------------------------------------------------------------------------

    The Exchange proposes to amend Rule 1017 to add new section (k)(F) 
which would provide that when an option series opens, the system 
disseminates the price and size of the PBBO. This amendment adds more 
detail to the rule. The Exchange must necessarily disseminate the PBBO 
not just on the opening but throughout the day.
    The Exchange proposes to delete current Rule 1017(l)(ix) which 
provides for a brief delay to calculate the opening. The current rule 
provides that the period will not exceed .25 of one second, but it has 
long been set at zero. The Exchange's technology does not require a 
delay in order to open and therefore the provision is obsolete.
    The Exchange also proposes to delete current Rule 1017(l)(x), which 
deals with when the ABBO becomes crossed. The impact of the ABBO on the 
Exchange's opening is now discussed throughout the proposed rule and 
therefore this provision is unnecessary.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\61\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\62\ in particular, in that it is designed to 
promote just and equitable principles of trade. Specifically, the 
changes to paragraphs (a) through (e) and (g) amend the current rule by 
adding details concerning the manner in which the Opening Process 
occurs in an option series. The amendment also adds detail to the rule 
and removes outdated language. The proposed rule is also re-organized 
in a more logical way and deletes ``reserved'' paragraphs, all of which 
improves the readability of the rule. For all of these reasons, 
paragraph (a), which adopts the term ``Opening Process'' to be used 
throughout the rule and which defines it, along with several other new 
definitions, should promote just and equitable principles of trade.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78f(b).
    \62\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed additions to Rule 1017(b) promote just and equitable 
principles of trade because the new language spells out in greater 
detail what interest is included in the Opening Process, which, in 
turn, helps investors determine what to submit. New Rule 1017(b) will 
specifically state that AON interest that can be satisfied will be 
considered for execution in determining the Opening Price throughout 
the Opening Process. The rule is currently silent on the eligibility of 
AON interest on the opening. It is consistent with the Act to include 
AON interest on the opening because this contingency market or limit 
order will execute in its entirety or not at all, provided that this 
interest can be satisfied. The Exchange

[[Page 56741]]

believes that AON should be included, similar to other orders, if it 
can be satisfied. This treatment is consistent with the treatment of 
AON in other market sessions.
    The additions to Rule 1017(d) regarding the 9:25 a.m. trigger and 
providing that orders entered at any time before an options series 
opens are included in the Opening Process should promote just and 
equitable principles of trade, because a reasonable time period has 
been selected after which eligible interest is included balanced 
against accepting as much interest as possible to result in a robust 
Opening Process. The 9:25 a.m. trigger is intended to tie the option 
Opening Process to quoting in the underlying security; it presumes that 
option quotes submitted before any indicative quotes have been 
disseminated for the underlying security may not be reliable or 
intentional. Therefore, the Exchange has chosen a reasonable timeframe 
at which to begin utilizing option quotes, based on the Exchange's 
experience with when underlying quotes start becoming available. In 
addition, the Exchange is proposing to state in proposed Rule 
1017(d)(ii) that the underlying security, including indexes, must be 
open on the primary market for a certain time period for all options to 
be determined by the Exchange. The Exchange is proposing that the time 
period be no less than 100 milliseconds and no more than 5 seconds. The 
Exchange currently applies a minimal delay of 500 milliseconds. This 
proposal is consistent with the Act because it is intended to permit 
the price of the underlying security to settle down and not flicker 
back and forth among prices after its opening. It is common for a stock 
to fluctuate in price immediately upon opening; such volatility 
reflects a natural uncertainty about the ultimate Opening Price, while 
the buy and sell interest is matched. The Exchange is proposing a range 
of no less than 100 milliseconds and no more than 5 seconds in order to 
ensure that it has the ability to adjust the period for which the 
underlying security must be open on the primary market. The Exchange 
may determine that in periods of high/low volatility that allowing the 
underlying to be open for a longer/shorter period of time may help to 
ensure more stability in the marketplace prior to initiating the 
Opening Process. Rule 1017(e) specifically describes the manner in 
which a trading halt would impact a reopening process. This paragraph 
is based on existing Rule 1017(h). This rule text makes clear that a 
reopening is not tied to the 9:25 a.m. time period of Rule 1017(d). 
This language should promote just and equitable principles of trade by 
specifically addressing the manner in which a reopening will occur 
after a trading halt.
    The Exchange believes that new Rule 1017(f) promotes just and 
equitable principles of trade, because the proposed conditions 
involving Zero Bid Markets, no ABBO and no Quality Opening Market 
trigger the price discovery mechanism rather than an immediate opening 
in order to validate the Opening Price against away markets or by 
attracting additional interest to address the specific condition. This 
is consistent with the Act because it should avoid opening executions 
in very wide or unusual markets where an opening execution price cannot 
be validated. This process will occur if there are no routable orders 
that cross the ABBO.
    Similarly, new Rule 1017(h) promotes just and equitable principles 
of trade, because it better describes how the system calculates the 
Potential Opening Price, which should provide a better understanding of 
this part of the process, which has many elements. Once the price at 
which the maximum number of contracts can be executed is determined, 
applying additional criteria promotes just and equitable principles of 
trade, because it helps arrive at a price that is logical and 
reasonable in light of away markets and other interest present in the 
system. Where there are no away markets, applying the boundary of a 
Quality Opening Market promotes just and equitable principles of trade 
also to help arrive at a reasonable Opening Price. When choosing 
between multiple Opening Prices when some contracts would remain 
unexecuted, using the lowest bid or highest offer of the largest sized 
side of the market promotes just and equitable principles of trade 
because it uses size as a tie breaker. The Exchange's method for 
determining the Potential Opening Price and Opening Price is consistent 
with the Act because it seeks to arrive at reasonable price in light of 
interest present in the system and away market interest. The Exchange's 
method seeks to validate the Opening Price and avoid opening executions 
in very wide or unusual markets where validation cannot occur.
    Proposed new Rule 1017(i) promotes just and equitable principles of 
trade by establishing when the Exchange opens immediately and which 
conditions are relevant, based on the Potential Opening Price 
determined in Rule 1017(h). The rule text in Rule 1017(i) concerning 
opening with a trade, is consistent with the Act because it enables an 
immediate opening to occur within a certain boundary without need for 
the price discovery process. The boundary provides protections and 
ensures a reasonable Opening Price. Throughout the Opening Process, 
there is no different impact to any particular participant; executions 
occur at the most reasonable price possible regardless of participant 
type.
    The OQR described in proposed Rule 1017(j) promotes just and 
equitable principles of trade by establishing a reasonable boundary to 
be applied during the PDM. The OQR operates the same way today and 
serves to provide a level of protection for potential opening 
executions. This is consistent with the Act because OQR continues to 
act as a protection for the Opening Price because it protects away 
market prices and also protects against extreme volatility which may 
impact the Opening Price.
    New Rule 1017(j)(5) concerning more than one Potential Opening 
Price is consistent with the Act because it provides price protection 
because it forces the Potential Opening Price to fall within the OQR 
boundary. Specifically, the mid-point calculation balances the price 
among interest participating in the Opening when there is more than one 
price at which the maximum number of contracts could execute. Limiting 
the mid-point calculation to the OQR when a price would otherwise fall 
outside of the OQR ensures the final mid-point price will be within the 
protective OQR boundary.
    New Rule 1017(j)(6) deals with the situation where there is more 
than one Potential Opening Price and an away market price involved. If 
there is more than one Potential Opening Price possible where no 
contracts would be left unexecuted and any price used for the mid-point 
calculation is an away market price when contracts will be routed, the 
system will use the away market price as the Potential Opening Price. 
This result is consistent with the Act, because the system may need to 
route to other markets and therefore it uses the away market price as 
the Opening Price. These boundaries serve to validate the quality of 
the Opening Price. OQR is intended to limit the Opening Price to a 
reasonable, middle ground price and thus reduce the potential for 
erroneous trades during the Opening Process. Although the Exchange 
applies other boundaries such as the Pre-Market BBO, the OQR is outside 
of that and provides a price that can maximize the number of executions 
at a reasonable price. The PDM in new Rule 1017(k) reflects what is 
generally known as an imbalance process. The

[[Page 56742]]

process is intended to attract liquidity to improve the price at which 
an option series will open as well as to maximize the number of 
contracts that can be executed on the opening. The Exchange believes 
that this is consistent with just and equitable principles of trade. 
The Exchange is adding various references to the applicable boundaries 
throughout this paragraph, as explained above, which should help 
investors receive reasonable prices, which is the case throughout the 
Opening Process. In addition, the handling of routing on the opening 
should promote just and equitable principles of trade by incorporating 
away markets into the process in a clearer and more detailed away. The 
PDM also promotes just and equitable principles of trade by taking into 
account whether all interest can be fully executed, which helps 
investors by including as much interest as possible in the Opening 
Process.
    The current rule takes away market interest into account at the 
beginning of the imbalance process, while the proposed rule proposes to 
open using Exchange interest only within the Pre-Market BBO to 
determine an Opening Price, provided certain conditions contained in 
new Rule 1017(i) are present to ensure participants receive a quality 
execution in the opening. This is reflected beginning in current Rule 
1017(l)(ii)(C). It is consistent with the Act to not consider away 
market liquidity until the price discovery process occurs because this 
proposed process provides for a swift, yet conservative opening. The 
Exchange is bounded by the Pre-Market BBO when determining an Opening 
Price. The away market prices would be considered, albeit not 
immediately.
    The Exchange believes that amending the rule text of current Rule 
1017(l)(viii) to describe the manner in which limit orders are executed 
in comparison to market orders promotes just and equitable principles 
of trade because it provides investors with the proper method in which 
the system will execute orders at the opening. It is consistent with 
the Act to execute market orders before limit order because those order 
types are by definition at the best price.
    The Exchange believes that the deletion of current Rule 1017(l)(ix) 
promotes just and equitable principles of trade because eliminating an 
obsolete timer will provide investors with accurate information 
concerning the operation of the Exchange's opening. Deleting the timer 
is consistent with the Act because the timer is no longer necessary and 
its removal results in potentially faster processing of interest 
received after the opening occurs.
    Similarly, the Exchange believes that the deletion of current Rule 
1017(l)(x) promotes just and equitable principles of trade, because the 
proposed rule will continue to describe the impact of a crossed ABBO, 
but in specific parts of the rule, where appropriate, which adds more 
context and clarity to the description of the opening. The Exchange is 
not adding this concept to the rule, rather just relocating the concept 
within the rule. It is consistent with the Act to terminate the opening 
process when the ABBO becomes crossed because it protects against 
potential pricing anomalies in the market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposal does not change 
the intense competition that exists among the options markets for 
options business including on the opening. Nor does the Exchange 
believe that the proposal will impose any burden on intra-market 
competition; the Opening Process involves many types of participants 
and interest.

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

    No written comments were either solicited or received.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2016-79 on the subject line.

Paper Comments

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

    All submissions should refer to File Number SR-Phlx-2016-79. 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-2016-79 and should be 
submitted on or before September 12, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\63\
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    \63\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19896 Filed 8-19-16; 8:45 am]
 BILLING CODE 8011-01-P


