
[Federal Register Volume 81, Number 221 (Wednesday, November 16, 2016)]
[Notices]
[Pages 80694-80701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27469]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79274; File No. SR-Phlx-2016-79]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Partial Amendment No. 2 and Order Granting Approval of a Proposed 
Rule Change, as Modified by Partial Amendment No. 2, To Amend PHLX Rule 
1017, Openings in Options

November 9, 2016.

I. Introduction

    On August 4, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (the ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
to amend its rules governing the opening of trading in options series 
on the Exchange. The proposed rule change was published for comment in 
the Federal Register on August 22, 2016.\3\ The Commission received no 
comment letters regarding the proposed rule change. On October 3, 2016, 
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a 
longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ On 
November 7, 2016, the Exchange filed Partial Amendment No. 1 to the 
proposed rule change (``Partial Amendment No. 1'').\6\ On November 8, 
2016, the Exchange filed Partial Amendment No. 2 to the proposed rule 
change, which superseded Partial Amendment No. 1 (``Partial Amendment 
No. 2'').\7\ The Commission is publishing this order to approve the 
proposed rule change, as modified by Partial Amendment No. 2.
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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. 78588 (August 16, 
2016), 81 FR 56733 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 79024, 81 FR 69892 
(October 7, 2016). The Commission designated a longer period within 
which to take action on the proposed rule change and designated 
November 20, 2016, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ Partial Amendment No. 1 is available at: https://www.sec.gov/comments/sr-phlx-2016-79/phlx201679-1.pdf.
    \7\ In Partial Amendment No. 2, Phlx amends its proposed rule 
change to: (1) Specify that references to ``quotes'' refer to two-
sided quotes; (2) provide additional rationale for the OQR and for 
boundaries that protect the Opening Price from trading through the 
limit price(s) of interest within OQR, which is unable to fully 
execute at the Opening Price; (3) state that in the event the 
Exchange routes to away markets and uses the away market price as 
the Opening Price, the Exchange will enter on its order book any 
unfilled interest at a price equal to or inferior than the Opening 
Price and the Exchange would route orders that would execute through 
the Opening Price; (4) explain that each Imbalance Message would be 
set for the same length of time; (5) include additional rationale 
for proposed changes to routing during the Opening Process; (6) 
provide examples for how certain parts of the Opening Process 
operate; and (7) revise the filing and the Exhibit 5 to state that 
the Exchange may open with the PBBO only if there are no routable 
orders locking the ABBO. Partial Amendment No. 2 is available at: 
https://www.sec.gov/comments/sr-phlx-2016-79/phlx201679-2.pdf.
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II. Description

    The Exchange has proposed to reorganize and amend current Rule 
1017, which describes the opening of trading in option series on the 
Exchange.\8\
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    \8\ For a complete description on the proposal, please refer to 
the Notice, supra note 3 and Partial Amendment No. 2, supra note 7.
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A. Definitions

    The Exchange proposes to revise the introductory language to Rule 
1017(a) to state that it would conduct an electronic opening for all 
option series traded on Phlx using its trading system (``system'').\9\ 
In addition, the Exchange proposes to revise Phlx Rule 1017(a) to 
define several of the terms used in proposed Phlx Rule 1017. The 
Exchange proposes to define ``Opening Process'' by cross-referencing 
Rule 1017(d),\10\ ``Opening Price'' by cross-referencing

[[Page 80695]]

Rule 1017(i) and (k),\11\ and ``Potential Opening Price'' by cross-
referencing Rule 1017(h).\12\ The Exchange also proposes to define the 
following terms:
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    \9\ See Phlx Rule 1017(a).
    \10\ See Phlx Rule 1017(a)(i).
    \11\ See Phlx Rule 1017(a)(ii).
    \12\ See Phlx Rule 1017(a)(iii).
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     ``ABBO'' as the Away Best Bid or Offer; \13\
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    \13\ See Phlx Rule 1017(a)(iv).
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     ``Phlx Electronic Market Maker'' as a Specialist,\14\ 
Streaming Quote Trader,\15\ or Remote Streaming Quote Trader \16\ who 
is required to submit continuous two-sided electronics quotations 
pursuant to Rule 1014(b)(ii)(D); \17\
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    \14\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Phlx 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 Phlx Rule 501.
    \15\ See Phlx Rule 1014(b)(ii)(A).
    \16\ See Phlx Rule 1014(b)(ii)(B).
    \17\ See Phlx Rule 1017(a)(vi).
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     ``Pre-Market BBO'' as the highest bid and lowest offer 
among Valid Width Quotes; \18\
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    \18\ See Phlx Rule 1017(a)(vii).
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     ``Quality Opening Market'' as the 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\
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    \19\ See Phlx Rule 1017(a)(viii).
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     ``Valid Width Quote'' as the two-sided electronic 
quotation submitted by a Phlx Electronic Market Maker that consists of 
a bid/ask differential that is compliant with Rule 1014(c)(i)(A)(1)(a); 
\20\ and
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    \20\ See Phlx Rule 1017(a)(ix).
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     ``Zero Bid Market'' as where the best bid for an options 
series is zero.\21\
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    \21\ See Phlx Rule 1017(a)(x).
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    In addition, the Exchange proposes to define the ``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 
Exchange's membership on the Exchange's Web site.\22\ This would revise 
the current definition of the ``market for the underlying security,'' 
which is defined in current Rule 1017(j), and includes the first market 
to open.\23\
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    \22\ See Phlx Rule 1017(a)(v).
    \23\ See Notice, 81 FR at 56734.
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B. Interest Included in the Opening Process

    Under the proposal, eligible interest during the Opening Process 
would include Valid Width Quotes, Opening Sweeps,\24\ and orders.\25\ 
Phlx proposes to permit Phlx Electronic Market Makers to submit 
quotes,\26\ Opening Sweeps, and orders. Phlx proposes that two-sided 
quotes other than Valid Width Quotes would not be included in the 
Opening Process. Under the proposal, Non-SQT Registered Options Traders 
may submit orders. Phlx also proposes that all-or-none interest that 
can be satisfied would be considered in determining the Opening 
Price.\27\
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    \24\ Phlx Rule 1017(b)(i) defines an Opening Sweep as a one-
sided electronic quotation submitted for execution against eligible 
interest in the system during the Opening Process.
    \25\ See Phlx Rule 1017(b).
    \26\ The term ``quotes'' refers to two-sided quotes. See Partial 
Amendment No. 2, supra note 7.
    \27\ Id.
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    The proposed rule provides that 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 would be cancelled immediately if that Phlx Electronic 
Market Maker fails to maintain a continuous quote with a Valid Width 
Quote in the affected series.\28\ The Exchange is also proposing that 
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 would consider only the most recent Opening Sweep at each price 
level submitted by that Phlx Electronic Market Maker in determining the 
Opening Price. Unexecuted Opening Sweeps would be cancelled once the 
affected series is open.\29\
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    \28\ See Phlx Rule 1017(b)(i)(A).
    \29\ See Phlx Rule 1017(b)(i)(B).
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    Currently, the Phlx rules provide that the system will use only 
Opening Sweeps submitted by Phlx Electronic Market Makers to determine 
the pro-rata allocation.\30\ Phlx proposes to change its rules so that 
the system would aggregate the size of all eligible interest for a 
particular participant category (e.g., all Phlx Electronic Market Maker 
(a participant category) quotes, Opening Sweeps, and orders are 
aggregated in determining the pro-rata allocation) at a particular 
price level for trade allocation purposes.\31\ Additionally, the 
Exchange is proposing that orders represented by Floor Brokers must be 
entered electronically to be considered in the Opening Process.\32\ 
Under proposed Rule 1017(d), Phlx Electronic Market Maker Valid Width 
Quotes and Opening Sweeps received starting at 9:25 a.m. and orders 
entered at any time before a series opens would be included in the 
Opening Process.
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    \30\ See Notice, supra note 3, at 56735.
    \31\ See Phlx Rule 1017(b)(ii).
    \32\ See Phlx Rule 1017(c).
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C. Opening Processes

    Under proposed Rule 1017(d), the Opening Process for an option 
series would be conducted pursuant to Rule 1017(f)-(k) on or after 9:30 
a.m. if: (1) The ABBO, if any, is not crossed; and (2) the system has 
received, within two minutes 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 within two minutes of market 
opening in the case of U.S. dollar-settled foreign currency options, 
either:
    (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 Makers have been submitted 
within such timeframe, one Phlx Electronic Market Maker has submitted a 
Valid Width Quote.\33\
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    \33\ See Phlx Rule 1017(d)(i). The Exchange represents that 
these conditions are the same as those in current Rule 1017(k). See 
Notice, supra note 3, at 56736.
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    The Exchange proposes that for all options, the underlying 
security, including indexes, must be open on the primary market for a 
certain period of time as determined by the Exchange, which shall be no 
less than 100 milliseconds and no more than 5 seconds.\34\ According to 
the Exchange, this range is designed to allow it to respond to 
volatility by requiring the underlying to be open for a longer or 
shorter period of time prior to opening to ensure more stability in the 
marketplace before initiating the Opening Process.\35\
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    \34\ Phlx Rule 1017(d)(ii). The Exchange represents that it 
currently applies a minimal delay of 500 milliseconds. See Notice, 
supra note 3, at 56736.
    \35\ See Notice, supra note 3, at 56736.
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    Under proposed Rule 1017(d)(iii), the Specialist assigned in a 
particular equity option must enter a Valid Width Quote

[[Page 80696]]

no 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 foreign currency option must enter a Valid Width Quote not 
later than 30 seconds after the announced market opening.\36\ Under 
proposed Rule 1017(d)(iv), 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 would be 
required to submit continuous, two-sided quotes in that option series 
until the time that the Specialist submits his or her quote, after 
which the Phlx Electronic Market Maker that submitted such quote would 
be obligated to submit quotations pursuant to Rule 1014(b)(ii)(D).\37\
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    \36\ Id. The Exchange represents that these obligations are 
unchanged from those in the current rule text.
    \37\ Id. The Exchange represents that this process is 
substantially unchanged from the current rule text.
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    As proposed, the Opening Process would stop and an option series 
would not open if the away best bid or offer (``ABBO'') becomes crossed 
or when the requisite number of Valid Width Quotes pursuant to Rule 
1017(d)(i) is no longer present. The Exchange states that it would wait 
for the ABBO to become uncrossed before initiating the Opening Process 
to ensure that there is stability in the marketplace as the Exchange 
determines the Opening Price.\38\ Once each of these conditions no 
longer exist, the Opening Process in the affected option series would 
start again pursuant to the Opening Process described in Rule 1017(f)-
(k). The Exchange is proposing to use the process described in Rule 
1017 to reopen an option series after a trading halt, irrespective of 
the specific times described in proposed Rule 1017(d).\39\
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    \38\ Id.
    \39\ Phlx Rule 1017(e). The Exchange represents that other than 
the reference to the specific times, the reopening process is 
currently described in Rule 1017(h). See Notice, supra note 3, at 
56736.
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D. Opening With a PBBO

    Under proposed Rule 1017(f), if there are no opening quotes or 
orders that lock or cross each other and no routable orders locking or 
crossing the ABBO, Phlx would 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 would calculate an Opening Quote Range (``OQR'') and conduct 
the price discovery mechanism (``PDM'').\40\ The Exchange believes that 
when these conditions exist, it would be difficult to arrive at a 
reasonable price, and therefore, further price discovery is 
warranted.\41\
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    \40\ See infra Section II.I.
    \41\ Id. The proposed rule differs from current Rule 1017(l)(i), 
which provides that if there are no opening quotes or orders that 
lock or cross each other, the system will open.
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E. Pre-Market BBO Calculation

    Pursuant to proposed Rule 1017(g), the system would calculate a 
Pre-Market BBO if there are opening Valid Width Quotes or orders that 
lock or cross each other. The Exchange represents that this is provided 
for in the current rule text.\42\
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    \42\ See Notice, supra note 3, at 56736.
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F. Potential Opening Price

    Proposed Rule 1017(h) describes how the system calculates the 
Potential Opening Price once the Opening Process begins.\43\ To 
calculate the Potential Opening Price, Phlx considers all Valid Width 
Quotes, Opening Sweeps, and orders, except all-or-none interest that 
cannot be satisfied, to identify the price at which the maximum number 
of contracts can trade (``maximum quantity criterion'').\44\ The 
Exchange states that the proposed rule, like the current rule, aims to 
maximize the number of contracts that can trade to find the most 
reasonable and suitable price.\45\
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    \43\ Id.
    \44\ See Phlx Rule 1017(h).
    \45\ See Notice, supra note 3, at 56737.
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    Under proposed Rule 1017(h)(A), when two or more Potential Opening 
Prices would satisfy the maximum quantity criterion and leave no 
contracts unexecuted, the system would use the highest and lowest of 
those prices to calculate the mid-point. If the mid-point is not 
expressed as a permitted minimum price variation, it would be rounded 
to the minimum price variation that is nearest to the closing price for 
the affected series from the immediate prior trading session. If there 
is no closing price from the immediate prior trading session, the 
system would round the mid-point price up to the minimum price 
variation to determine the Opening Price. The Exchange states that this 
is similar to current Rule 1017(l)(ii)(B), but the Exchange has added 
that this method of calculating the Opening Price would occur where two 
or more Potential Opening Prices would leave no contracts 
unexecuted.\46\
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    \46\ Id.
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    Under proposed Rule 1017(h)(B), the Exchange would add that if two 
or more Potential Opening Prices for the affected series would satisfy 
the maximum quantity criterion and leave contracts unexecuted, the 
Opening Price would be either the lowest executable bid or highest 
executable offer of the largest sized side. This is designed to base 
the Potential Opening Price on the maximum quantity of contracts that 
are executable.\47\ As described in new Rule 1017(h)(C), the Potential 
Opening Price would be bounded by the away market price that may not be 
satisfied with the Exchange routable interest.\48\ According to the 
Exchange, proposed Rule 1017(h)(c) would ensure that the Exchange would 
not open with a trade that would trade through another market.
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    \47\ Id.
    \48\ Phlx Rule 1017(h)(C).
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G. Opening With Trade

    Under proposed Rule 1017(i), the Exchange would open the option 
series for trading at the following Opening Price if: (1) The Potential 
Opening Price is at or within the best of the Pre-Market BBO and the 
ABBO; (2) the Potential Opening Price is at or within the non-zero bid 
ABBO if the Pre-Market BBO is crossed; or (3) where there is no ABBO, 
the Potential Opening Price is at or within the Pre-Market BBO that is 
also a Quality Opening Market. If there is more than one Potential 
Opening Price that would meet these conditions where no contracts would 
be left unexecuted and any value used for the mid-point calculation 
crosses either the Pre-Market BBO or the ABBO, then the Exchange would 
open the option series for trading and use the best price that the 
Potential Opening Price crosses outside as a boundary price for the 
purposes of the mid-point calculation. The Exchange states that the 
purpose of these boundaries is to help ensure that the Potential 
Opening Price is reasonable and does not trade through other 
markets.\49\
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    \49\ See Notice, supra note 3, at 56737.
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H. Calculation of the Opening Quote Range

    The Exchange proposes that the system would calculate an OQR for an 
option series that would be used in the PDM.\50\ The Exchange states 
that the OQR is an additional boundary designed to limit the Opening 
Price to a reasonable price and reduce the potential for erroneous 
trades during the Opening Process.\51\ Except as provided

[[Page 80697]]

in proposed Rule 1017(j)(3) and (4), to determine the minimum value for 
the OQR, an amount, as defined in a table to be determined by the 
Exchange, would be subtracted from the highest quote bid among Valid 
Width Quotes on the Exchange and on the away market(s), if any. Under 
proposed Rule 1017(j)(3), 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, 
the minimum value for the OQR would be the highest quote bid among 
quotes on away market(s), and the maximum value for the OQR would be 
the lowest quote offer among quotes on away market(s). Under proposed 
Rule 1017(j)(4), if 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 would be the lowest quote bid among Valid 
Width Quotes on the Exchange, and the maximum value for the OQR would 
be the highest quote offer among Valid Width Quotes on the 
Exchange.\52\
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    \50\ Phlx Rule 1017(j).
    \51\ See Notice, supra note 3, at 56741.
    \52\ Id. The Exchange represents that the process under Rule 
1017(j)(1)-(4) is the same as the process described in current Rule 
1017(l)(iii) and (iv), except that the new Rule 1017(j) combines 
those concepts into a single provision.
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    Under proposed Rule 1017(j)(5), if there is more than one Potential 
Opening Price possible where no contracts would be left unexecuted, any 
Potential Opening Price used for the mid-point calculation (described 
in Rule 1017(h)) that is outside the OQR would be restricted to the OQR 
price on that side of the market for the purposes of the mid-point 
calculation. Proposed Rule 1017(j)(6) would provide that 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 
(described in Rule 1017(h)) is an away market price when contracts 
would be routed, the system would use the away market price as the 
Potential Opening Price. The Exchange states that it uses the away 
market price as the Opening Price because the system may need to route 
to other markets.\53\ Under proposed Rule 1017(j)(7), if non-routable 
interest can be maximum executable against Exchange interest after the 
system determines that routable interest satisfies the away market, 
then the Potential Opening Price is the price at which the maximum 
volume, excluding the volume that would be routed to an away market, 
may be executed on the Exchange as described in proposed Rule 1017(h). 
The Exchange also proposes that the system would consider routable 
customer interest in price/time priority to satisfy the away market.
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    \53\ Id.
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I. Price Discovery Mechanism

    Current Rule 1017(l)(vi), which the Exchange proposes to delete, 
provides that if all opening marketable size cannot be completely 
executed at or within the OQR without trading through the ABBO, the 
Exchange would conduct a price discovery process. Under proposed Rule 
1017(k), the Exchange would conduct the PDM, after the OQR calculation, 
if it has not opened pursuant to the processes described in Rule 
1017(f) or (i). According to the Exchange, the purpose of the PDM is to 
satisfy the maximum number of contracts possible by applying wider 
price boundaries and seeking additional liquidity.\54\
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    \54\ Id. at 56738.
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    Under the proposal, first, the Exchange would broadcast an 
imbalance message (including 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 (``Imbalance Message''), and begin an 
``imbalance timer'' (``Imbalance Timer'') that would not exceed three 
seconds and would be for the same number of seconds for all options 
traded on the Exchange. The Exchange notes that this provision is the 
same as in the existing rule, except that the Exchange is adding the 
requirement that the Imbalance Message must be within the Pre-Market 
BBO to ensure that the price is reasonable.\55\
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    \55\ The Exchange represents that the Imbalance Timer will be 
the same number of seconds for all options traded on the Exchange. 
See Notice, supra note 3, at 56738.
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    Under proposed Rule 1017(k)(B), any new interest received by the 
system would then update the Potential Opening Price. If during or at 
the end of the Imbalance Timer, the Opening Price is at or within the 
OQR, the Imbalance Timer would end and the system would execute at the 
Opening Price. However, this would occur only if the executions consist 
of Exchange interest only without trading through: (1) The ABBO and (2) 
the limit price(s) of interest within the OQR that is unable to be 
fully executed at the Opening Price. Under the proposal, if no new 
interest comes in during the Imbalance Timer, and the Opening Price is 
at or within the OQR, the Exchange would open at the end of the 
Imbalance Timer.
    If the option series has not opened pursuant to proposed Rule 
1017(k)(B), the system would (1) 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 the 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 
(2) initiate a route timer, not to exceed one second (``Route Timer''). 
Current Rule 1017(l)(ii)(C) provides that if the Exchange's opening 
price includes away interest, the system would initiate a route timer, 
and then subsequently route to other markets disseminating prices 
better than the Exchange's opening price, execute marketable interest 
at the Exchange's opening price, and route to other markets 
disseminating prices equal to the Exchange's opening price if 
necessary. However, under the proposed rule change, the Route Timer 
would be initiated during the imbalance process.
    The Exchange states that the Route Timer is intended to give 
participants an opportunity to respond to an Imbalance Message before 
any opening interest is routed to away markets and thereby, maximize 
trading on the Exchange.\56\ As proposed, the Route Timer would operate 
as a pause before an order is routed to an away market. If, during the 
Route Timer, interest is received by the system that would allow the 
Opening Price to be within the OQR without trading through other 
markets and without trading through the limit price(s) of interest 
within the OQR that is unable to be fully executed at the Opening 
Price, the system would trade and the Route Timer would end. The system 
would monitor quotes received during the Route Timer period and make 
ongoing corresponding changes to the permitted OQR to reflect them. The 
Exchange notes that this proposed rule change would revise the current 
rule requirement that there be no imbalance for the Exchange to open 
and widen the boundary of available Opening Prices, which the Exchange 
believes would make it more likely that an Opening Price be 
discovered.\57\
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    \56\ Id. at 56739. The Exchange represents that the system would 
not route away until the Route Timer ends.
    \57\ Id.
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    Proposed Rule 1017(k)(C)(3) would provide that when the Route Timer 
expires, if the Potential Opening Price is within the OQR (without 
trading through the limit price(s) of interest within the OQR that is 
unable to be fully executed at the Opening Price), the system would 
determine if the total number of contracts displayed at better

[[Page 80698]]

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. Under the proposal, the 
Exchange would open the option by routing and/or trading on the 
Exchange, pursuant to Rule 1017(k)(C)(3)(i)-(iii). The Exchange 
represents that under the proposal, as under the current rule, the 
Exchange would apply the OQR as a boundary before considering away 
markets.\58\
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    \58\ Id.
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    Pursuant to proposed Rule 1017(k)(C)(3)(i), if the total number of 
better priced away contracts would satisfy the number of marketable 
contracts available on the Exchange on either the buy or sell side, the 
system would route all marketable contracts on the Exchange to the 
better priced away markets as an intermarket sweep order (``ISO'') 
designated as an immediate-or-cancel order(s) (``IOC''), and determine 
an opening PBBO that reflects the interest remaining on the Exchange. 
In contrast with the current rule, which states that contracts routed 
away are priced at the better away market price, under the proposed 
rule, the system would price any contracts routed away to other markets 
at the Exchange's Opening Price.
    Under proposed Rule 1017(k)(C)(3)(ii), if the total number of 
better priced away contracts would not satisfy the number of marketable 
contracts the Exchange has, the system would determine how many 
contracts it has available at the Opening Price. If the total number of 
better priced away contracts plus the number of contracts available at 
the Opening Price would satisfy the number of marketable contracts on 
the Exchange on either the buy or sell side, the system would 
contemporaneously route a number of contracts that would satisfy 
interest at other markets at prices better than the Opening Price and 
trade available contracts on the Exchange at the Opening Price. The 
system would price any contracts routed to other markets at the better 
of the Opening Price or the order's limit price pursuant to Rule 
1017(k)(C)(3)(ii) at the Opening Price. Under the current rules of the 
Exchange, the Exchange will execute only at the Opening Price, and does 
not specify that the system would use the better of the Opening Price 
or the order's limit price to route to away markets. The Exchange 
states that this proposed Rule 1017(k)(C)(3)(ii) is designed to 
maximize execution of interest on the Exchange or away markets.\59\
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    \59\ See Notice, supra note 3, at 56739.
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    Proposed Rule 1017(k)(C)(3)(iii) provides that if the total number 
of better priced away contracts plus the number of contracts available 
at the Opening Price plus the contracts available at other markets at 
the Opening Price would satisfy the number of marketable contracts the 
Exchange has on either the buy or sell side, the system would 
contemporaneously route a number of contracts that would satisfy 
interest at other markets at prices better than the Opening Price 
(pricing any contracts routed to other markets at the better of the 
Opening Price or the order's limit price), trade available contracts on 
the Exchange at the Opening Price, and route a number of contracts that 
would satisfy interest at other markets at prices equal to the Opening 
Price. The Exchange notes that the proposed rule adds a reference to 
the order's limit price. The Exchange states that routing at the better 
of the Opening Price or the order's limit price is intended to achieve 
the best possible price available at the time the order is received by 
the away market and that routing at the order's limit price ensures 
that the order's limit price is not violated.\60\
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

    Under proposed Rule 1017(k)(C)(4), after the first and second 
Imbalance Messages, each of which would be set for the same amount of 
time and would last for the length of the Imbalance Timer, the system 
may send up to two additional Imbalance Messages (which may occur while 
the Route Timer is operating) bounded by the OQR and reflecting away 
market interest in the volume. After the Route Timer has expired, the 
processes in Rule 1017(k)(C)(3) would repeat. However, unlike as 
provided in current Rule 1017(l)(vii)(C)(6), a new Route Timer would 
not be initiated.
    The Exchange proposes that, pursuant to proposed Rule 
1017(k)(C)(5), after all additional Imbalance Messages have occurred 
pursuant to proposed Rule 1017(k)(C)(4), the system would open as many 
contracts as possible by routing to other markets at prices better than 
the Opening Price for their disseminated size, trading available 
contracts on the Exchange at the Opening Price bounded by the OQR 
(without trading through the limit price(s) of interest within the OQR 
which is unable to be fully executed at the Opening Price), and routing 
contracts to other markets at prices equal to the Opening Price at 
their disseminated size. In this situation, the system would price any 
contracts routed to other markets at the better of the Opening Price or 
the order's limit price. Any unexecuted contracts from the imbalance 
not traded or routed would 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 would be automatically submitted as a new 
order. The Exchange notes that this is similar to the text of the 
current rule, but that the Exchange is deleting text that provides that 
before an order is cancelled back or re-entered, it would be displayed 
in the Exchange's quote at the Opening Price for the remaining size for 
a period not to exceed ten seconds.\61\ The Exchange represents that 
this does not occur as the Exchange has set this time period for zero 
seconds.\62\ Accordingly, the Exchange is also deleting language that 
provides that during the display time period, the system would 
disseminate, on the opposite side of the market from remaining 
contracts: (1) 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 (2) 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. The 
Exchange believes that this provision is no longer necessary as there 
is no display time period under the proposed rule.\63\
---------------------------------------------------------------------------

    \61\ Id. at 56740.
    \62\ Id.
    \63\ Id.
---------------------------------------------------------------------------

    Under proposed Rule 1017(k)(C)(6), the system would execute orders 
at the Opening Price that have contingencies (such as, without 
limitation, all-or-none) and non-routable orders, such as a ``Do Not 
Route'' or ``DNR'' Orders, to the extent possible.\64\ The system would 
only route non-contingency customer orders. The Exchange proposes that 
under Rule 1017(k)(D), the system would: (1) Re-price DNR orders (that 
would otherwise have to be routed to the exchange(s) disseminating the 
ABBO for an opening to occur) to a price that is one minimum trading 
increment inferior to the ABBO, and (2) disseminate the re-priced DNR 
Order as part of the new PBBO.\65\
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    \64\ This is substantially the same as the current rule text in 
existing Phlx Rule 1017(l)(vi)(C)(8).
    \65\ This is substantially the same as the current rule text in 
existing Phlx Rule 1017(l)(vi)(D).
---------------------------------------------------------------------------

J. Other Items

    Under the proposed rule change, the system would give priority to 
market orders first in time priority, then resting limit orders, and 
the allocation

[[Page 80699]]

provisions of Rule 1014(g)(vii) would apply.\66\ Further, the Exchange 
proposes that when the option series opens, the system would 
disseminate the price and size of the PBBO.\67\ In addition, the 
Exchange proposes to delete rule text in current Rule 1017(i), which 
currently provides that a limit order to buy 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 is deleting this 
text because it treats these orders as limit orders, which the Exchange 
believes is consistent with participants' expectations.\68\
---------------------------------------------------------------------------

    \66\ Phlx Rule 1017(k)(E).
    \67\ Phlx Rule 1017(k)(F).
    \68\ See Notice, supra note 3, at 56740.
---------------------------------------------------------------------------

    The Exchange also proposes to delete current Rule 1017(l)(ix), 
which provides for a delay to calculate the opening. The Exchange's 
current technology does not require a delay in order to open, and the 
Exchange states that therefore, this requirement is obsolete.\69\ 
Further, the Exchange proposes to delete current Rule 1017(l)(x), which 
addresses when the ABBO becomes crossed. The Exchange states that the 
impact of the ABBO is now discussed throughout the rule, and this 
provision is therefore unnecessary.\70\
---------------------------------------------------------------------------

    \69\ Id.
    \70\ Id.
---------------------------------------------------------------------------

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as modified by Partial Amendment No. 2, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\71\ In particular, for 
the reasons discussed below, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\72\ which 
requires, among other things, that the rules of a national securities 
exchange be designed 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.
---------------------------------------------------------------------------

    \71\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \72\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Definitions and Organizational Changes

    The Commission notes that, generally, the Exchange is proposing 
changes to the definitions described in Section II.A to better organize 
and clearly convey for readers existing concepts that are throughout 
the Exchange's Opening Process rules. The Commission notes that the 
Exchange is proposing to eliminate from the definition of ``market for 
the underlying security'' under Rule 1017(a)(v) the phrase the ``first 
market to open.'' The Exchange represents that it does not currently 
use the first market to open to determine the market for the underlying 
security and will only use the primary listing market and primary 
volume market to determine the underlying market.\73\ In addition, use 
of the term ``Phlx Electronic Market Maker,'' rather than ``Phlx XL 
Participant,'' should reduce investor confusion because ``Phlx XL 
Participant'' includes non-SQT Registered Options Traders or ROTs,\74\ 
who cannot submit quotes electronically, and are not be subject to Rule 
1017 because Rule 1017 applies only to electronic trading. The 
Commission notes that the Exchange is proposing to reorganize several 
provisions of Rule 1017, which should improve the clarity and 
readability of the Exchange's rules.
---------------------------------------------------------------------------

    \73\ See Notice, supra note 3, at 56734.
    \74\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT. 
See Rule 1014(b)(ii)(C).
---------------------------------------------------------------------------

B. Interest Included in the Opening Process

    The Commission notes that the Exchange is proposing that all-or-
none interest that can be satisfied would be considered for execution 
and in determining the Opening Price throughout the Opening Process. 
The Exchange is also proposing to aggregate the size of all eligible 
interest for a particular participant category at a particular price 
level to determine the pro-rata allocation \75\ rather than using only 
Opening Sweeps. The Commission believes that these proposed changes 
could benefit investors by increasing interest included in the Opening 
Process and potentially result in a better Opening Price. The 
Commission notes that the allocation methodology used would be 
consistent with existing Phlx rules. The Commission also notes that the 
proposed rule change provides for time frames for orders and quotes to 
be entered on the Exchange pursuant to Phlx Rule 1017(d) and the 
conditions under which the Opening Process would occur. The Commission 
believes that these proposed rule changes could provide investors with 
more certainty around when interest can be submitted to the Exchange 
and the conditions required for the Opening Process to begin.
---------------------------------------------------------------------------

    \75\ Phlx Rule 1014(g)(vii).
---------------------------------------------------------------------------

C. Opening Processes and Reopening After a Trading Halt

    As discussed in Section II.C, proposed Phlx Rule 1017(d) sets forth 
the Opening Process for an option series, which the Exchange represents 
is the same as the requirements under current Rule 1017(k). The 
Exchange represents that throughout the Opening Process, there will be 
no different impact to any particular participants and that executions 
occur at the most reasonable price possible regardless of participant 
type.\76\
---------------------------------------------------------------------------

    \76\ See Notice, supra note 3, at 56741.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposal to provide a 
delay between the opening of the underlying and the related option is 
not novel \77\ and would provide the Exchange with flexibility to help 
ensure a stable Opening Process to determine the price of an option. 
The Commission notes that proposed Rule 1017(d)(iii) and (iv) sets 
forth time frames for a Specialist to enter a Valid Width Quote and the 
requirements for a Phlx Electronic Market Maker to enter continuous, 
two-sided quotes, which according to the Exchange, are unchanged from 
the current rule text.\78\ The Commission believes that the Exchange's 
proposal to make explicit in Rule 1017(d)(iv) that the Opening Process 
would stop and an option series would 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, at which time the process would 
be re-started, would benefit investors by clarifying the operation of 
the rule.
---------------------------------------------------------------------------

    \77\ See Chicago Board Option Exchange Rule 6.2B(b).
    \78\ See Notice, supra note 3, at 56736.
---------------------------------------------------------------------------

    Lastly, new Rule 1017(e) states that the procedure described in 
Rule 1017 may be used to reopen an option after a trading halt. This 
concept is currently in Rule 1017(h) except that the Exchange is adding 
that if there is a trading halt or pause in the underlying security, 
the Opening Process would start again irrespective of the specific 
times listed in Rule 1017(d). The Commission notes that the times 
listed in Rule 1017(d) relate to the normal market opening at 9:30 a.m. 
and thus would not be appropriate for re-openings, which do not occur 
at the beginning of the trading day. The

[[Page 80700]]

Commission believes that these proposals should promote an orderly 
opening following a trading halt.

D. Opening With a PBBO and Pre-Market BBO Calculation

    As discussed in Section II.D, the Exchange is proposing that it 
would open with an opening quote by disseminating the PBBO only if 
there are no opening quotes or orders that lock or cross each other and 
no routable orders locking or crossing the ABBO. The Commission notes 
that this proposed change comports with the Exchange's existing 
rules,\79\ and is designed to help ensure that the Exchange does not 
open with a price that would cross away markets. The Exchange is also 
proposing that in the event of a Zero Bid Market, no ABBO, and no 
Quality Opening Market, the Exchange would conduct the PDM and 
calculate an OQR. The Exchange believes that when these three 
conditions exist, it is difficult to arrive at a reasonable and 
expected price and that the proposed change is designed to avoid 
opening executions in very wide or unusual markets.\80\ The Commission 
notes that the Pre-Market BBO Calculation remains substantially 
unchanged from Phlx's previous rules. The Commission believes that the 
proposal could result in a more reasonable Opening Price, to the 
benefit of investors.
---------------------------------------------------------------------------

    \79\ See current Phlx Rule 1017(l)(x).
    \80\ See Notice, supra note 3, at 56741.
---------------------------------------------------------------------------

E. Potential Opening Price and Opening With a Trade

    As discussed in Section II.F, the Exchange is proposing that in 
calculating the Potential Opening Price, the system would consider all 
Valid Width Quotes, Opening Sweeps, and orders, except all-or-none 
interest that cannot be satisfied, and identify the maximum quantity 
criterion. The Commission believes that specifying the interest 
considered in determining the Potential Opening Price would allow 
market participants to better understand the operation of the rule. The 
Exchange is proposing that when two or more Potential Opening Prices 
would both satisfy the maximum quantity criterion and leave no 
contracts unexecuted, the system would take the highest and lowest of 
those prices and take the mid-point. The Commission notes that this is 
based on current Phlx Rule 1017(l)(ii)(B). The Commission believes that 
the Exchange's proposal to use the lowest executable bid or the highest 
executable offer of the largest sized order in the event of a tie among 
Potential Opening Prices that would satisfy the maximum quantity 
criteria and leave contracts unexecuted could provide for more orderly 
opening. As further discussed in Section II.F, the Exchange has also 
proposed that the Potential Opening Price would be bounded by the away 
market price that could not be satisfied with the Exchange routable 
interest, which is designed to prevent opening with a trade that would 
trade through another market.
    As discussed above in Section II.G, the proposal describes the 
conditions under which the Exchange would open with a trade using 
certain price boundaries for the Potential Opening Price. The 
Commission notes that the conditions specified in Rule 1017(i) are 
designed to identify a reasonable Opening Price for an options series 
to open on the Exchange without trading through the prices of other 
markets.\81\
---------------------------------------------------------------------------

    \81\ See Notice, supra note 3, at 56741.
---------------------------------------------------------------------------

F. Calculation of Opening Quote Range

    As described in Section II.H, the Exchange is proposing to add 
additional criteria to the OQR, which is applied as a boundary during 
the PDM. According to the Exchange, the OQR is designed to act as a 
protection for the Opening Price because it protects away market prices 
and also protects against extreme volatility, which impacts the Opening 
Price.\82\ The Commission believes that the proposed changes to the OQR 
could help the Exchange better maximize the amount of interest to be 
considered during the Opening Process and arrive at a reasonable 
Opening Price in light of both interest present in the system and away 
market interest, to the benefit of investors. The Exchange also 
proposes that the system would consider routable customer interest in 
price/time priority to satisfy the away market, which is consistent 
with the priority treatment of orders the Exchange applies at other 
times throughout the trading day.\83\
---------------------------------------------------------------------------

    \82\ Id.
    \83\ See, e.g., Phlx Rule 1014(g)(vii).
---------------------------------------------------------------------------

G. Price Discovery Mechanism

    The PDM seeks to identify an Opening Price if the Exchange has not 
already done so through the processes provided in 1017(f) and (i). The 
PDM is designed to attract liquidity to improve the price at which an 
options series will open and maximize the number of contract that can 
be executed at the opening.\84\ The Commission notes that, while many 
of the processes of the PDM under proposed Rule 1017(k) are the same 
under existing Rule 1017 and that many of the changes describing the 
PDM process would reorganize the current rule text to add clarity, the 
Exchange is also proposing changes to the manner in which the PDM 
operates, as identified above. As described above, the Exchange has 
proposed to clarify when it will route interest to away markets during 
the Opening Process and the use of Imbalance Messages. In addition, the 
Exchange states that the proposed changes to price contracts that it 
routes to away markets at the Opening Price or the order's limit price 
are designed to achieve the best possible price for participants.\85\ 
The Commission notes that the proposed changes to the PDM are designed 
to improve the execution prices for market participants, ensure that 
the Exchange does not trade-through an away market price, and add 
clarity to its rules by deleting obsolete rules and providing more 
detail. The Commission believes that the proposed changes to the PDM 
could help the Exchange achieve the goals of the PDM and could provide 
better executions to participants.
---------------------------------------------------------------------------

    \84\ See Notice, supra note 3, at 56741.
    \85\ See Notice, supra note 3, at 56741.
---------------------------------------------------------------------------

H. Other Items

    The Commission notes that the Exchange's proposal to handle limit 
orders in the same manner at the opening as throughout the rest of the 
trading day is consistent with the practices of other exchanges, which 
do not provide that limit orders would be treated differently at 
different times in the trading day.\86\ Finally, the Commission 
believes that the proposal to remove the delay to calculate the opening 
in current Rule 1017(l)(ix) would be in the best interest of investors 
because, as the Exchange represents, such delay is no longer necessary, 
and therefore, obsolete.
---------------------------------------------------------------------------

    \86\ See, e.g., Chicago Board Option Exchange Rule 6.2B(c)(iv) 
and BOX Rule 7070(e)(q), each of which provide that during the 
opening, the system would give priority to market orders.
---------------------------------------------------------------------------

IV. Solicitation of Comments on Partial Amendment No. 2

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Partial Amendment 
No. 2 to 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.

[[Page 80701]]

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 December 7, 2016.

V. Accelerated Approval of Proposed Rule Change, as Modified by Partial 
Amendment No. 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Partial Amendment No. 2, prior to the 30th day 
after the date of publication of notice of Partial Amendment No. 2 in 
the Federal Register. Partial Amendment No. 2 revised the proposed rule 
change by: (1) Specifying that references to ``quotes'' refer to two-
sided quotes; (2) providing additional rationale for the OQR and for 
boundaries that protect the Opening Price from trading through the 
limit price(s) of interest within OQR which is unable to fully execute 
at the Opening Price; (3) stating that in the event the Exchange routes 
to away markets and uses the away market price as the Opening Price, 
the Exchange will enter on its order book any unfilled interest at a 
price equal to or inferior than the Opening Price and the Exchange 
would route orders that would execute through the Opening Price; (4) 
explaining that each Imbalance Message will be set for the same length 
of time; (5) including additional rationale for proposed changes to 
routing during the Opening Process; (6) providing examples for how 
certain parts of the Opening Process operate; and (7) revising the 
filing and Exhibit 5 to state that the Exchange may open with the PBBO 
only if there are no routable orders locking the ABBO.
    Partial Amendment No. 2 supplements the proposed rule change by, 
among other things, clarifying the interest included in the Opening 
Process and providing additional explanation and detail about several 
aspects of the Exchange's Opening Process. It also helps the Commission 
evaluate whether the proposed rule change would be consistent with the 
protection of investors and the public interest.
    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\87\ to approve the proposed rule change, as 
modified by Partial Amendment No. 2, on an accelerated basis.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\88\ that the proposed rule change (SR-Phlx-2016-79), as amended by 
Partial Amendment No. 2, be, and hereby is, approved.
---------------------------------------------------------------------------

    \88\ Id.
    \89\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\89\
Brent J. Fields,
Secretary.
[FR Doc. 2016-27469 Filed 11-15-16; 8:45 am]
 BILLING CODE 8011-01-P


