
[Federal Register Volume 81, Number 229 (Tuesday, November 29, 2016)]
[Notices]
[Pages 86031-86033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28632]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79373; File No. SR-Phlx-2016-116]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the 
Allocation of Directed Complex Orders

November 22, 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 November 16, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II 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 the allocation of Directed Orders as 
it relates to Complex Orders.\3\
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    \3\ A Complex Order is any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, priced at a net debit or credit based on 
the relative prices of the individual components, for the same 
account, for the purpose of executing a particular investment 
strategy. Furthermore, a Complex Order can also be a stock-option 
order, which is an order to buy or sell a stated number of units of 
an underlying stock or ETF coupled with the purchase or sale of 
options contract(s). See Exchange Rule 1098.
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    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 purpose of this rule change is to amend the allocation of 
Directed Orders at Rule 1014(g)(viii) to except Directed Complex Orders 
from receiving a participation guarantee. A Directed Order is any order 
(other than a stop or stop-limit order as defined in Rule 1066) to buy 
or sell which has been directed to a particular specialist, RSQT, or 
SQT by an Order Flow Provider (``OFP'').\4\
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    \4\ Phlx Rule 1080(1)(i)(A).
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    In May 2005 the Exchange adopted rules for Phlx XL that permit 
Exchange specialists, Streaming Quote Traders (``SQTs''),\5\ and Remote 
Streaming Quote Traders (``RSQTs'') \6\ to receive Directed Orders, and 
to provide a participation guarantee to specialists, SQTs and RSQTs 
that receive Directed Orders.\7\ Pursuant to Phlx Rule 1080(l)(ii) a 
Directed Order will be automatically executed and allocated to those 
quotations and orders at the National Best Bid or Offer (``NBBO'') when 
the Exchange's disseminated price is at the NBBO at the time of receipt 
of the Directed Orders and the member or member organization is quoting 
at the Exchange's disseminated price.
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    \5\ An SQT is an Registered Options Trader (``ROT'') who has 
received permission from the Exchange to generate and submit option 
quotations electronically in options to which such SQT is assigned. 
An SQT may only submit such quotations while such SQT is physically 
present on the floor of the Exchange. An SQT may only trade in a 
market making capacity in classes of options in which the SQT is 
assigned. See Phlx Rule 1014(b)(ii)(A). A ROT is defined in Exchange 
Rule 1014(b) as a regular member of the Exchange located on the 
trading floor who has received permission from the Exchange to trade 
in options for his own account. A ROT includes SQTs and RSQTs as 
well as on and off-floor ROTS.
    \6\ An RSQT is an ROT that is a member affiliated with a Remote 
Streaming Quote Trader Organization 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. A qualified RSQT may function as a Remote 
Specialist upon Exchange approval. See Phlx Rule 1014(b)(ii)(B).
    \7\ See Securities Exchange Act Release No. 51759 (May 27, 
2005), 70 FR 32860 (June 6, 2005). See also Phlx Rule 1014(g)(viii) 
(setting forth the automatic trade allocation algorithm for Directed 
Orders).
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    At this time, the Exchange is excepting Directed Complex Orders 
from a Directed Orders allocation because the Exchange's system cannot 
prevent a participation allocation for Directed Complex Orders when the 
Exchange's disseminated best bid or offer is not at the NBBO when the 
Directed Complex Order is received. The Exchange may offer a 
participation allocation for Directed Complex Orders at a later date by 
filing a proposed rule change with the Commission, after it has a 
limitation in place to systematically enforce Rule 1080(l)(ii) with 
respect to Directed Complex Orders. With this proposal, Complex Orders 
may continue to be marked as Directed Orders, but these orders will not 
receive a participation allocation pursuant to Exchange Rule 
1014(g)(viii). Instead, these Complex Orders will be allocated pursuant 
to Exchange Rule 1014(g)(vii).
    Today, as noted above, a Directed Order is defined in 1080(1)(i)(A) 
as any order (other than a stop or stop-limit order as defined in Rule 
1066) to buy or sell which has been directed to a particular 
specialist, RSQT, or SQT by an OFP. Pursuant to Exchange Rule 1080(l), 
OFPs must transmit Directed Orders to a particular specialist, SQT, or 
RSQT electronically. If the Exchange's disseminated best bid or offer 
is at the NBBO when the Directed Order is received, the Directed Order 
is automatically executed on Phlx XL and allocated to the orders and 
quotes represented in the Exchange's quotation. A Directed Specialist, 
SQT, or RSQT will receive a participation allocation pursuant to 
Exchange Rule 1014(g)(viii) if the Directed Specialist, SQT, or RSQT 
was quoting at the NBBO at the time that the Directed Order was 
received.\8\ Otherwise, the automatic execution will be allocated to 
those quotations and orders at the NBBO pursuant to

[[Page 86032]]

Exchange Rule 1014(g)(vii).\9\ Directed Orders can be sent not only on 
behalf of public customers but also on behalf of broker dealers. 
Directed Orders are limited to orders sent on an agency basis by an OFP 
and not on behalf of the sender's proprietary account. To qualify as a 
Directed Order, an order must be delivered to the Exchange 
electronically. Today, both simple and Complex Orders may be submitted 
to the Exchange as Directed Orders and receive an allocation.\10\
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    \8\ See Exchange Rule 1080(l)(ii).
    \9\ See Exchange Rule 1080(l)(iii).
    \10\ Today, Directed Complex Orders are eligible to receive a 
Directed Order allocation only if it is legging into the simple 
order book (i.e. the individual components of the Complex Order are 
trading against simple orders or quotes). Complex Orders which are 
stock-option orders are not eligible to leg into the simple order 
book and therefore not eligible to receive a Directed Order 
allocation. See Phlx Rule 1098(c)(i).
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    The Exchange's proposal would result in Directed Complex Orders not 
receiving a participation guarantee as a Directed Order pursuant to 
Exchange Rule 1014(g)(viii). Directed Simple Orders would continue to 
receive a participation guarantee pursuant to Rule 1014(g)(viii).
    The Exchange believes that Directed Orders reward specialists, 
SQTs, and RSQTs for actively engaging in marketing activities and 
establishing relationships with Order Flow Providers (``OFPs'') that 
generate Directed Orders sent to the Exchange by such OFPs. The 
Exchange believes that continuing to provide a participation guarantee 
for simple orders which are directed, will continue to result in 
additional order flow to the Exchange, thus adding depth and liquidity 
to the Exchange's markets, and enabling the Exchange to continue to 
compete effectively with other options exchanges for order flow. The 
Exchange also believes that no longer providing a participation 
guarantee when a Directed Complex Order executes will not adversely 
impact the market or the opportunity for such orders to execute. 
Directed Complex Orders will continue to be provided the same access to 
liquidity on the Exchange as today. The Exchange intends to discontinue 
the participation allocation prior to December 1, 2016.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\12\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by continuing to reward specialists, SQTs, and RSQTs 
transacting simple options on Phlx XL with a participation guarantee in 
trades involving Directed Orders to encourage the capture of order flow 
on the Exchange. With this proposal, the Exchange would not permit a 
participation guarantee for Directed Complex Orders which are submitted 
to the Exchange, nonetheless the Exchange believes continuing to 
provide a participation guarantee for simple orders to be directed will 
continue to result in additional order flow to the Exchange, thus 
adding depth and liquidity to the Exchange's markets, and enabling the 
Exchange to continue to compete effectively with other options 
exchanges for order flow. Today, the system cannot prevent a 
participation allocation for Directed Complex Orders when the 
Exchange's disseminated best bid or offer is not at the NBBO when the 
Directed Order is received. The Exchange believes that it is consistent 
with the Act to not offer the participation allocation for the Directed 
Complex Orders without a system limitation in place that would prevent 
a Directed Specialist, SQT or RSQT from receiving a Directed Complex 
Order allocation pursuant to Exchange Rule 1014(g)(viii) unless the 
Directed Specialist, SQT or RSQT is quoting at the NBBO at the time the 
Directed Complex Order is received as required by Exchange Rule 
1080(l)(ii). The Exchange intended the Directed Order allocation to 
reward members and member organizations that are quoting at the NBBO 
when a Directed Order is received. The Exchange believes that such a 
system limitation would need to be in place to ensure that the 
Exchange's Rules related to Directed Complex Order operate as intended. 
Since the Exchange does not have the system limitation in place today, 
it would not function as intended.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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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. With this proposal, the 
Exchange would not provide a participation guarantee for Directed 
Complex Orders which are submitted to the Exchange. All Phlx members 
and member organizations would continue to receive a participation 
guarantee for simple orders directed to the Exchange but not receive a 
participation guarantee for Complex Orders that are directed.

B. 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

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 
thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \15\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has asked the 
Commission to waive the 30-day operative delay to allow the proposal to 
become operative prior to December 1, 2016.\16\ As discussed above, 
Phlx Rule 1080(l)(ii) allows a Directed Specialist, SQT, or RSQT to 
receive a participation allocation pursuant to Phlx Rule 1014(g)(viii) 
if the Directed Specialist, SQT, or RSQT was quoting at the NBBO at the 
time the Directed Order was received. The Exchange notes that it 
intended the Directed Order allocation to reward members and member 
organizations that are quoting at the NBBO when a Directed Order is 
received. The Exchange states that, at this time, the Exchange is not 
able to systematically enforce the requirement in Phlx Rule 1080(l)(ii) 
that a Directed Specialist, SQT, or RSQT be quoting a the NBBO at the 
time a Directed Complex Order is received to receive a Directed Complex 
Order allocation pursuant to Rule 1014(g)(viii). The

[[Page 86033]]

Exchange believes that it is necessary to have the ability to 
systematically enforce the requirements of Phlx Rule 1080(l)(ii) with 
respect to Directed Complex Orders to assure that the Exchange's 
Directed Complex Order rules operate as intended. Accordingly, the 
Exchange requests a waiver of the 30-day operative delay to allow the 
Exchange to discontinue the participation allocation for Directed 
Complex Orders prior to December 1, 2016.\17\ The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because the proposed 
rule change will allow the Exchange to discontinue the participation 
allocation for Directed Complex Orders until the Exchange is able to 
systematically enforce the requirements of Phlx Rule 1080(l)(ii) with 
respect to Directed Complex Orders.\18\ Accordingly, the Commission 
designates the proposed rule change to be operative upon filing.\19\
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    \15\ 17 CFR 19b-4(f)(6)(iii).
    \16\ The Exchange will provide prior notice of the change in the 
form of an Options Trader Alert.
    \17\ As noted above, the Exchange may seek to offer a 
participation allocation for Directed Complex Orders after the 
Exchange has the ability to systematically enforce the requirements 
of Phlx Rule 1080(l)(ii) with respect to Directed Complex Orders.
    \18\ The Commission also notes that the Exchange stated that if 
it intends to offer a participation allocation for Directed Complex 
Orders in the future it will file a proposed rule change with the 
Commission.
    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-2016-116 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-2016-116. 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-2016-116 and should be 
submitted on or before December 20, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-28632 Filed 11-28-16; 8:45 am]
 BILLING CODE 8011-01-P


