
[Federal Register Volume 81, Number 246 (Thursday, December 22, 2016)]
[Notices]
[Pages 93979-93986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30795]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79584; File No. SR-Phlx-2016-119]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To 
Amend the PIXL Price Improvement Auction in Phlx Rule 1080(n) and To 
Make Pilot Program Permanent

December 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 December 6, 2016, NASDAQ PHLX LLC (``Phlx'' or ``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. On December 15, 2016, 
the Exchange filed Amendment No. 1 to the proposed rule change, which 
amended and replaced the proposed rule change in its entirety. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, 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 Phlx Rule 1080(n), concerning a 
price-improvement mechanism entitled ``Price Improvement XL'', also 
known as ``PIXL.'' Certain aspects of PIXL are currently operating on a 
pilot basis (``Pilot''), which was initially approved by the Commission 
in 2010,\3\ and which is set to expire on January 18, 2017.\4\ In this 
proposal, the Exchange proposes to make the Pilot permanent, and to 
change the requirements for providing price improvement for PIXL 
Auction Orders, other than Auctions involving Complex Orders, of less 
than 50 option contracts.
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    \3\ See Securities Exchange Act Release No. 63027 (October 1, 
2010), 75 FR 62160 (October 7, 2010) (SR-Phlx-2010-108) (``PIXL 
Approval Order'').
    \4\ See Securities Exchange Act Release No. 78301 (July 12, 
2016), 81 FR 46731 (July 18, 2016) (SR-PHLX-2016-75).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/ 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 proposed rule change is to make permanent 
certain pilots within Rule 1080(n), relating to PIXL. In addition, Phlx 
proposes to modify the requirements for PIXL auctions involving less 
than 50 contracts (other than auctions involving Complex Orders) where 
the National Best Bid and Offer (``NBBO'') is only $0.01 wide.
Background
    The Exchange adopted PIXL in October 2010 as a price-improvement

[[Page 93980]]

mechanism on the Exchange.\5\ PIXL is a component of the Exchange's 
fully automated options trading system, PHLX XL[supreg], that allows an 
Exchange member (an ``Initiating Member'') to electronically submit for 
execution an order it represents as agent on behalf of a public 
customer, broker dealer, or any other entity (``PIXL Order'') against 
principal interest or against any other order it represents as agent 
(an ``Initiating Order'') provided it submits the PIXL Order for 
electronic execution into the PIXL Auction (``Auction'') pursuant to 
the Rule.
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    \5\ In addition to the PIXL Approval Order and the most recent 
extension cited above, the following proposed rule changes have been 
submitted in connection with PIXL. See Securities Exchange Act 
Release Nos. 65043 (August 5, 2011), 76 FR 49824 (August 11, 2011) 
(SR-Phlx-2011-104) (Extending Pilot for Price Improvement System, 
Price Improvement XL); 67399 (July 11, 2012), 77 FR 42048 (July 17, 
2012) (SR-Phlx-2012-94) (Extending Pilot for Price Improvement 
System, Price Improvement XL); 69845 (June 25, 2013), 78 FR 39429 
(July 1, 2013) (SR-Phlx-2013-46) (Order Granting Approval To 
Proposed Rule Change, as Modified by Amendment No. 1, Regarding 
Complex Order PIXL); 69989 (July 16, 2013), 78 FR 43950 (July 22, 
2013) (SR-Phlx-2013-74) (Extending Pilot for Price Improvement 
System, Price Improvement XL); 70654 (October 10, 2013), 78 FR 62891 
(October 22, 2013) (SR-Phlx-2013-76) (Order Granting Approval to 
Proposed Rule Change Relating to the Discontinuation of the 
Differentiation of Price Improvement XL Orders of Less Than 50 
Contracts); 72619 (July 16, 2014), 79 FR 42613 (July 22, 2014) 
(Extending Pilot for Price Improvement System, Price Improvement 
XL); and 75470 (July 16, 2015) 80 FR 43509 (July 22, 2015) (Amending 
Exchange Rule 1080(n), Price Improvement XL (``PIXL'') to Extend, 
Until July 18, 2016, a Pilot Program).
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    An Initiating Member may initiate a PIXL Auction by submitting a 
PIXL Order, which is not a Complex Order, in one of three ways:
     First, the Initiating Member could submit a PIXL Order 
specifying a single price at which it seeks to execute the PIXL Order 
(a ``stop price'').
     Second, an Initiating Member could submit a PIXL Order 
specifying that it is willing to automatically match as principal or as 
agent on behalf of an Initiating Order the price and size of all 
trading interest and responses to the PIXL Auction Notification 
(``PAN,'' as described below) (``auto-match''), in which case the PIXL 
Order will be stopped at the better of the National Best Bid/Offer 
(``NBBO'') or the Reference BBO \6\ on the Initiating Order side.
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    \6\ The ``Reference BBO'' is defined as the ``internal market 
BBO.''
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     Third, an Initiating Member could submit a PIXL Order 
specifying that it is willing to either: (i) Stop the entire order at a 
single stop price and auto-match PAN responses, as described below, 
together with trading interest, at a price or prices that improve the 
stop price to a specified price above or below which the Initiating 
Member will not trade (a ``Not Worse Than'' or ``NWT'' price); (ii) 
stop the entire order at a single stop price and auto-match all PAN 
responses and trading interest at or better than the stop price; or 
(iii) stop the entire order at the better of the NBBO or Reference BBO 
on the Initiating Order side, and auto-match PAN responses and trading 
interest at a price or prices that improve the stop price up to the NWT 
price. In all cases, if the PHLX Best Bid/Offer (``PBBO'') on the same 
side of the market as the PIXL Order represents a limit order on the 
book, the stop price must be at least one minimum price improvement 
increment better than the booked limit order's limit price.
    In addition, an Initiating Member may initiate a PIXL Auction by 
submitting a Complex PIXL Order which is of a conforming ratio, as 
defined in Commentary .08(a)(i) and (a)(ix) to Rule 1080. When 
submitting a Complex PIXL Order, the Initiating Member must stop the 
PIXL Order at a price that is better than the best net price (debit or 
credit) (i) available on the Complex Order book regardless of the 
Complex Order book size; and (ii) achievable from the best PHLX bids 
and offers for the individual options (an ``improved net price''), 
provided in either case that such price is equal to or better than the 
PIXL Order's limit price.
    After the PIXL Order is entered, a PAN is broadcast and a blind 
Auction ensues for a period of time as determined by the Exchange and 
announced on the Nasdaq Trader Web site. The Auction period will be no 
less than one hundred milliseconds and no more than one second. Anyone 
may respond to the PAN by sending orders or quotes. At the conclusion 
of the Auction, the PIXL Order will be allocated at the best price(s).
    Once the Initiating Member has submitted a PIXL Order for 
processing, such PIXL Order may not be modified or cancelled. Under any 
of the above circumstances, the Initiating Member's stop price or NWT 
price may be improved to the benefit of the PIXL Order during the 
Auction, but may not be cancelled. Under no circumstances will the 
Initiating Member receive an allocation percentage, at the final price 
point, of more than 50% with one competing quote, order or PAN response 
or 40% with multiple competing quotes, orders or PAN responses, when 
competing quotes, orders or PAN responses have contracts available for 
execution. After a PIXL Order has been submitted, a member organization 
submitting the order has no ability to control the timing of the 
execution.
The Pilot
    As described above, four components of the PIXL system are 
currently operating on a pilot basis: (i) Auction eligibility for 
Complex Orders in a PIXL Auction; (ii) the provision that an unrelated 
market or marketable limit order (against the PBBO) on the opposite 
side of the market from the PIXL Order received during the Auction will 
not cause the Auction to end early and will execute against interest 
outside of the Auction; (iii) the early conclusion of a PIXL Auction; 
and (iv) no minimum size requirement of orders entered into PIXL. The 
pilot has been extended until January 18, 2017.\7\
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    \7\ See note 4 above.
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    As described in greater detail below, during the pilot period the 
Exchange has been required to submit, and has been submitting, certain 
data periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size orders, there is significant price improvement available 
through PIXL, and that there is an active and liquid market functioning 
on the Exchange both within PIXL and outside of the Auction mechanism. 
The Exchange has also analyzed the impact of certain aspects of the 
Pilot; for example, the early conclusion of an Auction due to the PBBO 
crossing the PIXL Order stop price on the same side of the market as 
the PIXL Order, or due to a trading halt.
    The Exchange now seeks to have the Pilot approved on a permanent 
basis. In addition, the Exchange proposes to modify the scope of PIXL 
so that PIXL Orders for less than 50 option contracts, other than 
Auctions involving Complex Orders, will be required to receive price 
improvement of at least one minimum price improvement increment over 
the NBBO if the NBBO is only $0.01 wide. For orders of 50 contracts or 
more, or if the difference in the NBBO is greater than $0.01, and for 
Complex Orders, the requirements for price improvement remain the same.
Price Improvement for Orders Under 50 Contracts
    Currently, a PIXL Auction may be initiated if all of the following 
conditions are met. If the PIXL Order (except if it is a Complex Order) 
is for the account of a public customer the Initiating Member must stop 
the entire PIXL Order (except if it is a Complex Order) at a price that 
is equal to or better than the National Best Bid/Offer

[[Page 93981]]

(``NBBO'') and the internal market BBO (the ``Reference BBO'') on the 
opposite side of the market from the PIXL Order, provided that such 
price must be at least one minimum price improvement increment (as 
determined by the Exchange but not smaller than one cent) better than 
any limit order on the limit order book on the same side of the market 
as the PIXL Order.
    If the PIXL Order (except if it is a Complex Order) is for the 
account of a broker dealer or any other person or entity that is not a 
public customer the Initiating Member must stop the entire PIXL Order 
(except if it is a Complex Order) at a price that is the better of: (i) 
The Reference BBO price improved by at least one minimum price 
improvement increment on the same side of the market as the PIXL Order, 
or (ii) the PIXL Order's limit price (if the order is a limit order), 
provided in either case that such price is at or better than the NBBO 
and the Reference BBO.
    PHLX proposes to amend the PIXL auction to require at least $0.01 
price improvement for a PIXL Order, except if it is a Complex Order, if 
that order is for less than 50 contracts and if the difference between 
the NBBO is $0.01. Accordingly, PHLX is proposing to amend the Auction 
Eligibility Requirements to require that, if the PIXL Order (except if 
it is a Complex Order) is for less than 50 option contracts, and if the 
difference between the NBBO is $0.01, the Initiating Member must stop 
the entire PIXL Order at one minimum price improvement increment better 
than the NBBO on the opposite side of the market from the PIXL Order, 
and better than any limit order on the limit order book on the same 
side of the market as the PIXL Order. This requirement will apply 
regardless of whether the PIXL Order is for the account of a public 
customer, or where the PIXL Order is for the account of a broker dealer 
or any other person or entity that is not a Public Customer. The 
Exchange will continue to require that the Initiating Member stop the 
entire PIXL Order at a price that is better than any limit order on the 
limit order book on the same side of the market as the PIXL Order 
regardless of the size of the PIXL Order and the width of the NBBO.
    The Exchange will retain the current requirements for auction 
eligibility where the PIXL Order is for the account of a public 
customer and such order is for 50 option contracts or more, or if the 
difference between the NBBO is greater than $0.01. The Exchange will 
also retain the current requirements for auction eligibility where the 
PIXL Order is for the account of a broker dealer or any other person or 
entity that is not a public customer and such order is for 50 option 
contracts or more, or if the difference between the NBBO is greater 
than $0.01.
    Accordingly, the Exchange is amending the Auction Eligibility 
Requirements to state that, if the PIXL Order (except if it is a 
Complex Order) is for the account of a public customer and such order 
is for 50 option contracts or more or if the difference between the 
NBBO is greater than $0.01, the Initiating Member must stop the entire 
PIXL Order at a price that is equal to or better than the NBBO on the 
opposite side of the market from the PIXL Order, provided that such 
price must be at least one minimum price improvement increment (as 
determined by the Exchange but not smaller than one cent) better than 
any limit order on the limit order book on the same side of the market 
as the PIXL Order.
    Similarly, the Exchange is amending the Auction Eligibility 
Requirements to state that, if the PIXL Order (except if it is a 
Complex Order) is for the account of a broker dealer or any other 
person or entity that is not a public customer and such order is for 50 
option contracts or more, or if the difference between the NBBO is 
greater than $0.01, the Initiating Member must stop the entire PIXL 
Order (except if it is a Complex PIXL Order) at a price that is the 
better of: (i) The Reference BBO price improved by at least the Minimum 
Increment on the same side of the market as the PIXL Order, or (ii) the 
PIXL Order's limit price (if the order is a limit order), provided in 
either case that such price is at or better than the NBBO and the 
Reference BBO.\8\
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    \8\ In implementing this change, the System will reject a PIXL 
Order to buy if the NBBO is only $0.01 wide and the agency order is 
stopped on the offer provided the order is not customer to customer. 
The system will reject a PIXL Order to sell if the NBBO is only 
$0.01 wide and the Agency order is stopped on the bid provided the 
order is not customer to customer. The system will allow a customer 
to customer PIXL Order to trade on either the bid or offer, if the 
NBBO is $0.01 wide, provided (1) the execution price is equal to or 
within the NBBO, (2) there is no resting customer at the execution 
price, and (3) $0.01 is the Minimum Price Variation (MPV) of the 
option. The system will continue to reject a PIXL Order to buy if 
the NBBO is only $0.01 wide and the Agency order is stopped on the 
bid if there is a resting order on the bid. The system will continue 
to reject a PIXL Order to sell if the NBBO is only $0.01 wide and 
the Agency order is stopped on the offer if there is resting order 
on the offer. The system will provide an explicit reject reason if 
the system rejects a PIXL Order because the NBBO is only $0.01 wide 
and the PIXL Order did not improve the contra side NBBO. The 
handling of Complex PIXL Orders will be unchanged regardless of the 
NBBO width.
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    The Exchange also proposes to add language to Rule 1080(n)(i) to 
clarify that, if any of the auction eligibility criteria are not met, 
the PIXL Order will be rejected. The Exchange will also add language to 
Rule 1080(n)(i) to clarify the treatment of paired public customer -to- 
public customer orders pursuant to Rule 1080(n)(vi) as a result of 
these proposed changes. Specifically, Exchange will allow a PIXL Order 
to trade on either the bid or offer, pursuant to Rule 1080(n)(vi), if 
the NBBO is $0.01 wide, provided (1) the execution price is equal to or 
within the NBBO, (2) there is no resting customer at the execution 
price, and (3) $0.01 is the Minimum Price Variation (MPV) of the 
option. The Exchange also proposes to add language that it will 
continue to reject a PIXL Order to buy (sell) if the NBBO is only $0.01 
wide and the Agency order is stopped on the bid (offer) if there is a 
resting order on the bid (offer). These requirements are unchanged from 
the Exchange's current handling practices of paired public customer-to-
public customer PIXL Orders per Rule 1080(n)(vi), and the Exchange's 
current practice of rejecting PIXL Orders to buy (sell) if the NBBO is 
only $0.01 wide and the Agency order is stopped on the bid (offer) if 
there is a resting order on the bid (offer).
    The Exchange believes that these changes to PIXL may provide 
additional opportunities for PIXL Orders, other than Complex Orders, of 
under 50 option contracts to receive price improvement over the NBBO 
where the difference in the NBBO is $0.01 and therefore encourage the 
increased submission of orders of under 50 option contracts.\9\ Phlx 
notes that the statistics for the current pilot, which include, among 
other things, price improvement for orders of less than 50 option 
contracts under the current auction eligibility requirements, show 
relatively small amounts of price improvement for such orders. Phlx 
believes that the proposed requirements will therefore increase the 
price improvement that orders of under 50 option contracts may receive 
in PIXL. The Exchange also notes that the initial PIXL requirements for 
auction eligibility differentiated between PIXL Orders for a size of 
less than 50 option contracts and PIXL Orders for a size of 50 
contracts or more (both for PIXL Orders for the account of a public 
customer and for the account of a broker-dealer of any other person or 
entity that is not a public customer), with more stringent requirements 
for

[[Page 93982]]

PIXL Orders for a size of less than 50 option contracts.\10\
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    \9\ For the reasons discussed below, the Exchange is not 
proposing to modify the auction eligibility requirements for Complex 
Orders to require increased improvement.
    \10\ See PIXL Approval Order, supra note 3. Specifically, if the 
PIXL Order was for the account of a public customer and was for a 
size of 50 contracts or more, the Initiating Member must stop the 
entire PIXL Order at a price that is equal to or better than the 
NBBO on the opposite side of the market from the PIXL Order, 
provided that such price must be at least one minimum price 
improvement increment (as determined by the Exchange but not smaller 
than one cent) better than any limit order on the limit order book 
on the same side of the market as the PIXL Order. See PIXL Approval 
Order, supra note 3. In contrast, if the PIXL Order was for the 
account of a public customer and is for a size of less than 50 
contracts, the Initiating Member must stop the entire PIXL Order at 
a price that is the better of: (i) The PBBO price on the opposite 
side of the market from the PIXL Order improved by at least one 
minimum price improvement increment, or (ii) the PIXL Order's limit 
price (if the order is a limit order), provided in either case that 
such price is at or better than the NBBO, and at least one minimum 
price improvement increment better than any limit order on the book 
on the same side of the market as the PIXL Order. Id. The Exchange 
subsequently eliminated this size-based distinction for purposes of 
determining auction eligibility. See Securities Exchange Act Release 
No. 70654 (October 10, 2013), 78 FR 62891 (October 22, 2013) (Order 
approving SR-Phlx-2013-76). The auction eligibility requirements for 
orders of a size of less than 50 contracts, both for orders 
submitted for the account of a public customer and for orders 
submitted for the account of a broker-dealer or any other person or 
entity that is not a public customer, had been operating on a pilot 
basis, and were also eliminated accordingly. Id. In that order, the 
Commission noted that approving the elimination of the auction 
eligibility requirements for orders of under 50 option contracts did 
not affect the no minimum size pilot. Id.
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Auction Eligibility Requirements for Complex Orders
    Rule 1080(n) sets forth separate auction eligibility requirements 
for Complex Orders. If the PIXL Order is a Complex Order and of a 
conforming ratio, as defined in Rule 1098(a)(i) and (a)(ix), the 
Initiating Member must stop the entire PIXL Order at a price that is 
better than the best net price (debit or credit) (i) available on the 
Complex Order book regardless of the Complex Order book size; and (ii) 
achievable from the best Phlx bids and offers for the individual 
options (an ``improved net price''), provided in either case that such 
price is equal to or better than the PIXL Order's limit price. Complex 
Orders consisting of a ratio other than a conforming ratio will not be 
accepted. This provision applies to all Complex Orders submitted into 
PIXL and, where applied to Complex Orders where the smallest leg is 
less than 50 contracts in size, is part of the current Pilot.
    The Exchange is not proposing to modify the auction eligibility 
requirements for Complex Orders to require increased price improvement, 
as Rule 1080(n)(i)(C) already requires that the Initiating Member must 
stop the entire PIXL Order at a price that is better than the best net 
price (debit or credit) that is available on the Complex Order book 
regardless of the Complex Order book size; and that is achievable from 
the best Phlx bids and offers for the individual options, provided in 
either case that such price is equal to or better than the PIXL Order's 
limit price.
    The Exchange is proposing, however, to make permanent the sub-
paragraph concerning auction eligibility for Complex Orders in PIXL. 
Rule 1080(n)(i)(C) states that the auction eligibility requirements for 
a PIXL Order that is a Complex Order, where applied to Complex Orders 
where the smallest leg is less than 50 contracts in size, is part of 
the current Pilot.\11\
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    \11\ The Commission approved expanding PIXL to include Complex 
Orders in 2013, and approved this provision on a pilot basis. See 
Securities Exchange Act Release No. 69845 (June 25, 2013), 78 FR 
39429 (July 1, 2013) (SR-Phlx-2013-46).
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    As noted above, when PIXL was initially proposed, the Exchange 
proposed auction eligibility requirements for simple PIXL Orders for a 
size of less than 50 contracts that were more stringent than the 
auction eligibility requirements for simple PIXL Orders for a size of 
50 contracts or more. When initially proposed, the Exchange proposed to 
implement this size-based distinction on a pilot basis in order to 
ascertain the price improvement that small customer orders (i.e., less 
than 50 contracts) would receive under the Pilot.\12\ In approving 
different auction eligibility requirements for simple PIXL Orders of 
less than 50 contracts, the SEC noted that it was approving this 
provision on a pilot basis so that it could ascertain the level of 
price improvement attained for smaller-sized orders during the pilot 
period.\13\ When expanding PIXL to include Complex Orders, the Exchange 
proposed implementing size-based auction eligibility requirements for 
Complex Orders in PIXL on a pilot basis accordingly. The SEC 
subsequently approved the elimination of the size-based distinction for 
auction eligibility for simple PIXL Orders, and permitted Phlx to adopt 
the auction eligibility standard that previously applied to orders of 
50 contracts or greater.\14\
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    \12\ See PIXL Approval Order, supra note 3. As initially 
approved, for public customer orders, if the simple PIXL Order was 
for 50 contracts or more, the Initiating Member must stop the entire 
PIXL Order at a price that is equal to or better than the National 
Best Bid/Offer (``NBBO'') on the opposite side of the market from 
the PIXL Order, provided that such price must be at least one 
minimum price improvement increment (as determined by the Exchange 
but not smaller than one cent) better than any limit order on the 
limit order book on the same side of the market as the PIXL Order. 
If the PIXL Order was for a size of less than 50 contracts, the 
Initiating Member must stop the entire PIXL Order at a price that is 
the better of: (i) The PBBO price on the opposite side of the market 
from the PIXL Order improved by at least one minimum price 
improvement increment, or (ii) the PIXL Order's limit price (if the 
order is a limit order), provided in either case that such price is 
better than the NBBO, and at least one minimum price improvement 
increment better than any limit order on the book on the same side 
of the market as the PIXL Order.
    \13\ See PIXL Approval Order, supra note 3.
    \14\ See Securities Exchange Act Release No. 70654 (October 10, 
2013), 78 FR 62891 (October 22, 2013) (SR-Phlx-2013-76).
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    Phlx believes it is appropriate to approve this aspect of the Pilot 
on a permanent basis for two reasons. First, Phlx notes that the 
auction eligibility requirements for simple PIXL Orders are currently 
operating on a permanent basis.\15\ Although the auction eligibility 
requirements for Complex PIXL Orders distinguish between Complex PIXL 
Orders where the smallest leg is less than 50 contracts and Complex 
PIXL Orders where the smallest leg is 50 contracts or greater, the 
substantive auction eligibility requirements for all Complex PIXL 
Orders are currently the same. To the extent that the SEC approved the 
simple PIXL Order auction eligibility requirements on a pilot basis, it 
was to determine if the different auction eligibility requirements for 
simple PIXL Orders of less than 50 contracts resulted in different 
levels of price improvement for those orders in comparison to simple 
PIXL Orders of 50 contracts or greater. Since no comparable distinction 
exists here, and since the auction eligibility requirements for Complex 
PIXL Orders where the smallest leg is 50 contracts or greater is 
already operating on a permanent basis, Phlx believes it is appropriate 
to approve, on a permanent basis, the same auction eligibility 
requirements for Complex PIXL Orders where the smallest leg is less 
than 50 contracts.
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    \15\ See footnote 10 supra.
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    Second, the Exchange also believes that it is appropriate to 
approve this aspect of the Pilot on a permanent basis for Complex 
Orders where the smallest leg is less than 50 contracts in size because 
this will continue to provide such Orders with the opportunity to 
receive price improvement. Specifically, the Exchange believes that the 
auction eligibility requirements, which require a Complex Order to be 
stopped at a net debit/credit price that improves upon the stated 
markets present for the individual components of the Complex Order, 
ensure that at least one option leg will be executed at a better price 
than the established bid or offer for such leg. Moreover, as discussed 
in greater detail

[[Page 93983]]

below, Phlx has gathered data throughout the Pilot that indicates that 
there is a robust market for simple orders, including small customer 
orders, both within and outside of PIXL, and significant opportunities 
for price improvement for small customer orders that are entered into 
PIXL. Phlx believes that the market for Complex Orders, including small 
customer orders, both within and outside of PIXL is similarly robust, 
and therefore believes it is appropriate to approve this aspect of the 
Pilot on a permanent basis.
No Minimum Size Requirement
    Rule 1080(n)(vii) provides that, as part of the current Pilot, 
there will be no minimum size requirement for orders to be eligible for 
the Auction.\16\ The Exchange proposed the no-minimum size requirement 
for PIXL auctions because it believed that this would provide small 
customer orders with the opportunity for price improvement. In 
initially approving PIXL, the Commission noted that it would evaluate 
the PIXL auction during the Pilot Period to determine whether it would 
be beneficial to customers and to the options market as a whole to 
approve any proposal requesting permanent approval to permit orders of 
fewer than 50 contracts to be submitted to the PIXL auction.\17\
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    \16\ The Rule also requires the Exchange to submit certain data, 
periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition 
for all size orders and that there is an active and liquid market 
functioning on the Exchange outside of the Auction mechanism. Any 
raw data which is submitted to the Commission will be provided on a 
confidential basis.
    \17\ See PIXL Approval Order, supra note 3.
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    The Exchange believes that the data gathered since the approval of 
the Pilot establishes that there is liquidity and competition both 
within PIXL and outside of PIXL, and that there are opportunities for 
significant price improvement within PIXL.\18\ For simple PIXL Orders, 
in the period between January and June 2015, PIXL auctions executed 
34.8 million contracts, which represents 11.4% of total PHLX contract 
volume. The average daily number of contracts traded on PIXL declined 
from 399,361 contracts per day in January 2015 to 187,062 contracts per 
day in June 2015. The percent of PHLX volume traded in PIXL auctions 
declined from 14.4% in January 2015 to 8.5% in June 2015. The percent 
of consolidated volume traded in PIXL auctions fell from 2.3% in 
January 2015 to 1.2% in June 2015.
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    \18\ Specifically, the Exchange gathered and reported fifteen 
separate data fields relating to PIXL Orders of fewer than 50 
contracts, including (1) the number of orders of fewer than 50 
contracts entered into the PIXL Auction; (2) the percentage of all 
orders of fewer than 50 contracts sent to Phlx that are entered into 
the PIXL Auction; (3) the spread in the option, at the time an order 
of fewer than 50 contracts is submitted to the PIXL Auction; and (4) 
of PIXL trades where the PIXL Order is for the account of a public 
customer, and is for a size of fewer than 50 contracts, the 
percentage done at the NBBO plus $.01, plus $.02, plus $.03, etc. 
The Exchange also gathered and reported multiple data fields 
relating to competition, including, for the first Wednesday of each 
month: (1) The total number of PIXL auctions on that date; (2) the 
number of PIXL auctions where the order submitted to the PIXL was 
fewer than 50 contracts; (3) the number of PIXL auctions where the 
order submitted to the PIXL was 50 contracts or greater; and (4) the 
number of PIXL auctions (for orders of fewer than 50 contracts) with 
0 participants (excluding the initiating participant), 1 
participant, 2 participants, etc. See PIXL Approval Order, supra 
note 3.
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    For simple PIXL Orders, the mean number of unique participants in 
PIXL auctions was 4.0 and median was 3.0. The distribution of auctions 
and contracts traded by number of unique participants were similar, 
with a single participant in about 25% of auctions.
    The Exchange has also gathered information about activity in orders 
for less than 50 contracts and 50 contracts or greater for simple PIXL 
auctions between January and June 2015. For auctions occurring during 
that period, 93% of auctions were for orders for less than 50 
contracts, a percentage that increased slightly over that time period. 
Auctions for orders of less than 50 contracts accounted for 45.5% of 
the contract volume traded in PIXL. Auctions of 50 contracts or more 
made up 7.0% of all PIXL auctions and accounted for 54.5% of contracts 
traded in PIXL.
    With respect to price improvement, 68.6% of PIXL auctions for 
simple PIXL Orders executed at a price that was better than the NBBO at 
the time the auction began. 69.2% of auctions for less than 50 
contracts received price improvement. 56.3% of auctions for 50 
contracts or more received price improvement. 66.5% of contracts in 
auctions for less than 50 contracts received price improvement. 55.7% 
of auctions for 50 contracts or more received price improvement. The 
equal-weighted average price improvement was 5.5% for auctions of less 
than 50 contracts and 4.9% for auctions of 50 contracts or more. 
Average price improvement was 5.6% when PBBO was at the NBBO and 3.4% 
when PBBO was not at the NBBO.
    Phlx has also gathered data relating to the number of Complex 
Orders entered into PIXL. For November 2016, a total of 18,016 orders 
were entered into PIXL where the smallest leg was less than 50 
contracts, representing 99, 941 contracts.\19\ For November 2016, a 
total of 641 orders were entered into PIXL where the smallest leg was 
50 contracts or greater, representing 52,686 contracts.
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    \19\ In connection with this amendment, this November 2016 data 
for Complex Orders is being submitted as Exhibit 3b to the filing.
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    PHLX believes that the data gathered during the Pilot period 
indicates that there is meaningful competition in PIXL auctions for all 
size orders, there is an active and liquid market functioning on the 
Exchange outside of the auction mechanism, and that there are 
opportunities for significant price improvement for orders executed 
through PIXL. With respect to Complex Orders, the Exchange believes 
that this data establishes that there is liquidity and competition both 
within PIXL for Complex Orders and outside of PIXL for Complex Orders. 
The Exchange also believes that approving this aspect of the Pilot on a 
permanent basis would continue to permit the entry of small into PIXL, 
thereby continuing to provide such Orders with the opportunity for 
price improvement. The Exchange therefore believes that it appropriate 
to approve the no-minimum size requirement on a permanent basis for 
both simple and Complex PIXL Orders.
Early Conclusion of the PIXL Auction
    Rule 1080(n)(ii)(B) provides that the PIXL Auction shall conclude 
at the earlier of (1) the end of the Auction period; (2) for a PIXL 
Auction (except if it is a Complex Order), any time the Reference BBO 
crosses the PIXL Order stop price on the same side of the market as the 
PIXL Order; (3) for a Complex Order PIXL Auction, any time the cPBBO 
\20\ or the Complex Order book crosses the Complex PIXL Order stop 
price on the same side of the market as the Complex PIXL Order; or (4) 
any time there is a trading halt on the Exchange in the affected 
series.\21\

[[Page 93984]]

The last three conditions are operating as part of the current Pilot.
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    \20\ Rule 1098(a) defines the cPBBO as ``the best net debit or 
credit price for a Complex Order Strategy based on the PBBO for the 
individual options components of such Complex Order Strategy, and, 
where the underlying security is a component of the Complex Order, 
the National Best Bid and/or Offer for the underlying security.'' 
See Rule 1098(a)(iv).
    \21\ If the situations described in either of the final three 
conditions occur, the entire PIXL Order will be executed at: (1) In 
the case of the Reference BBO crossing the PIXL Order stop price, 
the best response price(s) or, if the stop price is the best price 
in the Auction, at the stop price, unless the best response price is 
equal to or better than the price of a limit order resting on the 
PHLX book on the same side of the market as the PIXL Order, in which 
case the PIXL Order will be executed against that response, but at a 
price that is at least one minimum price improvement increment 
better than the price of such limit order at the time of the 
conclusion of the Auction; (2) in the case of the cPBBO or the 
Complex Order book crossing the Complex PIXL Order stop price on the 
same side of the market as the Complex PIXL Order, the stop price 
against executable PAN responses and executable Complex Orders using 
the allocation algorithm in sub-paragraph (E)(2)(d)(i) through (iv); 
or (3) in the case of a trading halt on the Exchange in the affected 
series, the stop price, in which case the PIXL Order will be 
executed solely against the Initiating Order. Any unexecuted PAN 
responses will be cancelled. See Rule 1080(n)(ii)(C).
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    As with the no minimum size requirement, the Exchange has gathered 
data on these three conditions to assess the effect of early PIXL 
Auction conclusions on the Pilot.\22\ Between January and June 2015, 
320 auctions for simple PIXL Orders terminated early because the Phlx 
BBO crossed the PIXL Order stop price on the same side of the market. 
No auctions terminated early because of halts. The number of auctions 
that terminated early was 1/100th of 1% of all PIXL auctions over the 
period. The auctions that terminated early included 1/100th of 1% of 
contracts traded in PIXL auctions. The share of auctions that 
terminated early was stable between January and June 2015.
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    \22\ The Exchange agreed to gather and submit the following data 
on this part of the Pilot: (1) The number of times that the PBBO 
crossed the PIXL Order stop price on the same side of the market as 
the PIXL Order and prematurely ended the PIXL Auction, and at what 
time the PIXL Auction ended; (2) the number of times that a trading 
halt prematurely ended the PIXL auction and at what time the trading 
halt ended the PIXL Auction; (3) of the Auctions terminated early 
due to the PBBO crossing the PIXL order stop price, the number that 
resulted in price improvement over the PIXL Order stop price, and 
the average amount of price improvement provided to the PIXL Order; 
(4) in the Auctions terminated early due to the PBBO crossing the 
PIXL order stop price, the percentage of contracts that received 
price improvement over the PIXL order stop price; (5) of the 
Auctions terminated early due to a trading halt, the number that 
resulted in price improvement over the PIXL Order stop price, and 
the average amount of price improvement provided to the PIXL Order; 
(6) in the auctions terminated early due to a trading halt, the 
percentage of contracts that received price improvement over the 
PIXL order stop price; (7) the average amount of price improvement 
provided to the PIXL Order when the PIXL Auction is not terminated 
early (i.e., runs the full one second); (8) the number of times an 
unrelated market or marketable limit order (against the PBBO) on the 
opposite side of the PIXL Order is received during the Auction 
Period; and (9) the price(s) at which an unrelated market or 
marketable limit order (against the PBBO) on the opposite side of 
the PIXL Order that is received during the Auction Period is 
executed, compared to the execution price of the PIXL Order. See 
PIXL Approval Order, supra note 3.
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    Between January and June 2015, 76.3% of PIXL auctions for simple 
PIXL Orders that terminated early executed at a price that was better 
than the NBBO at the time the auction began. 71.9% of contracts in 
auctions that terminated early received price improvement. The average 
amount of price improvement per contract for PIXL auctions that 
terminated early was 4.1%.
    Based on the data gathered during the pilot, the Exchange does not 
anticipate that any of these conditions will occur with significant 
frequency, or will otherwise significantly affect the functioning of 
PIXL auctions. The Exchange also notes that over 75% of PIXL auctions 
for simple PIXL Orders that terminated early executed at a price that 
was better than the NBBO at the time the auction began, and over 70% of 
contracts in auctions that terminated early received price improvement. 
With respect to Complex PIXL Order, the Exchange similarly does not 
anticipate, based on the data gathered on this aspect of the Pilot for 
simple PIXL Orders, that either Rule 1080(n)(ii)(B)(3) or (4) will 
occur with significant frequency, or will otherwise significantly 
affect the functioning of Complex PIXL Order auctions. The Exchange 
therefore believes it is appropriate to approve this aspect of the 
Pilot on a permanent basis for both simple and Complex PIXL Orders.
Unrelated Market or Marketable Limit Order
    Rule 1080(n)(ii)(D) provides that an unrelated market or marketable 
limit order (against the PBBO) on the opposite side of the market from 
the PIXL Order received during the Auction will not cause the Auction 
to end early and will execute against interest outside of the Auction. 
In the case of a Complex PIXL Auction, an unrelated market or 
marketable limit Complex Order on the opposite side of the market from 
the Complex PIXL Order as well as orders for the individual components 
of the Complex Order received during the Auction will not cause the 
Auction to end early and will execute against interest outside of the 
Auction. If contracts remain from such unrelated order at the time the 
Auction ends, they will be considered for participation in the order 
allocation process described elsewhere in the Rule. This section is 
operating as part of the current Pilot.
    In approving this feature on a pilot basis, the Commission found 
that ``allowing the PIXL auction to continue for the full auction 
period despite receipt of unrelated orders outside the Auction would 
allow the auction to run its full course and, in so doing, will provide 
a full opportunity for price improvement to the PIXL Order. Further, 
the unrelated order would be available to participate in the PIXL order 
allocation.'' \23\ The Exchange believes that this rationale continues 
to apply for both simplex and Complex PIXL Orders. The Exchange also 
does not believe that this provision has had a significant impact on 
either the unrelated order or the PIXL auction process, either for 
simple or Complex PIXL Orders. The Exchange therefore believes it is 
appropriate to approve this aspect of the Pilot on a permanent basis 
for both simple and Complex PIXL Orders.
---------------------------------------------------------------------------

    \23\ See PIXL Approval Order, supra note 3.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\24\ in general and with 
Section 6(b)(5) of the Act,\25\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purposes of the Act or the administration of 
the Exchange.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f.
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is also 
consistent with Section 6(b)(8) of the Act \26\ in that it does not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    Specifically, the Exchange believes that PIXL, including the rules 
to which the Pilot applies, results in increased liquidity available at 
improved prices, with competitive final pricing out of the Initiating 
Participant's complete control. The Exchange believes that PIXL 
promotes and fosters competition and affords the opportunity for price 
improvement to more options contracts. The Exchange believes that the 
changes to the PIXL Auction requiring price improvement of at least one 
minimum price improvement increment over the NBBO for PIXL Orders, 
other than Complex Orders, of less than 50 option contracts where the 
difference in the NBBO is $0.01 will provide further price improvement 
for those PIXL Orders, and thereby encourage additional submission of 
those orders into PIXL. The Exchange notes that statistics for the 
current pilot, which

[[Page 93985]]

include, among other things, price improvement for orders of less than 
50 option contracts under the current auction eligibility requirements, 
show relatively small amounts of price improvement for such orders. 
Phlx believes that the proposed requirements will therefore increase 
the price improvement that orders of under 50 option contracts may 
receive in PIXL.
    The Exchange believes that approving the Pilot on a permanent basis 
is also consistent with the Act. With respect to the auction 
eligibility for Complex Orders, Phlx believes that it is appropriate to 
approve these requirements when applied to Complex Orders where the 
smallest leg is less than 50 contracts in size on a permanent basis. 
Phlx notes that the auction eligibility requirements for simple PIXL 
Orders are currently operating on a permanent basis, and that the same 
auction eligibility requirements currently apply to Complex PIXL Orders 
where the smallest leg is 50 contracts or greater. Phlx believes that 
approving this aspect of the Pilot on a permanent basis will continue 
to provide such Orders with the opportunity to receive price 
improvement. Specifically, the Exchange believes that the auction 
eligibility requirements, which require a Complex Order to be stopped 
at a net debit/credit price that improves upon the stated markets 
present for the individual components of the Complex Order, ensures 
that at least one option leg will be executed at a better price than 
the established bid or offer for such leg. Phlx also believes that, as 
with the market for simple orders, the market for complex orders, 
including small customer orders, both within and outside of PIXL is 
similarly robust.
    With respect to the no minimum size requirement, the Exchange 
believes that the data gathered during the Pilot period indicates that 
there is meaningful competition in PIXL auctions for all size orders in 
both simple and Complex PIXL Orders, there is an active and liquid 
market functioning on the Exchange outside of the auction mechanism, 
and that there are opportunities for significant price improvement for 
orders executed through PIXL, including for small customer orders. The 
Exchange also believes that approving this aspect of the Pilot on a 
permanent basis would continue to permit the entry of small simple and 
Complex Orders into PIXL, thereby continuing to provide such Orders 
with the opportunity for price improvement.
    With respect to the early termination of a PIXL Auction, the 
Exchange believes that it is appropriate to terminate an auction any 
time the Reference BBO crosses the PIXL Order stop price on the same 
side of the market as the PIXL Order (and the related provision for a 
Complex Order PIXL Auction), or any time there is a trading halt on the 
Exchange in the affected series. Based on the data gathered during the 
pilot for simple PIXL Orders, the Exchange does not anticipate that any 
of these conditions will occur with significant frequency for either 
simple or Complex PIXL Orders, or will otherwise disrupt the 
functioning of PIXL auctions for simple or Complex PIXL Orders. The 
Exchange also notes that a significant percentage of PIXL auctions for 
simple PIXL Orders that terminated early executed at a price that was 
better than the NBBO at the time the auction began, and that a 
significant percentage of contracts in auctions that terminated early 
received price improvement.
    With respect to the requirement that an unrelated market or 
marketable limit order (against the PBBO) on the opposite side of the 
market from the PIXL Order received during the Auction will not cause 
the Auction to end early and will execute against interest outside of 
the Auction, and the corresponding provision for Complex Orders, the 
Exchange does not believe that these provisions have had a significant 
impact on either the unrelated order or the PIXL auction process for 
either simple or Complex PIXL Orders. The Exchange also believes that 
allowing the PIXL Auction to continue in this scenario, both for simple 
and Complex PIXL Orders, will allow the auction to run its full course 
and, in so doing, will provide a full opportunity for price improvement 
to the PIXL Order, in addition to affording the unrelated order the 
opportunity to participate in the PIXL order allocation.

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 will apply to all 
Exchange members, and participation in the PIXL Auction process is 
completely voluntary. Based on the data collected by the Exchange 
during the Pilot, the Exchange believes that there is meaningful 
competition in PIXL auctions for all size orders, there are 
opportunities for significant price improvement for orders executed 
through PIXL, and that there is an active and liquid market functioning 
on the Exchange outside of PIXL. The Exchange believes that requiring 
increased price improvement for PIXL Orders may encourage competition 
by attracting additional orders to participate in PIXL. The Exchange 
believes that approving the Pilot on a permanent basis for both simple 
and Complex PIXL Orders will not significantly impact competition, as 
the Exchange is proposing no other change to the Pilot beyond 
implementing it on a permanent basis.

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, as modified by Amendment No. 1, 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-2016-119 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-2016-119. 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

[[Page 93986]]

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-2016-119 and should be 
submitted on or before January 12, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30795 Filed 12-21-16; 8:45 am]
 BILLING CODE 8011-01-P


