
[Federal Register Volume 82, Number 14 (Tuesday, January 24, 2017)]
[Notices]
[Pages 8241-8244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01460]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79805; File No. SR-Phlx-2016-82]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Amendment No. 1, and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a New 
Exception in Phlx Rule 1000(f) for Sub-MPV Split-Price Orders

January 17, 2017.

I. Introduction

    On August 3, 2016, NASDAQ PHLX LLC (the ``Exchange'' or ``Phlx'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
provide an additional exception to the mandatory use of the Exchange's 
Floor Broker Management System (``FBMS'') pursuant to Rule 1000(f)(iii) 
to permit Floor Brokers to execute certain sub-minimum price variation 
(``sub-MPV'') split-price orders in the trading crowd. The proposed 
rule change was published for comment in the Federal Register on August 
22, 2016.\3\ On October 3, 2016, the Commission extended the time 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change to November 20, 2016.\4\ 
On November 17, 2016, the Commission instituted proceedings under 
Section 19(b)(2)(B) of the Act to determine whether to approve or 
disapprove the proposed rule change.\5\ On December 9, 2016, the 
Exchange filed Amendment No. 1 to the proposed rule change.\6\ The 
Commission received no comments on the proposed rule change. This order 
provides notice of filing of Amendment No. 1 and approves the proposal, 
as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78593 (August 16, 
2016), 81 FR 56724 (``Notice'').
    \4\ See Securities Exchange Act Release No. 79023 (October 3, 
2016), 81 FR 69877 (October 7, 2016).
    \5\ See Securities Exchange Act Release No. 79345 (November 17, 
2016), 81 FR 84629 (November 23, 2016).
    \6\ Amendment No. 1 updated the original filing to: (1) Reflect 
the implementation of the Exchange's new Floor Broker Management 
System (``FBMS 3'') on November 3, 2016; (2) modify proposed Rule 
1000(f)(iii)(D) to provide additional detail regarding how certain 
split-price orders will be rounded; and (3) offer three examples to 
illustrate how split-price orders will be handled pursuant to the 
proposed exception. Amendment No. 1 replaced the original proposed 
rule change in its entirety. To promote transparency of its proposed 
amendment, when Phlx filed Amendment No. 1 with the Commission, it 
also submitted Amendment No. 1 as a comment letter to the file, 
which the Commission posted on its Web site and placed in the public 
comment file for SR-Phlx-2016-82 (available at https://www.sec.gov/comments/sr=phlx-2016-82/phlx201682-1.pdf https://www.sec.gov/comments/sr-cboe-2016-071/cboe2016071.shtml). The Exchange also 
posted a copy of its Amendment No. 1 on its Web site (http://nasdaqphlx.cchwallstreet.com/NASDAQPHLX/pdf/phlx-filings/2016/SR-Phlx-2016-82_Amendment_1.pdf) when it filed Amendment No.1 with the 
Commission.
---------------------------------------------------------------------------

II. Description of the Proposal \7\
---------------------------------------------------------------------------

    \7\ A more detailed description of the proposal appears in the 
Notice and in Amendment No. 1.
---------------------------------------------------------------------------

A. Background

    Currently, Phlx Rule 1000(f) requires that all Exchange options 
transactions be executed in one of the following three ways: ``(i) 
[a]utomatically by the Exchange Trading System pursuant to Rule 1080 
and other applicable options rules; (ii) by and among members in the 
Exchange's options trading crowd none of whom is a Floor Broker; or 
(iii) through the Options [FBMS] for trades involving at least one 
Floor Broker.'' \8\ Although a Floor Broker may represent orders in the 
trading crowd, a Floor Broker is not permitted to execute an order in 
the trading crowd unless one of three exceptions applies.\9\ The 
exceptions to the mandatory use of the FBMS \10\ are set forth in Phlx 
Rule 1000(f)(iii). These exceptions allow a Floor Broker to execute a 
transaction in the trading crowd (rather than through the FBMS) if: (i) 
There is a problem with Exchange's systems; (ii) the Floor Broker is 
executing the trade pursuant to Phlx Rule 1059 (``Accommodation 
Transactions'') or Phlx Rule 1079 (``Flex Index, Equity and Currency 
Options''); or (iii) the transaction involves a multi-leg order with 
more than 15 legs.\11\
---------------------------------------------------------------------------

    \8\ See Phlx Rule 1000(f).
    \9\ See Phlx Rule 1000(f)(iii).
    \10\ The original FBMS (``FBMS 1'') began operating in 2005. The 
Exchange retired FBMS 1 on March 31, 2016 after operating it 
concurrently with the Exchange's enhanced FBMS (``FBMS 2''), which 
was made available on March 7, 2014. As of April 1, 2016, the 
Exchange only operated FBMS 2. See Notice, supra note 3, at 56725. 
On November 3, 2016, the Exchange implemented FBMS 3 and retired 
FBMS 2. According to the Exchange, FBMS 3 is currently the sole 
operating version of FBMS on the Exchange. See Amendment No. 1, 
supra note 6, at 3 and 8-10. References throughout this Order to 
``FBMS'' refer to FBMS 3.
    \11\ See Notice, supra note 3, at 56726. See also Phlx Rule 
1000(f)(iii)(A)-(C). According to the Exchange, each time a Floor 
Broker uses one of the current exceptions to Phlx Rule 1000(f)(iii), 
the Floor Broker is required by Phlx Rule 1063(e)(ii), to record the 
information required by Phlx Rule 1063(e)(i) on paper trade tickets. 
The Exchange further represents that a Floor Broker may only 
represent an order for execution that has been timestamped with the 
time of entry on the trading floor. In addition, according to the 
Exchange, once an execution occurs, the trade ticket must be stamped 
with the time of execution of such order. See Notice, supra note 3, 
at 56726 and Amendment No. 1, supra note 6, at 11.
---------------------------------------------------------------------------

B. Split-Price Order Exception Proposal

    Phlx Rule 1014(g)(i)(B) provides a priority rule regarding open 
outcry split-price transactions in equity options and options overlying 
ETFs to permit a member who is responding to an order for at least 100 
contracts who buys (sells) at least 50 contracts at a particular price 
to have priority over all others in purchasing (selling) up to an 
equivalent number of contracts of the same order at the next lower 
(higher) price without being required to yield to existing customer 
interest in the limit order book.\12\ Absent Phlx Rule 1014(g)(i)(B), 
such orders would be required to yield priority. The Exchange states 
that ``[t]he purpose behind the split-price priority exception was `to 
bring about the execution of large orders, which by virtue of their 
size and the need to execute them at multiple

[[Page 8242]]

prices may be difficult to execute without a limited exception to the 
priority rules.' '' \13\
---------------------------------------------------------------------------

    \12\ See Notice, supra note 3, at 56726 (citing Securities 
Exchange Act Release No. 51820 (June 10, 2005), 70 FR 35759 (June 
21, 2005) (SR-Phlx-2005-28)) (approving pilot). See also Securities 
Exchange Act Release No. 55993 (June 29, 2007), 72 FR 37301 (July 9, 
2007) (SR-Phlx-2007-44) (permanent approval)).
    \13\ See Notice, supra note 3, at 56726. Floor Brokers that 
avail themselves of the split-price priority rule are obligated to 
ensure compliance with Section 11(a) of the Exchange Act. See 
Amendment No. 1, supra note 6, at 12.
---------------------------------------------------------------------------

    According to the Exchange, split-price orders are currently 
processed using either FBMS or paper tickets. The use of FBMS or paper 
tickets depends on whether the split-price order can be evenly split 
using simple calculations or whether the split-price order involves 
non-even integers and sub-MPV price points, which requires a more 
complicated computation to determine the number of contracts to trade 
at two different price points.\14\ The Exchange represents that FBMS 
does not have the capability to calculate specific volumes at two 
different MPV prices for split-price orders placed in a sub-MPV 
price.\15\ To compensate for this system limitation, the Exchange is 
proposing to amend Phlx Rule 1000(f)(iii) to add a new exception from 
the mandatory use of the FBMS that would allow Floor Brokers to execute 
certain split-price orders in the trading crowd that would be validated 
by Phlx surveillance staff for compliance with applicable priority and 
trade-through rules.
---------------------------------------------------------------------------

    \14\ See Notice, supra note 3, at 56726. Today, when the 
computation is more complicated, surveillance staff allows a Floor 
Broker to execute split-price orders involving non-even integers and 
sub-MPV price points in open outcry using paper tickets pursuant to 
Phlx Rule 1000(f)(iii)(A). See id.
    \15\ See id. at 56727. See Amendment No. 1, supra note 6, at 20.
---------------------------------------------------------------------------

    Accordingly, the Exchange is proposing in Phlx Rule 1000(f)(iii)(D) 
to allow the following split-price orders to be executed in the trading 
crowd: (1) Simple orders not expressed in the applicable sub-MPV and 
that cannot be evenly split into two whole numbers to create a price at 
the midpoint of the MPV; and (2) complex and multi-leg orders with at 
least one option leg with an odd-numbered volume that must trade at a 
sub-MPV price or one leg that qualifies under (1) above.\16\
---------------------------------------------------------------------------

    \16\ See Notice, supra note 3, at 56724.
---------------------------------------------------------------------------

    The Exchange represents that this exception ``is anticipated to be 
implemented infrequently and in the following [three] ways.'' \17\ 
Under the first scenario, a Floor Broker knows that, due to a system 
limitation, a sub-MPV split-price order cannot be handled by FBMS.\18\ 
In this case, the Floor Broker would comply with Phlx Rule 1063(e), 
expose the order in the trading crowd, and request the use of the 
proposed exception from the Options Exchange Official 
(``Official'').\19\ The Official would confirm his or her understanding 
of the order and the availability of the exemption, and if the Floor 
Broker's request is determined to be valid based on the split-price 
calculation, announce to application of the exemption to the Floor 
Broker and the trading crowd.\20\ After the Floor Broker negotiates and 
consummates the trade in the trading crowd, the Floor Broker would 
timestamp the paper ticket at the time the trade is consummated in the 
trading crowd, which would become the time of execution for the 
trade.\21\ The consummated trade would then be submitted to the 
Official to validate for compliance with priority and trade-through 
rules. If compliant, the Official would permit the Floor Broker to 
submit the manual split-price trade, via paper ticket, for trade 
reporting.\22\
---------------------------------------------------------------------------

    \17\ See Amendment No. 1, supra note 6, at 13.
    \18\ See id.
    \19\ See id.
    \20\ See id. at 13-14.
    \21\ See id. at 14. The Exchange notes that, typically, the 
Official captures a timestamp reflecting the time the Official 
observed that the trade was consummated in the trading crowd and 
may, in its discretion, substitute this timestamp for the timestamp 
recorded by the Floor Broker at the time of consummation. See id.
    \22\ See Amendment No. 1, supra note 6, at 14-15. According to 
the Exchange, the paper ticket will reflect the timestamp captured 
by the Floor Broker or (as described above) the Official, which will 
reflect the time the trade was consummated in the trading crowd. See 
id.
---------------------------------------------------------------------------

    The second scenario involves a situation in which a Floor Broker 
submits a split-price order to FBMS, but the Floor Broker does not 
realize that FBMS cannot handle the order because the price is outside 
the MPV.\23\ In this case, the Floor Broker would comply with Phlx Rule 
1063(e), expose the order in the trading crowd, and, upon consummation 
of the transaction, submit the order to FBMS for execution. Because 
FBMS cannot calculate the split-price for the order, FBMS would reject 
the submission and the Floor Broker would receive a rejection 
message.\24\ Upon the receipt of this message, the Floor Broker would 
inform the Official that FBMS rejected the split-price order. The 
Official would then review the terms of the consummated trade and, 
using the timestamp captured by the Floor Broker or Official,\25\ 
validate the consummated trade for compliance with priority and trade-
through.\26\ If the consummated trade is compliant, the Official would 
permit the Floor Broker to submit the manual split-price trade, via 
paper ticket reflecting the timestamp captured by the Floor Broker (or 
Official), for trade reporting.\27\
---------------------------------------------------------------------------

    \23\ See id. at 15.
    \24\ See id. According to the Exchange, this might occur if the 
order is not priced in the minimum price increment and consequently 
FBMS would reject the trade. See id.
    \25\ According to the Exchange, the Floor Broker captures a 
timestamp for the time that the Floor Broker submitted the proposed 
execution in FBMS. The Exchange further represents that, as in 
scenario 1, the Official also would typically capture a timestamp 
reflecting the time that the Official observed the Floor Broker's 
attempt to execute the transaction in FBMS. Surveillance staff may, 
in its discretion, substitute this timestamp for the timestamp 
recorded by the Floor Broker as the time that the trade was 
consummated. See Amendment No. 1, supra note 6, at 15. See also 
supra note 21.
    \26\ See id. at 15-16.
    \27\ See id. at 16.
---------------------------------------------------------------------------

    The third scenario is similar to the second scenario; however, 
neither the Floor Broker nor the Official captures a reliable time that 
the consummated trade was submitted to FBMS for execution.\28\ In this 
case, the Official would require the Floor Broker to ``re-trade'' the 
order using a paper ticket in the sequence described in the first 
scenario above.\29\
---------------------------------------------------------------------------

    \28\ See id.
    \29\ See id.
---------------------------------------------------------------------------

    The Exchange also proposes that, in addition to split-price orders 
executed pursuant to proposed Phlx Rule 1000(f)(iii)(D), Phlx 
surveillance staff would approve all executions submitted under Phlx 
Rule 1000(f)(iii) to validate that such executions abide by applicable 
priority and trade-through rules.\30\ The Exchange also proposes to 
round prices if necessary to execute the trade at the MPV, but only to 
the benefit of a customer order, or, where multiple customer orders are 
involved, for the customer order that is earliest in time.\31\ Where no 
customer order is involved, the rounding of prices will be applied to 
the non-customer order that is earliest in time.\32\
---------------------------------------------------------------------------

    \30\ See proposed Phlx Rule 1000(f)(iii).
    \31\ See proposed Phlx Rule 1000(f)(iii); see also Notice, supra 
note 3, at 56727.
    \32\ See Amendment No. 1, supra note 6, at 3 and 7.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of Section 6 of the Act \33\ and the rules and regulations 
thereunder applicable to a national securities exchange.\34\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\35\ which requires, among 
other things, that the rules of a national securities exchange

[[Page 8243]]

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; and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78f.
    \34\ 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).
    \35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission notes that the Exchange is proposing a new exception 
in Phlx Rule 1000(f)(iii)(D) that is designed to enable Floor Brokers 
to execute two types of split-price orders in the trading crowd that 
cannot be processed by FBMS because of a system limitation.\36\ The 
Exchange represents that its surveillance staff will oversee Floor 
Brokers' use of the proposed Phlx Rule 1000(f)(iii)(D) exception, which 
they do today for current exceptions provided under Phlx Rule 
1000(f)(iii).\37\ The Exchange further represents that for each 
execution pursuant to Phlx Rule 1000(f)(iii): (1) Exchange surveillance 
staff will verify that the conditions of the exception under Phlx Rule 
1000(f)(iii) are met and will ensure that the proposed exception for 
split-price orders will be used only rarely; \38\ (2) Exchange 
surveillance staff will approve executions pursuant to Phlx Rule 
1000(f)(iii) and validate compliance with applicable priority rules of 
the Exchange and trade-through rules of the Options Order Protection 
and Locked/Crossed Market Plan; \39\ and (3) all relevant trade data 
resulting from executions pursuant to Phlx Rule 1000(f)(iii) will be 
recorded on both paper tickets and in FBMS to ensure a proper audit 
trail for timely surveillance.\40\ The Commission notes that the 
activities of Phlx Surveillance under Rule 1000(f)(iii), including the 
substitution of timestamps, should be carried out in an objective 
manner and with due regard to the Exchange's obligations under the 
Act.\41\
---------------------------------------------------------------------------

    \36\ The Commission notes that the exception for split-price 
orders is similar in purpose to the current exceptions provided in 
Phlx Rule 1000(f)(iii)(B) and (C). See Securities Exchange Act 
Release No. 68960 (February 20, 2013), 78 FR 13132 (February 26, 
2013) (SR-Phlx-2013-09) (recognizing exceptions for certain 
executions to occur manually in the trading crowd and not through 
FBMS. ``[ ] FLEX orders will continue to be executable by Floor 
Brokers in the trading crowd pursuant to Rule 1079 and 1079A, rather 
than through FBMS. This is because FBMS will not be able to accept 
FLEX orders, which have varied and complicated terms. Similarly, 
accommodation transactions (also known as cabinet trades) will 
continue to be executable by Floor Brokers in the trading crowd 
pursuant to Rule 1059. Neither FLEX nor accommodation transactions 
are executed through Exchange systems today. Floor Brokers will also 
be permitted to execute orders in the trading crowd if they are 
handling an order with more than 15 legs, because the Exchange 
determined to limit the complexity of FBMS functionality and does 
not believe that many orders fall into this category or that Floor 
Brokers will be adversely affected.'').
    \37\ See Notice, supra note 3, at 56726. See also Amendment No. 
1, supra note 6, at 17. The Exchange notes its belief that it is 
``necessary and appropriate for the surveillance Staff to exercise 
independent judgment with respect to the proper timestamp for the 
consummation of trades on the floor of the Exchange.'' See Amendment 
No. 1, supra note 6, at 14, n.17. According to the Exchange, ``[t]he 
surveillance Staff is trained to observe objectively the conduct of 
floor participants, to detect conduct that improperly advantages 
floor participants, and to enforce Exchange rules.'' Id. Finally, 
the Exchange notes that it believes that ``[t]he absence of engaged 
and empowered surveillance Staff would undermine the integrity of 
the trading floor on the Exchange.'' Id.
    \38\ See Notice, supra note 3, at 56728. See also Amendment No. 
1, supra note 6, at 23.
    \39\ See Notice, supra note 3, at 56727. See also Amendment No. 
1, supra note 6, at 22. The Options Order Protection and Locked/
Crossed Market Plan is available at http://www.optionsclearing.com/components/docs/clearing/services/options_order_protection_plan.pdf.
    \40\ See Notice, supra note 3, at 56727. See also Amendment No. 
1, supra note 6, at 22.
    \41\ The Commission notes that Phlx surveillance staff might 
substitute the timestamp it captures for the timestamp captured by a 
Floor Broker if necessary to prevent conduct that would improperly 
advantage floor participants or to enforce compliance with the 
Exchange's rules. It is the Commission's understanding that such a 
substitution would happen only rarely and only if consistent with 
the authority conferred upon surveillance staff by the Exchange's 
rules. See Amendment No. 1., supra note 6, at 14, n.17.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act and the rules and regulations thereunder applicable 
to national securities exchanges.

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 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 No. SR-Phlx-2016-82 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 No. SR-Phlx-2016-82. 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 such filing will also 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 No. SR-Phlx-2016-82 and should be 
submitted on or before February 14, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the amended proposal in the 
Federal Register. As described above, in Amendment No. 1, Phlx updated 
its proposal to reflect the implementation of FBMS 3 and the retirement 
of FBMS 2; clarified how prices may be rounded for non-customer split-
price orders; and provided three examples that explain how split-price 
orders will be handled by the Exchange under the proposed 
exception.\42\ The Commission believes that Amendment No. 1 provided 
additional specificity regarding the operation of the new proposed 
exception in Phlx Rule 1000(f)(iii)(D). Accordingly, the Commission 
finds good cause, pursuant to Section 19(b)(2) of the Act,\43\ to 
approve the proposed rule change, as

[[Page 8244]]

modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \42\ See Amendment No. 1, supra note 6, at 3-4.
    \43\ 15 U.S.C. 78s(b)(2)
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-Phlx-2016-82), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
---------------------------------------------------------------------------

    \44\ See id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
---------------------------------------------------------------------------

    \45\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01460 Filed 1-23-17; 8:45 am]
 BILLING CODE 8011-01-P


