
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8445-8450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01613]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79835; File No. SR-Phlx-2016-119]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Granting 
Accelerated Approval of a 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

January 18, 2017.

I. Introduction

    On December 6, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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 amend the eligibility requirements for its 
Price Improvement XL mechanism (``PIXL'' or ``Auction'') and make 
permanent those aspects of PIXL that are currently operating on a pilot 
basis. 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 proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
December 22, 2016.\3\ The Commission received no comments regarding the 
proposal. This order approves the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79584 (December 16, 
2016), 81 FR 93979 (``Notice'').
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II. Description of the Proposal

    The Exchange adopted PIXL in October 2010 as a price-improvement 
mechanism on the Exchange.\4\ 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

[[Page 8446]]

electronically submit for execution a simple or complex 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 PIXL.
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    \4\ See Securities Exchange Act Release No. 63027 (October 1, 
2010), 75 FR 62160 (October 7, 2010) (SR-Phlx-2010-108) (``PIXL 
Approval Order'').
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    Certain aspects of PIXL are currently operating on a pilot basis 
(``Pilot''),\5\ which is set to expire on January 18, 2017.\6\ In this 
proposal, the Exchange proposes to make the Pilot permanent. 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.
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    \5\ 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.
    \6\ See Securities Exchange Act Release No. 78301 (July 12, 
2016), 81 FR 46731 (July 18, 2016) (SR-PHLX-2016-75).
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A. PIXL Auction Eligibility

    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 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.\7\
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    \7\ See Phlx Rule 1080(n)(i)(A).
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    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.\8\
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    \8\ See Phlx Rule 1080(n)(i)(B).
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    PHLX proposes to amend PIXL 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 
would 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 would 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 would retain the current requirements for Auction 
eligibility in all other instances. Accordingly, 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. 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.\9\
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    \9\ 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 
further proposes to 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 would 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). The Exchange states that these 
requirements are unchanged from the Exchange's current practice.
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    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.\10\ 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.\11\ Phlx 
believes that the proposed requirements will therefore increase the 
price improvement that orders of under 50 option contracts may receive 
in PIXL.\12\ The Exchange also notes that the initial PIXL requirements 
for Auction eligibility had 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 PIXL Orders for a size of less than 50 option contracts.\13\
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    \10\ See Notice, supra note 3, at 93981.
    \11\ See id.
    \12\ See id.
    \13\ See PIXL Approval Order, supra note 4 at 62161.
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B. Pilot Program

    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) no minimum size requirement of 
orders entered into PIXL; (iii) the early conclusion of a PIXL Auction; 
and (iv) 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

[[Page 8447]]

of the Auction. The pilot has been extended until January 18, 2017.\14\
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    \14\ See supra note 6.
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    During the Pilot period, the Exchange submitted 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.\15\ The Exchange has requested that the Commission approve 
the Pilot on a permanent basis.
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    \15\ See Phlx Rule 1080(n)(vii).
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1. Complex Orders
    Rule 1080(n) sets forth 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.\16\ 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.\17\
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    \16\ See Phlx Rule 1080(n)(i)(C).
    \17\ See id.
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    The Exchange does not propose to modify the Auction eligibility 
requirements for Complex Orders to require increased price improvement. 
The Exchange states that 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.\18\
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    \18\ See Notice, supra note 3, at 93982.
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    The Exchange proposes, 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.\19\ The Exchange states that the initial proposed 
Auction eligibility requirements for simple PIXL Orders of less than 50 
contracts were more stringent than the Auction eligibility requirements 
for simple PIXL Orders of 50 contracts or more.\20\ In approving 
different Auction eligibility requirements for simple PIXL Orders of 
less than 50 contracts, the Commission 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.\21\ The Exchanges subsequently proposed implementing size-based 
Auction eligibility requirements for Complex Orders in PIXL on a pilot 
basis.\22\ The Commission 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.\23\
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    \19\ 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) (``Complex PIXL Approval 
Order'').
    \20\ See PIXL Approval Order, supra note 4 at 62161.
    \21\ See PIXL Approval Order, supra note 4 at 62161-62.
    \22\ See Complex PIXL Approval Order, supra note 19.
    \23\ 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.\24\ First, Phlx notes that the 
Auction eligibility requirements for simple PIXL Orders are currently 
operating on a permanent basis.\25\ 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. The Exchange believes that 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.\26\ 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.\27\
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    \24\ See Notice, supra note 3, at 93982.
    \25\ See PIXL Approval Order, supra note 4.
    \26\ See Notice, supra note 3, at 93982.
    \27\ See id.
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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.\28\ 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.\29\ Phlx asserts that 
it 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.\30\ Phlx believes that the market for Complex Orders, including 
small customer orders, both within and outside of PIXL is similarly 
robust, and therefore has requested that the Commission approve this 
aspect of the Pilot on a permanent basis.\31\
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    \28\ See id.
    \29\ See id.
    \30\ See Notice, supra note 3, at 93983.
    \31\ See id.
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2. 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.\32\ The Exchange believes that the data gathered since the 
approval of the Pilot, which it discussed in the Notice, establishes 
that there is liquidity and competition both within PIXL and outside of 
PIXL, and

[[Page 8448]]

that there are opportunities for significant price improvement within 
PIXL.\33\
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    \32\ 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.
    \33\ See Notice, supra note 3, at 93983. See also Exhibit 3 to 
SR-Phlx-2016-119.
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    The Exchange also has 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.\34\
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    \34\ See Notice, supra note 3, at 93983.
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    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.\35\
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    \35\ See id.
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    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. 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.\36\
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    \36\ See id.
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    The Exchange 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.\37\ 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.\38\ The Exchange therefore has requested that the Commission 
approve the no minimum size requirement on a permanent basis for both 
simple and Complex PIXL Orders.
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    \37\ See id.
    \38\ See id.
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3. Early Conclusion of the PIXL Auction
    Rule 1080(n)(ii)(B) provides that the PIXL Auction shall conclude 
at the earlier of (i) the end of the Auction period; (ii) 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; (iii) for a Complex Order PIXL Auction, any time the cPBBO 
\39\ 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 (iv) 
any time there is a trading halt on the Exchange in the affected 
series.\40\ The last three conditions are operating as part of the 
current Pilot.
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    \39\ 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).
    \40\ 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.\41\ 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.\42\
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    \41\ See Exhibit 3 to SR-Phlx-2016-119.
    \42\ See Notice, supra note 3, at 93984.
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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%.\43\
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    \43\ See id.
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    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.\44\ 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.\45\ With respect to Complex PIXL Orders, 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.\46\ The Exchange therefore has requested that the Commission 
approve this aspect of the Pilot on a permanent basis for both simple 
and Complex PIXL Orders.
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    \44\ See id.
    \45\ See id.
    \46\ See id.
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4. 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

[[Page 8449]]

``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.'' \47\ The Exchange 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.\48\ The 
Exchange therefore has requested that the Commission approve this 
aspect of the Pilot on a permanent basis for both simple and Complex 
PIXL Orders.
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    \47\ See PIXL Approval Order, supra note 4.
    \48\ See Notice, supra note 3, at 93984.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\49\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\50\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to 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 customers, issuers, brokers and dealers.
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    \49\ 15 U.S.C. 78f(b). 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).
    \50\ 15 U.S.C. 78f(b)(5).
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    As part of its proposal, the Exchange provided summary data on 
Exhibit 3 of its filing for the period January through June 2015, which 
the Exchange and Commission both publicly posted on their respective 
Web sites. Among other things, this data is useful in assessing the 
level of price improvement in the Auction, in particular for orders for 
fewer than 50 contracts; the degree of competition for order flow in 
such Auctions; and a comparison of liquidity in the Auctions with 
liquidity on the Exchange generally.\51\ Based on the data provided by 
the Exchange, the Commission believes that the Exchange's price 
improvement auction generally delivers a meaningful opportunity for 
price improvement to orders, including orders for fewer than 50 
contracts, when the spread in the option is $0.02 or more. At the same 
time, as the Exchange has recognized, the data do not demonstrate that 
such orders have realized significant price improvement when the NBBO 
has a bid/ask differential of $0.01.\52\ Recognizing this, the Exchange 
has proposed to amend the Auction eligibility requirements to require 
price improvement of at least one minimum price improvement increment 
over the NBBO for PIXL Orders of less than 50 option contracts where 
the difference in the NBBO is $0.01.
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    \51\ See Exhibit 3 to SR-Phlx-2016-119.
    \52\ See Notice, supra note 3, at 93985.
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    The Exchange's proposal to modify the Auction eligibility 
requirements for orders of fewer than 50 contracts and seek permanent 
approval of the Pilot, as amended with the new provision, will, in the 
Commission's view, promote opportunities for price improvement for such 
orders when the NBBO is $0.01 wide, while continuing to provide 
opportunities for price improvement when spreads are wider than $0.01.
    In addition, the Commission has carefully evaluated the PIXL Pilot 
data and has determined that it would be beneficial to customers and to 
the options market as a whole to approve on a permanent basis the 
provisions concerning early conclusion of the PIXL Auction, and the 
receipt of an unrelated market or marketable limit order (against the 
Phlx BBO) on the opposite side of the market from the PIXL Order during 
the Auction. The Commission notes that there have been few instances of 
early termination of PIXL. The Commission further notes that permitting 
the PIXL Auction to continue despite receipt of unrelated orders 
outside the Auction would allow the Auction to run its full course and 
provide a full opportunity for price improvement to the PIXL Order 
while allowing the unrelated order to seek an execution, including in 
the Auction's order allocation.
    The Commission believes that, particularly for Auctions for fewer 
than 50 contracts when the bid/ask differential is wider than $0.01, 
the data provided by the Exchange support its proposal to make the 
Pilot permanent. The data demonstrate that the Auction generally 
provides price improvement opportunities to simple and complex orders, 
including orders of retail customers and particularly when the bid/ask 
differential is wider than $0.01, that there is meaningful competition 
for orders on the Exchange; and that there exists an active and liquid 
market functioning on the Exchange outside of the Auction.\53\ The 
Commission further believes that the proposed revisions to the 
eligibility requirements for simple PIXL Orders of fewer than 50 
contracts with respect to circumstances when the NBBO is $0.01 wide 
should help to enhance the operation of the Auction by providing 
meaningful opportunities for price improvement in such circumstances, 
and should benefit investors and others in a manner that is consistent 
with the Act. Thus, the Commission has determined to approve the 
Exchange's proposed revisions to Rule 1080(n) and to approve the Pilot, 
as proposed to be modified, on a permanent basis.
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    \53\ See Exhibit 3 to SR-Phlx-2016-119.
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IV. 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 30th day after 
publication of the notice thereof in the Federal Register. In 
particular, accelerated approval of the proposal would allow the 
applicable rules, as amended, to remain in effect following the 
expiration of the Pilot on January 18, 2017, which would avoid any 
potential investor confusion that could result from a suspension or 
temporary interruption in the Pilot. The Commission further notes that 
the original proposal, as modified by Amendment No. 1, was subject to a 
21 day comment period and no comments were received on the proposal. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\54\ to approve the proposed rule change prior to 
the 30th day after the date of publication of the notice of filing 
thereof in the Federal Register.
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    \54\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\55\ that the proposed rule change (SR-Phlx-2016-119), as modified 
by Amendment No. 1, be and hereby is approved on an accelerated basis.
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    \55\ 15 U.S.C. 78s(b)(2).


[[Page 8450]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\
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    \56\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01613 Filed 1-24-17; 8:45 am]
 BILLING CODE 8011-01-P


