
[Federal Register Volume 82, Number 146 (Tuesday, August 1, 2017)]
[Notices]
[Pages 35858-35864]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16210]


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SECURITIES AND EXCHANGE COMMISSION

[Release No 34-81230; File No. SR-Phlx-2017-34]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Add Functionality to the Options Floor 
Broker Management System

July 27, 2017.
    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 July 18, 2017, 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

[[Page 35859]]

III, below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add functionality to the Options Floor 
Broker Management System (``FBMS''), the electronic system through 
which Exchange Floor Brokers transmit orders to the Exchange's trading 
system (``System''). The Exchange also proposes to amend Options Floor 
Procedure Advice C-2.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Overview of FBMS. As described in Exchange Rule 1063, the Floor 
Broker Management System or FBMS is the electronic system that enables 
Floor Brokers to submit option orders represented on the Exchange 
trading floor (the ``Floor'') to the Exchange's Trading System for 
execution and reporting to the consolidated tape. FBMS also facilitates 
the creation of an electronic audit trail for such orders.
    Specifically, when a Floor Broker agrees to the terms of a trade on 
the Floor, then the Floor Broker memorializes the terms by entering the 
information into the FBMS software application using either a handheld 
tablet or a desktop computer. After the Floor Broker enters the trade 
terms into FBMS, the Floor Broker directs FBMS to transmit the 
information to the Exchange's automated Trading System.
    Upon receipt, the Trading System immediately verifies whether the 
terms of the trade comply with the Exchange's trade-through and 
priority requirements. It does so by comparing the terms of the trade 
to the market that prevailed at the time that the Trading System 
received the trade from FBMS. If the Trading System determines, at the 
time of receipt, that the trade violates either the trade-through rule 
or applicable priority requirements, then the Trading System rejects 
the trade. However, if the Trading System verifies that the trade 
complies with the applicable rules, then the Trading System will 
proceed to execute the trade and report the execution to the 
consolidated tape for dissemination to the public.
    FBMS provides numerous benefits to Floor Brokers, their Customers, 
and the Exchange. Notably, it helps to ensure fair and orderly trading 
by automating the enforcement of priority and trade-through rules for 
on-Floor trades and rendering the enforcement of such rules consistent 
for both on-Floor and off-Floor trading. FBMS also facilitates trading 
surveillance by capturing a fulsome audit trail for all options orders 
that Floor Brokers enter into it.
    Notwithstanding the benefits of FMBS, the simplicity of its design 
and the universality of its application also sometimes generate 
unintended adverse consequences for Floor Brokers, their Customers, and 
the Exchange. The circumstances in which these adverse consequences 
arise are as follows.
    Unlike routine trades, which Floor Brokers typically submit from 
FBMS to the Trading System almost instantaneously after coming to an 
agreement to their terms in open outcry on the Floor, certain Floor 
trades involve Multi-leg Orders,\3\ which require Floor Brokers to 
spend several seconds or more to fully calculate or reconcile their 
terms before the Floor Brokers are ready and able to submit them to the 
Trading System. For example, the Exchange estimates that the following 
tasks associated with reconciling the terms of Multi-leg Orders would 
require the following time periods to complete:
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    \3\ See Rule 1066(f) (defining the term ``Multi-leg Orders'').
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     The announced/negotiated price of a Multi-leg Order 
differs from that which was entered on the order but is in the 
allowable minimum price variation (``MPV'') (4 seconds);
     The announced/negotiated volume of a Multi-leg Order 
differs from that which was entered on the order (4 seconds);
     The announced/negotiated volume and price of a Multi-leg 
Order differs from that which was entered on the order, but the price 
is in the allowable MPV (7 seconds);
     The Multi-leg Order requires the use of the Complex 
Calculator to change the volume and/or price for one leg (9 seconds); 
and
     The Multi-leg Order requires the use of the Complex 
Calculator to enter all prices and volumes for: (i) 2 legs (14 
seconds); 5 legs (27 seconds); 10 legs (51 seconds); and 15 legs (69 
seconds).
    While the near-instantaneous entry of information about routine 
trades typically mitigates the risk that market conditions will shift 
between the time when Floor Brokers agree upon the terms of such trades 
on the Floor and the time when the Trading System receives the trades 
for verification and execution, the same cannot be said for trades 
involving Multi-leg Orders. A heightened risk exists that, during any 
extended delay that occurs between the time when Floor Brokers come to 
an agreement on the terms of a trade involving a Multi-leg Order and 
the time when the Broker submits the trade to the Trading System, 
market conditions will shift in a way that will render the trade 
inconsistent with Exchange's priority and trade-through rules, such 
that the Trading System will reject the trade.
    Simple orders in certain options are also susceptible to this risk 
when the markets for such options are volatile or prone to rapid 
changes--even during a short time frame between the time of agreement 
to the terms of a trade on the Floor and Trading System receipt. The 
market for options on exchange traded funds (``ETFs'') in the Penny 
Options Pilot is an example of a market that tends to shift rapidly.
    When the aforementioned scenarios occur, they harm Floor Brokers, 
their Customers, and the Exchange. In particular, a Customer 
experiences harm when a trade that a Floor Broker agrees to on its 
behalf cannot be executed on the terms agreed upon by the parties, if 
at all. This harm is unfair in that it occurs, not because the 
Customer's trade is invalid when agreed upon, but instead because the 
Floor Broker finds it humanly impossible to reconcile the trade details 
in FBMS and submit the trade to the Trading System quickly enough to 
keep pace with the market--a market that is often dominated by 
electronic trading algorithms that update quotations in nanoseconds 
rather than seconds. Meanwhile, a Floor Broker suffers financially when 
he or she is unable to execute a trade on behalf of his or her client. 
Finally, the

[[Page 35860]]

Exchange suffers when, as a result of all of the foregoing, Floor 
Brokers and their Customers forego trading on the Floor of the Exchange 
and instead resort to other venues that afford no similar disadvantages 
to those who engage in floor trades and are not held to the same 
execution standards that FBMS enforces today. Indeed, the Exchange 
observes that competing exchanges, like NYSE Amex, execute floor trades 
based upon the time when their floor brokers reach agreement on the 
trades in the trading crowd rather than the time when the trading 
system receives the trades; the Exchange further observes that at such 
competing exchanges, floor trades often execute at prices that differ 
from those that prevail when the exchanges report the trades to the 
consolidated tape.
    The Exchange notes that the problem it is attempting to solve 
through this proposal did not exist prior to the advent of FBMS, when 
Floor Brokers stamped paper tickets with the times when they reached 
agreement on their trades in the trading crowd, entered the trade terms 
onto the tickets, and submitted the tickets to an Exchange Data Entry 
Technician, who in turn forwarded the trade information to the Trading 
System for execution as of the time of the date stamp on the ticket. 
Moreover, the Exchange notes that even in the original version of FBMS, 
Floor Brokers could self-stipulate the time when they executed a trade 
and thereby avoid the risk that the market would move before they 
finished entering the terms of that trade into FBMS and submitted it to 
the System.
    Overview of Snapshot. To mitigate the unintended and unfair 
consequences of the current iteration of FBMS--while also preserving 
its benefits--the Exchange proposes to amend Rules 1000 and 1063 to 
permit the use of a new feature in FMBS called ``Snapshot.'' \4\
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    \4\ The Exchange became capable of offering Snapshot upon 
upgrading FBMS to version 3.0 in November 2016. The Exchange works 
continually to enhance Exchange systems to improve trading on the 
Exchange and in the national market system. The history of the 
different versions of FBMS is described in great detail in a 
previous filing. See Securities Exchange Release No. 78593 (August 
16, 2016) (SR-Phlx-2016-82).
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    Snapshot will in many respects serve as an electronic equivalent--
if not an enhanced version--of a paper ticket for Floor Brokers.\5\ 
Specifically, Snapshot will enable Floor Brokers who engage in certain 
types of Floor trades to: (i) Provisionally execute \6\ the trades in 
open outcry on the options Floor \7\; (ii) capture information about 
the state of the market that exists at the time when they provisionally 
execute such trades (i.e., take a ``snapshot'' of the market); (iii) 
afford Floor Brokers a limited amount of additional time to submit 
their provisionally executed trades through FBMS to the Trading System; 
and (iv) provided that Floor Brokers enter the trade information into 
FBMS and submit it to the Trading System in a timely fashion, have the 
Trading System verify \8\ their trades for compliance with trade-
through and priority rules based upon the state of the market that 
existed at the time when the trades were provisionally executed and 
Snapshots were taken (rather than at the time when the Trading System 
received the trades). Provided that the trades are indeed compliant, 
then the Trading System will report them to the consolidated tape. (If 
the trades are deemed to have been non-compliant with trade-through or 
priority rules at the time when the Snapshots were taken, then they 
will be rejected.) The time and market captured by the Snapshot will be 
utilized for all purposes, including audit trail \9\ and surveillance 
purposes.
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    \5\ As described below, Snapshot would be superior to a paper 
ticket in that it would provide for systematic enforcement of trade-
through and priority rules.
    \6\ As set forth in proposed Rule 1063(e)(v)(A)(1), provisional 
execution occurs when either: (i) The participants to a trade reach 
a verbal agreement in the trading crowd as to the terms of the trade 
or (ii) a Floor Broker crosses an order as set forth in Rule 
1064(a). Execution is defined as ``provisional'' insofar as the 
trade may be deemed invalid and then rejected when the Trading 
System subsequently verifies it.
    \7\ The use of Snapshot (for multi-leg orders and simple orders 
on options in ETFs included in the Options Penny Pilot) would be an 
exception to the general rule set forth in Rule 1000(f)(iii) that 
Floor Brokers may not execute trades in open outcry on the options 
trading Floor.
    \8\ The Snapshot will contain all information necessary for the 
Trading System to determine that a provisionally executed trade is 
consistent with all applicable priority and trade-through rules 
based on the time the trade is provisionally executed on the Floor. 
Specifically, the Snapshot will include: (1) The away market best 
bid and best offer; (2) the Exchange best bid and best offer; (3) 
Customer orders at the top of the Exchange book; and (4) the best 
bid and offer of all-or-none orders. The System needs each of these 
data elements to complete important priority and trade-through 
checks. The Snapshot must capture information regarding Customer 
orders and all-or-none orders because those impact the determination 
of priority and trade through differently than other orders on the 
Exchange Book.
    \9\ Every time a Floor Broker takes a Snapshot, a record of the 
Snapshot will be created and retained for audit trail purposes 
regardless of whether the Floor Broker acts upon the Snapshot by 
submitting it to the Trading System. This record is in addition to 
that which the Exchange presently creates upon initiation of an 
order in FBMS. Moreover, when a Floor Broker submits a trade subject 
to Snapshot to the Trading System and the trade is thereafter 
reported to the consolidated tape, an additional execution record 
will be created and retained for audit trail purposes that will 
contain all of the same details as all other trade records. For 
example, the Snapshot and the execution record created at the time 
of reporting to the consolidated tape will contain the time when a 
Snapshot was taken, the time of reporting to the consolidated tape, 
and all relevant order and execution details (including the Exchange 
best bid and offer and away best bid and offer). Lastly, the 
Snapshot record will include Exchange all-or-none order details to 
provide a fulsome capture of the Exchange best bid and offer at the 
time of the Snapshot.
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    The Exchange notes that Snapshot would not interact with the 
Exchange's electronic order book. As set forth in proposed Rule 
1063(e)(v)(C)(3), if an order exists on the book that has priority at 
the time when a Floor Broker seeks to take a Snapshot, the System will 
not prevent the Floor Broker from taking the Snapshot, but he will need 
to clear the order on the book, re-announce and provisionally re-
execute the trade, and take a new Snapshot before he submits the 
provisionally executed trade to the Trading System or else the Trading 
System will reject the provisionally executed trade and will not report 
that trade to the consolidated tape (as it would violate the priority 
rules of the Exchange).
    The following is an example of how Snapshot would operate in 
practice and how it would impact a hypothetical trade. In this example, 
a Floor Broker receives a Customer order to buy 100 SPY Jan 250 Calls 
for $1.05. He enters the trading crowd, lawfully announces the order, 
and requests bids and offers from the trading crowd. A Market Maker in 
the trading crowd offers to sell 100 contracts at $1.04 while the 
National Best Bid or Offer is $1.03 bid and $1.05 offer (no Customer 
orders on the offer). At this point, the Floor Broker can agree to the 
trade of the 100 SPY Jan 250 calls at a price of $1.04, a price which 
is $0.01 better than the limit price of the Customer order.
    Presently, and without the availability of Snapshot, if the market 
changes to $1.05 bid and $1.07 offer while the Floor Broker is updating 
his order in FBMS to reflect the provisional execution price of $1.04, 
then the Floor Broker will be unable to complete his purchase of 100 
contracts at $1.04 on behalf of the Customer and the Customer may end 
up paying the new offer of $1.07 per contract. Moreover, if another 
round of negotiation occurs in the crowd due to the inability of the 
Floor Broker to execute the previously agreed-upon trade at the time of 
agreement, then the same scenario noted above may occur again, 
resulting in either an error for the Floor Broker or the Customer 
paying a price higher than $1.07.
    With Snapshot, by contrast, the Floor Broker could click the 
Snapshot button in FBMS upon reaching an agreement

[[Page 35861]]

with a Market Maker in the crowd as to the terms of the trade, thereby 
effecting a provisional execution of the trade based upon the available 
market of a $1.03 bid and $1.05 offer. As discussed below, once the 
Floor Broker clicks the Snapshot button, he will have up to 15 seconds 
to enter into FBMS the final terms of his Customer's trade and then 
submit the trade to the Trading System. The Trading System will then 
verify that the trade complies with trade-through and priority rules 
based upon the market that existed, $1.03 bid and $1.05 offer, when the 
Snapshot was taken. Because in this example, the Trading System 
determines that the trade is valid, it will report the trade to the 
consolidated tape.
    By affording the Floor Broker the extra time that he needs to enter 
and submit this provisionally executed trade without having to bear the 
interim risk of market conditions changing, Snapshot would help ensure 
that the Floor Broker is able to execute the Customer order and do so 
at a price that meets the Customer's expectations and needs while 
continuing to adhere to trade-through and priority rules. In a larger 
sense, Snapshot would also compensate for the inherent disparity that 
exists between electronic options trading (involving the instantaneous 
interactions of trading algorithms) and floor-based options trading 
(involving the slower interactions of human beings). Lastly, it would 
help ensure that the Exchange remains competitive with other floor 
trading venues, like NYSE Amex, that already permit trading to occur in 
a manner similar to Snapshot, as well as with venues, like the proposed 
BOX Options Exchange trading floor, that are vague about whether they 
would permit such trading practices.\10\
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    \10\ See Ltr. from J. Conley, SVP and Corporate Secretary, 
Nasdaq to B. Fields, Secretary, Securities and Exchange Commission, 
dated March 27, 2017, at 3-4 (commenting on the failure of the BOX 
Options Exchange, in its proposal to establish open outcry trading, 
to explain how it would address a shift in the market that occurs 
between the time when a trade is agreed upon in open outcry and when 
it is entered into the BOX electronic order entry system for 
verification and execution).
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    Limitations on the Availability of Snapshot. Although the Exchange 
believes that Snapshot will be a welcome and beneficial addition to its 
Floor trading operations, the Exchange nevertheless recognizes the 
prudence of imposing reasonable controls upon the use of Snapshot to 
ensure that Floor Brokers do not misuse or abuse the functionality. 
These controls, which are set forth in proposed Rule 1063(v)(A), are as 
follows.
    First, a Floor Broker may not use the Snapshot feature for all of 
his options orders. Instead, a Floor Broker may trigger the Snapshot 
feature only for his or her use with a trade involving a Multi-leg 
Order (as defined in Rule 1066(f)) or a simple option order on an ETF 
that is included in the Options Penny Pilot. The reason for this 
limitation is to ensure that Floor Brokers use Snapshot only when the 
complexity of an order or the fast-moving nature of the market for 
certain options reasonably justifies the need for additional time to 
calculate or enter trade information or the ability to preserve market 
conditions that exist at the time of provisional execution. As 
discussed above, options involving Multi-leg Orders often involve time-
consuming tasks prior to trade entry that justify use of Snapshot. 
Likewise, the market for options orders on ETFs included in the Options 
Penny Pilot is known to be especially fast-moving and volatile, which 
again justifies the use of Snapshot.
    A second limitation that the Exchange proposes is that a Floor 
Broker may have only one Snapshot outstanding at any given time across 
all options classes and series. In other words, when a Floor Broker 
takes a Snapshot of a trade and while that Snapshot remains valid, the 
Floor Broker may not simultaneously take a Snapshot of another trade. 
The Exchange has built this limitation into FBMS such that FBMS will 
enforce it automatically. This limitation will directly contribute to 
preventing Floor Brokers from engaging in excessive use of and abuse of 
Snapshot.
    The Exchange notes that it proposes to amend Floor Advice C-2 to 
render it a violation for a Floor Broker to trigger the Snapshot 
feature for the purpose of obtaining favorable priority or trade-
through conditions or improperly avoiding unfavorable priority or 
trade-through conditions. Conduct that violates this Advice would 
include, for example, repeated instances in which Floor Brokers permit 
valid Snapshots to expire without submitting the trades subject to the 
Snapshots to the Trading System for verification and reporting to the 
consolidated tape. Surveillance Staff will monitor and enforce proper 
usage of the Snapshot feature on a post-trade basis.
    Limitations on the Validity of a Snapshot. In addition to the 
above, the Exchange proposes, in Rule 1063(v)(B), to limit the time 
period during which a Snapshot will remain valid such that a trade may 
execute based upon it. Specifically, the Exchange proposes to make each 
Snapshot valid for only 15 seconds, meaning that a Floor Broker may 
submit a trade from FBMS to the Trading System based upon a Snapshot at 
any time within 15 seconds after the Floor Broker clicks the Snapshot 
button and activates the feature.
    The Exchange decided to impose this limitation after it concluded 
that allowing Floor Brokers to rely upon a Snapshot for an extended 
period of time would unduly impair the validity of the consolidated 
tape. For example, the Exchange considered making a Snapshot valid for 
up to the full 90 seconds available to report trades to the 
consolidated tape. Although designating Snapshots as valid for up to 90 
seconds would have provided Floor Brokers with ample time to enter and 
submit even their most complex trades, the Exchange concluded that the 
cost to market transparency of lengthy delays in executing and 
reporting trades would outweigh this benefit. At the other end of the 
spectrum, the Exchange also considered imposing a strict time 
limitation on the validity of a Snapshot (as short as five seconds), 
but it decided against doing so after concluding that such a limitation 
would eliminate the utility of the Snapshot feature in most of the 
scenarios in which it could be useful. Ultimately, the Exchange settled 
on a 15 second limitation for the validity of a Snapshot as a 
reasonable and prudent compromise between the needs of the Floor 
Brokers for additional time to completely reconcile and record the 
terms of their trades with the needs of market participants for fast, 
accurate, and transparent reporting of trades.
    If a Snapshot expires before a Floor Broker completes his or her 
entry and submission of a trade, then FBMS will not permit the Floor 
Broker to rely upon the expired Snapshot to submit the trade to the 
Trading System. Instead, the Floor Broker has two options under the 
Exchange's proposal.
    First, assuming that the Floor Broker re-confirms the acceptability 
of the terms of the trade with all participants, then the Floor Broker 
may finish entering the trade details into FBMS without Snapshot and 
submit it to the Trading System. The Trading System will then validate 
and (assuming validity) execute the trade in the normal course using 
the market conditions that prevail at the time when the Trading System 
receives the trade.
    Alternatively, the Floor Broker may, after re-confirming the terms 
of the trade, take a new Snapshot of the market that records a new time 
of provisional execution. The Floor Broker would then have no more than 
15 seconds within which to submit the re-confirmed trade and, upon 
timely submission, the Trading System would evaluate it based

[[Page 35862]]

upon the prevailing market conditions reflected in the new Snapshot. 
Provided that the submitted trade adheres to the priority and trade-
through restrictions based upon the prevailing market condition 
reflected in the new Snapshot, then the Trading System will report the 
trade to the consolidated tape. Note that if the Floor Broker records 
multiple Snapshots respecting the same order, the Trading System would 
automatically use the most recent Snapshot for verification purposes.
    Ability to Refresh a Snapshot Before it Expires. Lastly, the 
proposal would permit a Floor Broker to replace a valid and existing 
Snapshot, prior to its expiration, with a new one by re-clicking the 
Snapshot button within 15 seconds of clicking it the first time. The 
Exchange proposes to include this functionality in Snapshot to allow a 
Floor Broker to address a scenario in which the market shifts between 
the time of provisional execution and the time when the Floor Broker 
takes a Snapshot, wherein the market captured in the Snapshot is such 
that it would not permit a trade to occur in accordance with the 
Exchange's rules. In this scenario, where the Trading System rejects or 
the Floor Broker reasonably anticipates that the Trading System will 
reject a provisional execution subject to a Snapshot, the proposal 
provides that the Floor Broker must re-announce the trade in the crowd 
before he refreshes the Snapshot.\11\
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    \11\ An example of this would occur if the System rejects or the 
Floor Broker realizes that the System will reject his or her 
Snapshot because an order exists on the Exchange's limit order book 
that has priority.
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    This functionality in Snapshot would also allow a Floor Broker to 
take a new Snapshot when he reasonably anticipates that he will be 
unable to input the final terms of the trade within the 15 second 
window. In this scenario, the proposal provides that the Floor Broker 
need only re-confirm the terms of the trade with the existing 
participants before he refreshes the Snapshot.
    By way of example, a Floor Broker enters the trading crowd with a 
Customer Multi-leg Order to Buy 100 IBM Jan 100 calls for $1.05 and 
Sell 97 Jan 105 calls for $0.85. The market for the Jan 100 calls is 
$1.00 bid and $1.15 offer while the market for the Jan 105 calls is 
$0.70 bid and $1.00 offer. The trading crowd has no interest in 
participating in this trade. This is a lawful trade and when the Floor 
Broker announces the execution, he clicks the Snapshot button. When the 
Snapshot appears, it reflects a rapid change in the market for the Jan 
100 calls to $1.10 bid and $1.15 offer. When the Floor Broker sees the 
Snapshot, he knows that it will be useless because the Trading System 
will reject the trade since his price of $1.05 is outside of the 
market. While the Snapshot remains valid, he sees the market for the 
Jan 100 calls change back to $1.00 bid and $1.15 offer. He re-announces 
the trade, receives no interest, and then clicks the Snapshot button 
again to record the change in the market and receives a new 15 second 
window in which to open the Complex Calculator, enter the terms of the 
trade into the Complex Calculator, and submit the trade to the Trading 
System for execution.
    A second example where a Floor Broker may utilize the Snapshot 
feature and find it necessary to re-click the Snapshot could occur when 
the Floor Broker enters the trading crowd with a multi-Legged Customer 
Order to buy 819 contracts of Leg 1, sell 912 contracts of Leg 2, and 
buy 1011 contacts of Leg 3--all for a net price of $2.00. In the 
trading crowd, the Floor Broker receives interest from several Market 
Makers who provide $2.00 offers with a net offer size greater than his 
order size (providing an over subscription of size). Because the Floor 
Broker has sufficient interest to execute the trade at $2.00, he clicks 
Snapshot, but he then finds himself unable, before the Snapshot 
expires, to finalize the volumes that each Market Maker will agree to 
trade (given that each Market Maker desired to trade more contracts 
than the order size). Accordingly, the Floor Broker re-confirms the 
terms of the trade and then refreshes the Snapshot.
    The Exchange does not believe that Floor Brokers have an incentive 
to abuse the Snapshot ``refresh'' functionality to take advantage of 
favorable market moves. Nevertheless, in an abundance of caution, the 
Exchange proposes to limit to three the number of Snapshots that Floor 
Brokers may take with respect to any single order, regardless of 
whether each such Snapshot persists for the full 15 seconds or for a 
shorter period.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and to protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Snapshot promotes just and equitable principles of trade and serves 
the interests of investors and the public by increasing the likelihood 
that investors will be able to execute their orders and do so in line 
with their expectations and needs. Similarly, Snapshot mitigates the 
risk that the Trading System will unfairly reject a trade due to a 
change in market conditions that occurs between the time when the 
parties negotiate a lawful and valid trade on the Floor and the time 
when the Trading System receives it.
    Snapshot also renders the Exchange Floor more competitive with off-
floor electronic trading venues because it compensates for the 
inefficiencies and delays inherent in a floor trading system that 
depends upon the inputs and interactions of human beings; such 
inefficiencies and delays do not exist in fully-electronic trading 
environments, where computers and algorithms interact on a near 
instantaneous basis. Additionally, Snapshot will render the Floor more 
competitive with other floor-based trading venues at which the Exchange 
observes trade executions occurring seconds or even minutes after 
verifications occur, but on trading terms that existed as of the time 
of verification.
    The Exchange believes that it is consistent with the Act to 
specifically exempt multi-leg orders and simple orders in options on 
Options Penny Pilot ETFs from the general rule set forth Rule 
1000(f)(iii) that Floor Brokers may not execute orders in the options 
trading crowd. As noted previously, the complex calculations that are 
often involved in multi-leg orders and the fast-moving nature of the 
markets for options on Penny Pilot ETFs render these two categories of 
options particularly appropriate for exceptional treatment using 
Snapshot. Enabling Floor Brokers to provisionally execute these two 
categories of options on the Options Floor (using Snapshot), rather 
than execute them in the Trading System, will not adversely impact 
investors or the quality of the market due to the controls that the 
Exchange proposes on the circumstances in which Floor Brokers may use 
Snapshot and on the manner in which they may use it. In fact, the 
proposal will protect investors and the public interest by improving 
Floor Brokers' ability to execute multi-leg orders and simple options 
on Penny Options Pilot ETFs while continuing to ensure that all 
priority and trade through rules are systematically enforced.

[[Page 35863]]

    Moreover, this proposal is consistent with Rule 611 of Regulation 
NMS,\14\ which requires the Exchange to establish policies and 
procedures that are reasonably designed to prevent trade-throughs of 
protected quotations. Presently, the Exchange verifies that a proposed 
trade complies with the trade-through rule as of the time when the 
Trading System receives the trade from FBMS; if the trade complies, 
then the Trading System executes the trade and reports it to the 
consolidated tape. However, the proposal would serve as an exception to 
this practice. It would permit Floor Brokers, upon reaching a meeting 
of the minds in the trading crowd regarding the terms of a trade, to 
take a Snapshot that provisionally executes the trade on the Floor. 
When the Floor Broker submits the trade to the Trading System using 
Snapshot, the Trading System will verify that the provisionally 
executed trade complied with the trade-through rule as of the time of 
its execution--i.e., the time when the crowd agreed to the terms of the 
trade and Snapshot was taken--rather than at the time when the Trading 
System receives the trade. If the Trading System determines that the 
provisionally executed trade complied with the trade-through rule, then 
it will report the trade to the consolidated tape. If, however, the 
Trading System determines that the provisionally executed trade was 
non-compliant with the trade-through rule as of the time when the 
Snapshot was taken, then it will reject the trade. In other words, even 
though the proposal will change the time of execution of a trade for 
purposes of verifying compliance with the trade-through rule, the 
automated compliance verification process will otherwise be unchanged 
and will still apply to systematically prevent trade-throughs for all 
trades, including those utilizing Snapshot.\15\
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    \14\ 12 CFR 242.611.
    \15\ The Exchange notes that the SEC has published analogous 
guidance indicating that a broker-dealer that individually 
negotiates the terms of a block trade among multiple parties would 
have policies and procedures reasonably designed to prevent a trade-
through even where the individually negotiated price is not at or 
within the best protected quotations at the time when the 
transaction terms are entered into the broker-dealer's automated 
system if the broker-dealer takes steps to verify that the 
transaction price of the trade was at or within the best protected 
quotations at some point during a 20 second period up to and 
including the time when the transaction terms are entered into the 
broker-dealer's order entry system. See SEC, Responses to Frequently 
Asked Questions Concerning Rule 611 and Rule 610 or Regulation NMS, 
Question 3.23: Agency Block Transactions with Non-Trade-Through 
Prices that are Individually Negotiated, at https://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
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    Finally, the Exchange's proposal accomplishes the above in a manner 
that: (1) Continues to provide automated and verifiable enforcement of 
applicable trade-through and priority rules; (2) is documented in 
writing and transparent, in contrast to the practices of other 
exchanges; (3) provides for trade reporting to occur in a timely 
fashion, even for the most complex trades, and within a 15 second time 
frame that is far less than the maximum 90 second reporting period 
allowable; and (4) imposes surveillance and responsible limitations 
upon Snapshot that ensure appropriate usage and prevents violations and 
abuse.

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.
    In fact, the proposal is pro-competitive for several reasons. The 
Exchange believes that the Snapshot feature will result in the 
Exchange's Floor operating more efficiently, which will help it compete 
with other floor-based exchanges.
    Moreover, the proposal helps the Exchange compete by ensuring the 
robustness of its regulatory program, ensuring Floor Brokers' 
compliance with that program, and by enhancing Customer protections 
through further utilization of electronic tools by members. The 
Exchange considers all of these things to be differentiators in 
attracting participants and order flow.
    Lastly, the proposal does not impose a burden on intra-market 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. Although the benefits of Snapshot will apply initially only 
to Floor Brokers, the Exchange plans to extend its availability to 
Registered Options Traders and Specialists once it receives authority 
to allow them to utilize FBMS.

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 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-2017-34 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-2017-34. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2017-34 and should be 
submitted on or before August 22, 2017.


[[Page 35864]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16210 Filed 7-31-17; 8:45 am]
 BILLING CODE 8011-01-P


