[Federal Register Volume 83, Number 94 (Tuesday, May 15, 2018)]
[Notices]
[Pages 22543-22546]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10255]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83195; File No. SR-Phlx-2018-35]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to the 
Zero-Bid Option Series

May 9, 2018.
    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 April 27, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to relocate the rule text relating to zero-
bid option series currently located at Rule 1080(i) to new Rule 1035 
and amend the current rule text to describe the current operation of a 
zero bid series.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to relocate the zero-bid options series rule 
text currently located in Rule 1080(i) to Rule 1035, which is currently 
reserved. The Exchange desires to rename Rule 1035 as ``Zero-Bid Option 
Series.'' The Exchange believes it will make it easier to locate this 
rule text in a separate rule. The Exchange also proposes to amend the 
current rule text which does not accurately describe the operation of 
the System.
    Current Rule 1080(i) states that the System \3\ will convert market 
orders to sell a particular option series to limit orders to sell with 
a limit price of the minimum trading increment applicable to such 
series that are received when, for options listed only on the Exchange, 
(1) the Exchange's disseminated bid price in such option series is 
zero; \4\ and (2) the Exchange's disseminated quotation in the series 
has a bid/ask differential less than or equal to $0.25. For options 
that are listed on multiple exchanges: (1) The disseminated NBBO 
includes a bid price of zero in the series; and (2) the Exchange's 
disseminated quotation in the series has a bid/ask differential less 
than or equal to $0.25. Such orders will be automatically placed on the 
limit order book in price-time priority.
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    \3\ The current rule refers to the ``AUTOM System''. The term 
``AUTOM'' is outdated and is being removed from the rule.
    \4\ A zero bid refers to an option where the bid price is $0.00.
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Background
    The Exchange adopted Rule 1080(i) in 2005 to permit Phlx's former 
order entry system, AUTOM, to automatically

[[Page 22544]]

convert market orders to sell when the bid price is zero to limit 
orders to sell with a limit price of $.05.\5\ The Adopting Filing also 
noted that market orders to sell, as well as limit orders to sell, 
would be placed on the limit order book in price-time priority in an 
effort to reduce the manual handling of such orders and automate the 
processing of market orders to sell when the Exchange's bid price is 
zero.\6\ The Adopting Filing noted that the provision established the 
time priority of market orders to sell when the bid price in the 
particular series is zero (and thus no execution could occur). The 
Adopting Filing provided that in the event that the bid price in the 
particular series becomes $.05 or greater, thus establishing a bid 
price that makes the booked limit orders to sell marketable, such 
orders to sell at the $.05 limit price or better would be executed in 
the order in which they were received (i.e., price-time priority).
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    \5\ See Securities Exchange Act Release No. 51352 (March 9, 
2005), 70 FR 12935 (March 16, 2005) (SR-Phlx-2005-03) (``Adopting 
Filing'').
    \6\ Former Phlx Rule 1080(c)(iv)(G) provided that sell orders 
received in a particular series in which the disseminated bid price 
is zero were handled manually by the specialist. The Adopting Filing 
was intended to eliminate the manual handling of orders by 
automating this process.
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    Thereafter, in 2006, Phlx amended Rule 1080(i) to limit the 
circumstances in which the Exchange's trading system, as it existed in 
2006, would convert a market order to sell into a limit order to sell a 
zero-bid option at $ 0.05.\7\ Since the Adopting Filing, the Exchange 
concluded that not all options with a zero bid are the same. With the 
adoption of zero bid, the Exchange treated options that have an offer 
price of a few dollars on the Exchange, as well as options that are not 
``zero-bid'' on other exchanges, as zero-bid options. The Subsequent 
Filing outlined additional factors that the Exchange would consider 
when determining whether an option is a zero-bid option for purposes of 
Rule 1080(i), including the Exchange's bid/ask differential and the 
NBBO. The Exchange noted in the Subsequent Filing that the new criteria 
would clarify when an option is truly a zero-bid option for which 
orders in that option should be subject to automated handling versus 
orders for non-zero-bid options that would require manual handling. The 
Exchange also noted in the Subsequent Filing that taking the bid/ask 
differential into consideration would help limit the conversion of 
market orders to sell to only those for true zero-bid options, because 
options with an offer higher than $0.25 are likely not to be worthless 
options. Similarly, for options traded on more than one exchange, the 
NBBO is relevant for validating whether an option truly is a zero-bid 
option.
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    \7\ See Securities Exchange Act Release No. 53822 (May 17, 
2006), 71 FR 29701 (May 23, 2006) (SR-Phlx-2006-32) (``Subsequent 
Filing'').
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    The Exchange notes that the System checked the bid/ask differential 
less than or equal to $0.25 as mentioned in 1080(i)(A)(2) and 
1080(i)(B)(2) \8\ until such time as the Exchange eliminated Market 
Exhaust \9\ in connection with other enhancements to the Phlx XL 
automated trading system, which was adopted in 2008. The Exchange 
discontinued Market Exhaust in 2011.\10\ Once Market Exhaust was 
discontinued on the Exchange, Phlx noted that orders received, when 
there are no participant quotations in the Exchange's disseminated 
market for the affected series, would be handled in accordance with 
existing Exchange rules regarding electronic order entry, execution, 
routing, trade reporting, and firm quotations, which included Rule 
1080(i) regarding zero bid. At that time, Phlx also amended Rule 
1082(a)(ii)(B)(4) by adopting Rule 1082(a)(ii)(B)(4)(a), which provided 
that, if there are no offers both on the Exchange and on away markets 
in the affected series, market orders to buy in the affected series 
would be cancelled immediately, and an electronic report of such 
cancellation will be transmitted to the sender. The Exchange would 
cancel such a market order because in this rare circumstance there 
would be no disseminated market on the Exchange and no disseminated 
market on any away market against which such market order could be 
routed and executed, and there would be no price at which the Exchange 
could place such a market order on the Exchange's limit order book.\11\ 
Pursuant to the 2012 rule change which eliminated Market Exhaust 
functionality, Rule 1082(a)(ii)(B)(4)(c) addressed the System's 
functionality in the circumstance where there are no bids or a zero 
priced bid on the Exchange and there are no bids on away markets in the 
affected series. In such a circumstance, the Exchange would disseminate 
a bid price of zero, and market orders to sell will be handled pursuant 
to Exchange Rule 1080(i).
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    \8\ The Exchange notes that it provided notice to members of the 
manner in which the functionality operated. See Options Trader Alert 
2015-38.
    \9\ PHLX XL, the Exchange's INET proprietary trading system 
which was established in 2008, initiated Market Exhaust when there 
were no PHLX XL participant quotations in the Exchange's 
disseminated market for a particular series and an initiating order 
in the series is received. The system initiated a ``Market Exhaust 
Auction'' for the initiating order, and then went through a series 
of steps depending on the market conditions present for the affected 
series, including a broadcast to participants, execution of all or 
part of the initiating order, routing the initiating order (or 
remaining contracts following execution) to better priced away 
markets, and a ``Provisional Auction,'' after which any unexecuted 
contracts from the initiating order was subject to, and not 
executable outside of, an Auction Quote Range. See Securities 
Exchange Act Release No. 66087 (January 3, 2012), 77 FR 1095 
(January 9, 2012) (SR-Phlx-2011-182).
    \10\ The Exchange determined that Market Exhaust only affected a 
small number of orders, given the specific set of circumstances that 
must occur in order for Market Exhaust to be initiated. See 
Securities Exchange Act Release No. 66087 (January 3, 2012), 77 FR 
1095 (January 9, 2012) (SR-Phlx-2011-182).
    \11\ See Securities Exchange Act Release No. 66087 (January 3, 
2012), 77 FR 1095 (January 9, 2012) (SR-Phlx-2011-182).
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    At this time, the Exchange proposes to remove the bid/ask 
differential and NBBO checks mentioned in 1080(i)(A)(2) and 
1080(i)(B)(2) and instead, where the bid price for any options series 
is $0.00, convert market orders to sell to limit orders regardless of 
the bid/ask differential and NBBO. The Exchange no longer manually 
handles orders. The Exchange's System automatically handles all zero-
bid options. The Exchange believes that all zero bid options should be 
uniformly treated in the same manner and have an equal opportunity to 
execute on Phlx. While options with an offer which is lower than $0.25 
continue to be likely to be worthless options, the Exchange does not 
believe those zero-bid options entered by market participants should be 
treated in a disparate matter as compared to those zero bid options 
with an offer higher than $0.25. Further, where the disseminated NBBO 
includes a bid price of zero the Exchange proposes to similarly convert 
these market orders to limit orders as proposed. The Exchange intends 
to accept and convert market orders to sell allowing them an equal 
opportunity to trade if interest should arrive in the case of a no bid 
option. The Exchange notes that the orders would rest on the Order Book 
at the minimum price increment. The Exchange proposes to amend the rule 
to state, similar to Nasdaq ISE LLC's (``ISE'') Rule 713, ``In the case 
where the bid price for any options series is $0.00, a market order 
accepted into the System to sell that series shall be considered a 
limit order to sell at a price equal to the minimum trading increment 
as defined in Rule 1034.'' Phlx is specifically utilizing the words 
``accepted into the System'' to account for market orders that may not 
be accepted into the System due to Limit Up-Limit Down restrictions 
which may prevent the market order from being accepted. The Limit Up-
Limit Down requirements must be met first before

[[Page 22545]]

the proposed rule would apply. Only after acceptance into the System 
will market orders be treated as a sell limit order at a price equal to 
the minimum trading increment. Further, the Exchange proposes to 
continue to provide that orders will be automatically placed on the 
limit order book in price-time priority, but proposes to restate this 
sentence for clarity, to make clear that ``Orders will be placed on the 
limit order book in the order in which they were received by the 
System.'' \12\ The Exchange proposes to note that with respect to 
market orders to sell in zero bid options which are submitted prior to 
the Opening Process and persist after the Opening Process, those orders 
are posted at a price equal to the minimum trading increment as defined 
in Rule 1034.\13\ The Exchange notes that it has posted market orders 
to sell in zero bid options which are submitted prior to the Opening 
Process and persist after the Opening Process in this fashion since the 
Exchange introduced the Opening Process. This detail was not included 
in the rule. The Exchange proposes to add this detail to provide market 
participants with greater insight into the handling of orders where 
there is a zero bid. The Exchange believes that this proposed amendment 
will accurately describe the manner in which a zero-bid options series 
operates within the System both before and after the Opening 
Process.\14\
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    \12\ The time of receipt for an order is the time such message 
is processed by the System.
    \13\ Phlx Rule 1034, entitled ``Minimum Increments'' provides 
for the minimum increments of trading.
    \14\ The Exchange's Opening Process is described in Rule 1017.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\16\ in particular, in that it is designed to 
promote just and equitable principles of trade and to protect investors 
and the public interest by amending the text of zero-bid options series 
to accurately describe the manner in which the System handles these 
types of orders.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that eliminating the System check for bid/ask 
differentials less than or equal to $0.25 and NBBO as mentioned in 
1080(i)(A)(2) and 1080(i)(B)(2), is consistent with the Act because the 
Exchange is treating all market orders to sell in zero bid options, 
regardless of the bid/ask differential, in the same fashion by 
converting all those orders, provided that the Exchange's disseminated 
bid price in such option is zero for an option listed only on the 
Exchange or, for an option listed on multiple exchanges and the 
disseminated NBBO includes a bid price of zero in the series. The 
Exchange no longer handles orders manually. All orders are 
automatically handled by the Exchange's System. The proposed Phlx rule 
text proposes to continue to provide that such orders will be 
automatically placed on the limit order book in price-time priority but 
restates this language to make clear that the market orders to sell in 
zero bid options will be placed on the limit order book in the order in 
which they were received by the System. While the Exchange notes that 
offers higher than $0.25 are likely not to be worthless options, 
nonetheless the Exchange would permit the order to rest on the Order 
Book at the minimum price increment and permit that market order to 
have the same opportunities for execution as offers lower than $0.25. 
The Exchange desires to prevent members from submitting market orders 
to sell in no bid series, which would execute at a price of $0.00. The 
Exchange believes that the proposed rule will achieve this objective 
and continue to permit the Exchange to execute orders within its System 
at prices which reflect some value. The Exchange believes that its 
proposal is consistent with the Act because it is in the interest of 
market participants to have these order executed regardless of the bid/
ask differential or NBBO, provided that the Exchange's disseminated bid 
price in such option is zero for any option, regardless of where the 
option is listed.
    The Exchange's proposal to add rule text regarding market orders to 
sell in zero bid options submitted prior to the Opening Process and 
persisting after the Opening Process is consistent with the Act because 
it provides more transparency as to the operation of this rule and as 
to how those market orders to sell in zero bid options will be handled 
by the System. Further, the Exchange believes that memorializing its 
current practice within the rule text will bring more clarity to the 
manner in which the zero bid rule operates to the benefits of all 
market participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that the 
proposed amendments do not impose an undue burden on competition 
because the proposed rule change will continue to apply uniformly for 
all market participants who enter market orders to sell into the System 
when there is a zero-bid.
    Sell market orders in zero bid options will continue to be placed 
on the limit order book in price-time priority. The Exchange does not 
believe that no longer considering the bid/ask differential and the 
NBBO when determining when to convert sell market orders in zero bid 
options to limit orders and instead convert all sell market orders in 
zero bid options will impose an undue burden on competition because the 
Exchange will treat all sell market orders in zero bid options in a 
uniform fashion. The proposed rule will permit market orders to sell in 
zero bid options to have the same opportunities for execution as offers 
with lower than $0.25 and regardless of the NBBO. The Exchange's 
proposal to add rule text regarding market orders to sell submitted 
prior to the Opening Process and persisting after the Opening Process 
does not impose an undue burden on competition, rather this proposal 
provides more transparency as to the operation of this rule and as to 
how those market orders to sell in zero bid options will be handled by 
the System.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) Impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-
4(f)(6) thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the

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Act \19\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \20\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the proposed rule change may become operative upon filing. The 
Exchange states that waiver of the operative delay would allow the 
Exchange to update its rules to immediately reflect the correct 
operation of zero-bid series on Phlx. Therefore, the Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest. Accordingly, the 
Commission hereby waives the operative delay and designates the 
proposed rule change operative upon filing.\21\
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    \19\ 17 CFR 240.19b-4(f)(6).
    \20\ 17 CFR 240.19b-4(f)(6)(iii).
    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2018-35 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-2018-35. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2018-35, and should be submitted on 
or before June 5, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10255 Filed 5-14-18; 8:45 am]
BILLING CODE 8011-01-P


