[Federal Register Volume 88, Number 113 (Tuesday, June 13, 2023)]
[Notices]
[Pages 38562-38572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-12573]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97658; File No. SR-Phlx-2023-22]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Various 
Options 8 Rules

June 7, 2023.
    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 May 31, 2023, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. 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 amend certain rule text within Options 8 
related to Phlx's trading floor. Specifically, the Exchange proposes to 
amend Options 8, Section 26, Trading Halts, Business Continuity and 
Disaster Recovery; Options 8, Section 28, Responsibilities of Floor 
Brokers; Options 8, Section 29, Use of Floor Based Management System by 
Floor

[[Page 38563]]

Market Makers and Lead Market Makers; Options 8, Section 30, Crossing, 
Facilitation and Solicited Orders; Options 8, Section 32, Types of 
Floor-Based (non-System) Orders; Options 8, Section 33, Accommodation 
Transactions; Options 8, Section 34, FLEX Index, Equity, and Currency 
Options; and Options 8, Section 39, Option Minor Rule Violations and 
Order and Decorum Regulations.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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 amend various rules within Options 8 
related to Phlx's trading floor. Specifically, the Exchange proposes to 
amend Options 8, Section 26, Trading Halts, Business Continuity and 
Disaster Recovery; Options 8, Section 28, Responsibilities of Floor 
Brokers; Options 8, Section 29, Use of Floor Based Management System by 
Floor Market Makers and Lead Market Makers; Options 8, Section 30, 
Crossing, Facilitation and Solicited Orders; Options 8, Section 32, 
Types of Floor-Based (non-System) Orders; Options 8, Section 33, 
Accommodation Transactions; Options 8, Section 34, FLEX Index, Equity, 
and Currency Options; and Options. Each change will be discussed below.
Automation of FLEX and Cabinet Orders
    Today, Phlx permits members and member organizations to transact 
FLEX Options \3\ and Cabinet Orders \4\ on its trading floor.
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    \3\ The term ``FLEX option'' means a FLEX option contract that 
is traded subject to Options 8, Section 34(a). The Exchange proposes 
to replace the term ``FLEX option'' with ``FLEX Option'' in the rule 
text.
    \4\ A ``cabinet order'' is a closing limit order at a price of 
$1 per option contract for the account of a Public Customer, firm, 
Lead Market Maker or ROT. An opening order is not a ``Cabinet 
Order'' but may in certain cases be matched with a Cabinet Order 
pursuant to subsection (a)(iii) of Options 8, Section 33. Only Floor 
Brokers may represent Cabinet Orders. See Options 8, Section 33(a).
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FLEX Options
    FLEX Options provide investors with the ability to customize basic 
option features including expiration date, exercise style, and certain 
exercise prices. Phlx FLEX Options may be FLEX index, equity, or 
currency options. Today, Phlx FLEX Options transactions are exposed in 
open outcry on the trading floor similar to other options that trade on 
Phlx's trading floor. Today, the Requesting Member \5\ initiates a 
Request-for-Quote (``RFQ'') by submitting a ticket to Market Operations 
staff prior to requesting a quote in open outcry by announcing certain 
contract terms to the trading crowd of the non-FLEX option.\6\ Members 
may enter, modify, or withdraw FLEX Quotes at any point during the 
Request Response Time,\7\ which is currently set to two minutes, at the 
Market Operations post. At the expiration of the Request Response Time, 
the open outcry BBO is identified in accordance with the price and time 
priority principles set forth by the Exchange. Thereafter, on receipt 
of an RFQ in proper form, the assigned Lead Market Maker or the 
Requesting Member shall cause the terms of the RFQ to be disseminated 
as an administrative message through the Options Price Reporting 
Authority (``OPRA'').\8\
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    \5\ A Requesting Member is a member of the Exchange qualified to 
trade FLEX Options pursuant to Options 3, Section 34(d) who 
initiates an RFQ for a FLEX option. See Options 3, Section 
34(b)(10).
    \6\ The contract terms include: (1) underlying index, security 
or foreign currency; (2) type, size, and crossing intention; (3) in 
the case of FLEX index options and FLEX equity options, exercise 
style and settlement type; (4) expiration date; (5) exercise price; 
and (6) respecting index options, the settlement value. See Options 
8, Section 34(c)(1).
    \7\ The Request Response Time is the minimum period of time 
established by the Exchange, during which Exchange members 
participating in FLEX Options may provide FLEX Quotes in response to 
a Request for Quotes. See Options 8, Section 34 (b)(12).
    \8\ FLEX Quotes must be entered during the Request Response Time 
within Options 8, Section 34(b)(12) of 15 seconds. All FLEX Quotes 
may be entered, modified or withdrawn at any point during the 
request response time. See Options 8, Section 34(c)(2).
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    If the Requesting Member has not indicated an intention to cross or 
act as principal with respect to any part of the FLEX trade, the member 
shall promptly accept or reject the displayed BBO; provided, however, 
that if such a Requesting Member either rejects the BBO or is given a 
BBO for less than the entire size requested, all FLEX participating 
members other than the Requesting Member will have an opportunity 
during the BBO Improvement Interval in which to match, or improve, (as 
applicable), the BBO pursuant to Options 8, Section 34(c)(3). At the 
expiration of any such BBO Improvement Interval,\9\ which is currently 
set to 15 seconds, the Requesting Member must promptly accept or reject 
the BBO(s). If the Requesting Member has indicated an intention to 
cross or act as principal with respect to any part of the FLEX trade, 
acceptance of the displayed BBO shall be automatically delayed until 
the expiration of the BBO Improvement Interval pursuant to Options 8, 
Section 34(c)(3). Prior to the BBO Improvement Interval, the Requesting 
Member must indicate at the post the price at which the member expects 
to trade. In these circumstances, the Requesting Member may participate 
with all other FLEX-participating members in attempting to improve or 
match the BBO during the BBO Improvement Interval pursuant to Options 
8, Section 34(c)(3). At expiration of the BBO Improvement Interval, the 
Requesting Member must promptly accept or reject the BBO(s) pursuant to 
Options 8, Section 34(c)(3). The Requesting Member has no obligation to 
accept any FLEX bid or offer pursuant to Options 8, Section 34(c)(3). 
Whenever, following the completion of FLEX bidding and offering 
responsive to a given RFQs, the Requesting Member rejects the BBO or 
the BBO size exceeds the FLEX transaction size indicated in the RFQs, 
members may accept the entire order or the unfilled balance of the BBO 
pursuant to Options 8, Section 34(c)(3). Once the FLEX Order is 
executed in open outcry, the FLEX trade is disseminated to OPRA by the 
Exchange pursuant to Options 8, Section 34(c)(6).
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    \9\ The BBO Improvement Interval means the minimum period of 
time, to be established by the Exchange, during which members may 
submit FLEX Quotes to meet or improve the BBO established during the 
Request Response Time. See Options 8, Section 34(b)(15).
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    In contrast, as proposed, in order to transact a FLEX Order, a 
member would enter open outcry trading and announce one of each of the 
following terms \10\

[[Page 38564]]

within subparagraph (f)(1).\11\ Additionally, all other terms of a FLEX 
Option series, which are the same as those that apply to non-FLEX 
Options, must be included except that a FLEX Index Option with an index 
multiplier of one may not be the same type (put or call) and may not 
have the same exercise style, expiration date, settlement type, and 
exercise price as a non-FLEX Index Option overlying the same index 
listed for trading (regardless of the index multiplier of the non-FLEX 
Index Option). Floor participants would have a reasonable amount of 
time (which amount of time must be between three seconds and five 
minutes) from the time a FLEX Trader requests a quote in a FLEX Option 
series or represents a FLEX Order (including announcing a crossing 
transaction pursuant to Options 8, Section 30(a)) to respond with bids 
or offers. This timeframe would be analogous to the RFQ Process which 
includes the BBO Improvement Interval. Today, an Options Exchange 
Official \12\ would intervene if they believed that an appropriate 
amount of time was not allotted for the FLEX Order to trade. The 
Options Exchange Official would enforce the requirement that the amount 
of time must be at least three seconds and no more than five minutes 
based on the complexity of the trade and the responses in the trading 
crowd when determining if the time was reasonable. For example, based 
on the number of participants who indicate an interest to participate 
in the trade and the complexity of the trade, the Options Exchange 
Official would determine if there was an appropriate amount of time and 
require more time if necessary. Unlike the current process, an RFQ 
ticket would not be submitted to the Market Operations post and the RFQ 
would not be disseminated to OPRA. By contrast, quotes are not 
disseminated with respect to other trades in open outcry today. While a 
market participant could seek to participate in the trade by calling a 
floor broker after viewing the FLEX RFQ on OPRA, this is an uncommon 
scenario.\13\ FLEX Orders, unlike standard orders, are less common and 
the Exchange does not have a similar RFQ process for standard orders 
that are analogous to those FLEX Orders. This proposed process would 
align with Cboe, Inc.'s (``Cboe'') process and not require Phlx to 
disseminate quotes to OPRA while other options floor exchanges have no 
similar obligations.\14\ The Exchange believes that the proposed 
process is analogous to the current process and provides market 
participants ample time to respond to requests for a market in a FLEX 
Order. As the foregoing process demonstrates, Phlx seeks to maintain a 
competitive trading floor through the administration of its rules which 
contain processes to ensure that options transactions are exposed in 
such a way as to permit other floor members an opportunity to 
participate in price discovery by requiring floor members to seek 
liquidity in open outcry.
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    \10\ See proposed Options 8, Section 34(f)(1) which states, 
``Characteristics of Underlying Interest: (A) any index upon which 
options currently trade on the Exchange. The applicable index 
multiplier shall be the same multiplier, in the case of U.S. dollar-
denominated FLEX index options, that applies to non-FLEX index 
options on the same underlying index; (B) any security which is 
options-eligible pursuant to Options 4, Section 3; or (C) any 
foreign currency which is options-eligible pursuant to Options 4, 
Section 3 and which underlies non-FLEX U.S. dollar-settled foreign 
currency options that are trading on the Exchange.''
    \11\ See proposed Options 8, Section 34(h).
    \12\ The term ``Option Exchange Official'' means an Exchange 
staff member or contract employee designated as such by the Chief 
Regulatory Officer. A list of individual Options Exchange Officials 
shall be displayed on the Exchange website. The Chief Regulatory 
Officer shall maintain the list of Options Exchange Officials and 
update the website each time a name is added to, or deleted from, 
the list of Options Exchange Officials. In the event no Options 
Exchange Official is available to rule on a particular matter, the 
Chief Regulatory Officer or his/her designee shall rule on such 
matter. See Options 1, Section 1(b)(38).
    \13\ See Options 3, Section 34(c)(1) and (2) which explains the 
RFQ Process to request a quotation and respond.
    \14\ Cboe does not disseminate via OPRA information respecting 
open outcry RFQs. See Securities Exchange Act Release No. 66052 
(December 23, 2011), 77 FR 306 at 308 (January 4, 2012) (SR-Cboe-
2011-123).
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    The Exchange proposes several amendments to Options 8, Section 34. 
First, the Exchange proposes to require FLEX Orders to be reported into 
Phlx's Options Floor Based Management System or ``FBMS.'' FBMS will 
create an electronic audit trail for FLEX Orders, thereby further 
automating the execution and reporting of FLEX Options. With this 
change, members and member organizations will be required to record all 
FLEX Orders represented in the trading crowd into FBMS.\15\ Orders 
entered into FBMS will be executed based on market conditions at the 
time of execution and in accordance with Exchange rules. All executed 
contracts will be reported to OPRA and sent to The Options Clearing 
Corporation (``OCC'') for clearing, similar to all other equity, equity 
index and U.S. dollar-settled foreign currency options orders executed 
on the Exchange's trading floor. Second, the Exchange proposes to 
remove its RFQ process including the BBO Improvement Interval Process, 
as explained above, with this rule change. Third, the Exchange proposes 
to reorganize Options 8, Section 34 to restructure its rule to include 
additional information which describes current FLEX trading on Phlx. 
The proposed amendments seek to reorganize Options 8, Section 34 so as 
to provide a greater amount of information concerning FLEX trading.
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    \15\ A FLEX Option series is only eligible for trading if the 
FLEX Order is represented in open outcry. See proposed Options 8, 
Section 34(h).
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    The Exchange proposes to add a new Options 8, Section 34(b) titled 
``Order Types'' to address FLEX Order types. This proposed rule text 
memorializes the Exchange's current practice as it relates to order 
types for FLEX trading. Specifically, the Exchange proposes to state 
that it may determine to make the order types and Time-in-Force, 
respectively, within Options 8, Section 32 submitted in FLEX Options 
(``FLEX Orders'') available on a class or System basis. Options 8, 
Section 32 describes the order types available on the trading floor. 
Specifically, with respect to complex orders transacted on the trading 
floor, complex FLEX Orders may have up to the maximum number of legs 
permitted pursuant to Exchange rules for standard trading. Further, 
each leg of a complex FLEX Order: (1) must be for a FLEX Option series 
authorized for FLEX trading with the same underlying equity security or 
index; (2) must have the same exercise style (American or European); 
and (3) for a FLEX Index Option, may have a different settlement type 
(a.m.-settled or p.m.-settled), except each leg must have the same 
settlement type. Today, Options 8, Section 32 provides that the 
Exchange may determine to make certain order types and time-in-force, 
respectively, available on a class or System basis. The Exchange is 
proposing to add this same rule text within new Options 8, Section 
34(b) with respect to FLEX Orders. Today, the Exchange may determine 
which orders may apply to FLEX trading. The language concerning complex 
orders is intended to memorialize the manner in which complex orders 
may trade as FLEX. The proposed rule text explains the manner in which 
these orders trade today on Phlx. This proposed change is not intended 
to amend the Exchange's current practice, which is not currently 
described within the FLEX rules.
    The Exchange proposes to relocate Options 8, Section 34(c)(8), 
concerning Trading Hours, to new Options 8, Section 34(c) without 
change. The Exchange proposes to add a new header re-titled ``Trading 
Hours''.
    The Exchange proposes to relocate Options 8, Section 34(c)(7), 
concerning Trading Rotations, to new Options 8, Section 34(d) without 
change.

[[Page 38565]]

    The Exchange proposes to adopt rule text similar to Cboe Rule 
4.21(a),\16\ which describes current permissible series for FLEX 
Options at new Options 8, Section 34(e). The proposed rule text would 
state that the Exchange may authorize for trading a FLEX Option class 
on any equity security or index it may authorize for trading a non-FLEX 
Option class on that equity security or index pursuant to Options 4, 
Section 3 and Options 4A, Section 3, respectively, even if the Exchange 
does not list that non-FLEX Option class for trading. FLEX Option 
series are not pre-established. A FLEX Option series is eligible for 
trading on the Exchange upon submission to the System of a FLEX Order 
for that series pursuant to Options 8, Section 34.
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    \16\ Unlike Cboe Rule 4.21(a), Phlx's subparagraph (e) does not 
address trading halts for FLEX Options. All options traded on Phlx 
are subject to Phlx's trading halt rule within Options 3, Section 9. 
Further, Cboe's rule does not describe intra-day halts.
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    FLEX Options would be subject to certain trading conditions, which 
exist today and are specified within current Options 8, Section 
34(b)(6)(B).\17\ The Exchange proposes to remove the rule text within 
Options 8, Section 34(b)(6)(B) related to the RFQ process, as explained 
below. As provided in current Options 8, Section 34(b)(6)(B), the 
Exchange only permits trading in a put or call FLEX Option series that 
does not have the same exercise style, same expiration date, and same 
exercise price as a non-FLEX Option series on the same underlying 
security or index that is already available for trading. As provided in 
current Options 8, Section 34(b)(6)(B), this includes permitting 
trading in a FLEX Option series before a series with identical terms is 
listed for trading as a non-FLEX Option series. As provided in current 
Options 8, Section 34(b)(6)(B), if the Exchange lists for trading a 
non-FLEX Option series with identical terms as a FLEX Option series, 
the FLEX Option series will become fungible with the non-FLEX Option 
series. As provided in current Options 8, Section 34(b)(6)(B), the 
System does not accept a FLEX Order for a put or call FLEX Option 
series if a non-FLEX Option series on the same underlying security or 
index with the same expiration date, exercise price, and exercise style 
is already listed for trading. Further, a FLEX Order for a FLEX Option 
series may be submitted on any trading day prior to the expiration 
date. The Exchange abides by these conditions today and proposes to 
enumerate them within its rules similar to Cboe. The proposed rule text 
explains the manner in which these orders trade today on Phlx. This 
proposed change is not intended to amend the Exchange's current 
practice.
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    \17\ Current Options 8, Section 34(b)(6)(B) states that provided 
the options on an underlying security or index are otherwise 
eligible for FLEX trading, FLEX Options shall be permitted in puts 
and calls that do not have the same exercise style, same expiration 
date and same exercise price as non-FLEX Options that are already 
available for trading on the same underlying security or index. FLEX 
Options shall also be permitted before the options are listed for 
trading as non-FLEX Options. Once and if the option series are 
listed for trading as non-FLEX Options, then (i) all existing open 
positions established under the FLEX trading procedures shall be 
fully fungible with transactions in the respective non-FLEX option 
series, and (ii) any further trading in the series would be as non-
FLEX Options subject to the non-FLEX trading procedures and Rules. 
However, in the event the Non-FLEX series is added intra-day, a 
position established under the FLEX trading procedures would be 
permitted to be closed using the FLEX trading procedures for the 
balance of the trading day on which the Non-FLEX series is added 
against another closing only FLEX position. For such FLEX series, 
the Exchange will make an announcement that the FLEX series is now 
restricted to closing transactions; a FLEX Request for Quotes 
(``RFQ'') may not be disseminated for any order representing a FLEX 
series having the same terms as a Non-FLEX series, unless such FLEX 
option order is a closing order (and it is the day the Non-FLEX 
series has been added); and only responses that close out an 
existing FLEX position are permitted. Any transactions in a 
restricted series that occur that do not conform to these 
requirements will be nullified by the Exchange.
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    Next, the Exchange proposes to add new rule text to proposed 
Options 8, Section 34(f) which provides that when submitting a FLEX 
Order for a FLEX Option series to FBMS, one of each of the terms within 
current Options 8, Section 34(b) must be included.\18\ Options 8, 
Section 34(b) is being relocated to Options 8, Section 34(f)(1), 
therefore subparagraph (f)(1) is being referenced in the proposed rule 
text at Options 8, Section 34(f). The Characteristics of Underlying 
Interest include: (A) any index upon which options currently trade on 
the Exchange; \19\ (B) any security which is options-eligible pursuant 
to Options 4, Section 3; or (C) any foreign currency which is options-
eligible pursuant to Options 4, Section 3 and which underlies non-FLEX 
U.S. dollar-settled foreign currency options that are trading on the 
Exchange.\20\ Further, the Exchange proposes to state within Options 8, 
Section 34(f) that all other terms of a FLEX Option series are the same 
as those that apply to non-FLEX Options, provided that a FLEX Index 
Option with an index multiplier of one may not be the same type (put or 
call) and may not have the same exercise style, expiration date, 
settlement type, and exercise price as a non-FLEX Index Option 
overlying the same index listed for trading (regardless of the index 
multiplier of the non-FLEX Index Option), which terms constitute the 
FLEX Option series. This rule text represents the Exchange's current 
practice. The Exchange states that, to the extent the Exchange lists a 
micro FLEX Index Option on an index on which it also lists a standard 
FLEX index option, it will be listed with a different trading symbol 
than the standard index option with the same underlying index to reduce 
any potential confusion.
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    \18\ Such terms are described in proposed new Options 8, Section 
34(f)(1), ``Characteristics of Underlying Interest.''
    \19\ The applicable index multiplier shall be the same 
multiplier, in the case of U.S. dollar-denominated FLEX index 
options, that applies to non-FLEX index options on the same 
underlying index.
    \20\ See current Options 8, Section 34(b).
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    As noted above, current Options 8, Section 34(b)(1) is being 
relocated to proposed Options 8, Section 34(f)(1) without substantive 
change. The Exchange proposes to amend the header to ``Characteristics 
of Underlying Interest.''
    Current Options 8, Section 34(b)(2), concerning Type, is relocated 
to proposed Options 8, Section 34(f)(2)(A) without substantive change. 
An ``A'' is being added to the sentence.
    Current Options 8, Section 34(b)(3), concerning Exercise Price, is 
relocated to proposed Options 8, Section 34(f)(3). The Exchange 
proposes to reword the current rule text which provides,

    (A) with respect to FLEX index options, may be specified in 
terms of a specific index value number, a percentage of the index 
value calculated as of the open or close of trading on the Exchange 
on the trade date, or a method for fixing such number;
    (B) with respect to FLEX equity options, may be specified in 
terms of a specific dollar amount rounded to the nearest $.10 or a 
percentage of the underlying security rounded to the nearest minimum 
increment; or
    (C) with respect to FLEX currency options, may be specified in 
terms of a specific dollar amount rounded to the nearest hundredth 
of a dollar.

    The Exchange proposes to more succinctly state that the Exchange 
may determine the smallest increment for exercise prices of FLEX 
Options not to exceed two decimal places. Today, the Exchange has the 
ability to require that FLEX index options be specified by an index 
value, number, percentage of index value calculated as of the open or 
close of trading on the Exchange on the trade date, a method for fixing 
such number, in terms of a specific dollar amount rounded to the 
nearest $.10 or a percentage of the underlying security rounded to the 
nearest minimum increment, or in terms of a specific

[[Page 38566]]

dollar amount rounded to the nearest hundredth of a dollar. At this 
time, the Exchange proposes to narrow its discretion to provide that it 
may determine the smallest increment for exercise prices of FLEX 
Options, not to exceed two decimal places. The Exchange has this 
authority today, it is electing to narrow its authority to provide the 
increment in the form of a dollar value.
    The Exchange proposes to remove the rule text within Options 8, 
Section 34(b)(4), related to the RFQ process, as explained below.
    Current Options 8, Section 34(b)(5), concerning Exercise style, is 
relocated to proposed Options 8, Section 34(f)(4) without change.
    Current Options 8, Section 34(b)(6)(A), concerning Expiration date 
style, is relocated to proposed Options 8, Section 34(f)(5) without 
change. The Exchange added rule text within proposed Options 8, Section 
34(e)(1) similar to current Options 8, Section 34(b)(6)(B). The 
Exchange proposes to remove the rule text within Options 8, Section 
34(b)(6)(B) related to the RFQ process, as explained below.
    The Exchange proposes to remove the RFQ feature, including the BBO 
Improvement Interval, from its FLEX Options which process was described 
above in detail. With the automation of FLEX Options to enable FLEX to 
be entered into FBMS, similar to all other options transactions 
executed on the Exchange's trading floor including cabinet as explained 
below, the Exchange is disabling the RFQ feature, including the BBO 
Improvement Interval. The Exchange notes that Cboe removed its RFQ 
feature for FLEX Orders.\21\ Similarly, Phlx proposes to remove its RFQ 
feature, including the BBO Improvement Interval.\22\
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    \21\ See Securities Exchange Act 87235 (October 4, 2019), 84 FR 
54671 (October 10, 2019) (SR-Cboe-2019-084) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend the 
Exchange's Rules Regarding the Trading of Flexible Exchange Options, 
and Move Those Rules From the Currently Effective Rulebook to the 
Shell Structure for the Exchange's Rulebook That Will Become 
Effective Upon the Migration of the Exchange's Trading Platform to 
the Same System Used by the Cboe Affiliated Exchanges).
    \22\ The Exchange notes that the minimum size requirements for 
an RFQ is also being removed within Options 8, Section 34(b)(8) as 
the Exchange would no longer have the RFQ process. The Exchange 
notes that one contract is the minimum size for options trading on 
Phlx and will remain the minimum size for FLEX Options trading on 
FLEX. See Options 3, Section 2.
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    The Exchange believes the current open outcry RFQ process, 
including the BBO Improvement Interval, for FLEX Orders is 
substantially similar to the current open outcry process for non-FLEX 
Orders described within Options 8, Sections 22, 23, and 24 at 
Supplementary Material .01, and therefore believes completely aligning 
the two processes is appropriate.\23\
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    \23\ A Floor Broker may also initially represent an order to the 
trading crowd, and then receives bids or offers, as appropriate, and 
trade. However, this is an uncommon scenario. See Options 8, Section 
28.
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    As noted herein, today, FLEX Quotes must be entered during the 
Request Response Time, which is currently set to two minutes. Phlx FLEX 
Options transactions are exposed in open outcry on the trading floor 
similar to other options that trade on Phlx's trading floor. 
Thereafter, during the BBO Improvement Interval, which is set to 15 
seconds, floor members may submit FLEX Quotes to meet or improve the 
BBO established during the Request Response Time. The Exchange proposes 
within Options 3, Section 34(h) to provide floor participants with a 
reasonable amount of time to respond with bids and offers, which would 
be between three seconds and five minutes from the time a FLEX Trader 
requests a quote in a FLEX Option series or represents a FLEX Order. 
This time would include announcing a crossing transaction pursuant to 
Options 3, Section 30(a). The Exchange believes that the proposed rule 
text permits FLEX Options to trade substantially similar to the current 
RFQ process, including the BBO Improvement Interval, in which a Floor 
Broker requests a market and provides Market Makers in the crowd with 
time to respond with a market. The Exchange believes that eliminating 
the RFQ process, which is not contemplated in non-FLEX Option open 
outcry trading, would have minimal (if any) impact on how a Floor 
Broker may request a market on the Exchange's trading floor with 
respect to FLEX Options. The initial process permits members the 
ability to enter, modify or withdraw FLEX Quotes at the Market 
Operations post during the Request Response Time, which is currently 
set to two minutes, after a quote was requested in open outcry. The 
proposed new process would continue to permit members the opportunity 
to enter, modify or withdraw FLEX Quotes in open outcry, without the 
need to submit FLEX Quotes at the Market Operations Post. Further, with 
respect to the BBO Improvement Interval, members continue to have an 
opportunity to match, or improve, (as applicable), the BBO. Today, the 
BBO Improvement Interval is 15 seconds. Members will also have the 
ability to cross any part of the FLEX trade pursuant to Options 8, 
Section 30(a)(2), as is the case today. The proposed timeframe of 
between three seconds and five minutes is appropriate to ensure there 
is at least a minimum amount of time for Market Makers to conduct the 
same activities that take place today with the RFQ process and the BBO 
Improvement Interval, given the unique terms of FLEX Options. Cboe Rule 
5.72(d)(1) provides its floor participants the same timeframe to 
respond with bids and quotes as the Exchange's proposal.
    Once a Floor Broker has received a market from the crowd, the Floor 
Broker may then represent its order on the trading floor in open outcry 
(after systematizing it, which it must do prior to representing an 
order on the trading floor) and elect to trade against the best prices 
or not, or announce an intention to cross at a specific price.\24\ As 
discussed above, this is substantially similar to the current RFQ 
process, including the BBO Improvement Interval. Currently, the 
Exchange has set a crossing entitlement for facilitations and 
solicitations of FLEX Orders in all classes to be 40%.\25\ The 40% 
crossing entitlement would apply to FLEX Orders as it applies today for 
all other crossing orders executed on the Exchange's trading floor. As 
provided for in proposed Options 8, Section 34(h), trading of FLEX 
Options is subject to all other Options 8 Rules applicable to the 
trading of options on the Exchange, unless otherwise provided in this 
Rule.
---------------------------------------------------------------------------

    \24\ See current Options 8, Section 30 which describes 
procedures for crossing orders on the Exchange's trading floor.
    \25\ Current Supplementary Material .02(iii) to Options 8, 
Section 30 prescribes the percentage of the order which a Floor 
Broker is entitled to cross in equity, index and U.S dollar settled 
foreign currency options, after all Public Customer orders that were 
(1) on the limit order book and then (2) represented in the trading 
crowd at the time the market was established have been satisfied, is 
40% of the remaining contracts in the order if the order is traded 
at or between the best bid or offer given by the crowd in response 
to the Floor Broker's initial request for a market.
---------------------------------------------------------------------------

    Current Options 8, Section 30(a) specifies that an Options Floor 
Broker who holds orders to buy and sell the same option series may 
cross such orders, must request bids and offers for such options 
series, and make all persons in the trading crowd aware of the request. 
Further, Options 8, Section 30(a) states that after providing an 
opportunity for such bids and offers to be made, the Floor Broker must 
bid and offer at prices differing by the minimum increment and must 
improve the market by bidding above the highest bid or offering below 
the lowest offer. If such

[[Page 38567]]

higher bid or lower offer is not taken, the Floor Broker may cross the 
orders at such higher bid or lower offer by announcing in public outcry 
that he is crossing and giving the quantity and price. All such orders 
are not deemed executed until entered into and executed through the 
FBMS.\26\ The Exchange believes the proposed rule change will have a 
minimal (if any) impact on the crossing of FLEX Orders in open outcry.
---------------------------------------------------------------------------

    \26\ There is an exception where there is a provisional 
execution using the Snapshot feature of FBMS (as described in 
Options 8, Section 28(i)); bids and offers can be withdrawn pursuant 
to Options 8, Section 22(c) or (d).
---------------------------------------------------------------------------

    The proposed allocation is substantially similar to the allocation 
for non-FLEX trading in open outcry, excluding the provisions that are 
inapplicable to FLEX trading, and to the current allocation for FLEX 
trading in open outcry. With respect to allocation for a FLEX Order as 
well as non-FLEX Orders, best-priced responses will continue to have 
first priority, however if a Customer order were at the same price, the 
Customer would have priority over a non-Customer.\27\ With respect to 
responses at the same price, because there is no electronic trading of 
FLEX Options on Phlx, there can be no priority Customer orders resting 
in the order book that would receive first priority at the same price. 
Therefore, the Customer priority rules of Options 8, Section 25 and 
Supplementary Material .02 of Options 8, Section 30 are inapplicable. 
Additionally, no Market Makers are appointed in FLEX Options, so there 
will be no participation entitlement applicable to FLEX trading. 
Therefore, the Market Maker entitlements described in Options 8, 
Section 25 and Supplementary Material .02 of Options 8, Section 30 are 
inapplicable. The crossing participation would continue to the next 
priority level in each of those respective rules. Therefore, members of 
the trading crowd who established the market will have priority over 
all other orders that were not represented in the trading crowd at the 
time that the market was established and will maintain priority over 
such orders except for orders that improve upon the market.\28\ With 
respect to the order book, Defined Participation \29\ shall be equal 
where size is the same, otherwise participants are allocated based on 
size.\30\ Therefore, the proposed rule change will have minimal (if 
any) impact on the allocation of responses in open outcry trades of 
FLEX Orders.
---------------------------------------------------------------------------

    \27\ See current Options 8, Section 25(a)(1) and Supplementary 
Material .02 of Options 8, Section 30.
    \28\ See Supplementary Material .02(vii) of Options 8, Section 
30.
    \29\ ``Defined Participation'' is the portion of the Remainder 
of the Order to which a crowd participant is entitled. ``Remainder 
of the Order'' means the portion of an Initiating Order that remains 
following the allocation of contracts to customers that are on 
parity in accordance with Options 8, Section 25.
    \30\ See Options 8, Section 25(c)(3)(B).
---------------------------------------------------------------------------

    This proposal simplifies the process pursuant to which FLEX Orders 
would execute on the Exchange in open outcry. As demonstrated above, 
the general open outcry trading rules are substantially similar to the 
current open outcry RFQ procedure, including the BBO Improvement 
Interval, for FLEX Options. However, the proposed rule change 
eliminates the terminology that applies only to FLEX trading. Floor 
participants are familiar with the general open outcry trading 
procedures, and therefore, by aligning the open outcry trading process 
for FLEX Options with that of non-FLEX Options, and permitting FLEX 
trading in the same manner as non-FLEX trading on the Exchange's 
trading floor, the Exchange believes the proposed rule change may 
encourage members to submit FLEX Orders for execution on Phlx.
    In line with the Exchange's proposal to remove the RFQ process, 
including the BBO Improvement Interval, the Exchange proposes to delete 
Options 8, Section 34(b)(4), (b)(6)(B), (b)(7), (b)(8), (b)(10)-(15) 
and (c) with describe the RFQ process. Further, the Exchange proposes 
to systematize the FLEX Options trading process so that it mirrors the 
trading process of all other orders entered on the Exchange's trading 
floor whereby trades are reported to FBMS. To that end, the proposal 
will require a Floor Broker to systematize a FLEX Order in the same 
manner as Floor Brokers systematize non-FLEX Orders. The Exchange 
believes the proposed rule change will result in a more efficient open 
outcry trading process for FLEX Orders, as a Floor Broker can request a 
market as soon as it gets that request from a customer. This may 
ultimately result in more timely executions for customers. This new 
process would eliminate the requirement to submit an RFQ ticket to the 
Market Operations post and the requirement to respond to such order at 
the Market Operations post.\31\ The Exchange desires to remove these 
manual processes and, instead, permit all responses to take place in 
open outcry verbally, thereby obviating the need to submit paper 
responses at the trading post. The Exchange believes the proposed rule 
change may reduce confusion regarding how FLEX Orders may trade in open 
outcry, given that any minor differences between the two processes that 
exist today are being eliminated with the proposed automation.
---------------------------------------------------------------------------

    \31\ The Exchange proposes to remove the rule text within 
Options 8, Section 26(g)(3)(F)(1)(d) which provides, ``FLEX Trade 
tickets must be sent by email to the Phlx Correction Post,'' because 
the process will require trades to be reported to FBMS.
---------------------------------------------------------------------------

    The Exchange proposes to relocate Options 8, Section 34(b)(5), 
concerning Exercise Style, to Options 8, Section 34(f)(4) without 
change.
    The Exchange proposes to relocate Options 8, Section 34(b)(6)(A), 
concerning Expiration Date, to Options 8, Section 34(f)(5) without 
change. The Exchange proposes to capitalize ``Date'' in the title. As 
noted above, the Exchange created a new Options 8, Section 34(e)(1) 
which incorporated provisions similar to those within Options 8, 
Section 34(b)(6)(B), except for rule text related to the RFQ process 
which is being deleted.
    The Exchange proposes to relocate Options 8, Section 34(b)(9), 
concerning Settlement, to Options 8, Section 34(f)(6) and remove 
current subsection (iii).\32\ The Exchange will only permit the 
settlement value to be specified as a.m.-settled or p.m.-settled. The 
Exchange will not permit the settlement value to be specified as the 
index value reported as an average over a specified time period.
---------------------------------------------------------------------------

    \32\ Current Options 8, Section 34(b)(9)(A)(iii) states, 
``respecting FLEX index options, the settlement value may be 
specified as the index value reported at the: . . . (iii) as an 
average over a specified period of time, within parameters 
established by the Exchange.''
---------------------------------------------------------------------------

    The Exchange proposes to relocate Options 8, Section 34(d), which 
describes FLEX simple orders and FLEX Complex Orders, to Options 8, 
Section 34(g) without substantive change. The Exchange proposes to 
change references to the terms ``ROT'' and ``Registered Options 
trader'' within this rule text to ``Market Maker'' within proposed 
Options 8, Section 29(d) and Section 34(d) and (i). In 2020, the 
Exchange amended the term ``ROT'' to ``Market Maker'' \33\ throughout 
the Phlx Rulebook.
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act 88213 (February 14, 2020), 85 
FR 9859 (February 20, 2020) (SR-Phlx-2020-03)(Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Relocate Rules 
From Its Current Rulebook Into Its New Rulebook Shell) (``Rulebook 
Relocation'').
---------------------------------------------------------------------------

    The Exchange proposes to add a new Options 8, Section 34(h), 
similar to Cboe Rule 5.72(a) and (b), to describe FLEX Options trading. 
As is the case today, trading of FLEX Options is subject to all other 
Options 8 Rules applicable to the trading of options on the Exchange, 
unless otherwise provided in this Rule.

[[Page 38568]]

Also, as is the case today, a FLEX Option series is only eligible for 
trading if the FLEX Order is represented in open outcry. With respect 
to simple FLEX Orders, a FLEX Order for a FLEX option series submitted 
to the System must include all terms for a FLEX option series set forth 
in subparagraphs (e) and (f) of Options 8, Section 34 (including that a 
non-FLEX option series with identical terms is not listed for trading), 
size, side of the market, and a bid or offer price, subject to the 
order entry requirements set forth in Options 8, Section 32. This 
proposed rule text represents the Exchange's current practice. With 
respect to complex FLEX Orders, a FLEX Order for a FLEX option complex 
strategy submitted to the System must satisfy the criteria for a 
complex FLEX Order set forth in subparagraph (b) of Options 8, Section 
34, and include size, side of the market, and a net debit or credit 
price. Additionally, each leg of the FLEX Option complex strategy must 
include all terms for a FLEX Option series set forth in subparagraphs 
(e) and (f) of Options 8, Section 34 (including that a non-FLEX Option 
series with identical terms is not listed for trading), subject to the 
order entry requirements set forth in subparagraph (a) of Options 8, 
Section 34. This proposed rule text represents the Exchange's current 
practice.
    The Exchange proposes to relocate Options 8, Section 34(e), 
concerning Position Limits, to Options 8, Section 34(i). The Exchange 
proposes to update a rule citation to reflect the changes proposed 
herein with the reorganization of the rule to reflect the relocated 
rule text.
    The Exchange proposes to relocate rule text within Options 8, 
Section 34(f), concerning Exercise Limits, to proposed Options 8, 
Section 34(j) without change.
    Finally, the Exchange proposes to relocate rule text from Options 
8, Section 34(g) and (h) into new Options 8, Section 26(g)(3)(F)(1)(d), 
Options 8, Section 34(k)(1) and (2) respectively, without substantive 
change.\34\ The Exchange also proposes to update rule citations within 
this section to account for the reorganization of the rule to reflect 
the relocated rule text.
---------------------------------------------------------------------------

    \34\ The Exchange proposes to re-letter the remainder of that 
section to account for the removed rule text.
---------------------------------------------------------------------------

    Finally, the Exchange proposes corresponding changes to reflect the 
proposed change to automate FLEX Options within Options 8, Section 
28(f), Section 29(f), Section 32(g), Section 39, A-1, B-7, and C-2.
Cabinet Options
    Cabinet Orders are bids and offers (whether opening or closing) at 
a price of $1 per option contract for the account of a Public Customer, 
firm, Lead Market Maker, Market Maker or Floor Market Maker. Cabinet 
Orders may only be executed on the Exchange's trading floor in open 
outcry pursuant to Options 8 Rules.\35\ Today, Phlx reports cabinet 
trades to OCC within 90 seconds.\36\ Today, Floor Brokers must submit 
the designated cabinet transaction form to the Nasdaq Market Operations 
staff for clearance within ninety seconds of execution. Phlx then 
immediately reports the cabinet trade to OCC.
---------------------------------------------------------------------------

    \35\ See Options 8, Section 33(a). Only Floor Brokers may 
represent Cabinet Orders.
    \36\ See Options 8, Section 33(a)(5).
---------------------------------------------------------------------------

    At this time, the Exchange proposes to require Cabinet Orders to be 
reported into FBMS. Similar to the proposal for FLEX Orders, FBMS will 
create an electronic audit trail for Cabinet Orders, thereby further 
automating the execution and reporting of Cabinet Orders. With this 
change, members and member organizations will be required to record all 
Cabinet Orders represented in the trading crowd into FBMS. All executed 
contracts will be reported to OPRA and sent to OCC for clearing similar 
to all other equity, equity index and U.S. dollar-settled foreign 
currency options orders executed on the Exchange's trading floor.
    In line with this proposed change, the Exchange proposes to amend 
Options 8, Section 33(a)(2) to provide that Floor Brokers shall enter 
Cabinet Orders into The Options Floor Based Management System pursuant 
to Options 3, Section 29. The Exchange proposes to remove the verbiage 
in Options 8, Section 33 which relates to the use of Cabinet forms, 
which are part of the Exchange's manual process.
    The Exchange proposes replacing the word ``he'' with ``the Floor 
Broker'' within Options 8, Section 33(a)(3)(A) to clarify which market 
participant was being referenced.
    In line with the proposed change, the Exchange proposes to amend 
Options 8, Section 33(a)(4) to specify that the Floor Broker must enter 
the Cabinet Order into FBMS.
    The Exchange proposes to remove the rule text within Options 8, 
Section 33(d)(3) which relates to the use of forms which would no 
longer be relevant.
    The Exchange proposes to update citations within Options 8, Section 
33(e), which refer FLEX rules within Options 8, Section 34 which rules 
are being relocated. The updated citations mirror those changes 
proposed to new Options 8, Section 34(k)(2).
Technical Amendment
    The Exchange proposes to amend rule citations within Options 8, 
Section 30(d) to correct references to subparagraphs, (i) and (ii) to 
properly cite (1) and (2), respectively.
Implementation
    The Exchange proposes to implement this rule change on or before 
March 29, 2024. The Exchange will announce an implementation date by 
issuing an Options Trader Alert.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\37\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\38\ 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, in general to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f(b)
    \38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange's proposal to automate FLEX Order and Cabinet Orders, 
so that members and member organizations will be required to record all 
FLEX Orders and Cabinet Orders represented in the trading crowd into 
FBMS, is consistent with the Act. The Exchange believes removing the 
requirement for members and member organizations to manually enter FLEX 
Orders into the Exchange's electronic audit trail and submit manual 
Cabinet Order forms and, instead require members and member 
organizations to enter these orders into FBMS, similar to all other 
orders executed on the trading floor, will reduce the administrative 
burden on floor participants and therefore removes impediments to and 
perfects the mechanisms of a free and open market.
    Also, because FLEX Orders and Cabinet Orders will be reported and 
processed like all other open outcry trades, market participants will 
not be impacted nor have to take on any additional reporting or 
processing burden. In addition, the Exchange believes that the proposal 
is designed to prevent fraudulent and manipulative acts and practices 
because having an electronic audit trail of all FLEX Orders and Cabinet 
Orders will provide a complete and accurate record of these 
transactions and better facilitate regulatory oversight. In particular, 
the Exchange believes the proposed rule

[[Page 38569]]

change will remove impediments to and perfect the mechanism of a free 
and open market, and protect investors and the public interest because 
the proposal more closely aligns the handling of FLEX Orders and 
Cabinet Orders with the handling of all other options transacted on 
Phlx's trading floor.
    Specifically, with respect to FLEX Options, the proposed open 
outcry process is closely aligned with the current open outcry trading 
process for non-FLEX Options, but is still similar to the FLEX trading 
processes in place today. The proposed rule change merely eliminates 
many of the differences between FLEX and non-FLEX trading to eliminate 
potential confusion for market participants given the current 
differences, while implementing trading processes with which market 
participants are more familiar. As a result, the Exchange believes the 
proposed rule change will have minimal impact on the trading of FLEX 
Options, and possibly increase participation in FLEX Options, which 
could add liquidity to the Exchange's FLEX market, which ultimately 
benefits investors. By permitting FLEX Options to trade in a manner 
similar to non-FLEX Options, the Exchange believes this further 
improves a comparable alternative to the OTC market in customized 
options. The Exchange believes market participants benefit from being 
able to trade customized options in an exchange environment in several 
ways, including but not limited to the following: (1) enhanced 
efficiency in initiating and closing out position; (2) increased market 
transparency; and (3) heightened contra-party creditworthiness due to 
the role of OCC as issuer and guarantor of FLEX Options.
    The Exchange believes the current open outcry RFQ process, 
including the BBO Improvement Interval, for FLEX Orders is 
substantially similar to the current open outcry process for non-FLEX 
Orders described within Options 8, Section 24 at Supplementary Material 
.01, and therefore believes completely aligning the two processes is 
appropriate. Phlx FLEX Options transactions are exposed in open outcry 
on the trading floor similar to other options that trade on Phlx's 
trading floor. Today, the initial process permits members the ability 
to enter, modify or withdraw FLEX Quotes at the Market Operations post 
during the Request Response Time, which is currently set to two 
minutes, after a quote was requested in open outcry. Thereafter, during 
the BBO Improvement Interval, which is set to 15 seconds, members may 
submit FLEX Quotes to meet or improve the BBO established during the 
Request Response Time. The Exchange's proposal within Options 3, 
Section 34(h) to provide floor participants with a reasonable amount of 
time to respond with bids and offers is consistent with the Act. The 
proposed timeframe of between three seconds and five minutes from the 
time a FLEX Trader requests a quote in a FLEX Option series or 
represents a FLEX Order would allow FLEX Options to trade substantially 
similar to the current RFQ process, including the BBO Improvement 
Interval. The proposed new process would continue to permit members the 
opportunity to enter, modify or withdraw FLEX Quotes in open outcry, 
without the need to submit FLEX Quotes at the Market Operations Post. 
Members would continue to have an opportunity to match, or improve, (as 
applicable), the BBO as is the case today during the BBO Improvement 
Interval. With the proposal members would have the ability to cross any 
part of the FLEX trade pursuant to Options 8, Section 30(a)(2), as is 
the case today. The proposed timeframe of between three seconds and 
five minutes is appropriate to ensure there is at least a minimum 
amount of time for Market Makers to conduct the same activities that 
take place today with the RFQ process and the BBO Improvement Interval, 
given the unique terms of FLEX Options. The Exchange believes that 
eliminating the RFQ process, including the BBO Improvement Interval, 
which is not contemplated in non-FLEX Option open outcry trading, would 
have minimal (if any) impact on how a Floor Broker may request a market 
on the Exchange's trading floor with respect to FLEX Options. The 
Exchange believes it is appropriate to continue to ensure there is at 
least a minimum amount of time for Market Makers to respond give the 
unique terms of FLEX Options.
    The proposed timeframe, which is analogous to the RFQ Process which 
includes the BBO Improvement Interval, is consistent with the Act and 
removes impediments to and perfects the mechanism of a free and open 
market by creating an appropriate timeframe to seek liquidity. Today, 
an Options Exchange Official would intervene if they believed that an 
appropriate amount of time was not allotted for the FLEX Order to 
trade. The Options Exchange Official would enforce the requirement that 
the amount of time must be at least three seconds and no more than five 
minutes based on the complexity of the trade and the responses in the 
trading crowd when determining if the time was reasonable. For example, 
based on the number of participants who indicate an interest to 
participate in the trade and the complexity of the trade, the Options 
Exchange Official would determine if there was an appropriate amount of 
time and require more time if necessary. Unlike the current process, an 
RFQ ticket would not be submitted to the Market Operations post and the 
RFQ would not be disseminated to OPRA.
    Additionally, the Exchange would no longer disseminate RFQ Quotes 
to OPRA as part of this proposal. The Exchange believes that not 
disseminating RFQ Quotes is consistent with the Act and removes 
impediments to and perfects the mechanism of a free and open market by 
aligning the process to transact FLEX Orders with the current process 
to transact other orders in open outcry. By contrast, quotes are not 
disseminated with respect to other trades in open outcry today. While a 
market participant could seek to participate in the trade by calling a 
floor broker after viewing the RFQ on OPRA, this is an uncommon 
scenario. The Exchange notes that the RFQ message has not provided any 
additional liquidity under the current process for FLEX Orders. Today, 
the RFQ message for FLEX Orders is the only administrative message 
disseminated to OPRA on the Exchange's trading floor. The Exchange does 
not otherwise disseminate an administrative message for other 
transactions on the Exchange's trading floor; only executed orders are 
disseminated to OPRA for non-FLEX Orders on the trading floor and for 
electronic transactions on Phlx. The Exchange believes that the open 
outcry process will continue to provide a competitive market for FLEX 
Orders and that the proposed process will provide an opportunity for 
the trading crowd to provide liquidity. FLEX Orders, unlike standard 
orders, are less common and the Exchange does not have a similar RFQ 
process for standard orders that are analogous to those FLEX Orders. 
This proposed process would align with Cboe's process and not require 
Phlx to disseminate quotes to OPRA while other options floor exchanges 
have no similar obligations.\39\
---------------------------------------------------------------------------

    \39\ Cboe does not disseminate via OPRA information respecting 
open outcry RFQs. See Securities Exchange Act Release No. 66052 
(December 23, 2011), 77 FR 306 at 308 (January 4, 2012) (SR-Cboe-
2011-123).
---------------------------------------------------------------------------

    The proposed allocation is substantially similar to the allocation 
for non-FLEX trading in open outcry, excluding the provisions that are 
inapplicable to FLEX trading, and to the current allocation for FLEX 
trading in open outcry. With respect to allocation

[[Page 38570]]

for a FLEX Order as well as non-FLEX Orders, best-priced responses will 
continue to have first priority, however if a Customer order were at 
the same price, the Customer would have priority over a non-
Customer.\40\ With respect to responses at the same price, because 
there is no electronic trading of FLEX Options on Phlx, there can be no 
priority Customer orders resting in the order book that would receive 
first priority at the same price. Therefore, the Customer priority 
rules of Options 8, Section 25 and Supplementary Material .02 of 
Options 8, Section 30 are inapplicable. Additionally, no Market Makers 
are appointed in FLEX Options, so there will be no participation 
entitlement applicable to FLEX trading. Therefore, the Market Maker 
entitlements described in Options 8, Section 25 and Supplementary 
Material .02 of Options 8, Section 30 are inapplicable. The crossing 
participation would continue to the next priority level in each of 
those respective rules. Therefore, members of the trading crowd who 
established the market will have priority over all other orders that 
were not represented in the trading crowd at the time that the market 
was established and will maintain priority over such orders except for 
orders that improve upon the market.\41\ With respect to the order 
book, Defined Participation shall be equal where size is the same, 
otherwise participants are allocated based on size.\42\ Therefore, the 
proposed rule change will have minimal (if any) impact on the 
allocation of responses in open outcry trades of FLEX Orders.
---------------------------------------------------------------------------

    \40\ See current Options 8, Section 25(a)(1) and Supplementary 
Material .02 of Options 8, Section 30.
    \41\ See Supplementary Material .02(vii) of Options 8, Section 
30.
    \42\ See Options 8, Section 25(c)(3)(B).
---------------------------------------------------------------------------

    The Exchange's proposal to reword rule text concerning Exercise 
Price located within proposed Options 8, Section 34(f)(3) is consistent 
with the Act and does not expand the Exchange's current discretion. 
Today, the Exchange has the ability to require that FLEX index options 
be specified by an index value, number, percentage of index value 
calculated as of the open or close of trading on the Exchange on the 
trade date, a method for fixing such number, in terms of a specific 
dollar amount rounded to the nearest $.10 or a percentage of the 
underlying security rounded to the nearest minimum increment, or in 
terms of a specific dollar amount rounded to the nearest hundredth of a 
dollar. In fact, the proposal narrows the Exchange's discretion to 
provide that it may determine the smallest increment for exercise 
prices of FLEX Options, not to exceed two decimal places. The Exchange 
has this authority today, it is electing to narrow its authority to 
provide the increment in the form of a dollar value. The proposal 
protects investors and the public interest by amending the rule text 
within proposed Options 8, Section 34(f)(3) to succinctly define the 
bounds of the Exchange's discretion.
    The Exchange's proposal to amend Options 8, Section 34(f) to 
provide that all other terms of a FLEX Option series are the same as 
those that apply to non-FLEX Options, provided that a FLEX Index Option 
with an index multiplier of one may not be the same type (put or call) 
and may not have the same exercise style, expiration date, settlement 
type, and exercise price as a non-FLEX Index Option overlying the same 
index listed for trading (regardless of the index multiplier of the 
non-FLEX Index Option), which terms constitute the FLEX Option series 
is consistent with the Act. The Exchange states that, to the extent the 
Exchange lists a micro FLEX Index Option on an index on which it also 
lists a standard FLEX index option, it will be listed with a different 
trading symbol than the standard index option with the same underlying 
index to reduce any potential confusion.
    The proposal eliminates the terminology that applies only to FLEX 
trading. Floor participants are familiar with the general open outcry 
trading procedures, and therefore, by aligning the open outcry trading 
process for FLEX Options with that of non-FLEX Options, and permitting 
FLEX trading in the same manner as non-FLEX trading on the Exchange's 
trading floor, the Exchange believes the proposed rule change may 
encourage members to submit FLEX Orders for execution on Phlx. The 
Exchange believes the proposed rule change may reduce confusion 
regarding how FLEX Orders may trade in open outcry, given that any 
minor differences between the two processes that exist today are being 
eliminated. The Exchange believes that, with this proposal, floor 
participants will have the necessary time to respond in open with 
markets to FLEX Orders, similar to other Non-FLEX Orders which are 
transacted in open outcry.
    The Exchange believes the proposed rule change will permit 
executions of FLEX Orders to continue to be completed in a timely 
fashion, while providing the crowd with sufficient time to price the 
unique terms of FLEX Options. The proposed amendments will enable floor 
participants to compete vigorously and potentially provide price 
improvement for FLEX Orders, as they do for non-FLEX Orders, as they 
will be encouraged to submit their best-priced bids and offers during 
the auctions to have the opportunity to execute against the FLEX Order.
    Finally, reorganizing the FLEX rules and adding greater specificity 
to the rule will provide market participants with greater information 
on FLEX Options which removes impediments to and perfect the mechanism 
of a free and open market. The organization of the Options 8, Section 
34 is intended to provide floor participants with greater information 
which represents the manner in which FLEX Options are transacted today 
on Phlx.

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

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.
    The Exchange's proposal to automate FLEX Orders and Cabinet Orders 
does not impose an undue burden on intra-market competition because 
FLEX Orders and Cabinet Orders will be reported and processed similar 
to all other open outcry trades. Further, market participants will not 
be impacted by this proposal. Members will not have additional 
reporting or processing burdens as a result of the proposal.
    The proposed amendments to FLEX Options do not impose an undue 
burden on inter-market competition as the Exchange seeks to automate 
its current FLEX and Cabinet processes. The removal of the RFQ Process, 
including the BBO Improvement Interval, is similar to Cboe.\43\
---------------------------------------------------------------------------

    \43\ See supra note 21.
---------------------------------------------------------------------------

    Furthermore, with respect to the amendments to FLEX Options, the 
Exchange does not believe that the proposed rule change will impose any 
burden on competition because the proposed open outcry process is 
closely aligned with the current open outcry trading process for non-
FLEX Options. The proposed process continues to be similar to the FLEX 
trading processes in place today. The proposed rule change merely 
eliminates many of the differences between FLEX and non-FLEX trading, 
which removes potential confusion for market participants given the 
current differences, while implementing trading processes with which 
market participants are more familiar. As a result, the Exchange 
believes the proposed rule change will

[[Page 38571]]

have minimal impact on the trading of FLEX Options, and possibly 
increase participation in FLEX Options, which could add liquidity to 
the Exchange's FLEX market, which ultimately benefits investors. Any 
member or member organization may transact FLEX Options.
    Eliminating the RFQ Process and the BBO Improvement Interval in 
favor of a reasonable timeframe of between three seconds and five 
minutes from the time a FLEX Trader requests a quote in a FLEX Option 
series or represents a FLEX Order to respond with bids or offers does 
not impose an undue burden on competition. The proposed timeframe, 
which is analogous to the RFQ Process which includes the BBO 
Improvement Interval, creates an appropriate timeframe to seek 
liquidity. Today, an Options Exchange Official would intervene if they 
believed that an appropriate amount of time was not allotted for the 
FLEX Order to trade. Based on the number of participants who indicate 
an interest to participate in the trade and the complexity of the 
trade, the Options Exchange Official would determine if there was an 
appropriate amount of time and require more time if necessary. The 
Exchange believes that eliminating the RFQ process, including the BBO 
Improvement Interval, which is not contemplated in non-FLEX Option open 
outcry trading, would have minimal (if any) impact on how a Floor 
Broker may request a market on the Exchange's trading floor with 
respect to FLEX Options.
    The Exchange's proposal to no longer disseminate RFQ Quotes to OPRA 
as part of this proposal does not impose an intra-market burden on 
competition because the proposal aligns the process to transact FLEX 
Orders with the current process to transact other orders in open 
outcry. The RFQ message has not provided any additional liquidity under 
the current process for FLEX Orders. Today, the RFQ message for FLEX 
Orders is the only administrative message disseminated to OPRA on the 
Exchange's trading floor. The Exchange does not otherwise disseminate 
an administrative message for other transactions on the Exchange's 
trading floor; only executed orders are disseminated to OPRA for non-
FLEX Orders on the trading floor and for electronic transactions on 
Phlx. The Exchange believes that the open outcry process will continue 
to provide a competitive market for FLEX Orders and that the proposed 
process will provide an opportunity for the trading crowd to provide 
liquidity. By contrast, quotes are not disseminated with respect to 
other trades in open outcry today. While a market participant could 
seek to participate in the trade by calling a floor broker after 
viewing the RFQ on OPRA, this is an uncommon scenario. FLEX Orders, 
unlike standard orders, are less common and the Exchange does not have 
a similar RFQ process for standard orders that are analogous to those 
FLEX Orders. The Exchange's proposal to no longer disseminate RFQ 
Quotes to OPRA as part of this proposal does not impose an inter-market 
burden on competition because the proposed process would align Phlx's 
process with Cboe's process and not require Phlx to disseminate quotes 
to OPRA while other options floor exchanges have no similar 
obligations.\44\
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    \44\ Cboe does not disseminate via OPRA information respecting 
open outcry RFQs. See Securities Exchange Act Release No. 66052 
(December 23, 2011), 77 FR 306 at 308 (January 4, 2012) (SR-Cboe-
2011-123).
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    The Exchange's proposal to reword rule text concerning Exercise 
Price located within proposed Options 8, Section 34(f)(3) does not 
impose an undue burden on competition because it does not expand the 
Exchange's current discretion. The proposal narrows the Exchange's 
authority to provide the increment in the form of a dollar value not to 
exceed two decimal places.
    The Exchange's proposal to amend Options 8, Section 34(f) to 
provide that all other terms of a FLEX Option series are the same as 
those that apply to non-FLEX Options, provided that a FLEX Index Option 
with an index multiplier of one may not be the same type (put or call) 
and may not have the same exercise style, expiration date, settlement 
type, and exercise price as a non-FLEX Index Option overlying the same 
index listed for trading (regardless of the index multiplier of the 
non-FLEX Index Option), which terms constitute the FLEX Option series 
does not impose an undue burden on competition. In the event that the 
Exchange were to list a micro FLEX Index Option on an index on which it 
also lists a standard FLEX index option, it will be listed with a 
different trading symbol than the standard index option with the same 
underlying index to reduce any potential confusion.

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)(iii) of the Act \45\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\46\
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    \45\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \46\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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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    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 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-2023-22 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-2023-22. 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/

[[Page 38572]]

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 a.m. and 3 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. Do 
not include personal identifiable information in submissions; you 
should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to file number SR-Phlx-2023-22, and should 
be submitted on or before July 5, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-12573 Filed 6-12-23; 8:45 am]
BILLING CODE 8011-01-P


