Notice2021-16231
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Opening Process
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Published
July 30, 2021
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 86 Issue 144 (Friday, July 30, 2021)</title>
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[Federal Register Volume 86, Number 144 (Friday, July 30, 2021)]
[Notices]
[Pages 41134-41138]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-16231]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92496; File No. SR-Phlx-2021-42]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Opening Process
July 26, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 19, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with
the Securities and Exchange Commission (``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 Phlx Options 3, Section 8, ``Options
Opening Process.''
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/phlx/rules">https://listingcenter.nasdaq.com/rulebook/phlx/rules</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
[[Page 41135]]
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
Phlx proposes to amend Options 3, Section 8, ``Options Opening
Process.'' Specifically, the Exchange proposes to amend the definition
of Valid Width Quote at Options 3, Section 8(a)(ix).
Phlx's Opening Process for an option series is conducted pursuant
to Options 3, Section 8 paragraphs (f)-(k), on or after 9:30 a.m.
Eastern Time the ABBO, if any, is not crossed and the System has
received, within two minutes \3\ of the opening trade or quote on the
market for the underlying security,\4\ a Valid Width Quote. The System
will accept a Lead Market Maker's Valid Width Quote or the Valid Width
Quote of at least one Phlx Electronic Market Maker.\5\ Today, Phlx
requires a Lead Market Maker to enter a Valid Width Quote in 90% of
their assigned series, not later than one minute following the
dissemination of a quote or trade by the market for the underlying
security.\6\ Lead Market Makers must promptly enter a Valid Width Quote
in the remainder of their assigned series, which did not open within
one minute following the dissemination of a quote or trade by the
market for the underlying security.\7\ In either case, the Lead Market
Maker or Phlx Electronic Market Maker must enter a Valid Width Quote to
open an options series. Phlx Options 3, Section 8(a)(ix) defines a
Valid Width Quote as follows:
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\3\ The Exchange may designated a shorter time provided it is
disseminated to membership on the Exchange's website.
\4\ In the case of index options, the timing is within two
minutes of the receipt of the opening price in the underlying index
or within two minutes of market opening for the underlying security
in the case of U.S. dollar-settled foreign currency options. In both
cases the Exchange may designated a shorter time provided it is
disseminated to membership on the Exchange's website. The Exchange
proposes an amendment within Options 3, Section 8(d)(i) as described
below.
\5\ The Exchange proposes an amendment within Options 3, Section
8(d)(i)(B) as described below.
\6\ In the case of index options, a Lead Market Maker must enter
a Valid Width Quote in 90% of their assigned series, not later than
one minute following the receipt of the opening price in the
underlying index. The Lead Market Maker assigned in a particular
U.S. dollar-settled foreign currency option must enter a Valid Width
Quote, in 90% of their assigned series, not later than one minute
after the announced market opening. See Options 3, Section
8(d)(iii).
\7\ In the case of index options, Lead Market Makers must
promptly enter a Valid Width Quote in the remainder of their
assigned series, which did not open following the receipt of the
opening price in the underlying index or, with respect to U.S.
dollar-settled foreign currency options, following the announced
market opening. See Options 3, Section 8(d)(iii).
A Valid Width Quote is a two-sided electronic quotation
submitted by a Phlx Electronic Market Maker that meets the following
requirements: Options on equities and index options bidding and/or
offering so as to create differences of no more than $.25 between
the bid and the offer for each option contract for which the
prevailing bid is less than $2; no more than $.40 where the
prevailing bid is $2 or more but less than $5; no more than $.50
where the prevailing bid is $5 or more but less than $10; no more
than $.80 where the prevailing bid is $10 or more but less than $20;
and no more than $1 where the prevailing bid is $20 or more,
provided that, in the case of equity options, the bid/ask
differentials stated above shall not apply to in-the-money series
where the market for the underlying security is wider than the
differentials set forth above. For such series, the bid/ask
differentials may be as wide as the quotation for the underlying
security on the primary market, or its decimal equivalent rounded
down to the nearest minimum increment. The Exchange may establish
differences other than the above for one or more series or classes
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of options.
The Exchange proposes to amend a Valid Width Quote to instead
provide:
A Valid Width Quote is a two-sided electronic quotation
submitted by a Phlx Electronic Market Maker that meets the following
requirements: Options on equities and index options bidding and/or
offering so as to create differences of no more than $5, provided
that, in the case of equity options, the bid/ask differentials
stated above shall not apply to in-the-money series where the market
for the underlying security is wider than the differentials set
forth above. For such series, the bid/ask differentials may be as
wide as the quotation for the underlying security on the primary
market, or its decimal equivalent rounded down to the nearest
minimum increment. The Exchange may establish differences other than
the above for one or more series or classes of options. Such
differences will be posted by the Exchange on its website.
This proposed language is similar to Nasdaq BX, Inc. (``BX'').\8\ The
Exchange proposes to widen the current bid/ask differentials for
several reasons.
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\8\ BX Options 3, Section 8(a)(9) provides, ``A `Valid Width
Quote' is a two-sided electronic quotation, submitted by a Market
Maker, quoted with a difference not to exceed $5 between the bid and
offer regardless of the price of the bid. However, respecting in-
the-money series where the market for the underlying security is
wider than $5, the bid/ask differential may be as wide as the
quotation for the underlying security on the primary market, or its
decimal equivalent rounded down to the nearest minimum increment.
The Exchange may establish differences other than the above for one
or more series or classes of options.'' See also Securities Exchange
Act Release No. 89731 (September 1, 2020), 85 FR 55524 (September 8,
2020) (SR-BX-2020-016) (Order Approving Proposed Rule Change To
Amend BX's Opening Process in Connection With a Technology
Migration).
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First, the proposal would conform the Valid Width Quote definition
of Phlx to that of BX. BX refers to a difference not to exceed $5
between the bid and offer within the description of a Valid Width
Quote, similar to BX Options 2, Section 4(f) and 5(d)(2) that describes
intra-day quotes. By amending Phlx's Valid Width Quote, the Exchange
notes that the $5 difference is akin to Phlx's intra-day requirement
within Phlx Options 2, Section 4(c)(1).\9\
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\9\ Phlx Options 2, Section 4(c)(1) provides, ``Options on
equities (including Exchange-Traded Fund Shares), index options and
options on U.S. dollar-settled FCOs may be quoted electronically
with a difference not to exceed $5 between the bid and offer
regardless of the price of the bid, provided that the foregoing bid/
ask differentials shall not apply to in-the-money series where the
market for the underlying security is wider than the differentials
set forth above. For such series, the bid/ask differentials may be
as wide as the spread between the national best bid and offer in the
underlying security. The Exchange may establish differences other
than the above for one or more series or classes of options.''
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Second, the proposed differential would simplify the differential
for Lead Market Makers, who would continue to be required to submit a
Valid Width Quote during the Opening Process in their assigned options
series. Widening the differentials would allow Lead Market Makers, and
Electronic Market Makers that elect to quote during the Opening
Process, an ability to quote wider during the Opening Process when an
underlying is volatile. Today, pursuant to Options 3, Section 8(a)(ix),
the Exchange may establish differences other than the established bid/
ask differentials for one or more series or classes of options. With
this proposal, the Exchange is not amending its ability to continue to
establish differences for one or more series or classes of options,
rather the Exchange may continue to set other requirements pursuant to
current Phlx Options 3, Section 8(a)(ix). Today, the Exchange has
established Valid Width Quote differentials which differ
[[Page 41136]]
from those described within Options 3, Section 8(a)(ix),\10\ they are:
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\10\ See <a href="https://www.nasdaq.com/docs/2021/03/25/PHLXSystemSettings.pdf">https://www.nasdaq.com/docs/2021/03/25/PHLXSystemSettings.pdf</a>.
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Maximum bid/ask
Bid price low end of Bid price high end of differential
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$0.00 $1.99 $0.75
2.00 4.99 1.20
5.00 9.99 1.50
10.00 19.99 2.40
20.00 20.00+ 3.00
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Also, options with an expiration more than nine months away
continue to be permitted a Valid Width Quote bid/ask differential of
$5.00. The Exchange will continue to utilize the differentials
currently posted on its website until such time as it provides notice
to members and member organizations of a change.
Third, the Exchange proposes to add rule text to state that such
differences will be posted by the Exchange on its website.\11\ Posting
the current differentials on its website would allow members and member
organizations to easily refer to the quoting obligations for the
Opening Process.
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\11\ Id.
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Technical Amendment
The Exchange proposes to add ``Eastern Time'' after 9:30 a.m. and
amend the word ``currency'' to security.'' The Exchange proposes to
amend ``Quotes'' to ``Quote'' within Options 3, Section 8(d)(i)(B).
2. Statutory Basis
The Exchange believes that its proposal to establish a $5
difference is consistent with Section 6(b) of the Act.\12\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \13\ requirements that the rules of
an exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \14\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ Id.
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The Exchange believes that the proposed $5 difference for the Valid
Width Quote is more appropriate because it reflects the Exchange's
experience in administering the rule and would continue to give Market
Makers flexibility including during the Opening Process. The Exchange
notes that the current standard is not being applied as the Exchange
has established Valid Width Quote differentials which differ from those
described within Options 3, Section 8(a)(8).\15\ Widening the Valid
Width Quote requirement would provide Lead Market Makers and Electronic
Market Makers that elect to quote during the Opening Process,
additional flexibility when submitting Valid Width Quotes during the
Opening Process thereby allowing these Market Makers the ability to
quote wider in instances where the Exchange has not established Valid
Width Quote differentials which differ from those in the rule because
volatile market conditions exist or there is news regarding an
underlying security which may impact pricing. Lead Market Makers are
integral to the Exchange's Opening Process as Phlx is dependent on
receiving a Valid Width Quote to open an options series. With this
proposal, Lead Market Makers would continue to be required to submit a
Valid Width Quote during the Opening Process in their assigned options
series.\16\
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\15\ See supra note 10.
\16\ Today, Phlx, Nasdaq GEMX, LLC (``GEMX''), Nasdaq MRX, LLC
(``MRX''), Nasdaq ISE, LLC (``ISE''), Miami International Securities
Exchange, LLC (``MIAX'') and MIAX Emerald, LLC (``Emerald'') and are
the only options markets that require a Primary Market Maker, or
Lead Market Maker in the case of Phlx, to submit a quote to open an
options series.
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The proposal would conform the Valid Width Quote definition of Phlx
to that of BX.\17\ BX refers to a difference not to exceed $5 between
the bid and offer within the description of a Valid Width Quote,
similar to BX Options 2, Section 4(f) and 5(d)(2) that describes intra-
day quotes. By amending Phlx's Valid Width Quote, the Exchange notes
that the $5 difference is akin to Phlx's intra-day requirement within
Phlx Options 2, Section 4(b)(4).\18\ Also, today, MIAX and Emerald
require market makers to enter a valid width NBBO with a difference of
no more than $5 between the bid and offer.\19\
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\17\ See supra note 8.
\18\ See supra note 9.
\19\ MIAX and Emerald require Market Makers to submit a valid
width NBBO in the opening where the bid and offer of the NBBO differ
no more than differences outlined in MIAX and Emerald Rule
603(b)(4)(i). MIAX and Emerald Rule 603(b)(4)(i) provides that
bidding and offering so as to create differences of no more than $5
between the bid and offer. Rule 603(b)(4)(ii) provides MIAX and
Emerald may establish differences other than the bid/ask
differentials described in (i) above for one or more option series
or classes, respectively. See MIAX and Emerald Rules 503.
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Not all options markets have bid/ask differentials. In 2019, Cboe
removed its quote width requirements while citing corresponding rules
of its affiliated exchanges.\20\ Cboe noted in the 2019 Rule Change
that the current quote width requirement at the time for generally all
classes was $10, however, its Market-Makers consistently maintained
two-sided quotes that were much tighter than the required width. Cboe
opined that, even if markets experienced periods of stress or
volatility, they remained obligated to maintain two sided markets and
engage in a course of dealings that must be reasonably calculated to
contribute to the maintenance of a fair and orderly market, which
includes refraining from making bids or offers that are inconsistent
with such course of dealings and updating quotations in response to
changed market conditions.\21\ Cboe noted that it did not believe that
continuing to provide for a quote width requirement was necessary nor
would it impact the maintenance of fair and orderly markets because
Market-Makers already quoted at a bid/ask spread much narrower than the
requirements and were required to continuously fulfill their
obligations to engage in a course of dealings reasonably calculated to
contribute to the maintenance of a fair and orderly market.\22\
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\20\ See Securities Exchange Act Release No. 87024 (September
19, 2019), 84 FR 50545 (September 25, 2019) (SR-Cboe-2019-059)
(``2019 Rule Change'').
\21\ Id.
\22\ Id.
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[[Page 41137]]
Unlike Cboe, Phlx does require its Market Makers to quote both
during the Opening Process and intra-day within certain established
bid/ask differentials. The Exchange notes that widening its Valid Width
Quote differential during the Opening Process will not impact the
maintenance of fair and orderly markets because Market Makers on Phlx,
unlike other markets that do not require quoting during the Opening
Process, will continue to require that its Market Makers provide Valid
Width Quotes during the Opening Process, thereby ensuring liquidity.
Also, Market Makers may quote tighter than the defined Valid Width
Quote differential. Finally, similar to Cboe's argument in the 2019
Rule Change, Market Makers are required to continuously fulfill their
obligations to engage in a course of dealings reasonably calculated to
contribute to the maintenance of a fair and orderly market.
Today, the Exchange has discretion to set other differentials,\23\
similar to MIAX and Emerald.\24\ The Exchange currently is utilizing
that discretion to set different bid/ask differentials based on its
observation of market openings. Currently, the Exchange requires Market
Makers to submit Valid Width Quotes which are tighter than the proposed
$5 difference.
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\23\ See Options 3, Section 8(a)(8), the Exchange may establish
differences other than the established bid/ask differentials for one
or more series or classes of options.
\24\ See MIAX and Emerald Rules 503.
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The Exchange's robust Opening Process seeks to encourage quality
markets. As noted herein, unlike a majority of options markets,\25\ it
requires Lead Market Makers to quote during the Opening Process to
ensure liquidity as well as an efficient Opening Process where options
series are opened quickly and at fair prices.
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\25\ See supra note 16.
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The proposal to add rule text to state that such differences will
be posted by the Exchange on its website \26\ would allow members and
member organizations to easily refer to the quoting obligations for the
Opening Process.
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\26\ Id.
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Technical Amendment
The Exchange's proposal to add ``Eastern Time'' after 9:30 a.m.,
amend the word ``currency'' to security,'' and amend ``Quotes'' to
``Quote'' within Options 3, Section 8(d)(i)(B) will bring greater
clarity to the Exchange's Rules.
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's proposal to
require Lead Market Makers and Electronic Market Makers to bid and/or
offer an option series with differences of no more than $5 for options
on equities and index options does not impose an undue burden on
competition. All Lead Market Makers, and Electronic Market Makers who
elect to quote during the Opening Process, would be subject to the same
requirement to submit a Valid Width Quote when submitting quotes during
the Opening Process. Differentials would be available on the Exchange's
website and therefore transparent, allowing members and member
organizations to easily refer to the quoting obligations for the
Opening Process. Finally, the proposal would also align quoting
requirements more closely to intra-day requirements within Phlx Options
2, Section 4(c)(1).
With respect to inter-market competition, the Exchange notes that
most options markets do not require market makers to quote during the
opening.\27\ The Exchange notes that MIAX and Emerald have quoting
requirements in the opening similar to the differential proposed
herein. Also, ISE, GEMX, and MRX are filing similar rule changes to
this proposal.\28\
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\27\ See supra note 16 citing the options markets that require
bid/ask differentials.
\28\ See SR-ISE-2021-17, SR-GEMX-2021-07 and SR-MRX-2021-09.
These rule changes are not yet noticed.
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Technical Amendment
The Exchange's proposal to add ``Eastern Time'' after 9:30 a.m.,
amend the word ``currency'' to security,'' and amend ``Quotes'' to
``Quote'' within Options 3, Section 8(d)(i)(B) will bring greater
clarity to the Exchange's Rules.
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 \29\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\30\
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\29\ 15 U.S.C. 78s(b)(3)(A)(iii).
\30\ 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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#bac8cfd6df97d9d5d7d7dfd4cec9fac9dfd994ddd5cc"><span class="__cf_email__" data-cfemail="1f6d6a737a327c7072727a716b6c5f6c7a7c31787069">[email protected]</span></a>. Please include
File Number SR-Phlx-2021-42 on the subject line.
Paper Comments
<bullet> 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-2021-42. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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
[[Page 41138]]
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-2021-42 and should be submitted on or before August 20, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-16231 Filed 7-29-21; 8:45 am]
BILLING CODE 8011-01-P
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