Notice2021-20447
Self-Regulatory Organizations; Nasdaq PHLX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 3, Section 17, To Decommission the Exchange's Quote Removal Kill Switch Functionality
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Published
September 22, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 181 (Wednesday, September 22, 2021)</title>
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[Federal Register Volume 86, Number 181 (Wednesday, September 22, 2021)]
[Notices]
[Pages 52702-52704]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-20447]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93015; File No. SR-Phlx-2021-51]
Self-Regulatory Organizations; Nasdaq PHLX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 3,
Section 17, To Decommission the Exchange's Quote Removal Kill Switch
Functionality
September 16, 2021.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on September 2, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 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 decommission the Exchange's quote removal
Kill Switch functionality at Options 3, Section 17.
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.
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 Options 3, Section 17 to
decommission the Exchange's quote removal Kill Switch functionality,
which is an optional tool that allows Market Makers \4\ to initiate a
message (or messages) \5\ to the System \6\ to promptly remove their
quotes from the market. Market Makers may submit a request to the
System to remove quotes based on certain identifier(s) on either a user
or group level (``Identifier'').\7\ If quotes are cancelled by the
Market Maker using Kill Switch, it will result in the removal of all
quotes requested for the Identifier(s). The Market Maker will be unable
to enter any additional quotes for the affected Identifier(s) until the
Market Maker sends a re-entry request to the Exchange.\8\
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\4\ For purposes of this filing, Market Makers include Lead
Market Makers, Streaming Quote Traders, and Remote Streaming Quote
Traders. See Options 1, Section 1(b)(28).
\5\ Today, Market Makers can log into an interface to send a
message to the Exchange to initiate the Kill Switch.
\6\ For purposes of this filing, the term ``System'' shall mean
the automated system for order execution and trade reporting owned
and operated by the Exchange. See Options 1, Section 1(b)(57).
\7\ Identifiers include Exchange accounts, ports, and/or badges
or mnemonics. Thus, a Market Maker using Kill Switch may elect to
remove quotes for an individual Identifier (e.g., badge) or any
group of Identifiers (e.g., all badges within one Market Maker
firm). Permissible groups must reside within a single member firm.
\8\ See Options 3, Section 17. The Kill Switch tool also
currently allows Phlx members to cancel open orders and prevent new
order submission. The Exchange is not proposing to decommission the
order cancellation portion of the Kill Switch tool at this time.
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Due to the lack of demand for the quote removal Kill Switch by
Market Makers, the Exchange proposes to decommission this optional tool
by the end of Q4 2021.\9\ Through consultation with individual Market
Maker firms prior to filing this rule change, the Exchange did not
receive any negative feedback for its proposal to decommission the
quote removal Kill Switch functionality. The Exchange has also provided
all market participants with advance notice that it will decommission
this functionality in Q4 2021.\10\ With the proposed changes, the
Exchange seeks to streamline its product offerings and to reallocate
Exchange resources to other business and risk management initiatives.
While the Exchange will no longer offer this optional functionality to
Market Makers, it will continue to offer similar quote management tools
that would assist Market Makers with their efforts to manage their risk
with respect to quotes on the Exchange. For example, Market Makers are
currently able to send a mass purge request through Specialized Quote
Feed (``SQF'') to pull their existing quotes from the market and
inhibit the entry of new quotes until the Market Maker sends a message
to the Exchange to re-enter the System.\11\
[[Page 52703]]
Indeed, the Exchange has found that Market Makers utilize this SQF
purge functionality instead of the Kill Switch quote removal tool when
they want to remove their quotes from the market.
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\9\ No Market Makers have used the Kill Switch for quote removal
in 2021.
\10\ See Options Trader Alert #2021-49.
\11\ ``SQF'' is an interface that allows Lead Market Makers,
Streaming Quote Traders (``SQTs'') and Remote Streaming Quote
Traders (``RSQTs'') to connect, send, and receive messages related
to quotes, Immediate-or-Cancel Orders, and auction responses into
and from the Exchange. Features include the following: (1) Options
symbol directory messages (e.g., underlying and complex
instruments); (2) system event messages (e.g., start of trading
hours messages and start of opening); (3) trading action messages
(e.g., halts and resumes); (4) execution messages; (5) quote
messages; (6) Immediate-or-Cancel Order messages; (7) risk
protection triggers and purge notifications; (8) opening imbalance
messages; (9) auction notifications; and (10) auction responses. The
SQF Purge Interface only receives and notifies of purge requests
from the Lead Market Maker, SQT or RSQT. Lead Market Makers, SQTs
and RSQTs may only enter interest into SQF in their assigned options
series. See Options 3, Section 7(a)(i)(B).
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In addition, all Phlx members, including Market Makers, may contact
the Exchange's market operations staff to request that the Exchange
cancel any of their existing bids, offers, or orders in any series of
options.\12\ Furthermore, the Exchange will continue to have mandatory
System-enforced risk mechanisms that automatically remove quotes for
the Market Maker once certain pre-set thresholds or conditions are met.
This includes risk protections such as rapid fire risk controls \13\
and cancel on disconnect.\14\
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\12\ See Options 3, Section 19.
\13\ The rapid fire risk controls automatically remove Market
Maker quotes submitted over SQF when certain firm-set thresholds are
met. Once the thresholds are triggered, the Market Maker must send a
re-entry indicator to re-enter the System. See Options 3, Section
15(c)(2).
\14\ When the SQF Port detects the loss of communication with a
member's Client Application because the Exchange's server does not
receive a Heartbeat message for a certain time period (``nn''
seconds), the Exchange will automatically logoff the member's
affected Client Application and automatically cancel all of the
member's open quotes. Quotes will be cancelled across all Client
Applications that are associated with the same Lead Market Maker or
Market Maker (collectively ``Market Maker'') ID and underlying
issues. See Options 3, Section 18(a).
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To effect the decommissioning of the quote removal Kill Switch, the
Exchange proposes to amend Options 3, Section 17 by eliminating all
references to quote removal within this Rule. In connection with this
change, the Exchange will also renumber current Options 3, Section
17(a)(2) and (a)(3) as Options 3, Section 17(a)(1) and (a)(2),
respectively.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\15\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\16\ in particular, in that it is designed to
promote just and equitable principles of trade, 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 that the proposed rule
change is consistent with the Section 6(b)(5) requirement that the
rules of an exchange not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange does not believe that the proposed rule
change will affect the protection of investors or the public interest
or the maintenance of a fair and orderly market because no Market
Makers have used the quote removal Kill Switch risk control in 2021. In
addition, the Exchange notes that the use of this tool is completely
optional, and the Exchange will continue to offer Market Makers similar
risk management tools such as the SQF mass quote purge functionality.
As discussed above, the Exchange has found that Market Makers use the
SQF purge functionality much more frequently than the quote removal
Kill Switch to pull their quotes from the market. Furthermore, Market
Makers will retain the ability to contact market operations staff to
manually purge their quotes from the market. In addition, the Exchange
will continue to implement mandatory System-enforced risk mechanisms
that automatically remove quotes for the Market Maker once certain pre-
set thresholds or conditions are met (i.e., rapid fire and cancel on
disconnect).
Also, the Exchange believes that the low usage rate for the quote
removal Kill Switch does not warrant the continuous resources necessary
for System support of such tools. As a result, the Exchange also
believes that the proposal will remove impediments to and perfect the
mechanism of a free and open market and a national market system by
allowing the Exchange to reallocate System capacity and resources
currently used to maintain this functionality to the development and
maintenance of other business initiatives and risk management products.
As noted above, the Exchange will retain the ability for Phlx
members to utilize Kill Switch to cancel orders and prevent new order
submission. The Exchange does not believe that decommissioning the
quote removal portion of the Kill Switch tool for Market Makers is
unfairly discriminatory because Market Makers are professional traders
with their own risk settings, and have more sophisticated
infrastructures than most other market participants. Furthermore, as
discussed above, the Exchange has determined that Market Makers
currently use the mass purge functionality on SQF to pull their quotes
from the market instead of using the quote removal Kill Switch tool to
achieve the same result.
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 proposed rule change will
allow the Exchange to decommission a risk management tool that is
rarely, if ever, used on the Exchange. As discussed above, Market
Makers currently have a variety of similar tools like the quote removal
Kill Switch that allow them to pull their quotes from the market and
inhibit the entry of new quotes, including the mass quote purge
functionality on SQF that the Exchange has found Market Makers use much
more frequently than the quote removal Kill Switch to achieve the same
result.
As noted above, the Exchange will retain the ability for Phlx
members to utilize Kill Switch to cancel orders and prevent new order
submission. The Exchange does not believe that decommissioning the
quote removal portion of the Kill Switch tool for Market Makers will
impose an undue burden on competition because Market Makers are
professional traders with their own risk settings, and have more
sophisticated infrastructures than most other market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-
4(f)(6) thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
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
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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.
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#9be9eef7feb6f8f4f6f6fef5efe8dbe8fef8b5fcf4ed"><span class="__cf_email__" data-cfemail="5624233a337b35393b3b333822251625333578313920">[email protected]</span></a>. Please include
File Number SR-Phlx-2021-51 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-2021-51. 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 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-2021-51 and should be submitted on
or before October 13, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-20447 Filed 9-21-21; 8:45 am]
BILLING CODE 8011-01-P
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