Notice2023-14286
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Establish Purge Ports for Equities Trading
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Published
July 7, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 129 (Friday, July 7, 2023)</title>
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[Federal Register Volume 88, Number 129 (Friday, July 7, 2023)]
[Notices]
[Pages 43405-43409]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-14286]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97825; File No. SR-Phlx-2023-28]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Establish Purge
Ports for Equities Trading
June 30, 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 June 28, 2023, 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 establish Purge Ports for equities
trading.
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 is proposing to establish a new port type, ``Purge
Port,'' which is a function enabling PSX Participants (the
``Participants'') to cancel all open orders or a subset of open orders
(per MPID, buy or sell side of the order, or ticker symbol) across
multiple protocols through a single cancel message.\3\ The Exchange
also proposes to amend the Pricing Schedule in Equity 7, Section 3 to
set fees for Purge Ports and to waive the fees for the Purge Ports in
the Exchange's Test Facility for the first two months a Participant
uses them in the Test Facility. Finally, the Exchange proposes to make
functional enhancements to its Order entry protocols to include a
function enabling Participants to cancel, through a single cancel
message, all open orders or a subset of open orders
[[Page 43406]]
(per MPID, buy or sell side of the order, or ticker symbol) entered
through that port (the ``purging functionality'').
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\3\ Purge Ports will be available for RASH, FIX and OUCH
protocols.
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A logical port represents a port established by the Exchange within
the Exchange's system for trading and billing purposes. Each logical
port grants a Participant the ability to accomplish a specific
function, such as order entry, order cancellation, access to execution
reports, and other administrative information.
The proposed Purge Ports are designed to assist Participants,
including Market Makers \4\ in the management of, and risk control
over, their orders, particularly if the firm is dealing with a large
number of securities. For example, if a Participant detects market
indications that may influence the execution potential of their orders,
the Participant may use the proposed Purge Ports to reduce uncertainty
and to manage risk by purging all orders in a number of securities.
This would allow the Participant to seamlessly avoid unintended
executions, while continuing to evaluate the market, their positions,
and their risk levels. While Purge Ports will be available to all
Participants, the Exchange anticipates they will be used primarily by
firms that conduct business activity that exposes them to a large
amount of risk across a number of securities. The proposed purging
functionality will operate similar to a Purge Port, by allowing a
Participant to purge all orders or a subset of open orders (per MPID,
buy or sell side of the order, or ticker symbol) open on that port. The
only material difference for a Participant, between relying on the
purging functionality as opposed to using a Purge Port, is that Purge
Port requires a Participant to send one message to accomplish desired
cancellation of orders or a subset thereof as described above, while
the purging functionality requires a Participant to send multiple
messages (which could be sent simultaneously) to accomplish the same
task.\5\
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\4\ Member organizations seeking to become registered as a PSX
Market Maker must comply with the applicable requirements of General
3, Section 1. See Equity 2, Section 4.
\5\ The Exchange expects the purging functionality to remain
substantially similar to Purge Ports, as described above, and would
offer the purging functionality as long as it offers Purge Ports.
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Participants may currently cancel individual orders through the
existing functionality of the RASH Order entry protocol,\6\ FIX Order
entry protocol \7\ and the OUCH Order entry protocol.\8\ In addition to
the current functionality, which is being retained, the Exchange now
proposes to expand the ability of Participants to cancel orders through
the new purge functionality, which would enable them to cancel all open
orders or a subset of open orders (per MPID, buy or sell side of the
order, or ticker symbol) entered through a single port; and through the
proposed Purge Ports, which would enable them to cancel all open
orders, or a subset of open orders (per MPID, buy or sell side of the
order, or ticker symbol) across multiple protocols through a single
cancel message.
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\6\ The RASH Order entry protocol is a proprietary protocol that
allows members to enter Orders, cancel existing Orders and receive
executions. RASH allows participants to use advanced functionality,
including discretion, random reserve, pegging and routing.
\7\ Financial Information eXchange (FIX) is a vendor-neutral
standard message protocol that defines an electronic message
exchange for communicating securities transactions between two
parties.
\8\ The OUCH Order entry protocol is a proprietary protocol that
allows subscribers to quickly enter orders into the System and
receive executions. OUCH accepts limit Orders from members, and if
there are matching Orders, they will execute. Non-matching Orders
are added to the Limit Order Book, a database of available limit
Orders, where they are matched in price-time priority. OUCH only
provides a method for members to send Orders and receive status
updates on those Orders.
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The Exchange notes that dedicated Purge Ports are not a new
functionality for equities exchanges, as other equity exchanges already
offer similar functionality.\9\ The Exchange also notes that the
proposed Purge Ports increase efficiency of already existing
functionality enabling the cancellation of orders. Nasdaq operates
highly performant systems with significant throughput and determinism
which allows participants to enter, update and cancel orders at high
rates. In that regard, Participants can cancel orders in rapid
succession across their order entry ports.\10\ In addition, the
Exchange provides a similar ability to mass cancel orders through the
Nasdaq Kill Switch, which is an optional tool offered at no charge that
enables Participants to establish pre-determined levels of risk
exposure, which can be used to cancel all open orders. Similarly,
Participants may use cancel-on-disconnect control when they experience
a disruption in connection to the Exchange to immediately cancel all
pending Exchange orders except for good-till-canceled orders.
Accordingly, the Exchange believes that the purge functionality and
Purge Ports provide an efficient option as an alternative to already
available services and enhance the Participant's ability to manage
their risk.
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\9\ See Securities Exchange Act Release No. 84405 (October 11,
2018), 83 FR 52598 (October 17, 2018) (SR-CboeEDGA-2018-016).
Explaining its decision to waive the 30-day operative delay of this
proposed rule change, the Commission stated that it believed that
purge ports may be a helpful tool for managing the risk associated
with trading equities, and that this can be important both for
individual market participants and the market in general.
\10\ Current Exchange port functionality supports cancelation
rates that exceed one thousand messages per second and the
Exchange's research indicates that certain Participants rely on such
functionality and at times utilize such cancelation rates.
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The Exchange proposes to provide the purging functionality without
charging any additional fees. All existing ports will be enhanced with
the purging functionality and will continue to be subject to the
existing fee schedule without any changes.
The Exchange proposes to adopt a fee for Purge Ports of $500 per
port/per month. As stated above, the Exchange believes that
Participants would benefit from a dedicated purge mechanism. Only firms
that request Purge Ports would be subject to the proposed fees, and
other firms can continue to operate in exactly the same manner as they
do today without dedicated Purge Ports, but with the additional purging
functionality.
The Exchange proposes to waive the applicable $300 per Purge Port,
per month fees for Participants that use their PSX access protocols
connection through the Exchange's Testing Facility to test the new
Purge Ports. The fees will be waived for the first two calendar months
from the date the participant first receives access to Purge Ports in
the Test Facility. A Participant may choose to conduct testing for
OUCH, FIX and RASH protocols simultaneously or at different times. If a
Participant chooses to conduct tests for their protocols separately,
the fees will be waived each time.
After the two months of service, a Participant will be expected to
have fully tested the new Purge Ports and will be charged for any fees
incurred for using the Exchange's Testing Facility ports thereafter.
Implementation
The Exchange intends to implement the proposed rule changes on or
before March 31, 2024. The Exchange will issue an Equity Trader Alert
to members announcing the exact date the Exchange will implement the
Purge Ports and the purging functionality, as described above.
[[Page 43407]]
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\11\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees and
other charges among members and issuers and other persons using any
facility, and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. The proposal is also 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.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange believes that the proposed rule change would promote
just and equitable principles of trade and remove impediments to and
perfect the mechanism of a free and open market because offering
Participants a new optional service promotes choice, flexibility,
efficiency, and competition. The Exchange believes the new features may
enhance participants' ability to manage orders, which would, in turn,
improve their risk controls to the benefit of all market participants.
The Exchange believes that the purging functionality and the Purge
Ports would foster cooperation and coordination with persons engaged in
facilitating transactions in securities because designating Purge Ports
for purge messages may encourage better use of such ports. This may,
concurrent with the ports that carry quote and other information
necessary for market making activities, enable more efficient, as well
as fair and reasonable, use of Market Makers' resources. Although
dedicated Purge Ports are a new functionality for Phlx equities
exchange,\13\ similar connectivity and functionality is offered by
options exchanges, including the Exchange's own affiliated options
exchanges, and other equities exchanges.\14\ The Exchange believes that
proper risk management, including the ability to efficiently cancel
multiple orders quickly when necessary, is similarly valuable to firms
that trade in the equities market, including Market Makers that have
heightened quoting obligations that are not applicable to other market
participants.
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\13\ See footnote 6, above.
\14\ See Securities Exchange Act Release No. 77613 (April 13,
2016), 81 FR 23023 (April 19, 2016). See also Securities Exchange
Act Release Nos. 79956 (February 3, 2017), 82 FR 10102 (February 9,
2017) (SR-BatsBZX-2017-05); 79957 (February 3, 2017), 82 FR 10070
(February 9, 2017) (SR-BatsEDGX-2017-07); 83201 (May 9, 2018), 83 FR
22546 (May 15, 2018) (SR-C2-2018-006).
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The proposed rule change will not relieve Market Makers of their
quoting obligations or firm quote obligations under Regulation NMS Rule
602.\15\ Specifically, any interest that is executable against a
Participant's or Market Maker's quotes and orders that is received by
the Exchange prior to the time of the removal of orders request will
automatically execute. Market Makers that purge their orders will not
be relieved of the obligation to provide continuous two-sided quotes on
a daily basis, nor will it prohibit the Exchange from taking
disciplinary action against a Market Maker for failing to meet their
continuous quoting obligation each trading day.\16\
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\15\ 17 CFR 242.602.
\16\ See Equity 2, Section 5.
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Dedicated Purge Ports, which were originally introduced for options
trading, subsequently became a feature in the equities market. The
Exchange, therefore, is not the first equities exchange to offer this
functionality to Participants and to charge associated fees.\17\
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\17\ Cboe charges $650 per port/per month for Purge Ports that
have substantially similar functionality. This fee is also $100 more
than the fee for a logical port on its exchange. See, Cboe EDGA U.S.
Equities Exchange Fee Schedule.
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The Exchange believes the proposed fee for Purge Ports is
reasonable. The Exchange currently charges $400 per port/per month for
logical ports. The Exchange believes it is reasonable to charge $500
per month for the proposed Purge Ports, which is $100 more than the fee
for a logical port, as such ports represent targeted enhancement of
technology and were specially developed to allow for the sending of a
single message to cancel multiple orders, thereby assisting firms in
effectively managing risk. Nasdaq also believes that a Participant that
chooses to utilize a Purge Port may, in the future, reduce their need
for additional logical ports by consolidating cancel messages to the
Purge Port and thus freeing up some capacity of the existing logical
ports and, therefore, allowing for increased message traffic without
paying for additional logical ports. In addition, the proposed purging
functionality will allow Participants to achieve essentially the same
outcome without paying for a dedicated Purge Port. Purge Ports provide
the ability to cancel multiple orders across multiple ports with less
messaging from the firms using the ports and therefore may create
efficiencies for firms and provide a more economical solution to their
risk management needs. In addition, Purge Port requests may cancel
orders submitted over numerous ports and contain added functionality to
purge only a subset of these orders (per MPID, buy or sell side of the
order, or ticker symbol). Effective risk management is important both
for individual market participants that choose to utilize risk features
provided by the Exchange, as well as for the market in general. As a
result, the Exchange believes that it is appropriate to charge fees for
such functionality as doing so aids in the maintenance of a fair and
orderly market.
The Exchange also believes that its ability to set fees for Purge
Ports is subject to significant substitution-based forces because
Participants are able to rely on currently available services both free
and those they receive when using existing trading protocols, which
will include the proposed purging functionality. If the value of the
efficiency introduced through the Purge Port functionality is not worth
the proposed fees, Participants will simply continue to rely on the
existing functionality and the proposed purging functionality and not
pay for Purge Ports. In that regard, Participants already can cancel
orders individually and by utilizing Nasdaq protocols that allow them
to develop proprietary systems that can send cancel messages at a high
rate.\18\ In addition, the Exchange already provides similar ability to
mass cancel orders through the Nasdaq Kill Switch, which is an optional
tool offered at no charge that enables Participants to establish pre-
determined levels of risk exposure, and can be used to cancel all open
orders. Similarly, Participants may use cancel-on-disconnect control
when they experience a disruption in connection to the Exchange to
immediately cancel all pending Exchange orders except for good-till-
canceled orders. Finally, the proposed purging functionality will allow
Participants to achieve essentially the same outcome in canceling
orders as they would by utilizing the Purge Ports. Accordingly, the
Exchange believes that the proposed Purge Ports fee is reasonable
because it is related to the efficiency introduced by the Purge Port
functionality related to other means and services already available
which are either free or already a part of a fee assessed to the
Participant's for existing
[[Page 43408]]
connectivity. Accordingly, because the proposed Purge Ports provide
additional optional functionality, excessive fees would simply serve to
reduce or eliminate demand for this optional product.
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\18\ Current Exchange port functionality supports cancelation
rates that exceed one thousand messages per second and the
Exchange's research indicates that certain Participants rely on such
functionality and at times utilize such cancelation rates.
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The Exchange also believes that offering the purging functionality
and the Purge Ports at the Exchange level promotes risk management
across the industry, and thereby facilitates investor protection. Some
market participants, in particular the larger firms, could and do build
similar risk functionality (as described above) in their trading
systems that permit the flexible cancellation of orders entered on the
Exchange at a high rate. Offering Exchange level protections ensures
that such functionality is widely available to all firms, including
smaller firms that may otherwise not be willing to incur the costs and
development work necessary to support their own customized mass cancel
functionality.
As noted above, the Exchange is not the first equities exchange to
develop and offer dedicated Purge Ports for equities trading, and the
proposed rate is lower than that charged by other equities exchanges
for similar functionality. Generally speaking, restricting the
Exchange's ability to offer new services and charge fees for these new
services discourages innovation and competition. Specifically in this
case, the Exchange's inability to introduce similar services to those
offered by other exchanges, and charge reasonable and equitable fees
for such services, would put the Exchange at a significant competitive
disadvantage and therefore serves to restrict competition in the
market--especially when other exchanges assess fees higher than those
proposed by the Exchange.
The Exchange believes that the proposed Purge Port fees are
equitable because the proposed Purge Ports are completely voluntary as
they relate solely to optional risk management functionality.
The Exchange also believes that the proposed amendments to its fee
schedule are not unfairly discriminatory because they will apply
uniformly to all Participants that choose to use the optional Purge
Ports. The proposed Purge Ports are completely voluntary and, as they
relate solely to optional risk management functionality, no Participant
is required or under any regulatory obligation to utilize them. All
Participants that voluntarily select this service option will be
charged the same amount for the same services. All Participants have
the option to select any connectivity option, and there is no
differentiation among Participants with regard to the fees charged for
the services offered by the Exchange.
The Exchange believes that the proposal to waive the applicable
$300 per Purge Port, per month fees for Participants that conduct tests
of their PSX access protocols connection through the Exchange's Testing
Facility to test the new Purge Ports functionality is reasonable and
not unfairly discriminatory. Importantly, the Exchange believes the
two-month waiver of the fee will encourage testing of the new optional
Purge Ports, which will allow participants to evaluate whether the new
optional service is of value to them and if so will help them better
implement them into their workflow. All Participants will be notified
about the availability of the new Purge Port functionality and have
access to test it but will not be required to use it. Moreover, the
fees for the RASH, FIX and OUCH ports will remain the same and apply to
all Participants in the same manner. Based on the Exchange's
experience, we anticipate that Participants will complete testing the
new Purge Ports within two months from initiating such tests and thus
will not incur any fees related to testing the functionality of Purge
Ports.
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. To the contrary, the Exchange
believes the proposed rule change will enhance competition because it
will enable the Exchange to innovate and offer similar equities Purge
Port functionality to that offered by other equity exchanges and on
options markets today. The proposed Purge Ports are completely
voluntary and will be made available to all members on an equal basis
at the same cost. While the Exchange believes that the proposed Purge
Ports provide a valuable service, Participants can choose to purchase,
or not purchase, these ports based on their own determination of the
value and their business needs. No Participant is required or under any
regulatory obligation to utilize Purge Ports. Accordingly, the Exchange
believes that the proposed rule change is designed to offer appropriate
risk management functionality to firms that trade on the Exchange
without imposing an unnecessary or inappropriate burden on competition.
The Exchange is also allowing the Participants to test this new
functionality for free by providing a two-month waiver in the
Exchange's Test Facility. Accordingly, the Exchange believes that the
proposed rule change is designed to offer optional risk management
functionality to firms that trade on the Exchange without imposing an
unnecessary or inappropriate burden on competition.
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 \19\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\20\
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\19\ 15 U.S.C. 78s(b)(3)(A)(iii).
\20\ 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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#ef9d9a838ac28c8082828a819b9caf9c8a8cc1888099"><span class="__cf_email__" data-cfemail="255750494008464a4848404b5156655640460b424a53">[email protected]</span></a>. Please include
file number SR-Phlx-2023-28 on the subject line.
[[Page 43409]]
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-2023-28. 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="https://www.sec.gov/rules/sro.shtml">https://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
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-2023-28 and should be
submitted on or before July 28, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2023-14286 Filed 7-6-23; 8:45 am]
BILLING CODE 8011-01-P
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