Notice2024-25728
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Proposed Rule Change To Amend Options 3, Section 13 Related to XND
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Published
November 6, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 215 (Wednesday, November 6, 2024)</title>
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[Federal Register Volume 89, Number 215 (Wednesday, November 6, 2024)]
[Notices]
[Pages 88092-88094]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-25728]
[[Page 88092]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101488; File No. SR-Phlx-2024-54]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change To Amend Options 3, Section 13 Related to XND
October 31, 2024.
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 October 18, 2024, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
a 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 Options 3, Section 13, Price
Improvement XL (``PIXL'').
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 13, Price
Improvement XL (``PIXL'') to permit orders for the accounts of
appointed Market Makers to be solicited for PIXL Auctions for XND
options only. XND options are options based on 1/100 the value of the
Nasdaq-100 (``XND'' or ``XND options''). Today, Cboe Exchange, Inc.
(``Cboe'') permits orders for the accounts of Market-Makers with an
appointment in SPX to be solicited for the Initiating Order submitted
for execution against an Agency Order in SPX options into an AIM
Auction pursuant to Rule 5.37.\3\
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\3\ See Securities Exchange Act Release No. 91116 (February 11,
2021), 86 FR 10154 (February 18, 2021) (SR-Cboe-2020-050) Order
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1
and 2, To Amend Rules 5.37 and 5.73 Related to the Solicitation of
Market Makers for SPX Initiating Orders in the Automated Improvement
Mechanism and FLEX Automated Improvement Mechanism.
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The Exchange proposes to amend Options 3, Section 13(a)(8) to
permit orders for the accounts of Market Makers with an appointment in
XND to be solicited for the Initiating Order \4\ submitted for
execution against a PIXL Order in XND options into a PIXL Auction
pursuant to Options 3, Section 13. Today, Options 3, Section 13(a)(8)
provides that, ``[a]n Initiating Order may not be a solicited order for
the account of any Exchange Lead Market Maker, SQT, RSQT or non-
streaming Market Maker assigned in the affected series.'' No similar
restriction applies to crossing transactions in open outcry trading,
where XND options also trade. As further discussed below, brokers
seeking liquidity to execute against Public Customer orders on the
trading floor regularly solicit appointed XND Market Makers for this
liquidity, as they are generally the primary source of pricing and
liquidity for those options.
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\4\ The ``Initiating Order'' is an order comprised of principal
interest or a solicited order(s) submitted to trade against the
order the submitting agency order on behalf of a Public Customer,
broker-dealer, or any other entity or ``PIXL Order.'' See Phlx
Options 3, Section 13.
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The Exchange believes not permitting Market Makers appointed in XND
to participate as contras in the PIXL Auction in XND makes it difficult
for brokers to find sufficient liquidity to fill their customer orders.
For example, if a Public Customer order is not fully executable against
electronic bids and offers, a floor broker can attempt to execute the
order, or remainder thereof, on the trading floor, where the liquidity
to trade with this remainder is generally provided by Market Makers in
the open outcry trading crowd. Additionally, brokers may solicit
liquidity from upstairs Market Maker firms.
The Exchange believes brokers will have difficulty finding
sufficient liquidity to initiate PIXL Auctions from only market
participants that are not Market-Makers appointed in XND, thereby
denying smaller, retail-sized XND options price improvement benefits.
The Exchange believes it is appropriate to permit orders for the
account of appointed XND Market Makers, similar to Cboe's SPX, to be
submitted as the contra order, as the Exchange believes the liquidity
provided by XND Market Makers will need to be available for brokers to
initiate PIXL Auctions in XND and create potential price improvement
opportunities for those retail-sized orders. If XND Market Makers
cannot be solicited for XND PIXL Auctions, the Exchange believes
brokers may not be able to initiate as many XND PIXL Auctions for their
retail orders, which may reduce the price improvement opportunities
available for those orders. The Exchange notes that today, there are
three electronic Market Maker firms with XND appointments.
In multi-list classes, many Market Makers serve as both appointed
Market Makers on the Exchange and as away market makers that are
registered on other options exchanges. These firms, as a result, can
use their accounts for their away market maker activities for being
solicited with respect to PIXL Auctions. In general, solicited orders
submitted as the Initiating Order for PIXL Auctions are almost always
comprised of orders for the accounts of away market makers. However,
XND is an exclusively listed class on the Exchange, so a firm cannot
serve as an XND away market maker. Permitting orders for the account of
an appointed XND Market Makers, similar to Cboe's SPX, to be submitted
as the contra order will allow brokers to more efficiently locate
liquidity to initiate PIXL Auctions to fill their Public Customer
orders, particularly during times of volatility, which may create
additional execution and price improvement opportunities for Public
Customers at all times. The Exchange believes the proposed rule change
will, therefore, provide retail-sized orders with similar price
improvement opportunities with PIXL as is the case with the trading
floor. Permitting XND Market Makers to serve as contra parties to
crossing transactions submitted into a PIXL Auction will also further
align PIXL Auctions with XND crossing executions that occur on the
trading floor. XND Market Makers frequently serve as contra parties to
crossing transactions on the trading floor.
Implementation
The Exchange proposes to implement this rule change on or before Q2
of 2025.
[[Page 88093]]
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\5\ in general, and furthers the objectives of Section
6(b)(5) of the Act.\6\ Specifically, the Exchange believes the proposed
rule change is consistent with the Section 6(b)(5) \7\ 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.
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\5\ 15 U.S.C. 78f(b)
\6\ 15 U.S.C. 78f(b)(5).
\7\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes the proposed rule change will
benefit investors. The proposed rule change will permit the primary XND
liquidity providers on the Exchange to provide the liquidity necessary
for brokers to initiate XND PIXL Auctions for their Public Customer
orders. If brokers can solicit the primary liquidity providers in XND
for PIXL Auctions the Exchange believes brokers will be able to more
efficiently locate liquidity to fill their Public Customer orders,
particularly during times of volatility. The Exchange believes the
proposed rule change will, therefore, provide retail-sized orders with
similar price improvement opportunities as on the trading floor. As a
result, the Exchange believes the proposed rule change will permit
sufficient liquidity to be available for PIXL Auctions, which may
create additional execution and price improvement opportunities for
Public Customers, including retail customers.
The Exchange also believes the proposed rule change will promote
just and equitable principles of trade and remove impediments to and
perfect the mechanism of a free and open market and a national market
system because it will align the XND PIXL Auction process with the open
outcry crossing process, and thus align the execution and price
improvement opportunities available in both auctions by permitting the
same participants to be solicited as contras in both types of auctions
in XND. Currently, XND Market Makers may be solicited with respect to
crossing transactions on the trading floor. However, pursuant to
Options 3, Section 13 governing PIXL, XND Market Makers would not be
able to be solicited to initiate PIXL Auctions. The Exchange believes
there is no reason to restrict XND Market Makers' ability to provide
liquidity into XND PIXL Auctions when they are able to similarly
provide, and do provide, that liquidity for open outcry XND crossing
transactions. Today, Cboe permits orders for the accounts of Market-
Makers with an appointment in SPX to be solicited for the Initiating
Order submitted for execution against an Agency Order in SPX options
into an AIM Auction pursuant to Cboe Rule 5.37.
The Exchange believes the proposed rule change will promote
competition in XND PIXL Auctions, including competition to initiate XND
PIXL Auctions, which will remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors. As noted above, there are three
electronic Market Maker firms with XND appointments. The Exchange
believes the availability of this liquidity available to PIXL Orders
will positively affect the experience for PIXL Orders and overall
quality of the auctions. Furthermore, the Exchange believes increasing
the number of market participants available to be solicited may
increase competition to provide Initiating Orders, which may lead to a
PIXL Auction being initiated at a better price. More market
participants competing to provide Initiating Orders may lead to
solicited parties providing more aggressive initial prices. The
Exchange believes the ability of all market participants, including
appointed Market Makers that did not submit an Initiating Order, to
submit responses to a PIXL Auction will continue to provide competition
for executions against Agency Orders. The Exchange does not believe the
proposed rule change will adversely impact the quoting behavior of XND
Market Makers.
The Exchange believes any risk that appointed Market Makers may
misuse the nonpublic information of an upcoming XND PIXL Auction is de
minimis. Currently, that same risk is present for non-appointed Market
Makers, but the Exchange has not observed any trends of solicited
market participants separately submitting unrelated orders as a result
of knowledge of impending PIXL Auctions in other classes. Phlx Options
3, Section 13(d) prohibits a pattern or practice of submitting multiple
orders in response to a PAN at a particular price point that exceeds,
in the aggregate, the size of the PIXL Order, will be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of General 9, Section 1(c). Further, Phlx General 9, Section
21 requires members to establish, maintain, and enforce written
policies and procedures reasonably designed to prevent the misuse of
material, nonpublic information by members and their associated
persons.
Finally, the Exchange believes the proposed rule change is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers because it will permit orders for accounts of
appointed XND Market Makers to be solicited in the same manner as
orders for the accounts of all other market participants in XND PIXL
Auctions. Currently, all market participants other than appointed XND
Market Makers would be able to be solicited as the contra and submit
responses in PIXL Auctions, while appointed XND Market Makers would be
restricted to only submitting responses. The Exchange believes that
this proposal may increase execution and price improvement
opportunities for Public Customers' XND orders, where the ability for
away market makers to provide liquidity is limited.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act.
The Exchange does not believe the proposed rule change will impose
any burden on intra-market competition that is not necessary or
appropriate in furtherance of the purposes of the Act because it will
provide XND Market Makers with the same execution opportunities in PIXL
Auctions that would be available to all other market participants.
Additionally, the proposed rule change will align open outcry and
electronic crossing auctions for XND and the execution and price
improvement opportunities available in both auctions by permitting the
same participants to be solicited as contras in both types of auctions
across XND. As a result, the Exchange believes it is appropriate for
the electronic crossing mechanism to more closely replicate the open
outcry crossing process in XND in order to minimize any impact on the
market for those options. Unlike in multi-list classes, Market Maker
firms cannot serve as XND market makers at other options exchanges. The
Exchange further believes the restriction of this change to XND will
preserve certain aspects of market structure that are important to
maintain Market Maker
[[Page 88094]]
incentives to provide electronic liquidity in XND options.
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act because it
relates to orders in an exclusively listed class submitted into a PIXL
Auction on the Exchange. Additionally, the Exchange notes that Cboe
permits orders for the accounts of Market-Makers with an appointment in
SPX to be solicited for the Initiating Order submitted for execution
against an Agency Order in SPX options into an AIM Auction pursuant to
Cboe Rule 5.37. The Exchange believes the proposed rule change may
improve price competition for smaller-sized orders within PIXL Auctions
for XND options, because the primary liquidity providers will be
available for the solicitation necessary to initiate those auctions.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be 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#b8cacdd4dd95dbd7d5d5ddd6cccbf8cbdddb96dfd7ce"><span class="__cf_email__" data-cfemail="3a484f565f17595557575f544e497a495f59145d554c">[email protected]</span></a>. Please include
file number SR-Phlx-2024-54 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-2024-54. 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-2024-54 and should be
submitted on or before November 27, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-25728 Filed 11-5-24; 8:45 am]
BILLING CODE 8011-01-P
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