Notice2024-30904
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Various Phlx Rules in Connection With a Technology Migration
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 30, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Notices]
[Pages 106888-106925]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-30904]
[[Page 106887]]
Vol. 89
Monday,
No. 249
December 30, 2024
Part IV
Securities and Exchange Commission
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Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Amend Various Phlx
Rules in Connection With a Technology Migration; Notice
Federal Register / Vol. 89 , No. 249 / Monday, December 30, 2024 /
Notices
[[Page 106888]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101989; File No. SR-Phlx-2024-71]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Various
Phlx Rules in Connection With a Technology Migration
December 19, 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 December 12, 2024, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III, below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Options 2, Section 6, Market Maker
Orders. The Exchange also proposes to amend the following Options 3
Rules: Section 4, Entry and Display of Quotes; Section 6, Firm
Quotations; Section 7, Types of Orders and Order and Quote Protocols;
Section 8, Opening Process; Section 9, Trading Halts; Section 10,
Electronic Execution Priority and Processing in the System; Section 15,
Simple Order Risk Protections; Section 23, Data Feeds and Trade
Information; and Section 28, Optional Risk Protections. The Exchange
also proposes to amend Options 5, Section 4, Order Routing; Options 6,
Section 1, Authorization to Give-Up; Options 7, Section 9, B, Port
Fees; and Options 8, Section 32, Types of Floor-Based (Non-System)
Orders.
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
In connection with a technology migration to an enhanced Nasdaq,
Inc. (``Nasdaq'') functionality which will result in higher
performance, scalability, and more robust architecture, the Exchange
intends to adopt certain trading functionality currently utilized at
Nasdaq affiliate exchanges. As further discussed below, the Exchange is
proposing to adopt such functionality substantially in the same form as
currently on the Nasdaq affiliated options exchanges, while retaining
certain intended differences between it and its affiliates. The
Exchange also proposes a number of changes to memorialize existing
functionality, add more granularity in its rules to describe how
existing functionality operates today, and to harmonize the Exchange's
rules where appropriate with the rules of its affiliated options
exchanges by using consistent language to describe identical
functionality.
Specifically, the Exchange proposes to amend Options 2, Section 6,
Market Maker Orders and the following Options 3 Rules: Section 4, Entry
and Display of Quotes; Section 6, Firm Quotations; Section 7, Types of
Orders and Order and Quote Protocols; Section 8, Opening Process;
Section 9, Trading Halts; and Section 10, Electronic Execution Priority
and Processing in the System; \3\ Section 15, Simple Order Risk
Protections; Section 23, Data Feeds and Trade Information; and Section
28, Optional Risk Protections. The Exchange also proposes to amend
Options 5, Section 4, Order Routing; Options 7, Section 9, B, Port
Fees; and Options 8, Section 32, Types of Floor-Based (Non-System)
Orders. Each rule change is described below.
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\3\ Phlx Options 1, Section 1(b)(57) provides, [t]he term
``System'' shall mean the automated system for order execution and
trade reporting owned and operated by the Exchange which comprises:
(i) an order execution service that enables members to automatically
execute transactions in option series; and provides members with
sufficient monitoring and updating capability to participate in an
automated execution environment; (ii) a trade reporting service that
submits ``locked-in'' trades for clearing to a registered clearing
agency for clearance and settlement; transmits last-sale reports of
transactions automatically to the Options Price Reporting Authority
(``OPRA'') for dissemination to the public and industry; and
provides participants with monitoring and risk management
capabilities to facilitate participation in a ``locked-in'' trading
environment; and (iii) the data feeds described at Options 3,
Section 23.
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Options 2, Section 6
Options 2, Section 6(a) currently states that Market Makers \4\ and
Lead Market Makers \5\ may enter all order types defined in Options 3,
Section 7(b) in the options classes to which they are appointed and
non-appointed, except for Market Orders as provided in Options 3,
Section 7(b)(1), Stop Orders as provided in Options 3, Section 7(b)(4),
All-or-None Orders as provided in Options 3, Section 7(b)(5), Directed
Orders as provided for in Options 2, Section 10, and Public Customer-
to-Public Customer Cross Orders subject to Options 3, Section 13(a) and
(f).
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\4\ A ``Market Maker'' means a Streaming Quote Trader or a
Remote Streaming Quote Trader who enters quotations for his own
account electronically into the System. See Options 1, Section
1(b)(28).
\5\ A ``Lead Market Maker'' means a member who is registered as
an options Lead Market Maker pursuant to Options 2, Section 12(a). A
Lead Market Maker includes a Remote Lead Market Maker which is
defined as a Lead Market Maker in one or more classes that does not
have a physical presence on the Exchange's Trading Floor and is
approved by the Exchange pursuant to Options 2, Section 11. See
Options 1, Section 1(b)(27).
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The Exchange proposes to remove the Market Maker restrictions
related to Market Orders,\6\ Stop Orders,\7\ All-or-None Orders \8\ and
Directed Orders \9\ so as not to restrict the ability of a Lead Market
Maker or Market Maker from entering orders they may enter today on
[[Page 106889]]
other options markets.\10\ With this proposed change, Market Makers
would be permitted to enter Market Orders, Stop Orders and All-or-None
Orders similar to other market participants, and similar to market
makers on ISE, GEMX and MRX, as explained below in greater detail.
Also, today, Market Makers may enter all Complex Order types. To make
this clear in the rule text, the Exchange proposes to reference Options
3, Section 14, which governs Complex Orders, in addition to referencing
Options 3, Section 7(b), which governs simple orders.\11\
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\6\ A Market Order is an order to buy or sell a stated number of
options contracts that is to be executed at the best price
obtainable when the order reaches the Exchange. Lead Market Makers,
Market Makers, and Off-Floor Broker-Dealers may not submit Market
Orders. See Phlx Options 3, Section 7(b)(1).
\7\ A Stop Order is a Limit Order or Market Order to buy or sell
at a limit price when interest on the Exchange for a particular
option contract reaches a specified price. A Stop Order shall be
cancelled if it is immediately electable upon receipt. A Stop Order
shall not be elected by a trade that is reported late or out of
sequence or by a Complex Order trading with another Complex Order.
Lead Market Makers and Maker Makers may not submit a Stop Order.
Off-Floor Broker-Dealers may not enter a Stop Market Order. See Phlx
Options 3, Section 7(b)(4).
\8\ An All-or-None Order is a Limit Order or Market Order that
is to be executed in its entirety or not at all. An All-or None
Order may only be submitted by a Public Customer as an Immediate-or-
Cancel Order. The Acceptable Trade Range protection in Options 3,
Section 15(a) is not applied to All-Or-None Orders. See Phlx Options
3, Section 7(b)(5).
\9\ The term ``Directed Order'' means any order to buy or sell
which has been directed to a particular Lead Market Maker, RSQT, or
SQT by an Order Flow Provider, as defined below. To qualify as a
Directed Order, an order must be delivered to the Exchange via the
System. See Phlx Options 2, Section 10.
\10\ The Exchange proposes to delete the term ``Lead Market
Makers'' in Options 2, Section 6(a) as the term ``Market Makers''
includes ``Lead Market Makers.'' Both terms are not necessary.
Additionally, removing the term ``Lead Market Makers'' harmonizes
the rule text in Phlx Options 2, Section 6(a) to ISE, GEMX, MRX and
BX Options 2, Section 6(a).
\11\ Today, Options 3, Section 14 includes all Complex Order
Types that may be traded by any market participant.
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Additionally, as currently noted in Options 3, Section 7(e), Off-
Floor Broker-Dealers may not enter All-or-None Orders, Market Orders,
Stop Market Orders, and public customer-to-public customer cross orders
subject to Options 3, Section 13(a) and (f). The Exchange is also
proposing to remove the restrictions applicable to Off-Floor Broker-
Dealers. Today, Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC (``GEMX'')
and Nasdaq MRX, LLC (``MRX'') Options 2, Section 6 do not provide
similar restrictions as Phlx for Market Orders, Stop Orders and All-or-
None Orders.
The Exchange proposes to permit Lead Market Makers, Market Makers,
and Off-Floor Broker Dealers to enter Market Orders and Stop Orders
similar to all other market participants on Phlx. Today, all market
participants, including Lead Market Makers, Market Makers and Off-Floor
Broker Dealers \12\ may transact Market Orders and Stop Orders on other
options markets.\13\ The Exchange does not believe there is any reason
to restrict Lead Market Makers, Market Makers and Off-Floor Broker
Dealers from entering Market Orders or Stop Orders. Previously, in a
2019 rule change \14\ Phlx noted that it believed that prohibiting
Market Makers from entering Market Orders was consistent with the Act
because Market Orders are designed to remove liquidity from the Order
Book. Further, that rule change noted that Stop Orders are non-
displayed order types until they are triggered which does not benefit
the role of a Market Makers in displaying liquidity on the Order
Book.\15\ Stop Orders are triggered by either the occurrence of a
transaction or posting on the order book. Once triggered, the order
becomes displayed as either a Market Order or Limit Order as described
in greater detail below in the discussion of Stop Orders in Options 3,
Section 7. At this time, the Exchange proposes to permit Lead Market
Makers, Market Makers, and Off-Floor Broker Dealers to enter both
Market Orders and Stop Orders. Today, ISE, GEMX and MRX do not prohibit
Lead Market Makers, Market Makers, and Off-Floor Broker Dealers from
entering a Market Order and Stop Order on those markets, and those
markets have not observed any adverse consequences. Also, current Phlx
Options 2, Section 6 restricts the number of contracts that a Market
Maker may enter in a quarter,\16\ thereby preventing Market Makers from
entering an unlimited quantity of orders. In addition, the Exchange
would no longer prohibit an Off-Floor Broker Dealer from entering a
Market Order for the same reasons.\17\ All Market Makers, including
away market makers, are restricted to a total number of contracts
executed during a quarter in options series to which it is not
appointed of twenty-five percent (25%) of the total number of contracts
executed by the Market Maker and Lead Market Maker in options series as
all options markets impose this restriction on market makers. The
Exchange does not believe there is any reason to restrict Off-Floor
Broker Dealers from entering Market Orders in options classes, rather,
the Exchange proposes to permit all member organizations to be able to
enter Market Orders. Finally, the Exchange believes that harmonizing
the ability for Lead Market Makers, Market Makers, and Off-Floor Broker
Dealers to enter both Market Orders and Stop Orders across ISE, GEMX,
MRX and Phlx will allow market participants to enter equivalent order
types on all these markets. For these reasons, Phlx believes Lead
Market Makers, Market Makers and Off-Floor Broker Dealers should be
permitted to utilize Market Orders and Stop Orders to remove liquidity
from its order book without impacting their ability to provide
liquidity.
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\12\ Phlx Options 1, Section 1(b)(33) provides, [t]he term
``Off-Floor Broker-Dealer Order'' means an order delivered from off
the floor of the Exchange by or on behalf of a broker-dealer for the
proprietary account(s) of such broker-dealer, including an order for
a market maker located on an exchange or trading floor other than
the Exchange's trading floor delivered electronically for the
proprietary account(s) of such market maker.
\13\ See Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC (``GEMX'')
and Nasdaq MRX, LLC (``MRX) Options 2, Section 6 and NYSE Arca, Inc.
Rule 6.37B-O and NYSE American LLC Rule 925.2NY.
\14\ See Securities Exchange Act Release No. 87691 (December 9,
2019), 85 FR 68197 (December 13, 2019) (SR-Phlx-2019-52) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Order Types and Remove and Relocate Certain Rule Text Currently
Located Within Rule 1080).
\15\ Id.
\16\ Pursuant to Phlx Options 2, Section 6, the total number of
contracts executed during a quarter by a Market Maker and Lead
Market Maker in options series to which it is not appointed may not
exceed twenty-five percent (25%) of the total number of contracts
executed by the Market Maker and Lead Market Maker in options
series.
\17\ Current Phlx Options 3, Section 7(e) provides that, an off-
floor broker-dealer order may be entered for a minimum size of one
contract. Off-floor broker-dealers may enter all order types defined
in Options 3, Section 7(b) except for All-or-None Orders, Market
Orders, Stop Market Orders, and public customer-to-public customer
cross orders subject to Options 3, Section 13(a) and (f).
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Today, Phlx restricts all market participants from entering All-or-
None Orders except Public Customers.\18\ Similar to other options
markets, the Exchange proposes to permit all market participants to
enter All-or-None Orders. The Exchange is proposing to amend the All-
or-None Order type in Options 3, Section 7 to reflect this proposed
change as explained further below. By way of background, in 2019, the
Exchange amended its All-or-None Order to no longer offer the order
type to Professionals.\19\ At the time, the Exchange noted that
permitting Public Customers to enter All-or-None Orders with specific
size limitations that rest on the Order Book would continue to allow
Public Customers the opportunity to obtain fills for their orders when
the market moves even if the All-Or-None Order was not immediately
executable upon entry. The Exchange notes that in 2023, it amended All-
or-None Orders so that they would no longer rest on the order book,
rather the order type would be executed in its entirety, or it will
cancel if it cannot execute.\20\ With this change, the prior reasoning
is no longer a reason to restrict the order type to Public Customer use
only. The Exchange proposes to remove the restriction that only permits
Public Customers to enter the order type and allow all market
participants to utilize the All-or-None Order which now does not rest
on the order book. The
[[Page 106890]]
Exchange proposes to reflect the removal of the restriction in Options
2, Section 6 to reflect the fact that Market Makers would be able to
trade All-or-None Orders. The Exchange also explains this change below
in Options 3, Section 7 with respect to the order type amendments for
All-or-None Orders. Permitting all market participants to enter an AON
Order will harmonize the order type to ISE, GEMX and MRX Options 3,
Section 7(c) which also permit all market participants to utilize this
order type.
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\18\ This includes Off-Floor Broker Dealers as noted in current
Options 3, Section 7(e).
\19\ See Securities Exchange Act Release No. 85262 (March 7,
2019), 84 FR 9192 (March 13, 2019) (SR-Phlx-2019-03) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Option Floor Procedure Advice A-9 and Phlx Rules 1000 and 1066
and To Adopt a New Phlx Rule 1078). Prior to this rule change, All-
or-None Orders were available to Public Customers and Professionals,
(``2019 AON Rule Change'').
\20\ See Securities Exchange Act Release No. 98142 (August 16,
2023), 88 FR 57140 August 22, 2023) (SR-Phlx-2023-34) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Phlx's All-or-None Order) (``2023 AON Rule Change'').
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The Exchange notes that Directed Orders are orders directed to a
Market Maker by an Order Flow Provider. An order becomes a Directed
Order when it interacts with a Market Maker quote that is at the NBBO
at the time of receipt of the Directed Order. The Exchange believes it
is misleading to include a Directed Order in this list because a
Directed Order may be executed by a Market Maker.
Third, the Exchange proposes to amend ``Public Customer-to-Public
Customer Cross Orders'' to ``Customer Cross Orders'' to align with the
name of this order type on ISE, GEMX and MRX Options 3, Section 7(i).
The Exchange proposes to relocate the definition of Public Customer-to-
Public Customer Cross Orders'' from Options 3, Section 13 to proposed
Options 3, Section 7(i). A Customer Cross Order cannot be entered by a
Market Maker. The Exchange believes noting this exception in this order
type will bring greater transparency to Options 2, Section 6.
Additionally, the Exchange proposes to adopt a Reserve Order at Options
3, Section 7(g). A Reserve Order is a limit order with a displayed and
non-displayed portion.
The Exchange believes that Market Maker liquidity should be
displayed liquidity.\21\ For these reasons, and to remain competitive
with other markets, the Exchange proposes to permit Market Makers to
enter all orders they are eligible to submit, with the exception of
Reserve Orders, and restrict Reserve Orders in the non-appointed
classes similar to ISE, GEMX and MRX Options 2, Section 6. As noted
above, Market Makers are not able to enter Reserve Orders.
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\21\ While Stop Orders are not displayed until triggered, the
Exchange notes that once triggered a Stop Order would be displayed
as either a Market or Limit Order.
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The Exchange also proposes to amend the rule citations to align
with the relocated rule text. Finally, the Exchange proposes to
renumber the remainder of the text within Options 2, Section 6, related
to total number of contracts that may be executed in a quarter, as new
``b.'' The proposed rule text of Options 2, Section 6 will align with
ISE, GEMX and MRX Options 2, Section 6.
Options 3, Section 4
With respect to quotes, today, as set forth in Options 3, Section
4(b)(6), if, at the time of entry, a quote would cause a locked or
crossed market violation or would cause a trade-through violation, it
will either be re-priced to the current national best offer (for bids)
or the current national best bid (for offers) as non-displayed and
displayed at one minimum price variance above (for offers) or below
(for bids) the national best price.
The Exchange now proposes to amend the quote re-pricing mechanism
currently described in Phlx Options 3, Section 4(b)(6) by harmonizing
it with ISE, GEMX and MRX Options 3, Section 4(b)(6). As amended, the
quote re-pricing language in Options 3, Section 4(b)(6) would be
amended to provide: ``If, at the time of entry, a quote would cause a
locked or crossed market violation or would cause a trade-through
violation, it will be re-priced to the current national best offer (for
bids) or the current national best bid (for offers) as non-displayed,
and displayed at one minimum price variance above (for offers) or below
(for bids) the national best price, or immediately cancelled, as
configured by the member organization.'' With this amendment, Phlx
would permit member organizations to configure their ports to instruct
the Exchange to immediately cancel a quote that would otherwise cause a
locked or crossed market violation in lieu of re-pricing the quote. The
Exchange believes this functionality will provide member organizations
with more flexibility in handling their quotes.
Further, the Exchange proposes to remove the Quote Exhaust
functionality which is explained further below. In connection with the
removal of that functionality, the Exchange proposes to amend Options
2, Section 6(b)(8) to remove a reference to the Quote Exhaust.
Options 3, Section 6
Currently, Options 3, Section 6, Firm Quotations, describes the
Exchange's Quote Exhaust functionality that was adopted in 2009.\22\
Quote Exhaust occurs when the Exchange's disseminated market at a
particular price level includes a quote, and such market is exhausted
by an inbound contra-side quote or order (``initiating quote or
order''), and following such exhaustion, contracts remain to be
executed from the initiating quote or order through the initial
execution price.\23\ The initial execution price that gives rise to
Quote Exhaust is known as the ``reference price.'' \24\ Under Quote
Exhaust, any order volume that is routed to away markets will be marked
as an ISO.\25\ When a Quote Exhaust occurs, the System will initiate a
``Quote Exhaust Timer'' that applies to all options traded on the
System, not to exceed one second, during which any participant
(including any participant(s) whose size was exhausted) may submit
quotes, sweeps or orders at any price level.\26\ Today, during the
Quote Exhaust Timer, the Exchange will disseminate the reference price
for the remaining size, provided that such price does not lock an away
market, in which case, the Exchange will disseminate a bid and offer
that is one MPV from the away market price. Today, the Exchange will
disseminate, on the opposite side of the market from remaining
unexecuted contracts: (i) a non-firm bid for the price and size of the
next available bid(s) on the Exchange if the remaining size is a
seller, or (ii) a non-firm offer for the price and size of the next
available offer(s) on the Exchange if the remaining size is a buyer. If
the remaining contracts in the initiating quote or order are either
traded or cancelled during the Quote Exhaust Timer, the Quote Exhaust
Timer will be terminated, and normal trading will resume.\27\
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\22\ See Securities Exchange Act Release No. 59721 (April 9,
2009), 74 FR 17245 (April 14, 2009) (SR-Phlx-2009-32) (Notice of
Filing of Proposed Rule Change Relating to the Exchange's Enhanced
Electronic Trading Platform for Options, Phlx XL II).
\23\ See Phlx Options 3, Section 6(a)(2)(B)(2).
\24\ Id.
\25\ Id.
\26\ See Phlx Options 3, Section 6(a)(2)(B)(2)(a).
\27\ See Phlx Options 3, Section 6(a)(2)(B)(2)(b).
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Today, if the Exchange receives an order, quote or sweep on the
opposite side of the market from the initiating quote or order during
the Quote Exhaust Timer that locks or crosses the reference price at
any time during the Quote Exhaust Timer, it will execute immediately
against the initiating quote or order at the reference price. If the
initiating quote or order that caused the Quote Exhaust is exhausted,
the Quote Exhaust Timer will be terminated. Today, with respect to any
order, quote or sweep received on the opposite side of the market from
the initiating quote or order during the Quote Exhaust Timer that is
inferior to the reference price, the system will place any non-IOC
order onto the book. Such non-IOC
[[Page 106891]]
order on the book will be included in the first PBBO calculation
following the end of the Quote Exhaust Timer. All non-marketable sweeps
and IOC orders will be cancelled immediately if not executed and will
not participate in the Quote Exhaust process.\28\ Today, if the
Exchange receives an order, quote or sweep on the same side of the
market as the initiating quote or order during the Quote Exhaust Timer,
the System will cancel any such sweep or IOC order. If such new quote
or order, other than an IOC order, is a market or marketable Limit
Order or marketable quote (i.e., priced at or through the reference
price) the System will display it at the reference price, with a
disseminated size that is the sum of such order and/or quote plus the
remaining contracts in the initiating order or quote.\29\
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\28\ See Phlx Options 3, Section 6(a)(2)(B)(2)(c).
\29\ See Phlx Options 3, Section 6(a)(2)(B)(2)(d).
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Today, at the end of the Quote Exhaust Timer, if there are still
unexecuted contracts remaining in the initiating quote or order or any
new interest on the same side of the market, the System will calculate
a new Phlx Best Bid/Offer (``PBBO''). The PBBO includes the remaining
unexecuted portion of the initiating quote or order plus any new
interest received on the same side of the market at the reference
price, or if locking or crossing the ABBO, at one minimum trading
increment away from the ABBO, for the full available size. The other
side of the PBBO will be the actual Exchange interest at the best
price.\30\
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\30\ See Phlx Options 3, Section 6(a)(2)(B)(2)(e).
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Today, the System will conduct an Acceptable Range Test to
determine if the next available price on the Exchange is within an
Acceptable Range.\31\ The System will first determine whether to trade
at the next available Phlx price by comparing it to the Acceptable
Range price (defined as, with respect to an initiating buy order, the
highest price of the Acceptable Range, and, with respect to an
initiating sell order, the lowest price of the Acceptable Range) and
the Away Best Bid/Offer (``ABBO'') price to establish a ``Best
Price''.\32\ Current Options 3, Section 6(g)(1) describes the Best
Price. The current rules review the various potential scenarios
including where the initiating quote or order does not lock the Best
Price, locks the Best Price, crosses the Best Price, the order is not
routable, and remainders.\33\ The current rule also considers scenarios
where there are no offers on the Exchange and on away markets in the
affected series, or no bids or a zero priced bid on Exchange.\34\
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\31\ See Phlx Options 3, Section 6(a)(2)(B)(2)(f).
\32\ See Phlx Options 3, Section 6(a)(2)(B)(2)(g).
\33\ See Phlx Options 3, Section 6(a)(2)(B)(2)(g)(1)-(6).
\34\ See Phlx Options 3, Section 6(a)(2)(B)(3).
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Today, with Quote Exhaust, the Exchange disseminates an updated bid
and offer prices together with the size associated with such bid and
offer in certain cases.\35\ All quotations made available by the
Exchange and displayed by quotation vendors shall be firm for customer
and broker-dealer orders \36\ at the disseminated price in an amount up
to the disseminated size,\37\ except in certain cases.\38\ Finally,
today, responsible brokers or dealers that receive an order to buy or
sell a listed option at the disseminated price in an amount greater
than the disseminated size shall, within thirty (30) seconds of receipt
of the order, (i) execute the entire order at the disseminated price
(or better), or (ii) execute that portion of the order equal to the
disseminated size at the disseminated price (or better), and revise its
bid or offer.\39\
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\35\ See Phlx Options 3, Section 6(a)(2)(C).
\36\ Phlx Supplementary .01 to Options 3, Section 6 provides,
``Broker-dealer orders'' includes orders for the account(s) of
market makers on another exchange and Market Makers on the Exchange.
\37\ Phlx Options 3, Section 6(b)(1) provides in pertinent part
that, except as provided in paragraph (c) of this Rule, all
quotations made available by the Exchange and displayed by quotation
vendors shall be firm for customer and broker-dealer orders at the
disseminated price in an amount up to the disseminated size. If the
responsible broker or dealer is representing (as agent) a Limit
Order, such responsible broker or dealer shall be responsible (as
agent) up to the size of such Limit Order, but may be responsible as
principal for all or a portion of the excess of the disseminated
size over the size of such Limit Order to the extent provided in
General 2, Section 17. Phlx Options 2, Section 6(b)(2) provides in
pertinent part that, in the event an SQT, RSQT or Lead Market Maker
in a Streaming Quote Option has electronically submitted on the
Exchange bids or offers for a Streaming Quote Option, each such SQT,
RSQT or Lead Market Maker member shall be considered a ``responsible
broker or dealer'' for that bid or offer, up to the size associated
with such responsible broker or dealer's bid or offer.
\38\ Phlx Options 2, Section 6(c) provides in pertinent part
that, the requirements of paragraph (b) or (d) of this Rule shall
not apply to displayed quotations: (i) when the level of trading
activities or the existence of unusual market conditions is such
that the Exchange is incapable of collecting, processing, and making
available to quotation vendors the data for a subject security
required to be made available pursuant to the SEC Quote Rule in a
manner that accurately reflects the current market on the Exchange
as determined by an Options Exchange Official; (ii) during a trading
rotation; (iii) if any of the circumstances provided in paragraph
(c)(3) of the SEC Quote Rule exist; or (iv) on a case by case basis
where it is determined that an exemption is warranted for an obvious
error in the posting of the disseminated price or disseminated size
due to reporter error or system malfunction. The Exchange shall
immediately notify all specified persons of such a determination.
Regular trading procedures shall be resumed when an Options Exchange
Official determines that the conditions supporting that declaration
no longer exist. The Exchange shall immediately notify all specified
persons of such a determination.
\39\ See Phlx Options 2, Section 6(d).
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Quote Exhaust was designed to enhance the process for refreshing a
Market Maker's quote that has been fully exhausted by an incoming quote
or order that has, after exhausting the Phlx quote at a particular
price level, remaining size to be executed at a price through the
reference price. The Quote Exhaust functionality was intended to
provide an opportunity for remaining portions of incoming quotes or
orders to be executed on the Exchange at prices that are equal to or
better than away markets by allowing Market Makers to refresh their
quotes before routing away, thus potentially providing better prices at
which to execute such remaining portions. Quote Exhaust is intended to
provide an opportunity for such quote or order to receive a price for
that order better than the next price that would otherwise be available
on Phlx whether by executing on the Phlx or by routing to applicable
away markets. This functionality implements price checks to limit
executions at far away prices.
At this time, Phlx proposes to discontinue Quote Exhaust. Today,
the Exchange offers various risk protections in its System to limit
executions at far away prices. Phlx offers an Acceptable Trade Range
protection at Options 3, Section 15(b)(1) and an Automated Quotation
Adjustments protection at Options 3, Section 15(c)(2). In light of
these additional protections and other risk protections that the
Exchange is adding with this proposal within Options 3, Section 15, the
Exchange does not believe that the Quote Exhaust protection is required
any longer. Other Nasdaq affiliated exchanges do not offer Quote
Exhaust. Once discontinued, the Exchange's quoting functionalities will
continue to abide by Phlx's Options 3, Section 4 rules governing the
entry and display of orders and the allocation methodology in Options
3, Section 10. By way of example,
Market Maker quotes 1.00 (100) x 1.10 (100)
FIX Order to Sell 101 @0.95 arrives
Order trades 100 @1.00 with the quote
The quote purges as its entire bid side volume were exhausted
The remaining 1 contract books
Today, the Quote Exhaust timer begins--the reference price is displayed
for the remaining 1 contract of the initiating sell order, and the
displayed bid is disseminated to OPRA with a `non-firm' indicator;
Dissemination is 0.00 (0) x 1.00 (1), bid not firm
Quote Exhaust timer concludes
[[Page 106892]]
Today, a firm quote is now disseminated to OPRA; dissemination is 0.00
(0) x 0.95 (1)
As proposed, without Quote Exhaust, there will be no period during
which the order is disseminated at the Quote Exhaust Reference Price;
instead, the order's remainder will book and display at its limit price
right away. The Exchange will continue to purge the other side of the
quote due to one side being exhausted, as is the case today on ISE,
GEMX, MRX that do not have a similar quote exhaust mechanism.
Without Quote Exhaust:
Market Maker quotes 1.00 (100) x 1.10 (100)
FIX Order to Sell 101 @0.95 arrives
Order trades 100 @1.00 with the quote
The quote purges as its entire bid side volume were exhausted
The remaining 1 contract books
A firm quote is disseminated to OPRA; dissemination is 0.00 (0) x 0.95
(1)
With respect to the interaction between the Quote Exhaust and risk
protections, the Exchange notes that instead of first being posted at
the Quote Exhaust Reference Price, aggressively priced orders can
instead post right away at the Acceptable Trade Range Threshold \40\,
allowing for quicker order execution while still providing order
exposure and pauses between price bands, which continues to allow for
risk mitigation. By way of example,
---------------------------------------------------------------------------
\40\ See Phlx Options 3, Section 15(b)(1) which describes the
Acceptable Trade Range.
Note that the configured Acceptable Trade Range (ATR) price band is
$0.07 in the price range used in this example.
Market Maker1 quotes 2.00 (10) x 2.12 (10)
Firm enters FIX Order to Buy 10 @1.80
Public Customer enters FIX Market Order to Sell 20 @MKT
Trades 10 @2.00 with Market Maker1's quote
Market Maker 1's quote is purged as its entire bid side volume has been
exhausted
Quote exhaust commences and displays the remainder of the Public
Customer's market order at the quote exhaust reference price,
disseminating to OPRA: 1.80 (10) x 2.00 (10), bid not firm
Quote exhaust timer passes
The remainder of the Public Customer's market order now posts at the
Acceptable Trade Range (ATR) Threshold of 1.93, disseminating to OPRA:
1.80 (10) x 1.93 (10), bid not firm
ATR Posting Period (iteration #1) passes
The remainder of the Public Customer's market order now posts at the
new ATR Threshold of 1.86, disseminating to OPRA: 1.80 (10) x 1.86
(10), bid not firm
ATR Posting Period (iteration #2) passes
The remainder of the Public Customer's market order now trades with the
Firm FIX order on the book, 10 @1.80
With this proposal, Quote Exhaust will no longer occur; after
trading with Market Maker 1's quote, the remainder of the Public
Customer Market Order will go straight into its first ATR Posting
Period, displaying at the ATR Threshold of 1.93--it will no longer
first display at the Quote Exhaust reference price of 2.00, but the
remainder of the behavior will remain the same due to applicability of
ATR.
Similar to ISE, GEMX and MRX, the Exchange proposes to amend
Options 3, Section 6 to rename it ``Collection and Dissemination of
Quotes'' and adopt a rule identical to ISE, GEMX and MRX Options 3,
Section 6. The proposed new rule will specify, as is the case today,
that each Market Maker shall communicate to the Exchange its bid and
offers in accordance with the requirements of Rule 602 of Regulation
NMS under the Exchange Act and the Rules of the Exchange.\41\ Further,
as is the case today, the Exchange will disseminate to quotation
vendors the highest bid and the lowest offer, and the aggregate
quotation size associated therewith that is available to Public
Customer Orders, in accordance with the requirements of Rule 602 of
Regulation NMS under the Exchange Act.\42\
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\41\ See proposed Phlx Options 3, Section 6(a).
\42\ See proposed Phlx Options 3, Section 6(b).
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The Exchange proposes in Options 3, Section 6(c) to adopt rules
around unusual market conditions. Today, Options 3, Section 6(c) notes
that ``when the level of trading activities or the existence of unusual
market conditions is such that the Exchange is incapable of collecting,
processing, and making available to quotation vendors the data for a
subject security required to be made available pursuant to the SEC
Quote Rule in a manner that accurately reflects the current market on
the Exchange as determined by an Options Exchange Official.'' The
Exchange proposes to continue to provide that in proposed Options 3,
Section 6(c)(1),
An Exchange official designated by the Board shall have the
power to determine that the level of trading activities or the
existence of unusual market conditions is such that the Exchange is
incapable of collecting, processing, and making available to
quotation vendors the data for the option in a manner that
accurately reflects the current state of the market on the Exchange.
Upon making such a determination, the Exchange shall designate the
market in such option to be ``fast.'' When a market for an option is
declared fast, the Exchange will provide notice that its quotations
are not firm by appending an appropriate indicator to its
quotations.
Further, the Exchange proposes to state in proposed Options 3,
Section 6(c)(2) that if a market is declared fast, designated Exchange
officials shall have the power to: (i) direct that one or more trading
rotations be employed pursuant to Options 3, Section 8; (ii) suspend
the minimum size requirement of Options 2, Section 5(c)(1); or (iii)
take such other actions as are deemed in the interest of maintaining a
fair and orderly market. Today, Options 3, Section 9(b) provides
certain manual trading halt authority deemed necessary in the interests
of maintaining a fair and orderly market in such class or series of
options and to protect investors.
Proposed Options 3, Section 6(c)(3) provides that the Exchange will
monitor the activity or conditions that caused a fast market to be
declared, and a designated Exchange official shall review the condition
of such market at least every thirty (30) minutes. Regular trading
procedures shall be resumed by the Exchange when a designated Exchange
official determines that the conditions supporting a fast market
declaration no longer exist. The Exchange will provide notice that its
quotations are once again firm by removing the indicator from its
quotations. Finally, the Exchange proposes to state in Options 3,
Section 6(c)(4) that if the conditions supporting a fast market
declaration cannot be managed utilizing one or more of the procedures
described above, then a designated Exchange official shall halt trading
in a class, or classes so affected. Today, ISE, GEMX and MRX have the
same authority in Options 3, Section 6(c)(3) to protect those markets
in the event of unusual market conditions. The Exchange believes that
it should be able to manage trading on Phlx in the same manner as ISE,
GEMX and MRX in the event of unusual market conditions.
Options 3, Section 7
Phlx proposes to align its order types to those of ISE, GEMX and
MRX Options 3, Section 7 and utilize the same numbering as those
markets.\43\
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\43\ The Exchange also proposes to separately file rule changes
related to Complex Orders, Qualified Contingent Cross Orders and
auctions. The Exchange notes that those filing will also add order
types to Options 3, Section 7 to mirror ISE, GEMX and MRX Options 3,
Section 7 order types.
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[[Page 106893]]
Phlx proposes to relocate Options 3, Section 7(f) \44\ to the first
paragraph of Options 3, Section 7.
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\44\ Current Phlx Options 3, Section 7(f) states, Orders may not
be unbundled, nor may a firm solicit a customer to unbundle an order
for this purpose.
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Market Orders
The Exchange proposes to amend the description of Market Orders.
Today, Options 3, Section 7(b)(1) states, ``A Market Order is an order
to buy or sell a stated number of options contracts that is to be
executed at the best price obtainable when the order reaches the
Exchange. Lead Market Makers, Market Makers and Off-Floor Broker-
Dealers may not submit Market Orders.'' The Exchange proposes to amend
the definition of Market Orders to introduce a cancel timer feature,
which will allow member organizations to designate Market Orders that
do not execute after a certain period of time to be cancelled back to
the member organization. Specifically, the Exchange proposes to add
that member organizations can designate their Market Orders not
executed after a pre-established period of time, as established by the
Exchange,\45\ will be cancelled back to the member organization once an
options series has opened for trading. Nasdaq BX, Inc. currently has an
identical timer feature for BX Market Orders.\46\ Similar to BX, the
proposed timer would be available once the intra-day trading session
begins for an options series, as the Exchange already has a separate
opening delay timer that provides protection to the market during the
Opening Process.\47\ In particular, the Exchange would cancel orders
(if consistent with the member organization's instructions) if an
options series has not opened before the conclusion of the opening
delay timer.\48\ As such, the Exchange is proposing that the pre-
established period of time for the proposed timer feature would
commence once the intra-day trading session begins for that options
series. In other words, while the Opening Process is on-going, and the
intra-day trading session has not commenced, the pre-established period
of time for the proposed timer feature would not commence. Further, the
Exchange proposes to note that Market Orders on the order book would be
immediately cancelled if an options series is halted, provided the
member organization designated the cancellation of Market Orders.\49\
The proposed changes are intended to make clear that in the event there
is a Market Order in a zero bid market while the Market Order was
resting on the order book, the Member has an option to designate the
cancellation of that Market Order pursuant to the proposed cancel timer
feature. In this case, those Market Orders to sell, which were resting
on the order book, would immediately cancel upon a trading halt instead
of waiting until the end of the pre-established timer period. ISE,
GEMX, MRX and BX also has identical language governing its Market
Orders today.\50\ Like ISE, GEMX, MRX and BX, the Exchange believes
that the proposed intra-day timer feature will provide additional
flexibility for member organizations that wish to cancel unexecuted
Market Orders after a certain period of time.
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\45\ The Exchange will initially set the pre-established period
of time at 4 seconds, identical to BX. This specification will be
set out in the ISE System settings document on a publicly available
website. The Exchange would issue an Options Trader Alert notifying
all member organizations if it determined to amend that timeframe.
\46\ See BX Options 3, Section 7(a)(5).
\47\ See Phlx Options 3, Section 8 for the Opening Process.
\48\ See Phlx Options 3, Section 8(k).
\49\ Member organizations may make the designation to cancel
their Market Orders through their FIX and port settings.
\50\ See ISE, GEMX and MRX Options 3, Section 7(a) and BX
Options 3, Section 7(a)(5).
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As noted above in Options 2, Section 6, the Exchange would no
longer prohibit Market Makers (and Lead Market Makers) \51\ from
entering Market Orders. In addition, the Exchange would no longer
prohibit an Off-Floor Broker Dealer \52\ from entering a Market Order
for the same reasons as expressed above in Options 2, Section 6.\53\
All Market Makers, including away market makers, are restricted to a
total number of contracts executed during a quarter in options series
to which it is not appointed of twenty-five percent (25%) of the total
number of contracts executed by the Market Maker and Lead Market Maker
in options series as all options markets impose this restriction on
market makers. The Exchange does not believe there is any reason to
restrict Off-Floor Broker Dealers from entering Market Orders in
options classes, rather, the Exchange proposes to permit all member
organizations to be able to enter Market Orders as is the case on The
Nasdaq Options Market LLC (``NOM''), BX, ISE, GEMX and MRX.
---------------------------------------------------------------------------
\51\ As explained above, Market Makers is a broad term that
covers Lead Market Makers so both terms are not needed.
\52\ Phlx Options 1, Section 1(b)(33) provides, [t]he term
``Off-Floor Broker-Dealer Order'' means an order delivered from off
the floor of the Exchange by or on behalf of a broker-dealer for the
proprietary account(s) of such broker-dealer, including an order for
a market maker located on an exchange or trading floor other than
the Exchange's trading floor delivered electronically for the
proprietary account(s) of such market maker.
\53\ Current Phlx Options 3, Section 7(e) provides that An off-
floor broker-dealer order may be entered for a minimum size of one
contract. Off-floor broker-dealers may enter all order types defined
in Options 3, Section 7(b) except for All-or-None Orders, Market
Orders, Stop Market Orders, and public customer-to-public customer
cross orders subject to Options 3, Section 13(a) and (f).
---------------------------------------------------------------------------
Limit Orders
The Exchange proposes to relocate ``Limit Orders'' from current
Options 3, Section 7(b)(2) to proposed Options 3, Section 7(b) without
change.\54\ The Exchange proposes to define three types of Limit Orders
similar to ISE, GEMX and MRX. First, the Exchange proposes to define a
``Marketable Limit Order'' as a Limit Order to buy (sell) at or above
(below) the best offer (bid) on the Exchange. Next, the Exchange
proposes to define a Fill-or-Kill Orders as a Limit Order that is to be
executed in its entirety as soon as it is received and, if not so
executed, treated as cancelled. Finally, the Exchange proposes to
relocate an Intermarket Sweep Order from current Options 3, Section
7(b)(3) to proposed Options 3, Section 7(b)(3) with some additions. The
Exchange proposes to reorder some sentences to closely resemble ISE,
GEMX and MRX Options 3, Section 7(b)(3). The Exchange proposes to add
an additional sentence to make clear that ISOs must have a TIF
designation of IOC. Additionally, the Exchange proposes to define the
``regular order book'' as the ``single-leg order book.''
---------------------------------------------------------------------------
\54\ Phlx Options 3, Section 7(b)(2) states, A Limit Order is an
order to buy or sell a stated number of options contracts at a
specified price or better.
---------------------------------------------------------------------------
All-or-None Orders
The Exchange proposes to relocate the All-or-None Orders from
current Options 3, Section 7(b)(5) to proposed Options 3, Section 7(c)
and amend it. Today, Phlx restricts All-or-None Orders to be entered
only by Public Customers. At this time, the Exchange proposes to permit
any member organization to submit an All-or-None Order similar to ISE,
GEMX, and MRX Options 3, Section 7(c). The Exchange would not apply the
Acceptable Trade Range protection in Options 3, Section 15(a) to All-
Or-None Orders, similar to other orders. Finally, similar to ISE, GEMX
and MRX, the Exchange proposes to modify All-or-None Orders so that
they would execute against multiple, aggregated orders if the
executions would occur simultaneously. Additionally, as is the case
today, an All-or-None Order would not be submitted during the Opening
Process similar to any other order that does not
[[Page 106894]]
rest as the there is no order book during the Opening Process.
Stop Orders
The Exchange proposes to relocate the Stop Order description from
Options 3, Section 7(b)(4) \55\ to proposed Options 3, Section 7(d) and
(e). Today, Phlx's Stop Order may be a Limit or Market Order. Also, the
Stop Order may not be elected by a trade that is reported late or out
of sequence or by a Complex Order trading with another Complex Order.
Phlx restricts Lead Market Makers, Maker Makers, and Off-Floor Broker-
Dealers from entering Stop Market Orders. At this time, the Exchange
proposes to amend its Stop Order to mirror the order type that is in
use on ISE, GEMX and MRX at Options 3, Section 7(d) and (e). First,
Phlx will permit all member organizations to utilize a Stop Order and
Stop Limit Order and not restrict Maker Makers (including Lead Market
Makers) as noted in the discussion of Options 2, Section 6 above.
Further, the category of ``Off-Floor Broker-Dealer Orders'' is being
eliminated as described below with this rule change. Second, the
Exchange will not separately specify a Stop Market Limit Order, rather
it will describe an elected Stop Order as a Market Order. The Exchange
proposes to describe a Stop Order as an order that becomes a Market
Order when the stop price is elected. A Stop Order to buy is elected
when the option is bid or trades on the Exchange at, or above, the
specified stop price. A Stop Order to sell is elected when the option
is offered or trades on the Exchange at, or below, the specified stop
price. A Stop Order shall be cancelled if it is immediately electable
upon receipt. Stop Orders may only be entered through FIX. The rule
text that currently provides, ``A Stop Order shall not be elected by a
trade that is reported late or out of sequence or by a Complex Order
trading with another Complex Order'' will be relocated to the ended of
the sentence. The Exchange proposes to provide that a Stop Limit Order
is an order that becomes a Limit Order when the stop price is elected.
A Stop Limit Order to buy is elected when the option is bid or trades
on the Exchange at, or above, the specified stop price. A Stop Limit
Order to sell becomes a sell limit order when the option is offered or
trades on the Exchange at, or below, the specified stop price. A Stop
Limit Order shall be cancelled if it is immediately electable upon
receipt. The Exchange is removing the rule text that states that a Stop
Order is a non-displayed, contingency order until elected because the
proposed rule text makes clear that the Stop Order does not become a
Market or Limit Order until it is elected. Finally, similar to a Stop
Order, a Stop Limit Order shall not be elected by a trade that is
reported late or out of sequence or by a Complex Order trading with
another Complex Order.
---------------------------------------------------------------------------
\55\ Phlx Options 3, Section 7(b)(4), states, A Stop Order is a
Limit Order or Market Order to buy or sell at a limit price when
interest on the Exchange for a particular option contract reaches a
specified price. A Stop Order shall be cancelled if it is
immediately electable upon receipt. A Stop Order shall not be
elected by a trade that is reported late or out of sequence or by a
Complex Order trading with another Complex Order. Lead Market Makers
and Maker Makers may not submit a Stop Order. Off-Floor Broker-
Dealers may not enter a Stop Market Order. (A) A Stop-Limit Order to
buy becomes a Limit Order executable at the limit price or better
when the option contract trades or is bid on the Exchange at or
above the stop-limit price. A Stop-Limit Order to sell becomes a
Limit Order executable at the limit price or better when the option
contract trades or is offered on the Exchange at or below the stop-
limit price. (B) A Stop Market Order is similar to a stop-limit
except it becomes a Market Order when the option contract reaches a
specified price. (C) A Stop Order is a non-displayed, contingency
order until elected.
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Cancel or Replace Orders
The Exchange proposes to relocate the Cancel and Replace Order
description from Options 3, Section 7(b)(7) \56\ to proposed Options 3,
Section 7(f). The Exchange proposes to modify the Cancel and Replace
Order so that it mirrors the functionality on ISE, GEMX and MRX at
Options 3, Section 7(f). The Exchange would state at the beginning that
``Cancel and Replace Orders shall mean'' to conform the text to the
other changes to the order types. The Exchange would remove the phrase
``with new terms and conditions'' and instead note that the replacement
order will retain the priority of the cancelled order, if the order
posts to the Order Book, provided the price is not amended or size is
not increased. In the case of Reserve Orders, which the Exchange is
adopting as noted further below, the replacement order will retain the
priority of the cancelled order, if the order posts to the Order Book,
provided the price is not amended or size (displayed and non-displayed)
is not changed. This new text specifically notes that amending the
price or increasing the size will result in a loss of priority. Further
the Exchange proposes to state that if the replacement portion of a
Cancel and Replace Order does not satisfy the System's price or other
reasonability checks (e.g., Options 3, Section 15(a)(1) and Options 3,
Section 15(a)(2)) the existing order shall be cancelled and not
replaced. Today, the Exchange utilizes the simple order checks in
Options 3, Section 15(a)(1), Order Price Protection, and Options 3,
Section 15(b)(1), Acceptable Trade Range, for each order entered into
the System, including replacement orders. This additional language
brings more clarity to the rule text.
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\56\ Phlx Options 3, Section 7(b)(7) provides, A Cancel-
Replacement Order is a single message for the immediate cancellation
of a previously received order and the replacement of that order
with a new order with new terms and conditions. If the previously
placed order is already filled partially or in its entirety, the
replacement order is automatically canceled or reduced by the number
of contracts that were executed. The replacement order will result
in a loss of priority.
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Reserve Orders
The Exchange proposes to adopt a Reserve Order at Options 3,
Section 7(g) that is identical to the order type in ISE, GEMX and MRX
Options 3, Section 7(g). As proposed, a Reserve Order would be a limit
order that contains both a displayed portion and a non-displayed
portion. Both the displayed and non-displayed portions of a Reserve
Order would be available for potential execution against incoming
marketable orders. A non-marketable Reserve Order would rest on the
order book. The displayed portion of a Reserve Order would be ranked at
the specified limit price and the time of order entry. The displayed
portion of a Reserve Order would trade in accordance with Options 3,
Section 10(a)(1)(A) for Public Customer Orders, and Options 3, Section
10(a)(1)(F) for non-Public Customer Orders. Reserve Orders would be
entered with an instruction for the displayed portion of the order to
be refreshed: (A) upon full execution of the displayed portion or upon
any partial execution; and (B) up to the initial size of the displayed
portion or with a random refresh quantity within a range determined by
the member organization. When the displayed portion of a Reserve Order
is decremented, either in full or in part, it would be refreshed from
the non-displayed portion of the resting Reserve Order. If the
displayed portion is refreshed in part, the new displayed portion would
include the previously displayed portion. Upon any refresh, the entire
displayed portion would be ranked at the specified limit price and
obtain a new time stamp, i.e., the time that the new displayed portion
of the order was refreshed. The new displayed portion would trade in
accordance with Options 3, Section 10(a)(1)(A) for Public Customer
Orders, and Options 3, Section 10(a)(1)(F) for non-Public Customer
Orders. The initial non-displayed portion of a Reserve Order rests on
the order book and would be ranked based on the specified limit price
and time of order entry. Thereafter, non-displayed portions, if any,
always obtain the same time stamp
[[Page 106895]]
as that of the new displayed portion as described in proposed Options
3, Section 7(g)(5). The non-displayed portion of any Reserve Order
would be available for execution only after all displayed interest has
been executed. The non-displayed portion of any Reserve Order would
trade in accordance with Options 3, Section 10(a)(1)(A) for Public
Customer Orders, and Options 3, Section 10(a)(1)(F) for non-Public
Customer Orders. The Exchange believes that the adoption of this new
order type will allow all member organizations the ability to trade
their orders with displayed and non-displayed portions similar to ISE,
GEMX and MRX Options 3, Section 7(g).
Attributable Orders
The Exchange proposes to adopt Attributable Orders at Options 3,
Section 7(h) that is identical to the order type in ISE, GEMX and MRX
Options 3, Section 7(h). An Attributable Order would be a market or
limit order which displays the user firm ID for purposes of electronic
trading on the Exchange. Use of Attributable Orders is voluntary.
Attributable Orders may not be available for all Exchange Systems. The
Exchange will issue an Options Regulatory Alert specifying the Systems
for which the Attributable Order type shall be available. The Exchange
believes that the availability of this order type will allow member
organizations the ability to display their firm identification if they
elect to do so.
Directed Orders <SUP>57</SUP>
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\57\ The Exchange is skipping certain letters in this rule to
account for other rule changes that will be filed that impact
Options 3, Section 7(i), (j), (k), (t) and (v). Where the Exchange
is reserving letters, it is to align to the lettering in ISE, GEMX
and MRX Options 3, Section 7.
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The Exchange proposes to relocate the reference to Directed Orders
currently in Options 3, Section 7(b)(11) \58\ to Options 3, Section
7(l) without change. The Exchange proposes to reserve Options 3,
Section 7(m).
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\58\ Phlx Options 3, Section 7(b)(11) provides, A Directed Order
is as described in Options 2, Section 10.
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Add Liquidity Orders
The Exchange proposes to adopt an Add Liquidity Order (``ALO'') at
Options 3, Section 7(n) that is identical to ISE, GEMX and MRX Options
3, Section 7(n). ALOs are limit orders that will only be executed as a
``maker'' on the Exchange. An Add Liquidity Order is a limit order that
is to be executed in whole or in part on the Exchange (i) only after
being displayed on the Exchange's limit order book; and (ii) without
routing any portion of the order to another market center. Member
organizations may specify whether an Add Liquidity Order shall be
cancelled or re-priced to the minimum price variation above the
national best bid price (for sell orders) or below the national best
offer price (for buy orders) if, at the time of entry, the order (i) is
executable on the Exchange; or (ii) the order is not executable on the
Exchange, but would lock or cross the national best bid or offer. If at
the time of entry, an Add Liquidity Order would lock or cross one or
more non-displayed orders or quotes on the Exchange, the Add Liquidity
Order shall be cancelled or re-priced to the minimum price variation
above the best non-displayed bid price (for sell orders) or below the
best non-displayed offer price (for buy orders). Notwithstanding the
aforementioned, if an Add Liquidity Order would not lock or cross an
order or quote on the System but would lock or cross the NBBO, the
order will be handled pursuant to Options 3, Section 5(d).\59\ An Add
Liquidity Order will be ranked in the Exchange's limit order book in
accordance with Options 3, Section 10 which governs priority and
allocation. Add Liquidity Orders may only be submitted when an options
series is open for trading. This order type would give market
participants greater control over the circumstances in which their
orders are executed.
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\59\ Phlx Options 3, Section 5(d) provides, An order will not be
executed at a price that trades through another market or displayed
at a price that would lock or cross another market. An order that is
designated by the member as routable will be routed in compliance
with applicable Trade-Through and Locked and Crossed Markets
restrictions. An order that is designated by a member as non-
routable will be re-priced in order to comply with applicable Trade-
Through and Locked and Crossed Markets restrictions. If, at the time
of entry, an order that the entering party has elected not to make
eligible for routing would cause a locked or crossed market
violation or would cause a trade-through violation, it will be re-
priced to the current national best offer (for bids) or the current
national best bid (for offers) as non-displayed, and displayed at
one minimum price variance above (for offers) or below (for bids)
the national best price.
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Below are some examples of the Add Liquidity Order.
Add Liquidity Only Order Re-Price Example
<bullet> Non-Penny Program MPV Option in open trading state
<bullet> Market Maker A quote $0.90 (10) x $1.00 (10)
<bullet> ABBO $0.85 x $1.05
<bullet> Firm A sends Add Liquidity Only Order to buy 5 arrives at
$1.00
[cir] Reprices on book to $0.95
[cir] Displays on $0.95 bid, which is National Best displayed bid with
a quantity of 5
<bullet> Order to sell 10 arrives at $0.90
[cir] 5 execute with Firm A @$0.95
[cir] 5 execute with Market Maker A @$0.90
[cir] NBBO updates back to $0.90 x $1.00
Add Liquidity Only Reject Example
<bullet> Non-Penny Program MPV Option in open trading state
<bullet> Market Maker A quote $0.90 (10) x $1.00 (10)
<bullet> ABBO $0.85 x $1.05
<bullet> Firm A sends Add Liquidity Only Order to buy 5 arrives at
$1.00
[cir] Order is rejected back to sender because the sender configured
the order for reject instead of re-price
The Exchange notes that it proposes to reserve Options 3, Section
7(o), (p), (q), (r), (s) and (t).
Opening Sweep
The Exchange proposes to relocate the Opening Sweep order type at
Options 3, Section 7(b)(6) \60\ to Options 3, Section 7(u) and amend
it. The Exchange proposes to replace references to ``Lead Market
Makers'' and ``Market Makers'' to simply ``Market Makers'' as all Lead
Market Makers are also Market Makers.\61\ Additionally, the Exchange
proposes to note that with the technology migration, that Opening
Sweeps would be subject to the new Market Wide Risk Protection proposed
in Options 3, Section 15. The Exchange is proposing to add a Market
Wide Risk Protection to its rules with this proposal as described
below. Finally, the Exchange proposes to add a precise citation to the
Opening Process in the last sentence of Options 3, Section 7(u) by
including ``(b)(i)'' after Options 3, Section 8.
---------------------------------------------------------------------------
\60\ Phlx Options 3, Section 7(b)(6) provides, An Opening Sweep
is a one-sided order entered by a Lead Market Maker or Market Maker
through SQF for execution against eligible interest in the System
during the Opening Process. This order type is not subject to any
protections listed in Options 3, Section 15, except for Automated
Quotation Adjustments. The Opening Sweep will only participate in
the Opening Process pursuant to Options 3, Section 8 and will be
cancelled upon the open if not executed.
\61\ See Phlx Options 1, Section 1(b)(28) which defines a Market
Maker as a Streaming Quote Trader or a Remote Streaming Quote Trader
who enters quotations for his own account electronically into the
System.
---------------------------------------------------------------------------
The Exchange proposes to reserve Options 3, Section 7(x) and (y).
PIXL Order
The Exchange proposes to relocate the description of a PIXL Order
from Options 3, Section 7(b)(9) \62\ to Options 3, Section 7(y) without
substantive
[[Page 106896]]
change.\63\ The Exchange proposes to populate Supplementary Material
.01 to Options 3, Section 7 in a separate rule change.
---------------------------------------------------------------------------
\62\ Phlx Options 3, Section 7(b)(9) provides, A PIXL Order is
as described in Options 3, Section 13.
\63\ The Exchange proposes to remove ``A'' before the words
``PIXL Order.''
---------------------------------------------------------------------------
Time in Force Provisions
The Exchange proposes to relocate the rule text concerning Time in
Force from current Options 3, Section 7(c) to Supplementary Material
.02 to Options 3, Section 7 without change. Phlx Options 3, Section
7(c) provides, ``Time in Force or ``TIF.'' The term ``Time in Force''
shall mean [sic] the period of time that the System will hold an order
for potential execution, and shall include:''
Day Order
The Exchange proposes to relocate Day Order from current Options 3,
Section 7(c)(1) \64\ to Supplementary Material .02(a) to Options 3,
Section 7 and make minor amendments to the description. The Exchange
proposes to amend the first sentence which states, ``If not executed,
an order entered with a TIF of ``Day'' expires at the end of the day on
which it was entered.'' The Exchange proposes to instead provide, ``An
order to buy or sell entered with a TIF of ``DAY,'' which, if not
executed, expires at the end of the day on which it was entered.'' The
Exchange is rewording the rule text of Day Order to mirror the text in
ISE, GEMX and MRX Supplementary Material .02(a) to Options 3, Section
7. The Exchange notes that Phlx does not have the Precise or OTTO
protocols today.
---------------------------------------------------------------------------
\64\ Phlx Options 3, Section 7(c)(1) provides, If not executed,
an order entered with a TIF of ``Day'' expires at the end of the day
on which it was entered. All orders by their terms are Day Orders
unless otherwise specified. Day orders may be entered through FIX.
---------------------------------------------------------------------------
Good-Till-Cancelled
The Exchange proposes to relocate Good Till Cancelled from Options
3, Section 7(c)(4) \65\ to Supplementary Material .02(b) to Options 3,
Section 7 and amend the description. Currently, Supplementary Material
.02(b) to Options 3, Section 7 provides that a Good Til Cancelled
(``GTC'') Order entered with a TIF of GTC, if not fully executed, will
remain available for potential display and/or execution unless
cancelled by the entering party, or until the option expires, whichever
comes first. GTC Orders shall be available for entry from the time
prior to market open specified by the Exchange until market close. The
Exchange proposes to instead provide that an order to buy or sell
entered with a TIF of ``GTC'' remains in force until the order is
filled, canceled or the option contract expires; provided, however,
that GTC orders will be canceled in the event of a corporate action
that results in an adjustment to the terms of an option contract. The
first sentence of the current text is simply worded differently. Also,
all order types are available throughout the trading day unless
specified otherwise. The Exchange proposes to add language concerning a
corporate event, noting that GTC orders are canceled in the event of a
corporate action that results in an adjustment to the terms of an
option contract. This is also true today. The Exchange is adding this
rule text to clarify the current System behavior. The proposed GTC
description is identical to the rule text in ISE, GEMX and MRX
Supplementary Material .02(b) to Options 3, Section 7. There is no
System change as a result of the change to the description of the GTC
order.
---------------------------------------------------------------------------
\65\ Phlx Options 3, Section 7(c)(4) provides, A Good Til
Cancelled (``GTC'') Order entered with a TIF of GTC, if not fully
executed, will remain available for potential display and/or
execution unless cancelled by the entering party, or until the
option expires, whichever comes first. GTC Orders shall be available
for entry from the time prior to market open specified by the
Exchange until market close.
---------------------------------------------------------------------------
Good-Till-Date
The Exchange proposes to adopt a new TIF designation, Good-Till-
Date or ``GTD'' at Supplementary Material .02(c) to Options 3, Section
7 which is identical to ISE, GEMX and MRX's Good-Till-Date TIF at
Supplementary Material .02(c) to Options 3, Section 7. A Good-Till-Date
TIF is an order to buy or sell entered with a TIF of ``GTD,'' which, if
not executed, would be cancelled at the sooner of the end of the
expiration date assigned to the order, or the expiration of the series;
provided, however, that GTD orders would be canceled in the event of a
corporate action that results in an adjustment to the terms of an
option contract. The Exchange believes this additional TIF will provide
member organizations with additional opportunities when trading on
Phlx.
Immediate-or-Cancel
The Exchange proposes to relocate Immediate-or-Cancel from Options
3, Section 7(c)(2) \66\ to Supplementary Material .02(d) to Options 3,
Section 7 and amend the description. Supplementary Material .02(d) to
Options 3, Section 7 currently states, ``An Immediate-or-Cancel
(``IOC'') Order entered with a TIF of ``IOC'' is a Market Order or
Limit Order to be executed in whole or in part upon receipt. Any
portion not so executed is cancelled.'' The Exchange proposes a non-
substantive amendment to instead provide, ``Immediate-or-Cancel. An
order entered with a TIF of ``IOC'' that is to be executed in whole or
in part upon receipt. Any portion not so executed is to be treated as
cancelled.'' The Exchange proposes to relocate the rule text in Options
3, Section 7(c)(A) to Supplementary Material .02(d)(1) to Options 3,
Section 7 without change. The Exchange proposes to relocate the rule
text in Options 3, Section 7(c)(B) to Supplementary Material .02(d)(2)
to Options 3, Section 7 and remove the reference to ``Lead Market
Maker'' to simply ``Market Makers'' as all Lead Market Makers are also
Market Makers.\67\ The Exchange proposes to amend ``SQF is not subject
to'' to ``the SQF protocol will not be subject to''. The Exchange
proposes to add an ``(A)'' before Order Price Protection, and change
``or Size Limitation in Options 3, Section 15(a)(1), (a)(2), and
(b)(2), respectively, or Size Limitation within Options 3, Section
16(e)'' to ``and Size Limitation Protection as defined in Options 3,
Section 15(a)(1), (a)(2), and (b)(2) respectively, for single leg
orders.'' These modifications are non-substantive and simply bring more
clarity to the rule text. The Exchange proposes to relocate the rule
text in current Phlx Options 3, Section 7(c)(2)(C) in a separate rule
change. These changes align with rule text in ISE, GEMX and MRX
Supplementary Material .02(d) to Options 3, Section 7.
---------------------------------------------------------------------------
\66\ Phlx Options 3, Section 7(c)(2) provides, An Immediate-or-
Cancel (``IOC'') Order entered with a TIF of ``IOC'' is a Market
Order or Limit Order to be executed in whole or in part upon
receipt. Any portion not so executed is cancelled. (A) Orders
entered with a TIF of IOC are not eligible for routing. (B) IOC
orders may be entered through FIX or SQF, provided that an IOC Order
entered by a Market Maker or Lead Market Maker through SQF is not
subject to the Order Price Protection, the Market Order Spread
Protection, or Size Limitation in Options 3, Section 15(a)(1),
(a)(2), and (b)(2), respectively, or Size Limitation within Options
3, Section 16(e). (C) Orders entered into the Price Improvement XL
(``PIXL'') Mechanism and Qualified Contingent Cross (``QCC'')
Mechanism are considered to have a TIF of IOC. By their terms, these
orders will be: (1) executed either on entry or after an exposure
period, or (2) cancelled.
\67\ See Phlx Options 1, Section 1(b)(28) which defines a Market
Maker as a Streaming Quote Trader or a Remote Streaming Quote Trader
who enters quotations for his own account electronically into the
System.
---------------------------------------------------------------------------
Opening Only
The Exchange proposes to relocate Opening Only from Options 3,
Section 7(c)(3) \68\ to proposed Supplementary
[[Page 106897]]
Material .02(e) of Options 3, Section 7. The Exchange is proposing to
add Phlx's new Market Wide Risk Protection to the list of risk
protections that would apply to Opening Only. The Exchange proposes a
new Market Wide Risk Protection as explained below in this proposal.
Also, the Exchange proposes to capitalize ``orders'' in the last
sentence.
---------------------------------------------------------------------------
\68\ Phlx Options 3, Section 7(c)(3) provides, An Opening Only
(``OPG'') order is entered with a TIF of ``OPG''. This order can
only be executed in the Opening Process pursuant to Options 3,
Section 8. This order type is not subject to any protections listed
in Options 3, Section 15, except Size Limitation. Any portion of the
order that is not executed during the Opening Process is cancelled.
OPG orders may not route.
---------------------------------------------------------------------------
Order Entry Protocols
The Exchange proposes to amend the rule text currently in
Supplementary Material .03(a)(i) of Options 3, Section 7. With respect
to the FIX protocol, within proposed Supplementary Material .03(A) of
Options 3, Section 7,\69\ the Exchange proposes to add ``post trade
allocation messages'' to the list of features that will be included in
FIX. A post trade allocation message allows market participants to
specify how an order should be subdivided among one or more
accounts.\70\ Today, ISE, GEMX and MRX provide post trade allocation
messages through FIX.\71\ The Exchange does not propose to amend the
SQF protocol within Supplementary Material .03(B) of Options 3, Section
7 \72\ or the FBMS protocol within Supplementary Material .03(C) of
Options 3, Section 7.\73\
---------------------------------------------------------------------------
\69\ Phlx Supplementary Material .03(A) of Options 3, Section 7
provides, ``Financial Information eXchange'' or ``FIX'' is an
interface that allows members and their Sponsored Customers to
connect, send, and receive messages related to orders and auction
orders and responses to and from the Exchange. Features include the
following: (1) execution messages; (2) order messages; and (3) risk
protection triggers and cancel notifications.''
\70\ For example, a member may specify the account(s) and their
respective order quantities which make up the order.
\71\ See ISE, GEMX and MRX Supplementary Material .03(a)(i) of
Options 3, Section 7.
\72\ Phlx Supplementary Material .03(A) of Options 3, Section 7
provides, ``Specialized Quote Feed'' or ``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. Immediate-or-Cancel Orders entered into SQF are not subject
to the Order Price Protection, the Market Order Spread Protection,
or Size Limitation in Options 3, Section 15(a)(1), (a)(2) and
(b)(2), respectively.
\73\ Phlx Supplementary Material .03(C) of Options 3, Section 7
provides, Options Floor Based Management System or (``FBMS'') is a
component of the System designed to enable members and/or their
employees to enter, route and report transactions stemming from
options orders received on the Exchange. The FBMS also is designed
to establish an electronic audit trail for options orders
negotiated, represented and executed by members on the Exchange, to
the extent permissible pursuant to Options 8, Section 22(a), such
that the audit trail provides an accurate, time-sequenced record of
electronic and other orders, quotations and transactions on the
Exchange, beginning with the receipt of an order by the Exchange,
and further documenting the life of the order through the process of
execution, partial execution, or cancellation of that order. The
features of FBMS are described in Options 8, Sections 28(e) and 29.
In addition, a non-member or member may utilize an FBMS FIX
interface to create and send an order into FBMS to be represented by
a Floor Broker for execution.
---------------------------------------------------------------------------
Routing
The Exchange proposes to relocate the rule text at Options 3,
Section 7(d) \74\ to Supplementary Material .04 of Options 3, Section 7
without change.
---------------------------------------------------------------------------
\74\ Phlx Options 3, Section 7(d) provides, Routing Strategies.
Orders may be entered on the Exchange with a routing strategy of
FIND, SRCH or Do-Not-Route (``DNR'') as provided in Options 5,
Section 4 through FIX only.
---------------------------------------------------------------------------
Options 3, Section 8
The Exchange proposes to amend Options 3, Section 8, Options
Opening Process, at Options 3, Section 8(b) to note the eligible
interest that will be included in the Opening Process. The Exchange
currently provides at Options 3, Section 8(b) that, ``Eligible interest
during the Opening Process includes Valid Width Quotes, Opening Sweeps,
and orders. Quotes, other than Valid Width Quotes, will not be included
in the Opening Process. Non-SQT Market Makers may submit orders.'' The
Exchange proposes to note that ``Eligible interest during the Opening
Process includes Valid Width Quotes, Opening Sweeps, and orders,
including Opening Only Orders, but excluding orders with a Time-In-
Force of ``Immediate or Cancel'' and Add Liquidity Orders. Quotes,
other than Valid Width Quotes, will not be included in the Opening
Process. The displayed and non-displayed portions of the Reserve Orders
are considered for execution and in determining the Opening Price
throughout the Opening Process. Non-SQT Market Makers may submit
orders.'' \75\ The Exchange would exclude Add Liquidity Orders and
consider Reserve Orders (displayed and non-displayed portions) for
execution in the Opening Process as well as when considering the
Opening Price. The Exchange proposes to amend the rule text to note how
those order types are accepted by the System for processing during the
Opening Process. The proposed eligibility of these orders mirror ISE,
GEMX and MRX Options 3, Section 8(b).
---------------------------------------------------------------------------
\75\ Today, Opening Only Orders are eligible for the Opening
Process but not Immediate or Cancel Orders.
---------------------------------------------------------------------------
Also, similar to ISE, GEMX and MRX Options 3, Section 8(g), the
Exchange proposes to account for the addition of Reserve Orders with
respect to the Potential Opening Price \76\ in Phlx Options 3, Section
8(h). The Exchange notes that to calculate the Potential Opening Price,
the System will take into consideration all Valid Width Quotes and
orders (including Opening Sweeps and displayed and non-displayed
portions of Reserve Orders) for the option series and identify the
price at which the maximum number of contracts can trade (``maximum
quantity criterion''). The addition of this rule text will make clear
the manner in which the System will handle a Reserve Order during the
Opening Process.
---------------------------------------------------------------------------
\76\ The Potential Opening Price indicates a price where the
System may open once all other Opening Process criteria is met.
---------------------------------------------------------------------------
The Exchange proposes to amend Options 3, Section 8(h)(A), which
currently describes how the Potential Opening Price would be calculated
when there is more than one Potential Opening Price. Today, Phlx
Options 3, Section 8(h)(A) provides that when two or more Potential
Opening Prices would satisfy the maximum quantity criterion and leave
no contracts unexecuted, the System takes the highest and lowest of
those prices and takes the mid-point; if such mid-point is not
expressed as a permitted minimum price variation, it will be rounded to
the minimum price variation that is closest to the closing price for
the affected series from the immediately prior trading session. If
there is no closing price from the immediately prior trading session,
the System will round up to the minimum price variation to determine
the Opening Price. The Exchange proposes to no longer round in the
direction of the previous trading day's closing price, rather it would
round up to the minimum price variation if the mid-point of the high/
low is not expressed as a permitted minimum price variation with this
technology migration. The proposed changes are intended to simplify and
bring greater transparency to the Opening Process, as market
participants can now have a better sense of how the Potential Opening
Price will be calculated without having to account for the closing
price of each options series. This proposed change will mirror
[[Page 106898]]
the functionality on ISE, GEMX and MRX.\77\
---------------------------------------------------------------------------
\77\ See ISE, GEMX and MRX Options 3, Section 8(g).
---------------------------------------------------------------------------
The Exchange further proposes to amend Phlx Options 3, Section
8(j)(7), which currently describes the determination of Opening Quote
Range (``OQR'') boundaries in certain scenarios.\78\ Specifically, the
Exchange proposes to amend the last sentence of Options 3, Section
8(j)(7) which currently states, ``The System will route routable Public
Customer and Professional interest pursuant to Options 3, Section
10(a)(1)(A).'' The Exchange proposes to remove the current limitation
that only allows routable Public Customer \79\ and Professional \80\
interest to route during the Opening Process. Instead, all routable
market participant interest will be allowed to route to align the
Exchange's opening functionality with ISE, GEMX and MRX Options 3,
Section 8, which does not limit orders that may route in the Opening
Process. Specifically, the Exchange proposes to remove the reference to
Public Customer and Professional to allow all routable interest to
route in the Opening Process. The Exchange proposes to update the
cross-cite to Phlx Options 3, Section 10(a)(1)(A), that currently
points to the Public Customer priority overlay. Instead, the Exchange
would amend the citation to point to the more general priority rule in
Phlx Options 3, Section 10(a).
---------------------------------------------------------------------------
\78\ OQR is an additional type of boundary used in the Opening
Process, and is intended to limit the opening price to a reasonable,
middle ground price, thus reducing the potential for erroneous
trades during the Opening Process.
\79\ The term ``Public Customer'' means a person or entity that
is not a broker or dealer in securities and is not a Professional as
defined within Options 1, Section (b)(45). See Option 1, Section
1(b)(46).
\80\ The term ``Professional'' means any person or entity that
(i) is not a broker or dealer in securities, and (ii) places more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). Member
organizations must indicate whether orders are for Professionals.
See Option 1, Section 1(b)(45).
---------------------------------------------------------------------------
Similar to other changes noted herein, the Exchange proposes to
amend Phlx Options 3, Section 8(k)(C)(6) to note how Reserve Orders
will be handled in the Opening Process for purposes of execution. The
Exchange proposes to state, ``The System will execute orders at the
Opening Process that have contingencies (such as without limitation,
Reserve Orders) and non-routable orders, such as a ``Do Not Route'' or
``DNR'' Orders, to the extent possible. This rule text will add
transparency to Phlx's rule text, and mirror rule text in ISE, GEMX and
MRX Options 3, Section 8(j)(6). Additionally, the Exchange proposes an
amendment to the last sentence of Phlx Options 3, Section 8(k)(C)(6)
which currently states, ``The System will only route non-contingency
Public Customer and Professional orders.'' In line with proposed
amendments to permit the System to route all market participant
interest, thereby removing the limitation that only allows routable
Public Customer and Professional interest to route, and in line with
the addition of rule text related to the handling of Reserve Orders,
the Exchange proposes to instead provide, ``The System will only route
non-contingency orders, except Reserve Orders may route up to their
full volume.'' With this proposal, Phlx would have the following
contingency orders that will not route: a Stop Order, an All-or-None
Order and a Fill-or-Kill Order.
The Exchange proposes to amend current Phlx Options 3, Section
8(k)(D) to mirror rule text in ISE, GEMX and MRX Options 3, Section
8(j)(6)(A) which states, ``The System will cancel any order or quote
that is priced through the Opening Price. All other interest will be
eligible for trading after opening.'' Today, the Phlx System will
cancel any order or quote priced through the Opening Price. Also,
today, all other interest will be eligible for trading after the
Opening Process and will remain on the order book. The Exchange
believes that this rule text will bring greater transparency to Phlx's
Opening Process.
Finally, the Exchange proposes to amend rule text in the Opening
Process Cancel Timer at Phlx Options 3, Section 8(l). With the
retention of the ``Good-Till-Cancel Order'' and adoption of the ``Good-
Till-Date Order,'' the Exchange proposes to amend the order types in
the last sentence of Options 3, Section 8(l) for consistency.
Options 3, Section 9
The Exchange proposes to amend Phlx Options 3, Section 9, Trading
Halts. Specifically, the Exchange proposes to amend Options 3, Section
9(d)(3) to amend the manner in which a Stop Order will be treated
during a trading halt. The Exchange proposes to mirror the treatment of
Stop Orders in ISE, GEMX and MRX Options 3, Section 9(d)(3). Today, the
rule text notes that ``[a]fter the opening, the Exchange shall elect
Stop Orders, as defined in Options 8, Section 32(c)(2), and, because
they become Market Orders, shall cancel them back and notify member
organizations of the reason for such rejection.'' The Exchange proposes
to amend the rule text to instead provide, ``After the Opening Process,
if a Stop Order is elected, as defined in Options 3, Section 7(d)
because they become Market Orders, the System shall cancel them back
and notify market participants of the reason for such cancellation.''
Stop Orders would become elected as provided for in proposed Options 3,
Section 7(d).\81\ The Exchange currently cites Phlx Options 8, Section
32 erroneously, as those rules refer to Stop Order types on the trading
floor. The Exchange proposes to instead cite proposed new Options 3,
Section 7(d) which describes the electronic Stop Order type. The
Exchange proposes to note that the System cancels orders. Also, the
Exchange proposes to change the word rejection to cancellation because
the order would be cancelled not rejected. The Exchange also proposes
to amend Phlx Options 3, Section 9(f) which currently states, ``During
a halt, the Exchange will maintain existing orders on the book (but not
existing quotes), except as noted in Options 5, Section 4, accept
orders and quotes, and process cancels. During a halt, existing quotes
are cancelled and auction orders and auction responses, as well as
Crossing Orders, are rejected.'' The Exchange notes that this exception
in Phlx Options 3, Section 9(f) to potential exceptions to this rule
within Options 5, Section 4 is not necessary as the Exchange follows
the trading halt processes in Options 3, Section 9. Options 5, Section
4 does not change the manner in which Options 3, Section 9 operates.
---------------------------------------------------------------------------
\81\ As proposed in Options 3, Section 7(d) a Stop Order becomes
a Market Order when the stop price is elected. A Stop Order to buy
is elected when the option is bid or trades on the Exchange at, or
above, the specified stop price. A Stop Order to sell is elected
when the option is offered or trades on the Exchange at, or below,
the specified stop price.
---------------------------------------------------------------------------
Options 3, Section 10
The Exchange proposes to amend Phlx Options 3, Section 10,
Electronic Execution Priority and Processing in the System. Today,
generally, Phlx's System rounds down. With this technology migration,
the Exchange proposes to amend Phlx's rounding methodology to round up
to the nearest integer. Today, ISE, GEMX and MRX Options 3, Section
10(c) provide for a Size Pro-Rata allocation with the same rounding
methodology as proposed for Phlx. The Exchange is opting to round up
and not down, uniformly, and disclose that rounding methodology
directly within Options 3, Section 10, so that all member organizations
are aware of the rounding methodology that would be utilized by the
System. In addition, if the result of an allocation is not a whole
[[Page 106899]]
number, it will now be rounded up to the nearest whole number instead
of down. Finally, with respect to rounding, because the System is
rounding up, the provisions which describe allocations for remainders
of less than one contract are being deleted because they cannot
mathematically occur. The Exchange believes that rounding up uniformly
is consistent with the Act because it provides for the equitable
allocation of contracts among the Exchange's market participants. The
Exchange proposes to provide market participants with transparency as
to the number of contracts that they are entitled to receive as the
result of rounding. Further, the Exchange believes that this
methodology produces an equitable outcome during allocation that is
consistent with the protection of investors and the public interest
because all market participants are aware of the methodology that will
be utilized to calculate outcomes for allocation purposes. By way of
example,
Broker/Dealer Order to Buy 20 @1.00
Firm Order to Buy 10 @1.00
Customer Order to Sell 7 @1.00
Today, this order would allocate as follows: 4 contracts to the Broker/
Dealer Order (BD receives 20/30 of the incoming 7 = 4.667, rounds down
to 4 contracts)
Today, this order allocates 2 contracts to the Firm Order (Firm
receives 10/30 of the incoming 7 = 2.33, rounds down to 2 contracts)
Today, this order allocates 1 contract (the odd lot) to the Broker/
Dealer Order
With this proposal, allocation will round up instead of down,
meaning the Broker/Dealer order would instead be allocated 5 contracts
and the Firm order would receive the remaining 2 contracts.
To that end, the Exchange proposes to amend Options 3, Section
10(a) to instead provide that ``If the result is not a whole number, it
will be rounded up to the nearest whole number. Size Pro-Rata Priority
shall mean that resting orders and quotes in the order book are
prioritized according to price. If there are two or more resting orders
or quotes at the same price, the System allocates contracts from an
incoming order or quote to resting orders and quotes beginning with the
resting order or quote displaying the largest size proportionally
according to displayed size, based on the total number of contracts
displayed at that price. Pursuant to Size Pro-Rata, if there are still
contracts to be allocated after the displayed size of all orders at
that price has been executed, the remaining size from the incoming
order will be allocated proportionally against non-displayed interest
according to remaining total size of each resting order at such price,
beginning with the order which has the largest total size remaining.
The Exchange is proposing to allocate similar to ISE, GEMX and MRX
Options 3, Section 10(c). The Size Pro-Rata allocation divides the
remainder proportionally among the non-displayed interest. Both the
displayed and non-displayed portions of a Reserve Order are available
for potential execution against incoming marketable orders or quotes.
The non-displayed portion of any Reserve Order is available for
execution only after all displayed interest on the single-leg order
book has been executed. The Odd Lot Allocation within Phlx Options 3,
Section 10(a)(1)(F) is also being removed because the Exchange would no
longer utilize the random assignment discussed in that paragraph,
rather the Exchange would simply round up any allocation which does not
result in a whole number, and thus would have no Odd Lot contracts
remaining to be allocated.
The Exchange proposes to amend Phlx Options 3, Section 10(a)(1)(B)
to change a reference to ``DROT'' to ``Directed Market Maker'' for
consistency.
The Exchange proposes to amend Phlx Options 3, Section 10(a)(1)(C)
to provide that ``After all Public Customer orders have been fully
executed, upon receipt of a Directed Order pursuant to Options 2,
Section 10, provided the Directed Market Maker's quote is at the better
of the internal PBBO or the NBBO, the Directed Market Maker will be
afforded a participation entitlement. This participation entitlement
will be considered after the Opening Process.'' Today, a Directed
Market Maker's quote or market maker order must be at the better of the
internal PBBO or NBBO. The Exchange believes that similar to ISE, GEMX
and MRX Options 3, Section 10(c)(1)(C), that Market Maker orders should
not be considered when offering Directed Market Maker priority
enhancements. Phlx Options 2, Section 10 provides that when the
Exchange's disseminated price is the NBBO at the time of receipt of the
Directed Order, and the Directed Lead Market Maker, SQT or RSQT is
quoting at the better of the internal PBBO or the NBBO, the Directed
Order shall be automatically executed and allocated in accordance with
Options 3, Section 10(a)(1)(C). The Exchange proposes to only offer the
Directed Market Maker enhanced allocation if a Directed Market Maker's
quote is at the better of the internal PBBO or the NBBO and not its
order. Consistent with this change, the Exchange proposes to remove
``or order(s)'' after quote throughout Options 3, Section 10(a)(1)(C).
Consistent with its proposal to round up, the Exchange proposes to
remove the last sentence of Options 3, Section 10(a)(1)(C) that
provides, ``If rounding would result in an allocation of less than one
contract, the Directed Market Maker shall receive one contract.''
The Exchange proposes to amend the Phlx's Entitlement for Orders of
5 contracts or fewer at Options 3, Section 10(a)(1)(D) to align with
ISE, GEMX and MRX Options 3, Section 10(a)(1)(D). The Exchange proposes
to amend the last sentence to provide, ``On a quarterly basis, the
Exchange will evaluate what percentage of the volume executed on the
Exchange is comprised of orders for 5 contracts or fewer allocated to
Lead Market Makers, and will reduce the size of the orders included in
this provision if such percentage is over 40%.'' Today, Phlx's
percentage for the reduction is 25%. The Exchange believes that
utilizing the higher percentage continues to restrict Lead Market
Makers with respect to the percentage of the volume executed on Phlx
that is comprised of orders for 5 contracts or fewer allocated to Lead
Market Makers. The Exchange will continue to evaluate the percentage on
a quarterly basis. The Exchange monitors ISE, GEMX and MRX Lead
Markets' orders for 5 contracts or fewer based on this percentage today
and this has not raised any concerns. Finally, this proposal will align
this percentage to 40% identical to ISE, GEMX and MRX Options 3,
Section 10(a)(1)(D) so that Market Makers have the same compliance
across the Nasdaq affiliated exchanges.\82\ Phlx notes that currently
Lead Market Makers are not approaching the 25% threshold noted in
Options 3, Section 10(a)(1)(D)(ii) related to the quarterly review of 5
contracts or fewer by the Exchange, which percentage is based on total
volume executed. With this proposal, Phlx will monitor the frequency in
which Lead Market Makers receive orders for 5 contracts or fewer.
Specifically, the Exchange will review the proposed provision quarterly
and will maintain the orders for 5 contracts or fewer at a level that
will not allow these small size orders executed by Lead Market Makers
to account for more than 40% of the volume executed on the Exchange.
The Exchange does not believe the proposal raises any new or novel
issues as other options exchanges also offer the same
[[Page 106900]]
allocation for orders for 5 contracts or fewer.\83\ The Exchange
believes that providing this benefit offers Lead Market Makers an
incentive for vigorous quoting since a Lead Market Maker must be
quoting at the NBBO in order to receive the allocation. Incentivizing
Lead Market Makers to provide liquidity on Phlx, in turn, provides
greater opportunity for executions, tighter spreads, and better pricing
for all member organizations. While the Commission has, in the past,
been concerned about locking up larger portions of order flow from
intra-market price competition, the Exchange believes that the
enhancement would remain adequately balanced by the increased 40%
threshold that limits the volume of orders of five contracts or fewer
that are executed by Lead Market Makers to account for no more than 40%
of the volume executed on the Exchange. The proposed increased
limitation of 40% continues to strike a reasonable balance between
encouraging vigorous price competition by Lead Market Makers and
rewarding those Lead Market Makers for their unique duties. Lead Market
Maker are also subject to the heightened quoting requirements specified
in Options 2, Section 5(c)(2)(B). As noted above, consistent with
proposed rounding, the Exchange proposes to remove the Phlx Odd Lot
Allocation in Phlx Options 3, Section 10(a)(1)(F) \84\ because Phlx
will round up which would not result in remaining contracts to be
allocated after rounding. There is no net benefit or negative to
electing to round up versus utilizing any other method of rounding
(down, banker's rounding, etc.) provided the rounding is handling
uniformly and applied in the same manner to each trade executed by the
System. The Exchange will uniformly apply its proposed rounding
methodology, rounding up, to all transactions executed on Phlx. The
Exchange also proposes to remove the reference to this paragraph at the
end of Phlx Options 3, Section 10(a)(1)(D)(ii).
---------------------------------------------------------------------------
\82\ BX also utilizes 40%. See Options 3, Sections
10(a)(1)(C)(1)(c) and 10(a)(2)(iii).
\83\ See ISE, GEMX and MRX Options 3, Section 10(a)(1)(D).
\84\ Phlx Options 3, Section 10(a)(1)(F) provides, [i]f there
are contracts remaining after Market Maker Priority is applied, such
contracts shall be allocated by randomly assigning all Market Makers
(including the Lead Market Maker or Directed Market Maker) an order
of allocation each trading day, and allocating orders, quotes and
sweeps in accordance with the trading day's order assignment,
provided the Market Maker, is at the best price at which the order,
quote or sweep is being traded.
---------------------------------------------------------------------------
Similar to ISE, GEMX and MRX Options 3, Section 10(c)(1)(E), the
Exchange proposes to account for Reserve Orders in proposed Phlx
Options 3, Section 7(g)(3). The Exchange proposes to state that, ``If
there are contracts remaining after all Market Maker interest has been
fully executed, notwithstanding Options 3, Section 7(g)(3), such
contracts shall be executed based on the Size Pro-Rata execution
algorithm as described in Options 3, Section 10(a).'' The Exchange
proposes to cite to proposed Phlx Options 3, Section 7(g)(3) which
provides that the displayed portion of a Reserve Order will trade in
accordance with Options 3, Section 10(a)(1)(A) for Public Customer
Orders and this subparagraph (F) for non-Public Customer Orders. The
displayed portion of a Reserve Order will be allocated the same as
other order types. Both the displayed and non-displayed portions of a
Reserve Order are available for potential execution against incoming
marketable orders or quotes. The non-displayed portion of any Reserve
Order is available for execution only after all displayed interest on
the single-leg order book has been executed. The proposed rule text
related to allocation of a Reserve Order is identical to ISE, GEMX and
MRX at Options 3, Section 10(g). The Exchange also proposes to add a
citation to Options 3, Section 10(a) in this paragraph for clarity.
Finally, the Exchange proposes to amend Phlx Options 3, Section
10(a)(2) to capitalize ``market maker'' and remove the Market Maker
order at the end of this paragraph because, as proposed above, the
Exchange proposes to only offer the Directed Market Maker allocation if
a Directed Market Maker's quote is at the better of the internal PBBO
or the NBBO and not an order.
Options 3, Section 15
The Exchange proposes to amend Options 3, Section 15, Simple Order
Risk Protections.
Order Price Protection
The Exchange proposes to amend its Order Price Protection (``OPP,''
also known as the fat finger check) in Phlx Options 3, Section 15(a)(1)
to align certain features with the OPP functionality currently offered
by its affiliate, NOM and BX. The Exchange's proposal will introduce an
alternative method to determine parameters for this risk protection.
The Exchange notes that OPP is intended to prevent erroneous executions
of orders on Phlx. This proposal seeks to further this objective by
introducing a fixed dollar threshold that, in combination with the
existing percentage threshold, will provide a modified approach to
order rejection based on the price of the order.
The Exchange's current OPP feature prevents certain day limit, good
til cancelled, and immediate or cancel orders at prices outside of pre-
set standard limits from being accepted by the System. OPP applies to
all options but currently does not apply to Stop-Limit Orders,
Intermarket Sweep Orders or Complex Orders. Today, OPP is operational
each trading day after the opening until the close of trading, except
during trading halts. OPP assists member organizations in controlling
risk by checking each order, before it is accepted into the System,
against certain parameters. Today, as set forth in Phlx Options 3,
Section 15(a)(1)(B), OPP rejects incoming orders that exceed certain
parameters according to the following algorithm:
(i) If the better of the NBBO or the internal market BBO (the
``Reference BBO'') on the contra-side of an incoming order is
greater than $1.00, orders with a limit more than 50% through such
contra-side Reference BBO will be rejected by the System upon
receipt.
(ii) If the Reference BBO on the contra-side of an incoming
order is less than or equal to $1.00, orders with a limit more than
100% through such contra-side Reference BBO will be rejected by the
System upon receipt.
With this technology migration, the Exchange proposes to expand the
algorithm for OPP to introduce a fixed dollar threshold as an
alternative to the percentage specified within the current rule. To
effect this change, the Exchange proposes to amend Phlx Options 3,
Section 15(a)(1)(B) to provide that OPP will reject incoming orders
that exceed certain parameters according to the following algorithm:
(i) If the better of the NBBO or the internal market BBO (the
``Reference BBO'') on the contra-side of an incoming order is
greater than $1.00, orders with a limit more than the greater of the
below will cause the order to be rejected by the System upon
receipt.
(A) 50% through such contra-side Reference BBO; or
(B) a configurable dollar amount not to exceed $1.00 through
such contra-side Reference BBO as specified by the Exchange
announced via an Options Trader Alert.
(ii) If the Reference BBO on the contra-side of an incoming
order is less than or equal to $1.00, orders with a limit more than
the greater of the below will cause the order to be rejected by the
System upon receipt.
(A) 100% through such contra-side Reference BBO; or
(B) a configurable dollar amount not to exceed $1.00 through
such contra-side Reference BBO as specified by the Exchange
announced via an Options Trader Alert.
The proposed alternative would permit for a range of prices to be
executed where the incoming order is up to $1.00 from the Reference
BBO. The parameters are identical to NOM and BX Options 3, Section
15(a)(1)(B). Similar to NOM and BX, the Exchange
[[Page 106901]]
believes that utilizing the greater of a fixed dollar amount or
percentage would expand the applicability of OPP while still providing
a reasonable limit to the range where orders will be accepted. By
implementing a functionality that applies the greater of a fixed dollar
amount not to exceed $1.00 or a percentage, the Exchange would ensure
that this protection would be able to accommodate all orders based on a
determination of how far from the Reference BBO the order is priced.
The Exchange notes that certain securities in lower price ranges
would not benefit from the application of a percentage as would
securities with higher prices. For instance, the application of a 50%
threshold to a $50 security would provide a rejection if a limit order
was priced $75 or greater compared to a 100% threshold for a $0.02
security which would be rejected if a limit order was priced $0.04 or
greater. As such, certain orders could be rejected under the current
framework because the percentage threshold is applied to the contra-
side of an incoming order, including in cases where the order is not
erroneously priced. Below are additional examples to illustrate the
application of the current and proposed rule:
Example: An Option Priced Less Than $1.00
For a penny MPV option with a BBO on Phlx of $0.01 x $0.02,
consider that the configurable dollar amount is set to $0.05.
Current Rule: Reject buy orders of more than $0.04 bid if
incoming order was less than $1.00, and it was more than 100%
through the contra-side of the Reference BBO.
Proposed Rule: A buy order priced up to $0.07 ($0.02 offer +
$0.05 configuration) would not be rejected because a configurable
dollar amount from $0.00 to $0.05 would allow the order to be
entered into the System for execution.
This order was marketable upon entry and was not priced far from
the current bid. The Exchange believes in this example, the order
should be permitted to trade instead of being rejected.
Example: An Option Priced Greater Than $1.00
For a penny MPV option with a BBO on Phlx of $1.01 x $1.02,
consider that the configurable dollar amount is set to $0.60.
Current Rule: Reject buy orders 50% through $1.02--orders priced
greater than $1.53 ($1.02 + $0.51).
Proposed Rule: A buy order priced up to $1.62 would not be
rejected (this would be greater than 50% through 1.02).
This order was marketable upon entry and was not priced far from
the current bid. The Exchange believes in this example, the order
should be permitted to trade instead of being rejected.
As the above examples illustrate, the Exchange believes that
securities in the lower price range could benefit by the proposed
alternative method because the fixed amount provides for additional
executions in certain situations where a percentage would reject an
order that was intentional and not erroneous. This approach has been
successful for NOM and BX in limiting erroneous executions while
permitting intentional executions at reasonable prices, and the
Exchange therefore proposes to adopt this approach for its options
market as well. Similar to NOM and BX, the Exchange will post the
configurable amount on its website and announce any changes to the
amount in an Options Trader Alert.
The Exchange also proposes to add language similar to NOM and BX,
which would provide the Exchange with discretion to temporarily
deactivate OPP from time to time on an intra-day basis if it determined
that unusual market conditions warranted deactivation in the interest
of a fair and orderly market. Like NOM and BX, the Exchange believes
that it will be useful to have the flexibility to temporarily disable
OPP intra-day in response to an unusual market event (for example, if
dissemination of data was delayed and resulted in unreliable underlying
values needed for the Reference BBO). Member organizations would be
notified of intra-day OPP deactivation and any subsequent reactivation
by the Exchange through the issuance of System status messages.
Specifically, the Exchange proposes to add in Phlx Options 3, Section
15(a)(1)(A) that OPP may be temporarily deactivated on an intra-day
basis at the Exchange's discretion.
Lastly, the Exchange proposes to amend Options 3, Section 15(a)(1)
to remove the current exclusion of Intermarket Sweep Orders (``ISOs'')
and Complex Orders from the OPP rule. With the proposed amendment, OPP
will apply to ISOs. With respect to ISOs, the intent of an ISO is to
sweep as many prices as possible at the top of the book, so market
participants need to cast as wide a net as possible to get those prices
and fill the ISO. With the current OPP functionality, lower priced ISOs
are more likely to get rejected for the reasons discussed above, and
the Exchange determined at the time to exclude ISOs when adopting OPP.
The proposal to add a fixed dollar threshold as an alternative OPP
parameter, however, would provide more flexibility for more lower-
priced options (including lower-priced ISOs) to get executed, and the
Exchange therefore believes it is no longer necessary to exclude ISOs
from OPP going forward. The Exchange further believes extending the
protection to ISOs will promote the goal of limiting erroneous
executions on the Exchange while permitting intentional executions at
reasonable prices, and in general, extend more protections to ISOs. The
Exchange is removing Complex Orders from the list of order types noted
in Options 3, Section 15(a) because Section 15 applies to single-leg
orders. The Exchange notes Complex Order risk protections in Options 3,
Section 16. Finally, the Exchange proposes to add ``until elected''
after Stop-Limit Orders. Once the Stop-Limit Order is elected, the
Exchange checks the Limit Order against the OPP bounds and will cancel
the order back to the entering member if the order falls outside of the
OPP bounds at the time of its election.
Market Wide Risk Protection
The Exchange proposes to introduce new order entry and execution
rate checks identical to those on BX at Options 3, Section 15(a)(3) for
Market Wide Risk Protection. These new risk protections are designed to
aid member organizations in their order risk management by
supplementing current price reasonability checks with activity based
order protections.\85\ The Exchange proposes to detail these risk
protections in proposed Options 3, Section 15(a)(3), entitled ``Market
Wide Risk Protection'' or ``MWRP''. As proposed, the System will
maintain one or more counting programs for each member organization
that count orders entered and contracts traded on Phlx. Member
organizations may use multiple counting programs to separate risk
protections for different groups established within the member
organization. The counting programs will maintain separate counts, over
rolling time periods specified by the member organization for each
count, of: (1) the total number of orders entered in the order book;
and (2) the total number of contracts traded.\86\
---------------------------------------------------------------------------
\85\ The Exchange currently provides members organizations with
price protections for orders such as the OPP and the Market Order
Spread Protection, which prevent limit orders and market orders from
being executed at far away and potentially erroneous prices.
\86\ Phlx will also provide Market Wide Risk Protections for
Complex Orders in a separate rule change.
---------------------------------------------------------------------------
All member organizations must provide parameters for the order
entry and execution rate protections as described in (1) and (2) above.
While the MWRP is mandatory for all member organizations, the Exchange
is not proposing to establish minimum or maximum values for the order
entry and execution parameters described above. The Exchange believes
that this
[[Page 106902]]
approach will give member organizations the flexibility needed to
appropriately tailor the MWRP to their respective risk management
needs. In this regard, the Exchange notes that each member organization
is in the best position to determine risk settings appropriate for
their firm based on the member organization's trading activity and
business needs. In the interest of maintaining a fair and orderly
market, however, the Exchange will also establish default values for
each of these parameters that apply to member organizations that do not
submit their own parameters for the MWRP, and will announce these
default values in an Options Trader Alert to be distributed to member
organizations. The Exchange notes that this approach is consistent with
BX's current functionality and would provide Phlx member organizations
with the flexibility to establish their own MWRP order entry and
execution rate parameters. The Exchanges also notes that similar to BX,
Phlx member organizations will have the discretion to establish the
applicable time period for each of the counts maintained under the
proposed MWRP, provided that the selected time period must be within
the minimum and maximum duration of the applicable time period
established by the Exchange and announced via an Options Trader
Alert.\87\
---------------------------------------------------------------------------
\87\ See proposed Options 3, Section 15(a)(3). See also BX
Options 3, Section 15(a)(3).
---------------------------------------------------------------------------
Pursuant to proposed Phlx Options 3, Section 15(a)(3)(A)-(C), if,
during the applicable time period, the member organization exceeds the
thresholds that it has set for any of the order entry or execution
counts described above on Phlx, the System will automatically reject
all subsequent incoming orders entered by the member organization.
Member organizations may also choose to have the System automatically
cancel all of their existing orders on Phlx when the MWRP is triggered.
The MWRP will remain engaged until the member organization manually
notifies the Exchange to enable the acceptance of new orders. For
member organizations that still have open orders on the order book that
have not been cancelled pursuant to proposed subparagraph (B), the
System will continue to allow those member organizations to interact
with existing orders entered before the protection was triggered,
including sending cancel order messages and receiving trade executions
for those orders. The action taken in proposed subparagraphs (A)-(C) is
substantially similar to BX Options 3, Section 15(a)(3)(C), except that
BX does not have complex order functionality.
The Exchange believes that the proposed MWRP will assist member
organizations in better managing their risk when trading on Phlx. In
particular, the proposed rule change provides functionality that allows
member organizations to set risk management thresholds for the number
of orders or contracts executed on the Exchange during a specified
period. As discussed above, this is similar to how BX has implemented
the MWRP, and the Exchange believes this functionality will likewise be
beneficial for Phlx member organizations.
The examples below illustrate how the MWRP would work both for
order entry and order execution protections:
Example: Order Entry Rate Protection
Broker Dealer 1 (``BD1'') designates an allowable order rate of 499
orders/1 second.
@0 milliseconds, BD1 enters 200 orders. (Order total: 200 orders).
@450 milliseconds, BD1 enters 250 orders. (Order total: 450
orders).
@950 milliseconds, BD1 enters 50 orders. (Order total: 500 orders).
Market Wide Risk Protection is triggered on Phlx due to exceeding
499 orders in 1 second. All subsequent orders are rejected, and if BD1
has opted in to this functionality, all existing orders are cancelled.
BD1 must contact the Exchange to resume trading.
Example: Order Execution Rate Protection
BD1 designates an allowable execution rate of 15,000 contracts/2
seconds.
@0 milliseconds, BD1 receives executions for 5,000 contracts.
(Execution total: 5,000 contracts).
@600 milliseconds, BD1 receives executions for 10,000 contracts.
(Execution total: 15,000 contracts).
@1550 milliseconds, BD1 receives executions for 2,000 contracts.
(Execution total: 17,000 contracts).
Market Wide Risk Protection is triggered on Phlx due to exceeding
15,000 contracts in 2 seconds. All subsequent orders are rejected, and
if BD1 has opted in to this functionality, all existing orders are
cancelled. BD1 must contact the Exchange to resume trading.
Acceptable Trade Range
The Exchange proposes to amend the Acceptable Trade Range or
``ATR'' at Phlx Options 3, Section 15(b)(1) to note that ATR will not
be available for All-or-None Orders. The Exchange notes that it would
be difficult, from a technical standpoint, to apply this feature to
those orders because their particular contingency makes it difficult to
automate their handling.\88\ In 2023, the Exchange filed a rule change
\89\ to amend Phlx's All-or-None Orders so that they may only be
submitted as an Immediate-or-Cancel Order. As a result of the 2023 rule
change, All-or-None Orders no longer rest on the order book and instead
execute in their entirety or are cancelled if it cannot execute.\90\
The Exchange should have noted at that time that because of that change
that ATR would not be available for All-or-None Orders. The Exchange is
proposing this rule text to note similar to, ISE, GEMX and MRX Options
3, Section 15(a)(2)(A)(i) that the Acceptable Trade Range is not
available for All-or-None Orders.\91\
---------------------------------------------------------------------------
\88\ See Securities Exchange Act Release No. 79677 (December 22,
2016), 81 FR 96114 (December 29, 2016) (SR-ISEGemini-2016-17)
(Notice of Filing of Proposed Rule Change To Amend Various Rules in
Connection With a System Migration to Nasdaq INET Technology).
\89\ See Securities Exchange Act Release No. 98142 (August 16,
2023), 88 FR 57140 (August 22, 2023) (SR-Phlx-2023-34) (Nasdaq PHLX
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Amend Phlx's All-or-None Order) (``SR-Phlx-2023-34'').
\90\ Id.
\91\ Similar to Phlx, ISE, GEMX and MRX All-or-None Orders are
immediate or cancel. See ISE, GEMX and MRX Options 3, Section 7(c).
---------------------------------------------------------------------------
Additionally, the Exchange proposes to account for quotes, in
addition to orders in Options 3, Section 15(b)(1)(B) in the sentence
that provides, ``If the order/quote remains unexecuted after the
Posting Period, a New Acceptable Trade Range will be calculated and the
order/quote will execute, route, or post up to the new Acceptable Trade
Range Threshold Price, unless a member organization has requested that
their orders be returned if posted at the outer limit of the Acceptable
Trade Range (in which case, the order will be returned).'' In addition
to orders, quotes are also subject to a request to be returned if
posted at the outer limit of the Acceptable Trade Range. The addition
of quotes clarifies the current System functionality.
The Exchange also proposes to remove the following phrase in
Options 3, Section 15(b)(1)(B), ``. . . unless a Quote Exhaust has
occurred, in which case the Quote Exhaust process in Options 3, Section
6(a)(ii)(B)(3) will ensue, triggering a new Reference Price.'' As noted
above in this proposal, the Exchange would no longer have the Quote
Exhaust functionality. Therefore, the Exchange notes that a Quote
Exhaust would not impact the ATR functionality as a result of its
removal.
[[Page 106903]]
Anti-Internalization
The Exchange proposes to enhance the anti-internalization (``AIQ'')
functionality at Phlx Options 3, Section 15(c)(1), provided to Market
Makers on the Exchange by giving member organizations the flexibility
to choose to have this protection apply at the market participant
identifier (i.e., existing functionality), at the Exchange account
level, or at the firm level. The Exchange believes that this
enhancement will provide helpful flexibility for Market Makers that
wish to prevent trading against all quotes and orders entered by their
firm, or Exchange account, instead of just quotes and orders that are
entered under the same market participant identifier. Similar
functionality is currently available on ISE, MRX and GEMX at Options 3,
Section 15(a)(3)(A).
Currently, as provided in Phlx Options 3, Section 15(c)(1), the
Exchange provides mandatory AIQ functionality that prevents Market
Makers from trading against their own quotes and orders. In particular,
quotes and orders entered by Market Makers using the same market
participant identifier will not be executed against quotes and orders
entered on the opposite side of the market by the same Market Maker
using the same identifier. In such a case, the System cancels the
oldest of the quotes or orders back to the entering party prior to
execution. This functionality does not apply in any auction.
Today, this protection prevents Market Makers from trading against
their own quotes and orders at the market participant identifier level.
The proposed enhancement to this functionality would allow member
organizations to choose to have this protection applied at the Market
Maker identifier level (existing functionality), at the Exchange
account level, or at the firm level. If member organizations choose to
have this protection applied at the Exchange account level, AIQ would
prevent quotes and orders from different market participant identifiers
associated with the same Exchange account from trading against one
another. Similarly, if the member organizations choose to have this
protection applied at the member organization firm level, AIQ would
prohibit quotes and orders from different market participant
identifiers within the member organization firm from trading against
one another. The Exchange believes that the proposed AIQ enhancement
will provide member organizations with more tailored functionality that
allows them to manage their trading as appropriate based on the member
organizations' business needs. While the Exchange believes that some
firms may want to restrict AIQ to trading against interest from the
same Market Maker identifier (i.e., as implemented today), other firms
may find it helpful to be able to configure AIQ to apply at the
Exchange account level or at the firm level so that they are protected
regardless of which Market Maker identifier the order or quote
originated from. ISE, GEMX and MRX Options 3, Section 15(a)(3)(A) offer
identical flexibility.
The examples below illustrate how AIQ would operate based on the
market participant identifier level protection, the Exchange account
level, or for member organizations that choose to apply AIQ at the firm
level:
Example: Market Participant Identifier Level
ABC (market participant identifiers 123A & 555B) with AIQ
configured at the market participant identifier level.
123A Quote: $1.00 (5) x $1.10 (20).
555B Buy Order entered for 10 contracts at $1.10.
555B Buy Order executes 10 contracts against 123A Quote. 123A and
555B are not prevented by the System from trading against one another
because member organization ABC has configured AIQ to apply at the
market participant identifier level. This is the same as existing
functionality.
Example: Exchange Account Level
ABC (Account 999 with market participant identifiers 123A and 555B,
and Account 888 with market participant identifier 789A) with AIQ
configured at the Exchange account level.
123A Quote: $1.00 (5) x $1.10 (20).
789A Quote: $1.05 (10) x $1.10 (20).
555B Buy Order entered for 30 contracts at $1.10.
555B Buy Order executes against 789A Quote but 555B Buy Order does
not execute against 123A Quote. AIQ purges the 123A Quote and the
remaining contracts of the 555B Buy Order rests on the book at $1.10.
123A and 555B are not permitted trade against one another because
member organization ABC has configured AIQ to apply at the Exchange
account level. This is new functionality as the member organization has
opted to have AIQ operate at the Exchange account level.
Example: Firm Level
ABC (Account 999 with market participant identifiers 123A and 555B,
and Account 888 with market participant identifier 789A) with AIQ
configured at the firm level.
123A Quote: $1.00 (5) x $1.10 (20).
789A Quote: $1.05 (10) x $1.10 (20).
555B Buy Order entered for 30 contracts at $1.10.
AIQ purges the 123A Quote and the 789A Quote and the 555B Buy Order
rests on the book at $1.10. This is new functionality as the member
organization has opted to have AIQ operate at the member organization
firm level.
Quotation Adjustments
The Exchange proposes to amend Phlx Options 3, Section 15(c)(2),
which sets forth the Exchange's ``Rapid Fire'' risk protection for
quotes, to expand existing functionality by introducing optional Delta
and Vega (as defined below) curtailment measures in addition to the
current percentage-based and volume-based curtailments. The new
curtailment measures will be functionally similar to the Delta and Vega
thresholds currently offered by BX pursuant to Options 3, Section
15(c)(2). The proposed new Delta and Vega thresholds are optional risk
protections. In connection with this change, the Exchange also proposes
to restructure its rules regarding Rapid Fire and ``Multi-Trigger''
risk protections to more closely align with the BX's rule structure
which has identical language to the proposed Phlx rule text.\92\ With
the proposed changes, Rapid Fire and Multi-Trigger will be triggered
only when a Market Maker exceeds its designated thresholds similar to
BX's approach, instead of when the thresholds are met or exceeded (as
is currently the case).
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\92\ As presently set forth in Phlx Options 3, Section
15(c)(2)(C), the Exchange's Multi-Trigger functionality removes
Market Maker quotes in all options series in all underlying issues
when a specified number of Rapid Fire thresholds are triggered over
a chosen interval.
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Today, Rapid Fire is a risk protection that removes a Market
Maker's quotes and SQF interest \93\ in all options series
[[Page 106904]]
of an underlying security from the marketplace when certain designated
percentage-based or volume-based thresholds are met or exceeded. Market
Makers are required to utilize either the percentage-based threshold or
the volume-based threshold.\94\ The Exchange proposes to amend the
current Rapid Fire functionality to no longer remove IOC Orders
submitted through SQF and continue to remove quotes. Today, ISE, GEMX,
MRX and BX only remove quotes through SQF and do not remove IOC Orders
submitted through SQF.\95\ The Exchange believes that preserving an IOC
Order submitted through SQF is consistent with the Act as Market Makers
quote to provide liquidity on the Exchange and the risk protection is
intended to provide a protection to those participants when acting as
liquidity providers. Market Makers utilizing IOC Orders may also
provide liquidity but to a lesser extent. The Exchange believes that
limiting the risk protection to quotes, similar to other Nasdaq
affiliated markets, continues to protect investors while not also
purging IOC orders which may interact against other interest on the
Exchange.
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\93\ Today, the exchange's SQF protocol permits Market Makers to
submit both quotes and Immediate-or-Cancel or ``IOC'' Orders to the
Exchange. Phlx Supplementary Material .03(A) of Options 3, Section 7
provides, ``Specialized Quote Feed'' or ``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. Immediate-or-Cancel Orders entered into SQF are not subject
to the Order Price Protection, the Market Order Spread Protection,
or Size Limitation in Options 3, Section 15(a)(1), (a)(2) and
(b)(2), respectively.
\94\ See Phlx Options 3, Section 15(c)(2)(G). In contrast, the
Multi-Trigger threshold is optional.
\95\ See ISE, GEMX and MRX Options 3, Section 15(a)(3)(B)(i).
See also BX Options 3, Section 15(c)(2)(A).
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The Exchange now proposes to introduce two optional thresholds
which, in addition to the existing percentage-based and volume-based
thresholds, will make up the suite of Rapid Fire thresholds that will
be offered to Market Makers upon the technology migration. First, in
new subparagraph (c)(2)(A)(iii) of Phlx Options 3, Section 15, the
Exchange proposes to add:
(iii) Delta Threshold. A Market Maker may provide a Delta
Threshold by which the System will automatically remove a Market
Maker's quotes in all series of an options class. For each class of
options, the System will maintain a Delta counter, which tracks the
absolute value of the difference between (1) purchased call
contracts plus sold put contracts and (2) sold call contracts plus
purchased put contracts. If the Delta counter exceeds the Delta
Threshold established by the member organization, the System will
automatically remove a Market Maker's quotes in all series of the
options class.
The proposed rule text for Delta Threshold is identical to BX
Options 3, Section 15(c)(2)(A)(iii).
Second, in new subparagraph (c)(2)(A)(iv) of Phlx Options 3,
Section 15, the Exchange proposes to add:
Vega Threshold. A Market Maker may provide a Vega Threshold by
which the System will automatically remove a Market Maker's quotes
in all series of an options class. For each class of options, the
System will maintain a Vega counter, which tracks the absolute value
of purchased contracts minus sold contracts. If the Vega counter
exceeds the Vega Threshold established by the Member, the System
will automatically remove a Market Maker's quotes in all series of
the options class.
The proposed rule text for Vega Threshold is identical to BX
Options 3, Section 15(c)(2)(A)(iv).
With the proposed changes to add the Delta and Vega Thresholds
described above, the Exchange also proposes to amend its Rapid Fire and
Multi-Trigger rules to align the rule structure with BX Options 3,
Section 15(a)(2)(C). In restructuring these rules, the existing Phlx
functionality will remain unchanged except with respect to when the
Rapid Fire and Multi-Trigger thresholds will be triggered, and a minor
change to the specified time period. Each will be discussed in more
detail below. The Exchange will separately describe the Active Quote
Protection amendment proposed in Options 3, Section 15(c)(2)(B) below.
To effect this change, the Exchange proposes to adopt new rule text
in Phlx Options 3, Section 15(c)(2)(A), which will provide that Market
Makers are required to utilize the Percentage Threshold or Volume
Threshold. The Exchange will also replace each instance of
``Percentage-Based Threshold'' and ``Volume-Based Threshold'' with
``Percentage Threshold'' and ``Volume Threshold'' throughout Options 3,
Section 15(c)(2) to align with BX terminology. The Exchange further
proposes to add that Market Makers may utilize the new Delta and Vega
Thresholds to make clear that these thresholds are optional for Market
Makers. The Exchange has determined not to make the new Delta and Vega
Thresholds mandatory under this proposal, and will continue to require
Market Makers to utilize either the Percentage or Volume Threshold, for
Market Makers who do not elect to use the Active Quote Protection
discussed below in lieu of the Rapid Fire protections.
For each of these features, the System will automatically remove a
Market Maker's quotes in all series in an options class when any of the
Percentage Threshold, Volume Threshold, Delta Threshold or Vega
Threshold has been exceeded. As noted above, this is a change from
current functionality where as amended, Rapid Fire will be triggered
only when the Market Maker exceeds any of the designated thresholds.
Currently, Rapid Fire is triggered when the designated thresholds are
met or exceeded.\96\ In addition, a Market Maker is required to specify
a period of time not to exceed 30 seconds (``Specified Time Period'')
during which the System will automatically remove a Market Maker's
quotes in all series of an options class. This is another change from
current functionality where today, the Specified Time Period
established by the Market Maker for the Percentage and Volume
Thresholds must not exceed 15 seconds.\97\ The proposed changes on Phlx
relating to when Rapid Fire will be triggered and the Specified Time
Periods will align with BX Options 3, Section 15(c)(2)(A). By
harmonizing Phlx's Rapid Fire rule to BX's rule in this manner, the
Exchange seeks to simplify the regulatory requirements and increase the
understanding of the Exchange's operations related to Rapid Fire for
market participants on Phlx and on BX. The Exchange believes more
consistent rules with its affiliated exchange will contribute to less
complexity for market participants and more efficient regulatory
compliance.
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\96\ See Phlx Options 3, Section 15(c)(2)(A) and (B).
\97\ See Phlx Options 3, Section 15(c)(2)(A) and (B).
---------------------------------------------------------------------------
Otherwise, the new rule text in Phlx Options 3, Section 15(c)(2)(A)
will not change existing Rapid Fire functionality. In particular, the
Specified Time Period will commence for an options class every time an
execution occurs in any series in such option class and will continue
until the System removes quotes as described in the Rule or the
Specified Time Period expires. The Specified Time Period operates on a
rolling basis among all series in an options class in that there may be
Specified Time Periods occurring simultaneously for each Threshold and
such Specified Time Periods may overlap. The Specified Time Periods
will be the same value for each of the Percentage Threshold, Volume
Threshold, Delta Threshold, and Vega Threshold.\98\
---------------------------------------------------------------------------
\98\ See id. for similar features in the current Percentage and
Volume Thresholds.
---------------------------------------------------------------------------
The Exchange also proposes to replace the description of the
existing Percentage Threshold in Phlx Options 3, Section 15(c)(2)(A)
with new rule text in Options 3, Section 15(c)(2)(A)(i) as follows:
[[Page 106905]]
Percentage Threshold. A Market Maker must provide a specified
percentage (``Percentage Threshold''), of not less than 1%, by which
the System will automatically remove a Market Maker's quotes in all
series of an options class. For each series in an options class, the
System will determine (1) during a Specified Time Period and for
each side in a given series, a percentage calculated by dividing the
size of a Market Maker's quote size executed in a particular series
(the numerator) by the Marker Maker's quote size available at the
time of execution plus the total number of the Market Marker's quote
size previously executed during the unexpired Specified Time Period
(the denominator) (``Series Percentage''); and (2) the sum of the
Series Percentage in the options class (``Issue Percentage'') during
a Specified Time Period. The System tracks and calculates the net
impact of positions in the same options class; long call percentages
are offset by short call percentages, and long put percentages are
offset by short put percentages in the Issue Percentage. If the
Issue Percentage exceeds the Percentage Threshold the System will
automatically remove a Market Maker's quotes in all series of the
options class during the Specified Time Period.
With the proposed changes, the Percentage Threshold will be applied
in the same manner as today, except with respect to the differences
discussed above (i.e., when the Percentage Threshold will be triggered
and the threshold's Specified Time Period). The proposed rule text is
identical to BX Options 3, Section 15(c)(2)(A)(i).
The Exchange also proposes to replace the description of the
existing Volume Threshold in Phlx Options 3, Section 15(c)(2)(A)(ii)
with new rule text in Options 3, Section 15(c)(2)(A)(ii) as follows:
Volume Threshold. A Market Maker must provide a Volume Threshold
by which the System will automatically remove a Market Maker's
quotes in all series of an options class when the Market Maker
executes a number of contracts which exceeds the designated number
of contracts in all series in an options class.
With the proposed changes, the Volume Threshold will be applied in
the same manner as today, except with respect to the differences
discussed above (i.e., when the Volume Threshold will be triggered and
the threshold's Specified Time Period). The proposed rule text is
identical to BX Options 3, Section 15(c)(2)(A)(ii).
In connection with the foregoing changes, current Phlx Options 3,
Section 15(c)(2)(C), which describes the Exchange's Multi-Trigger risk
protection, will be amended throughout to add the Delta and Vega
Thresholds wherever the Rule references Percentage and Volume
Thresholds. In addition, the Exchange proposes to amend the Multi-
Trigger Specified Time Period from 15 seconds to 30 seconds to align
with the Specified Time Periods proposed above. The Exchange further
proposes in the Multi-Trigger rule to amend when Multi-Trigger will be
triggered to align with the Rapid Fire changes proposed above.
Specifically, the Exchange proposes to amend the provision, ``[o]nce
the System determines that the number of triggers equals or exceeds a
number. . .'' to instead state, ``[o]nce the System determines that the
number of triggers exceeds a number. . .'' to make clear that Multi-
Trigger will no longer remove Market Maker quotes when the Multi-
Trigger threshold is met (and not exceeded).
Phlx Options 3, Section 15(c)(2)(D), which explains how the System
purges quotes once the Rapid Fire and Multi-Trigger thresholds are
triggered, will be amended to conform with the changes proposed above.
In particular, the Exchange proposes conforming changes to add the
Delta and Vega Thresholds wherever these provisions reference
Percentage and Volume Thresholds, and to replace ``reached'' with
``exceeded'' in each instance where the language indicates that the
Rapid Fire and Multi-Trigger thresholds have been reached.\99\
---------------------------------------------------------------------------
\99\ The Exchange will describe the amendments to proposed
Options 3, Section 15(c)(2)(D)(i) and (ii) further below.
---------------------------------------------------------------------------
Phlx Options 3, Section 15(c)(2)(E) will likewise be amended to add
references to the Delta and Vega Thresholds, and will state that if a
Market Maker requests the System to remove quotes in all options series
in an underlying issue, the System will automatically reset the
Specified Time Period(s) for the Percentage, Volume, Delta, or Vega
Threshold.\100\ As is the case today, the Multi-Trigger Specified Time
Period(s) will not automatically reset for the Multi-Trigger Threshold.
---------------------------------------------------------------------------
\100\ The Specified Time Period(s) will also be automatically
reset if Rapid Fire is triggered (and the System automatically
removes quotes).
---------------------------------------------------------------------------
Phlx Options 3, Section 15(c)(2)(F), which sets forth the re-entry
process once Rapid Fire and Multi-Trigger are triggered, the Exchange
will likewise add references to the Delta and Vega Thresholds wherever
the provision refers to the Percentage and Volume Thresholds. The
Exchange also proposes a clarifying change in the first sentence to
add, ``[w]hen the System removes quotes as a result of exceeding . .
.'' in order to align with BX Options 3, Section 15(c)(2)(F). The
Exchange further proposes a non-substantive change in the first
sentence to amend ``reentry'' to ``re-entry''
Lastly, Options 3, Section 15(c)(2)(G), will be amended to specify
that the Exchange will require Phlx Market Makers to utilize either the
Percentage Threshold, the Volume Threshold, or the Contract Limit. For
Market Makers that elect to utilize the Contract Limit, the Percentage
Threshold, Volume Threshold, Delta Threshold, and Vega Threshold will
not be available for use on the Market Maker's badge. The Delta, Vega,
and Multi-Trigger Thresholds are optional. The Exchange is adding
``Contract Limit'' to the required risk protections that must be
utilized by a Phlx Market Maker.
The following are examples to illustrate how the proposed Delta and
Vega Thresholds would apply:
Example: Delta Threshold
MM1 has Delta Threshold set to 10 contracts
MM1 quotes IBM Call Option 2.55 (100) x 3.00 (1000)
FIX Order to Sell 11 @MKT trades with MM quote
Trade occurs for 11 @2.55, triggers Rapid Fire for MM1 since 11 calls
purchased for MM1 > MM1's Delta Threshold of 10
Example: Vega Threshold
MM1 has Vega Threshold set to 10 contracts
MM1 quotes IBM Call Option 2.55 (100) x 3.00 (1000)
FIX Order to Sell 11 @MKT trades with MM quote
Trade occurs for 11 @2.55, triggers Rapid Fire for MM1 since 11 calls
purchased for MM1 > MM1's Vega Threshold of 10
Active Quote Protection
The Exchange proposes to adopt an active risk counter functionality
called active quote protection (``Active Quote Protection''), at Phlx
Options 3, Section 15(c)(2)(B), which will be available to Market
Makers as an alternative to existing passive risk counter functionality
described in Options 3, Section 15(c)(2)(A) (i.e., ``Automated
Quotation Adjustments'' or Rapid Fire).\101\ The proposed Active Quote
Protection functionality will be identical to BX Options 3, Section
15(c)(2)(B). Today, the Exchange requires Market Makers to configure
risk exposure thresholds based on either percentage of executed quotes
(``Percentage Threshold'') or total number of executed contracts
(``Volume Threshold''). Also, as proposed herein,
[[Page 106906]]
the Exchange proposes two optional risk exposure thresholds based on
the absolute value of the difference between long and short positions
(``Delta Threshold''), and absolute value of the difference between
contracts bought and contracts sold (``Vega Threshold'') (collectively,
``Thresholds'').\102\ As set forth in Options 3, proposed Section
15(c)(2)(A), the System tracks each Threshold with a corresponding risk
counter over a Market Maker-specified rolling time period not to exceed
30 seconds. Furthermore, Section 15(c)(2)(A) describes that when a risk
counter exceeds the corresponding Threshold during the specified time
period, the System would automatically remove the Market Maker's quotes
in all series of the applicable options class (each, a ``Purge
Event''). As a result of a Purge Event, the corresponding risk counter
and Threshold would reset upon such removal. The Exchange also notes
that pursuant to Section 15(c)(2)(E) today, the Thresholds and risk
counters can be completely reset if the Market Maker specifically
requests the System to remove quotes in all options series in an
underlying issue. This risk protection is passive in that the risk
counters wait to reset until the expiry of a specified time period, a
Purge Event, or when the Market Maker otherwise sends a specific
instruction to the Exchange to remove quotes to completely reset the
counters.
---------------------------------------------------------------------------
\101\ As described below, the Exchange will specifically define
this passive risk counter functionality as ``Rapid Fire'' within
this Rule.
\102\ The proposed Thresholds are described in detail in Phlx
Options 3, Section 15(c)(2)(A)(i)--(iv). If a Market Maker does not
provide a parameter for each Threshold, the Exchange will apply
default parameters announced to member organizations.
---------------------------------------------------------------------------
The Exchange now proposes to introduce a new risk protection, which
is an alternative to Rapid Fire, called Active Quote Protection that
would enable Market Makers to actively manage their executed contract
limit (``Contract Limit'') by sending an electronic instruction to the
Exchange to decrement their executed contract limit counter (``Limit
Counter'') by a specified amount at any time, rather than waiting until
the expiry of a defined time period, when the risk limit is exceeded
(like a Purge Event), or when the Market Maker otherwise sends a
specific instruction to purge quotes to completely reset the risk
counter.\103\
---------------------------------------------------------------------------
\103\ If the Market Maker opting to use Active Quote Protection
does not provide a Contract Limit at the outset, the Exchange will
apply a default parameter for the Active Quote Protection Contract
Limit (which would be announced to member organizations). The
Exchange will initially set the default Contract Limit at 100
contracts.
---------------------------------------------------------------------------
The Contract Limit, as set by the Market Maker, would apply for the
duration of the trading day. Once the Market Maker's Limit Counter
exceeds the Contract Limit set by the Market Maker, the System would
automatically remove quotes in all series of the applicable options
class submitted through the Exchange's Specialized Quote Feed
protocol,\104\ identical to how the quote removal mechanism works for a
Purge Event today.\105\ Today, Purge Events are triggered under the
existing Quotation Adjustments on the first execution that exceeds the
applicable Threshold. Once an execution occurs, the System checks all
Thresholds to see if they have been exceeded. If exceeded, the Market
Maker's quote would be purged pursuant to Phlx Options 3, Section
15(c)(2)(C). In order to remain consistent with the firm quote
obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS,
any marketable orders or quotes that are executable against a Market
Maker's quotes that are received \106\ prior to the time the applicable
Threshold is triggered will be automatically executed up to the size of
the Market Maker's quote, regardless of whether the execution would
cause the Market Maker to exceed their pre-set Percentage Threshold,
Volume Threshold, Delta Threshold, or Vega Threshold.\107\
---------------------------------------------------------------------------
\104\ Specialized Quote Feed or ``SQF'' is an interface that
only Market Makers may use to submit quotes to the Exchange at
renumbered Supplementary Material .03(B) to Options 3, Section 7.
\105\ See Options 3, Section 15(c)(2)(C).
\106\ The time of receipt for an order or quote is the time such
message is processed by the Exchange's order book.
\107\ See proposed Phlx Options 3, Section 15(c)(2)(D)(ii).
---------------------------------------------------------------------------
Under Active Quote Protection, the System would similarly handle
the Market Maker's quote in that the quote could be filled one
execution over the Contract Limit before the Market Maker's remaining
quotes are cancelled by the System in order to be consistent with the
firm quote obligations under Rule 602 of Regulation NMS. Specifically,
the Exchange notes that any marketable orders or quotes that are
executable against a Market Maker's quotes that are received \108\
prior to the time the Contract Limit is triggered will be automatically
executed up to the size of the Market Maker's quote, regardless of
whether the execution would cause the Market Maker to exceed the
Contract Limit.\109\
---------------------------------------------------------------------------
\108\ The time of receipt for an order or quote is the time such
message is processed by the Exchange's order book.
\109\ For both the current Quotation Adjustments and proposed
Active Quote Protection, the System will execute marketable interest
up to the size of the Market Maker's quote, but cannot guarantee
interest will be fully executed, as is the case with any execution
in the Exchange's order book. There is always the possibility that
the Market Maker's quote size (and/or Market Maker's quote plus
other interest on the order book) may not be sufficient volume to
fill the incoming interest.
---------------------------------------------------------------------------
Additionally, under Active Quote Protection, Market Makers will be
able to submit a request (i) to decrement their Limit Counter by a
specified number of contracts, or (ii) to fully decrement their Limit
Counter to zero.\110\ Market Makers that elect to use the proposed
Active Quote Protection on a badge \111\ will not be able to use the
existing Threshold risk protections described above on the same badge
(i.e., the active and passive risk counter functionality would be
mutually exclusive per badge) given that it would be unnecessarily
complex to implement from a technology standpoint. Market Makers may be
associated with multiple badges today, so if they want to use both risk
protections for their activity on the Exchange, they will be able to
set either the active or passive risk counter functionality on each
badge.
---------------------------------------------------------------------------
\110\ As discussed later in this rule change, in order to re-
enter the System after their quotes are purged pursuant to the
Active Quote Protection, Market Makers will need to submit the same
request to fully decrement their Limit Counter to zero.
\111\ Phlx Options 1, Section 1(b)(6) provides that the term
``badge'' means an account number, which may contain letters and/or
numbers, assigned to Lead Market Makers and Market Makers. A Lead
Market Maker or Market Maker account may be associated with multiple
badges.
---------------------------------------------------------------------------
To effectuate the foregoing changes, the Exchange proposes to set
forth the new risk protection in paragraph (B) of Phlx Options 3,
Section 15(c)(2), as follows:
In lieu of Rapid Fire, a Market Maker may provide an executed
contract limit (``Contract Limit'') that, if exceeded, the System
will automatically remove the Market Maker's quotes in all series of
an options class submitted through SQF. The System will apply the
Contract Limit for the duration of the trading day. For each class
of options, the System will maintain an active limit counter that
will track the current number of contracts executed through the
Market Maker's quotes (``Limit Counter''). If the Limit Counter
exceeds the Contract Limit established by the Market Maker, the
System will automatically remove the Market Maker's quotes as
described in Section 15(c)(2)(D). Market Makers may submit a request
(i) to decrement their Limit Counter by a specified number of
contracts, or (ii) to fully decrement their Limit Counter to zero,
including to re-enter the System as described in Section
15(c)(2)(E). For Market Makers that elect to utilize the Contract
Limit, the Percentage Threshold, Volume Threshold, Delta Threshold,
and Vega Threshold will not be available for use on the Market
Maker's badge.
The Exchange also proposes to amend proposed paragraph (G) of Phlx
Options 3, Section 15(c)(2) to specify that the
[[Page 106907]]
active and passive risk counter functionality will be mutually
exclusive per badge). As amended, proposed paragraph (G) will provide:
The Exchange will require Phlx Market Makers to utilize either
the Percentage Threshold, the Volume Threshold, or the Contract
Limit. For Market Makers that elect to utilize the Contract Limit,
the Percentage Threshold, Volume Threshold, Delta Threshold, and
Vega Threshold will not be available for use on the Market Maker's
badge. The Delta, Vega, and Multi-Trigger Thresholds are optional.
As described above, once the Limit Counter exceeds the Contract
Limit set by the Market Maker under the proposed Active Quote
Protection, the System would automatically remove quotes in the same
manner as currently specified for a Purge Event in proposed paragraph
(D) of Phlx Options 3, Section 15(c)(2). Accordingly, the Exchange
proposes to add Active Quote Protection's Contract Limit throughout the
proposed Rule as noted herein. Specifically, proposed paragraph (D)
will provide that the System will automatically remove quotes in all
series of an options class in an underlying security when the
Percentage Threshold, Volume Threshold, Delta Threshold, Vega
Threshold, or the Contract Limit has been exceeded. The System will
automatically remove quotes in all series of an option class in all
underlying securities when the Multi-Trigger Threshold \112\ has been
exceeded. The System will send a Purge Notification Message to the
Market Maker for all affected options when the above thresholds have
been exceeded. Proposed subparagraph (D)(i) will provide that the
Percentage Threshold, Volume Threshold, Delta Threshold, Vega
Threshold, Contract Limit, and Multi-Trigger Threshold are considered
independently of each other.
---------------------------------------------------------------------------
\112\ Multi-Trigger Threshold is defined in current paragraph
(C) of Section 15(c)(2) as the number of allowable triggers by which
the Exchange will automatically remove quotes in all options series
in all underlying issues submitted through designated Phlx protocols
as specified by the Exchange. This threshold is part of the
Exchange's Multi-Trigger risk protection.
---------------------------------------------------------------------------
Further, as discussed above, any marketable orders or quotes that
are executable against a Market Maker's quotes that are received \113\
prior to the time the applicable Threshold or Contract Limit is
triggered will be automatically executed up to the size of the Market
Maker's quote, even if such execution would cause the Market Maker to
exceed any of their pre-set risk limits with respect to any of the
foregoing risk parameters. The Exchange notes that proposed sub-
paragraph (D)(ii) only mentions that quotes will execute up to the
Market Maker's size, and is silent on marketable orders. In addition,
the current Rule does not specify the time of receipt of such
marketable interest that is executable against the size of the Market
Maker's quote. As such, the Exchange proposes to add this specificity
in proposed sub-paragraph (D)(ii) to better describe how the System
operates today for Quotation Adjustments and how the System will
operate for proposed Active Quote Protection. In particular, sub-
paragraph (D)(ii) will provide:
---------------------------------------------------------------------------
\113\ The time of receipt for an order or quote is the time such
message is processed by the Exchange's order book.
The System will execute any marketable orders or quotes that are
executable against a Market Maker's quote and received prior to the
time the Percentage Threshold, Volume Threshold, Delta Threshold,
Vega Threshold, or Contract Limit is triggered up to the size of the
Market Maker's quote, even if such execution results in executions
in excess of the Market Maker's applicable Threshold or Contract
---------------------------------------------------------------------------
Limit with respect to any parameter.
In addition, when the System removes quotes as a result of
exceeding the Contract Limit under Active Quote Protection, the
Exchange proposes to require the Market Maker to submit a request to
re-enter the System. This request will be the same type of message as
the request described in proposed paragraph (B) where the Market Maker
must request to fully decrement their Limit Counter back to zero in
order to re-enter the System. This requirement will be added in
proposed paragraph (F) of Phlx Options 3, Section 15(c)(2), and will be
similar to how the existing quote purge mechanism works for the
Thresholds today, except the Market Maker needs to send a separate
message (i.e., a re-entry indicator) to re-enter the System when their
quotes are purged as a result of exceeding any of the existing
Thresholds.
The Exchange also proposes that the new Active Quote Protection
would leverage the existing and amended multi-trigger (``Multi-
Trigger'') functionality proposed in Phlx Options 3, Section
15(c)(2)(C). Today, Multi-Trigger is a risk protection offered
alongside the current Quotation Adjustments. A Market Maker or Market
Maker Group, which is defined as multiple affiliated Phlx Market
Makers,\114\ may provide the specified time period and number of
allowable Purge Events by which the Exchange will automatically remove
quotes in all options series in all underlying issues submitted through
designated Phlx protocols as specified by the Exchange (``Multi-Trigger
Threshold''). As proposed, Multi-Trigger is triggered when during a
time period established by the Market Maker not to exceed 30 seconds,
the total number of Quotation Adjustment Purge Events exceeds the
Multi-Trigger Threshold provided to the Exchange by the Phlx Market
Maker or Phlx Market Maker Group. When Multi-Trigger is triggered, the
System automatically purges all of the Market Maker's or Group's quotes
in all options series in an underlying issue. As set forth in proposed
Phlx Options 3, Section 15(c)(2)(F), when the System removes quotes as
a result of the Multi-Trigger Threshold, the Market Maker must manually
request re-entry to the System by contacting the Exchange. Exchange
staff must then set a re-entry indicator in this case to enable re-
entry, which will cause the System to send a Reentry Notification
Message to the Phlx Market Maker or Group for all options series in all
underlying issues. The Market Maker's Clearing Firm will be notified
regarding the trigger and re-entry into the System after quotes are
removed as a result of the Multi-Trigger Threshold, provided the Market
Maker's Clearing Firm has requested to receive such notification.
---------------------------------------------------------------------------
\114\ This would be more than one Phlx Market Maker, but does
not require the aggregation of all of the member organization's
Market Makers. A Group would be comprised of Phlx Market Makers
affiliated with one member organization (i.e., one options member
firm). The member organization would be required to define a Group
by providing a list of such affiliated Phlx Market Makers to the
Exchange.
---------------------------------------------------------------------------
Today, Multi-Trigger is meant to provide Market Makers or a Group
with protection from the risk of multiple executions across multiple
series of an option or across multiple options. This risk protection
recognizes that risk to Market Makers is not limited to a single series
in an option or even to all series in an option; Market Makers that
quote in multiple series of multiple options have significant exposure,
requiring them to offset or hedge their overall positions. Market
Makers are required to continuously quote in assigned options, and
quoting across many series in an option or multiple options creates the
possibility of executions that can create large, unintended principal
positions that could expose Market Makers to unnecessary risk. Multi-
Trigger is therefore intended to assist Market Makers or Groups in
managing their market risk by tracking the number of Purge Events
relative to the Multi-Trigger Threshold set by the Market Maker or
Group. The Exchange believes that tracking the number of Active Quote
Protection Purge Events for a
[[Page 106908]]
Market Maker or Group against its Multi-Trigger Threshold would be
similarly useful for managing market risk.
To that end, the Exchange proposes to further update Multi-Trigger
to add purge events under Active Quote Protection to the Multi-Trigger
counter such that Active Quote Protection purge events and Purge Events
under the current Quotation Adjustments will be aggregated together as
counting toward the specified Multi-Trigger Threshold. Accordingly, the
Exchange proposes to add references to the Active Quote Protection rule
(i.e., proposed paragraph (B) of Options 3, Section 15(c)(2))
throughout the Multi-Trigger rule in proposed paragraph (C),
specifically:
A Market Maker or Market Maker Group (multiple affiliated Market
Makers is a ``Group'' as defined by a Phlx member and provided by
such member to the Exchange) may provide a Specified Time Period and
number of allowable triggers by which the Exchange will
automatically remove quotes in all options series in all underlying
issues submitted through designated Phlx protocols, as specified by
the Exchange (``Multi-Trigger Threshold''). During a specified time
period established by the Phlx Market Maker not to exceed 30 seconds
(``Multi- Trigger Specified Time Period''), the number of times the
System automatically removes the Phlx Market Maker's or Group's
quotes in all options series will be based on the number of triggers
of the Percentage Threshold described in paragraph (A)(i) above, the
Volume Threshold described in paragraph (A)(ii) above, the Delta
Threshold described in paragraph (A)(iii) above, the Vega Threshold
described in paragraph (A)(iv) above, and the Contract Limit
described in paragraph (B) above. Once the System determines that
the number of triggers exceeds a number established by either the
Phlx Market Maker or Group, during a Multi-Trigger Specified Time
Period, the System will automatically remove all quotes in all
options series in all underlying issues for that Phlx Market Maker
or Group, during a Multi-Trigger Specified Time Period, the System
will automatically remove all quotes in all options series in all
underlying issues for that Phlx Market Maker or Group. A trigger is
defined as the event which causes the System to automatically remove
quotes in all options series in an underlying issue. A Multi-Trigger
Specified Time Period will commence after every trigger of the
Percentage Threshold, Volume Threshold, Delta Threshold, Vega
Threshold, or Contract Limit and will continue until the System
removes quotes as described in paragraph (D) below or the Multi-
Trigger Specified Time Period expires. The System counts triggers
within the Multi-Trigger Specified Time Period across all triggers
for the Phlx Market Maker or Group. A Multi-Trigger Specified Time
Period operates on a rolling basis in that there may be multiple
Multi-Trigger Specified Time Periods occurring simultaneously and
such Multi-Trigger Specified Time Periods may overlap.
The following example illustrates the proposed behavior of the
Active Quote Protection risk protection:
Active Quote Protection Example
Market Maker AAPL
Contract Limit: 100
Market Maker trades a transaction for 10 contracts in AAPL; Limit
Counter goes from 0 to 10.
Market Maker sends a request to decrement its Limit Counter in AAPL
for 10 contracts; Limit Counter goes from 10 to 0.
Market Maker trades a transaction for 20 contracts in AAPL; Limit
Counter goes from 0 to 20.
Market Maker trades a transaction for 50 contracts in AAPL; Limit
Counter goes from 20 to 70.
Market Maker sends a request to decrement its Limit Counter in AAPL
for 20 contracts; Limit Counter goes from 70 to 50.
Market Maker trades a transaction for 60 contracts in AAPL; Limit
Counter goes from 50 to 110 and all Market Maker quotes in AAPL are
automatically purged after the execution because the Limit Counter
exceeded the Market Maker's Contract Limit of 100 executed contracts.
At this point, the Market Maker must send a request to fully
decrement its Limit Counter in AAPL back to zero in order to begin
quoting again.
Multi-Trigger Active Quote Protection Example
Assume Market Maker in AAPL and SPY has Quotation Adjustments set
for AAPL and Active QP set for SPY.
Market Maker sets its Multi-Trigger Threshold so that it is
triggered at 25 purge events within a 20 second time period.
On a given trading day, if an Active Quote Protection Purge Event
is triggered 15 times in SPY and a Quotation Adjustment Purge Event is
triggered 11 times in AAPL, all within 20 seconds, then the Exchange
will automatically remove all of the Market Maker's quotes AAPL and SPY
because 26 purge events were triggered for the Market Maker.
Lastly, the Exchange proposes to title paragraph (A) as ``Rapid
Fire'' and paragraph (C) as ``Multi-Trigger'' to more clearly identify
which rules apply to which risk protections.
Post-Only Quoting Protection
The Exchange proposes to adopt an optional quoting protection for
Market Makers at Phlx Options 3, Section 15(c)(3) that will be
identical to BX Options 3, Section 15(c)(3). This optional risk
protection would allow Market Makers to prevent their quotes from
removing liquidity from the Exchange's order book upon entry. As
proposed, Market Makers may elect to configure their SQF protocols to
prevent their quotes from removing liquidity (``Post-Only Quote
Configuration''). A Post-Only Quote Configuration would re-price or
cancel a Market Maker's quote that would otherwise lock or cross any
resting order or quote \115\ on the order book upon entry. Market
Makers may elect whether to re-price or cancel their quotes with this
functionality. When configured for re-price, quotes would be re-priced
and displayed by the System to one MPV below the current best offer
(for bids) or above the current best bid (for offers). Notwithstanding
the aforementioned, if a quote with a Post-Only Quote Configuration
would not lock or cross an order or quote on the System but would lock
or cross the NBBO, the quote will be handled pursuant to Options 3,
Section 4(b)(6).\116\ When configured for cancel, Market Makers will
have their quotes cancelled whenever the quote would lock or cross the
NBBO or be placed on the book at a price other than its limit price.
Finally, the Exchange notes that similar to BX, this risk protection
will not apply during an Opening Process because the order book is
established once options series are open for trading. Below are some
Post-Only Quote Configuration examples.
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\115\ This would include any re-priced orders pursuant to Phlx
Options 3, Section 5(d), ALOs as described in proposed Options 3,
Section 7(n), and any re-priced quotes as described in Phlx Options
3, Section 4(b)(6). As described above, ALOs may re-price.
\116\ Phlx Options 3, Section 4(b)(6) provides that a quote will
not be executed at a price that trades through another market or
displayed at a price that would lock or cross another market. If, at
the time of entry, a quote would cause a locked or crossed market
violation or would cause a trade-through violation, it will either
be re-priced and displayed at one minimum price variance above (for
offers) or below (for bids) the national best price, or immediately
cancelled, as configured by the Member.
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Re-Priced Post-Only Quote Configuration--Penny Interval Program Display
and Execution Example
Penny Interval Program MPV in open trading state
Market Makers A and C do not have Post-Only Quote Configuration risk
protection configured
Market Maker B is configured for Post-Only Quote Configuration re-price
Market Maker A quote $0.98 (10) x $1.00 (10)
ABBO $0.96 x $1.03
Market Maker B quote $1.00 (10) x $1.01 (10) arrives
[[Page 106909]]
[cir] Bid side of quote re-prices onto order book @0.99 and sets
displayed NBBO to 10 quantity
[cir] Offer side rests at 1.01 without issue
Market Maker C quote $0.97 (20) x $0.98 (20) arrives
Trades 10 with Market Maker B @$0.99 and 10 with Market Maker A @$0.98
Market Maker B avoids taking liquidity while Market Maker C, who chose
not to be configured for such, removes liquidity by interacting with
re-priced interest on Phlx's order book.
Re-Priced Post-Only Quote Configuration--Non-Penny Interval Program
Display and Execution Example
Non-Penny Interval Program MPV in open trading state
Market Maker A quote $0.95 (10) x $1.00 (10)
ABBO $0.85 x $1.05
Market Maker B (configured for Post-Only Quote Configuration and
selection of re-price upon quote) quote arrives $1.00 (5) x $1.05 (5)
[cir] Bid side quote re-prices on order book to $0.95
[cir] Displays on order book @$0.95 (bid), which now shows (15
quantity)
[cir] Offer side quote books and displays in Depth of Market Feed at
$1.05
Order to sell 10 contracts arrives @$0.95
[cir] 7 contracts execute with Market Maker A @$0.95
[cir] 3 contracts execute with Market Maker B @$0.95
In this example, the Market Maker avoided taking liquidity by
deploying the Post-Only Quote Configuration with re-price.
Options 3, Section 23
The Exchange proposes to amend Phlx Options 3, Section 23, Data
Feeds and Trade Information. The Exchange proposes to rename various
market data feeds in Phlx Options 3, Section 23(a) to harmonize the
names of the feeds to ISE, GEMX and MRX market data feeds at Options 3
Section 23(a). Specifically, the Exchange proposes to rename ``Top of
PHLX Options'' to ``Nasdaq Phlx Top of Market'' but continue to utilize
``TOPO'' as the acronym. The Exchange proposes to rename ``PHLX
Orders'' as ``Nasdaq Phlx Order Feed.'' Finally, the Exchange proposes
to rename ``PHLX Depth of Market'' as ``Nasdaq Phlx Depth of Market.''
The Exchange proposes similar amendments to the name of the feeds at
Options 7, Section 9, B.
The Exchange proposes to no longer offer TradeInfo, which is a user
interface set forth in Phlx Options 3, Section 23(b)(2) that permits a
member to: (i) search all orders submitted in a particular security or
all orders of a particular type, regardless of their status (open,
canceled, executed, etc.); (ii) view orders and executions; and (iii)
download orders and executions for recordkeeping purposes. Due to the
lack of demand for this interface by member organizations the Exchange
is retiring the interface. The Exchange seeks to decommission the
TradeInfo interface when the Exchange migrates over to the enhanced
technology platform with the technology migration. The Exchange notes
that FIX and the Clearing Trade Interface (``CTI''),\117\ which are
available to all member organizations, can be used today to obtain
order information that is currently available within TradeInfo, and FIX
can be used to cancel orders today.
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\117\ CTI is a real-time clearing trade update message that is
sent to a member after an execution has occurred and contains trade
details specific to that member. The information includes, among
other things, the following: (i) The Clearing Member Trade Agreement
or ``CMTA'' or ``OCC'' number; (ii) Exchange badge or house number;
(iii) the Exchange internal firm identifier; (iv) an indicator which
will distinguish electronic and non-electronically delivered orders;
(v) liquidity indicators and transaction type for billing purposes;
and (vi) capacity. See Options 3, Section 23(b)(1).
---------------------------------------------------------------------------
Additionally, the Exchange proposes to remove the $95 per user, per
month TradeInfo Interface Fee in the Pricing Schedule at Options 7,
Section 9, B. The fee would not be necessary once TradeInfo is
discontinued.
Options 3, Section 28
The Exchange proposes to introduce optional quantity and notional
value checks in new Phlx Options 3, Section 28, entitled ``Optional
Risk Protections.'' The proposed optional order risk protections will
be identical to the protections currently offered by ISE, GEMX and MRX
Options 3, Section 28. Member organizations may use this voluntary
functionality through their FIX protocol to limit the quantity and
notional value they can send per order and on aggregate for the day.
Specifically, member organizations may establish limits for the
following parameters, as set forth in proposed subparagraphs (a)(1)-
(4):
(1) Notional dollar value per order, which will be calculated as
quantity multiplied by limit price multiplied by number of underlying
shares;
(2) Daily aggregate notional dollar value;
(3) Quantity per order; and
(4) Daily aggregate quantity
Proposed paragraph (b) will provide that member organizations may
elect one or more of the above optional risk protections by contacting
Market Operations and providing a per order value (for (a)(1) and
(a)(3)) or daily aggregate value (for (a)(2) and (a)(4)) for each order
protection. Member organizations may modify their settings through
Market Operations. Proposed paragraph (c) will provide that the System
will reject all incoming aggregated member organization orders for any
of the (a)(2) and (a)(4) risk protections after the value configured by
the member organization is exceeded. Proposed paragraph (d) will
provide that the System will reject all incoming member organization
orders for any of the (a)(1) and (a)(3) risk protections upon arrival
if the value configured by the member organization is exceeded by the
incoming order. The Exchange notes that the difference in handling
between aggregate and individual order protections is necessary to
allow for complete processing of the final order that puts a member
organization's configured value over the aggregate values configured.
While individual orders can be directly measured against the configured
values for (a)(1) and (a)(3), the aggregate values must be calculated
after complete processing of an order and thus the rejection of orders
begins upon the arrival of the next order after the aggregate values in
(a)(2) or (a)(4) have been exceeded.
The following example shows how the System will reject all
subsequent incoming aggregated orders after the (a)(2) or (a)(4) values
configured by the member organization have been exceeded.
Optional Risk Protection Example
Aggregate Quantity Limit = 800.
Member organization enters an order to Buy 500--Accepted.
Member organization enters an order to Buy 400--Accepted (member
organization did not meet the configured limit of 800 with the first
order of 500 at the time Member organization entered the second order).
Member organization enters an order to Buy 1--Rejected (member
organization already exceeded the configured limit of 800 with the
second order of 400).
The following example shows how the System will reject all incoming
orders upon arrival if the (a)(1) or (a)(3) values configured by the
member organization have been exceeded by the arriving order:
Quantity per Order Limit = 800.
Member organization enters an order to Buy 801--Rejected (member
organization exceeded the Quantity per order limit upon arrival with
the order to buy 801 contracts).
Proposed paragraph (e) will provide that if a member organization
sets a notional dollar value, a Market Order
[[Page 106910]]
would not be accepted from that member organization. This is because
notional dollar value is calculated by using an order's specified limit
price, and Market Orders by definition are priced at the best available
price upon execution. Lastly, proposed paragraph (f) will provide that
the proposed risk protections are only available for orders entered
through FIX. Additionally, all of the proposed settings will be firm
level.
Options 5, Section 4
The Exchange proposes to amend Options 5, Section 4, Order Routing,
to align Phlx's routing to ISE Options 4, Section 5.
The Exchange proposes to amend Phlx Options 5, Section 4(a) to
include Stop-Limit Orders in addition to Stop Orders in the list of
order types that are not included in the PBBO because they have not
been triggered. Today, Phlx's Stop Order description refers to both a
market and limit order. The Exchange's proposal adopts the Stop Order
at ISE Options 3, Section 7(d) and Stop Limit Order at ISE Options 3,
Section 7(e). The Exchange proposes to reflect both order types. As is
the case today, the Exchange proposes to note, similar to ISE Options
4, Section 5(a), that when checking the Order Book, the System will
seek to execute at the price at which it would send the order to an
away market. The Exchange believes that this sentence will bring
greater clarity to the Exchange's rule. Similarly, the Exchange
proposes to add text to clarify its current System behavior for TIFs.
Today, routing options may be combined with all available order types
and times-in-force, with the exception of order types and times-in-
force whose terms are inconsistent with the terms of a particular
routing option. The Exchange also believes this sentence will clarify
the current operation of the routing System. Finally, as is the case
today, the Exchange proposes to note the time the routing System is
available, the ability to list an order as non-routable and cross-
reference the locked and crossed rules. The Exchange would state, ``The
order routing process shall be available to members from 9:30 a.m.
Eastern Time until market close and shall route orders as described
below. Member organizations can designate orders as either available
for routing or not available for routing. All routing of orders shall
comply with Options 5, Options Order Protection and Locked and Crossed
Market Rules.'' This proposed rule text provides greater transparency
to the Exchange's current System operation and harmonizes Phlx's rule
text to ISE Options 4, Section 5(a).
The Exchange proposes some modifications to its FIND Order in Phlx
Options 5, Section 4(iii)(B) to conform to ISE Options 5, Section
4(iii)(B). By way of background, a FIND Order is an order that is: (i)
routable at the conclusion of an Opening Process; and (ii) routable
upon receipt during regular trading, after an option series is open.
Phlx proposes to add the following language to the end of Options 5,
Section 4(iii)(B) to reflect its current routing functionality, ``FIND
Orders that are not marketable with the ABBO upon receipt will be
treated as DNR for the remainder of the trading day and post to the
order book, even in the event that there is a new Opening Process after
a trading halt.'' Phlx also proposes to add rule text to the end of
Phlx Options 5, Section 4(a)(iii)(B) which states, ``. . . and post to
the Order book, even in the event that there is a new Opening Process
after a trading halt'' to make clear that the FIND Order would post to
the Order Book and not route again, even if there were a new Opening
Process.\118\
---------------------------------------------------------------------------
\118\ FIND Orders that are not marketable with the ABBO upon
receipt are handled differently than FIND Orders that are marketable
with the ABBO upon receipt. FIND Orders that are marketable with the
ABBO upon receipt would be eligible for routing the next time the
option series is subject to a new Opening Process, which may include
a re-opening after a trading halt. FIND Orders that are not
marketable with the ABBO upon receipt will not be subject to routing
even in the event that there is a new Opening Process after a
trading halt. The handling of FIND Orders on Phlx is identical to
ISE Options 5, Section 4(a)(iii)(B).
---------------------------------------------------------------------------
The Exchange proposes to amend Phlx Options 5, Section
4(iii)(B)(1). The Exchange proposes to remove the following sentences,
``With respect to an Opening Process, only a Public Customer and
Professional FIND Order on the Order Book, whether it is received prior
to the opening or it is a GTC FIND Order from a prior day, may be
routed at the conclusion of an Opening Process. Non-Public Customer and
non-Professional FIND Orders are not eligible for routing at the
conclusion of an Opening Process.'' Phlx proposes to amend its routing
functionality to permit all market participants to route, not just
Public Customer and Professional FIND Orders. To this end, Phlx
proposes to remove this limitation. The Exchange proposes to amend the
next sentence which state, ``At the end of an Opening Process, any FIND
Order that is priced through the Opening Price, pursuant to Phlx
Options 3, Section 8(a)(iii), will be cancelled, and any FIND Order
that is at or inferior to the Opening Price will be executed pursuant
to Options 3, Section 8(k).'' The Exchange proposes to instead provide,
``At the end of an Opening Process, any FIND Order that is priced
through the Opening Price, pursuant to Phlx Options 3, Section
8(a)(iii), will be cancelled, and any FIND Order that is at or inferior
to the Opening Price will execute or book pursuant to Options 3,
Section 8(k).'' The Exchange noted in proposed Phlx Options 5, Section
4(iii)(B) that a FIND Order may post to the order book in certain
cases. This rule text adds clarity to the rules by naming all possible
scenarios. Finally, the Exchange proposes to remove the last sentence
of this paragraph which states, ``Such FIND Order will not be eligible
for routing until the next time the option series is subject to a new
Opening Process.'' The Exchange is removing this sentence because of
the addition to the end of Options 5, Section 4(a)(iii)(B). The Opening
Process at Phlx Options 3, Section 8(k), describes the manner in which
orders route at the end of that process. This sentence is not necessary
within this routing rule. FIND Orders that are not marketable with the
ABBO upon receipt will be treated as DNR for the remainder of the
trading day, and will not be subject to routing even in the event that
there is a new Opening Process after a trading halt.\119\
---------------------------------------------------------------------------
\119\ Orders that route during an Opening Process route at the
end of the Opening Process, when the Exchange simultaneously opens
an options series and routes. Thereafter, FIND Orders that were
submitted after the Opening Process would attempt once to route
until the FIND Order rests on the Order Book. Once it rests on the
Order Book, the FIND Order would not route until the next Opening
Process. Finally, an Opening Process may occur intra-day if there
was a trading halt. After a trading halt BX would reopen with an
Opening Process and the FIND Order would be eligible to route once
again.
---------------------------------------------------------------------------
Phlx Options 5, Section 4(iii)(B)(2) currently states,
With respect to an Opening Process, if during a route timer at
the conclusion of an Opening Process pursuant to Options 3, Section
8(k) markets move such that the FIND Order is executable against
Exchange interest, the FIND Order will immediately execute. If
during a route timer, ABBO markets move such that the FIND Order is
no longer marketable against the ABBO nor marketable against the
PBBO, the FIND Order will post at its limit price. If the FIND Order
is locked or crossed by away quotes, it will route at the completion
of the route timer. If the ABBO worsens but remains better than the
PBBO, the FIND Order will reprice and be reexposed at the new
price(s) without interrupting the route timer.
In order to more efficiently display the various potential routing
scenarios, without repeating certain rule text several times throughout
the rule, the Exchange proposes to amend Phlx Options 5, Section
4(a)(iii)(B)(2), similar
[[Page 106911]]
to ISE Options 5, Section 4(a)(iii)(B)(2), to describe the potential
scenarios that may occur for a FIND Order. The proposed paragraph
provides,
Generally, a FIND Order will be included in the displayed PBBO
at its limit price, unless the FIND Order locks or crosses the ABBO,
in which case it will be entered into the Order Book at the ABBO
price and displayed one MPV inferior to the ABBO. If there exists a
locked ABBO when the FIND Order is entered onto the Order Book, the
FIND Order will be entered into the Order Book at the ABBO price and
displayed one MPV inferior to the ABBO. If during a Route Timer,
ABBO markets move such that the FIND Order is no longer marketable
against the ABBO nor marketable against the BBO, the FIND Order will
post at its limit price. If the FIND Order is locked or crossed by
away quotes, it will route at the completion of the Route Timer. If
the ABBO worsens but remains better than the BBO, the FIND Order
will reprice and be re-exposed at the new price(s) without
interrupting the Route Timer. If, during the Route Timer, any new
interest arrives opposite the FIND Order that is equal to or better
than the ABBO price, the FIND Order will trade against such new
interest at the ABBO price, unless the ABBO is improved to a price
which crosses the FIND Order's already displayed price, in which
case the incoming order will execute at the previous ABBO price as
the away market crossed a displayed price.
This paragraph utilizes the term ``generally'' because it always
applies to FIND Orders. The Exchange proposes to state that a FIND
Order will be included in the displayed BBO at its limit price, unless
the FIND Order locks or crosses the ABBO, in which case it will be
entered into the Order Book at the ABBO price and displayed one MPV
inferior to the ABBO.\120\ This statement will provide context to the
FIND Order and would apply consistently to FIND Orders. The Exchange
further proposes to provide that if there exists a locked ABBO when the
FIND Order is entered onto the Order Book, the FIND Order will be
entered into the Order Book at the ABBO price and displayed one MPV
inferior to the ABBO.\121\ The Exchange further proposes to describe
the possible scenarios that may occurring during a Route Timer, when
ABBO markets move such that the FIND Order is no longer marketable
against the ABBO nor marketable against the BBO, the FIND Order will
always post at its limit price. If the FIND Order is locked or crossed
by away quotes, it will route each time at the completion of the Route
Timer. In the situation where an ABBO worsens, but remains better than
the BBO, the FIND Order will reprice and be re-exposed at the new
price(s) without interrupting the Route Timer, each time. If, during
the Route Timer, any new interest arrives opposite the FIND Order that
is equal to or better than the ABBO price, the FIND Order will trade
always against such new interest at the ABBO price, unless the ABBO is
improved to a price which crosses the FIND Order's already displayed
price, in which case the incoming order will execute at the previous
ABBO price as the away market crossed a displayed price.\122\ The
Exchange believes that describing these scenarios in this introductory
paragraph will provide a basis to understand certain FIND Order
behaviors in certain circumstances and eliminate the need to have these
circumstances repeated throughout the rule. The Exchange proposes to
remove the first sentence of Phlx Options 5, Section 4(a)(iii)(B)(2)
because it is covered within Phlx Options 3, Section 8(k), which
describes the Opening Process. The Exchange believes that this
paragraph, as amended, will provide greater clarity as to all the
possible scenarios and will harmonize Phlx's rule to ISE's rule.
---------------------------------------------------------------------------
\120\ This sentence is currently located in Phlx Options 5,
Section 4(iii)(B)(5).
\121\ This sentence is currently located in Phlx Options 5,
Section 4(iii)(B)(5).
\122\ This sentence is currently located in Phlx Options 5,
Section 4(iii)(B)(5).
---------------------------------------------------------------------------
The Exchange proposes to amend Phlx Options 5, Section
4(a)(iii)(B)(3) to add ``A FIND Order received after an Opening Process
that is not marketable against the PBBO or the ABBO will be entered
into the Order Book at its limit price. The FIND Order will be treated
as DNR for the remainder of the trading day, even in the event that
there is a new Opening Price after a trading halt'' to the end of the
paragraph. This text is similar to ISE Options 5, Section
4(a)(iii)(B)(3). Phlx treats FIND Orders received after an Opening
Process that are not marketable against the BBO or the ABBO in the same
manner as ISE. Phlx is adding this rule text to make clear that the
FIND Order will not route, even if there is a new Opening Process to
reflect current System functionality. The Exchange will not allow a
non-marketable order to route. The same sentence is being added to Phlx
Options 5, Section 4(a)(iii)(B)(4) for clarity.
The Exchange proposes to amend Phlx Options 5, Section
4(a)(iii)(B)(5) to remove sentences that were relocated to Phlx Options
5, Section 4(a)(iii)(B)(2) as noted above.
The Exchange proposes to amend Phlx Options 5, Section
4(a)(iii)(B)(6) to amend the penultimate sentence to note that an
Opening Process may occur after a trading halt. An Opening Process
would occur intra-day if there was a trading halt. After a trading
halt, Phlx would reopen with an Opening Process. This is th
[…truncated; see source link]Indexed from Federal Register on December 30, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.